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A  TREATISE 


,E,TAf^ 


ON  THE  LAW  OP 


COEPOEATIONS 


HAVINa  A 


CAPITAL  STOCK 


BY 

WILLIAM  W.  COOK 

Of  the  New  Yokk  Bab 


FOUETH  EDITION 


VOL.  n 


CHICAGO 

CALLAGHAN  AND  COMPANY 

1898 


T 


Copyright,  1887. 

lY 

WILLIAM  W.  COOK 


Copyright,  1889, 

BY 

WILLIAM  W.  COOK, 


Copyright,  1894, 

BY 

5KILLI.AM  W..COQK. 


I  '.ICoByRictHv.lSoV.  •*! 

by'' 

WILLIAM  W.  COOK. 


STATE  JOURNAL  PRINTING  COMPANY, 

PlOMTKRS  AND   StEREOTYPERS, 
MADISON,  WIS. 


CONTENTS  OF  VOLUME  IT. 


PAET  III. 

MISCELLANEOUS  RIGHTS  OF  STOCKHOLDERS. 

CHAPTER  XXV. 
Stock-brokees  a.\d  Their  Contracts §  44^ 

CHAPTER  XXVI. 
Pledges  aud  Mortgages  of  Stock 463 

CHAPTER  XXVII. 
Levy  of  Attachment  and  Execution  Upon  Shares  of  Stock    .      480 

CHAPTER  XXVIII. 

Constitutionality   of  Amendments  to  Charters  —  Right  of  a 
Stockholder  to  Object 

^  ,  CHAPTER  XXIX. 

w  .S   "Trusts"  and  Unincorporated  Joint-Stock  Assocu^tions  .        .    503a 

^   '>'  A.  "Trusts." 

ti    '^'  R  Uuincorporated  Joint-Stock  Associations. 

<i  CHAPTER  XXX. 

^    Stockholders'  Right  to  Inspect  the  Books  of  the  Corporation      511 

CHAPTER  XXXI. 

Liens  of  the   Corporation   on  Stock  for  the  Stockholders' 

Debts  to  the  Corporation "-'" 

CHAPTER  XXXII. 

T^                >                                                                                 ...      534 
Dividends 

CHAPTER   XXXIII. 

Life  Estates  and  Remainders  in  Shares  of  Stock      .        •       .652 


iV  COXTEXTS    OF   VOLUME    II. 

CHAPTEK  XXXiy. 

Taxation  of  Shares  of  Stock  and  of  Corporations  .        •        .  §  561 

A.  Taxation  of  Shares  of  Stock. 

B.  Taxation  of  National  Bank  Stock. 

C.  Other  Methods  of  Taxing  Coriiorationa. 

CHAPTEE  XXXy. 

Forms  of  Actions  and  Measure  of  Damages  Where  a  Stock- 
holder Has  Been  Deprived  of  His  Stock     ....      573 

CHAPTER  XXXVI. 

Stockholders'  Meetings  —  Calls,  Time,  Place,  and  Classes  of 

Meetings 588 

CHAPTER  XXXYII. 
Elections  and  Other  Corporate  Meetings 603 

CHAPTER  XXXVIII. 

Dissolution,  Forfeiture,  and  Irregular  Incorporation    .        .      628 


PAET  lY. 

FRAUDS  — ULTRA  VIRES  ACTS  — INTRA  VIRES  ACTS  — NEGLI- 
GENCE AND  IRREGULAR  CONTRACTS  OF  DIRECTORS,  STOCK- 
HOLDERS, PROMOTERS,  AND  AGENTS. 

CHAPTER  XXXIX. 

Fraudulent  Acts  of  Directors,  Majority  of  Stockholders,  and 

Third  Persons §  643 

A.  The  Occasion,  Scope,  and  Purpose  of  the  Subject  Herein. 

B.  Frauds  of  Corporate  Directors,  of  a  Majority  of  the  Stockhold- 

ers, or  of  Third  Persons,  to  Remedy  Which  a  Stockholder 
May  Bring  Suit. 

CHAPTER  XL. 

Ultra  Vires  Acts  and  Contracts  —  In  Other  Words,  Acts  and 
Contracts  Which  Are  in  Excess  of  the  Charter  Powers 
OF  the  Corporation,  Directors,  or  Stockholders         .        .      667 


CONTENTS    OF    YOLUirE    II.  V 

CHAPTER  XLI. 

Intra  Vires  Acts  and  Contracts  —  In  Other  Words,  Acts  and 
Contracts  Which  Are  Within  the  Charter  Powers  of  the 
Corporation,  Directors,  or  Stockholders      .        .        .        .  ^  683 

CHAPTER  XLII.     ' 

Stockholder's  Actions  to  Hold  the  Directors  TjTabt.f.  for  Neg- 
ligence IN  THE  Discharge  op  Their  Duties  ....      701 

CHAPTER  XLIII. 

The  Power  of  Various  Officers  and  Agents  to  Contract  for 
A  Corporation,  and  the  Mode  of  Drawing  and  Exe- 
cuting Corporate  Contracts  —  ADiiissiONs  and  Notice  704 
A-  Power  of  Promoters^  Stockholders,  Directors,  Executive  Com- 
mittee, President,  Secretary,  Treasurer,  Cashier,  General 
Manager,  and  Miscellaneous  Agents  to  Contract  for  a  Cor- 
poration. 

B.  The  Form  of  Corporate  Contracts  —  Corporate  Seal  — Draft- 

ing, Signing,  and  Sealing — Liability  of  Officers  on  Contracts 
Irregularly  Executed. 

C.  Admissions  of  Officers  and  Notice  to  Officers. 

CHAPTER  XLIY. 

Ratification,  Acquiescence,  or  Laches  as  a  Bar  to  a  Stockhold- 
er's Action  Herein 728 

CHAPTER  XLV. 

Parties,  Pleadings,  etc.,  ix  Suits  by  Stockholders  in  Behalf  op 
the  Corporation  —  Suits  by  or  Against  the  Corpora- 
tion IN  General 734 

A.  Suits  by  Stockholders  in  Behalf  of  the  Corporation. 

B.  Suits  by  or  Against  the  Corporation  in  General 


PAET  Y. 

BONDS,   MORTGAGES,   FORECLOSURES,   RECEIVERS,   AND 
REORGANIZATIONS. 

CHAPTER  XLYI. 

Bonds,  Notes,  etg,  op  a  Corporation  —  Guar-^j^tes  and  Accommo- 
dation Paper §  760 


PAET  III. 
MISCELLANEOUS  RIGHTS  OF  STOCKHOLDERS. 


CHAPTER  XXY. 
STOCK-BROKERS  AND  THEIR  CONTRACTa 


445.  Definitions  and  scope  of  the 

subject. 

446.  Who  may  be  a  broker  and  cus- 

tomer. 

447.  Facts  making  person  a  broker 

or  customer  unintentionally. 

448.  Broker  must  obey  specific  or- 

ders of  customer. 

449.  Must  act  in  good  faith  and  in 

reasonable  tijne. 

450.  Cannot  purchase  from  or  sell 

to  himself. 

451.  Duties  and  liabilities  of  cus- 

tomer towards  broker. 

452.  Duties    and   liabilities   of   a 

broker  tovpards  customer. 

453.  Method  of  completing  a  bro- 

ker's contract. 


§  454  Privity  of  contract  between 
broker  and  opposite  parties. 

455.  Privity  of  contract  between 

the  opposite  customers. 

456.  Intervening  sub-brokers  and 

sub-customers. 

457.  Purchases   or  sales  on    mar- 

gins—  Broker  as  a  pledgee. 

458.  Broker's  rights  and  duties  on 

failure  of  margin^ 

459.  What  will  excuse  notice  and 

demand  for  more  margin. 

460.  Customer's  remedies  and  dam- 

ages herein. 

461.  Broker's  remedies  and  dam- 

ages herein. 

462.  Broker's  customs  and  iisages. 


§  445.  Definitions  and  scope  of  the  subject. —  By  far  the  greater 
part  of  purchases  and  sales  of  stock  is  made,  both  in  this  coun- 
try and  in  England,  through  organizations  specially  formed  for 
that  purpose  and  called  stock  exchanges.  A  stock  exchange  is 
a  place  of  business  where  those  who  make  up  the  membership 
of  the  exchange  buy  and  sell  stocks  and  bonds.  These  persons 
are  called  stock-brokers.  A  stock-broker  is  one  who  buys  and 
sells  stock  as  the  agent  of  another,  the  latter  being  called  a 
customer  of  the  stock-broker.^    Accordingly,  in  an  ordinary 


1  In  Sibbald  v.  Bethlehem  Iron  Co., 
83  N.  Y.  378  (1881),  Finch,  J.,  favors 
the  definition  from  Pott  v.  Turner,  6 
Bing.  702,  706  (1830),  where  a  broker 
is  defined  as  "  one  who  makes  bar- 
gains for  another  and  receives  a 
commission  for  so  doing."  Story  on 
Agency,  §28  (9th  ed.),  says:    "The 


true  definition  of  a  broker  seems  to 
be  that  he  is  an  agent  employed  to 
make  bargains  and  contracts  between 
other  persons  in  matters  of  trade, 
commerce,  or  navigation,  for  a  com- 
pensation commonly  called  broker- 
aga"  For  a  valuable  article  on  the 
status,  rights,  duties,  and  liabilities 


r9l 


§  ^^5.] 


BKOKEKS   AJSTD   THEIK   CONTKACTS. 


[CH.  XXV. 


purchase  of  stock  througli  stock-brokers,  there  are  generally 
at  least  four  persons  involved  —  the  two  brokers  and  their  re- 
spective customers.  Stock-brokers  have  a  language  of  their 
own.  They  have  coined  and  put  into  general  circulation  cer- 
tain phrases  and  terms  descriptive  of  their  business.  These 
terms  have  become  so  closely  identified  with  the  subject  of 
stock  and  transactions  in  stock  that  the  courts  have  defined 
their  meaning  and  explained  their  application.^ 


of  a  broker,  by  Eliot  Norton,  Esq.,  see 
Harvard  L.  Review,  voL  VIIL 

1 A  "  bull "  is  a  dealer  who  endeav- 
ors to  make  tlie  price  of  stocks  go 
higher.  A  "  bear  "  is  a  dealer  who 
endeavors  to  make  the  price  of  stocks 
go  lower.  A  "  short "  sale  is  a  sale  of 
stocks  which  the  seller  does  not  pos- 
sess, but  which  he  expects  to  pur- 
chase later  on  at  a  lower  figure,  thus 
fulfilling  his  contract  and  making 
profit  by  the  decline.  In  the  mean- 
time the  broker  generally  borrows 
the  stock  from  other  parties  to  de- 
liver to  the  vendee,  and  to  be  re- 
tm-ned  to  the  person  loaning  the 
stock  at  the  end  of  the  transaction. 
The  customer  deposits  with  the  bro- 
ker a  small  amount  of  money  as  se- 
cuiity,  called  a  " margin,"  and  he  is 
bound  to  keep  the  margin  good.  Hess 
V.  Rau,  95  N.  Y.  359  (1884);  White  v. 
Smith,  54  N.  Y.  522  (1874);  Knowlton 
V.  Fitch,  52  N.  Y.  288  (1873);  Apple- 
man  V.  Fisher,  34  Md.  540  (1871);  Sis- 
tare  V.  Best,  88  N.  Y.  527,  533  (1882). 
A  "  long  "  p\ir chase  of  stock  is  a  pur- 
chase in  the  expectation  that  the 
stock  will  rise  in  value. 

Stock  options  are  of  three  kinds  — 
puts,  calls,  and  straddles.  A  "  put " 
is  a  contract  whereby  a  person  has 
the  privilege  of  requiring  another 
person  to  take  from  the  former  cer- 
tain speciGed  stock  at  a  specified 
price  at  any  time  within  a  specified 
period  of  time,  the  former  not  being 
bound  to  sell.  See  Bigelow  v.  Bene- 
dict, 70  N.  Y.  202  (1877).  A  "  call "  is 
a  contract  whereby  a  person  has  the 


privilege  of  requiring  another  person 
to  sell  or  deliver  to  the  former  cer- 
tain specified  stock  at  a  specified 
price  at  any  time  within  a  certain 
specified  period,  the  former  not  being 
bound  to  purchase.  A  "  straddle  "  or 
"  spread-eagle  "  is  a  combination  of  a 
put  and  a  calL  It  gives  a  person  the 
double  privilege  of  delivering  to  or 
demanding  from  another  person  cer- 
tain stock  at  a  certain  price  within  a 
specified  time.  Harris  v.  Tumbridge, 
83  N.  Y.  92  (18^0);  Story  v.  Salomon, 
71  N.  Y.  420  (1877).  A  "  corner  "  ex- 
ists where  the  "  bears  "  have  sold  a 
large  quantity  of  stock  "  short,"  and 
cannot  borrow  the  stock  to  fill  their 
contracts,  but  must  buy  it  from  those 
who  have  cornered  the  market  on  that 
stock.  See  Cameron  v.  Durkheim,  55 
N.  Y.  425,  438  (1874).  As  to  the  legal- 
ity of  these  various  transactions,  see 
§§  341-348,  supra,  especially  §  344,  n. 
It  is  not  fraud  for  the  owner  of 
the  larger  part  of  the  capital  stock 
of  a  corporation  to  "corner*'  the 
market,  that  is,  to  enter  into  con- 
tracts with  various  parties  to  pur- 
chase stock  of  the  corporation,  al- 
though he  knew  that  such  contracts 
could  not  be  fulfilled  by  such  parties 
by  reason  of  the  fact  that  he  himself 
held  such  stock,  and  it  could  not  be 
obtained  elsewhere.  The  same  rule 
prevails  although  such  person  offered 
the  stock  for  public  subscription  and 
purchased  the  greater  part  liimself. 
Salaman  v.  Warner,  64  L.  T.  Rep.  598 
(1891). 
A  "  loan  "  of  stock  is  still  another 


792 


CH.  XXV.J 


BEOKEES    AJSTD    THEIE    CONTEACTS. 


[§  ^^6. 


This  chapter  treats  of  the  rights,  duties,  and  liabilities  of 
stock-brokers.^  There  are  various  incidental  subjects,  however, 
which  enter  largely  into  brokers'  contracts,  such  as  pledges  of 
stock  2  and  gambling  sales  of  stock.'  These  subjects  are  fully 
treated  elsewhere. 

§446.  WJio  may  he  a  Irolcer  and  customer. —  Any  person 
may  be  a  stock-btoker  who  may  make  a  contract,  but  it  is  be- 
yond the  power  of  a  national  bank  to  act  as  a  broker.*  Strict 
rules  prevail  as  to  who  may  be  a  customer.  An  infant  is  not 
bound  by  his  contracts  with  or  through  a  stock-broker,  any 
more  than  he  is  bound  by  his  other  contracts.  Moreover,  if 
the  broker  carries  on  stock  transactions  for  an  infant  he  is  lia- 
ble to  the  latter  for  all  moneys  lost  thereby.^  Again,  a  broker 
who  sells  or  buys  stock  in  the  name  of  an  infant  is  himself  liable 
to  the  other  party  in  case  the  contract  is  not  completed  by  rea- 
son of  such  infancy.^  On  the  other  hand,  if  the  broker's  cus- 
tomer hands  in  the  name  of  a  third  person,  an  infant,  as  the 

transaction.  When  a  man  sells  stock 
on  the  exchange  he  must  deliver  it, 
and  if  he  does  not  own  any  he  must 
borrow  it  of  some  one  who  does. 
When  he  borrows  the  stock,  he  ad- 
vances the  market  price  of  it  to  the 
lender,  who  pays  interest  on  this 
money.  The  transaction  is  really  a 
call  loan.,  The  lender  of  the  stock 
can  call  for  his  stock  at  any  time, 
and  the  borrower  can  call  for  his 
money.  When  a  strong  bearish  feel- 
ing is  running,  and  too  much  short 
selling  has  been  indulged  in,  stocks 
become  scarce,  and  those  who  have 
them  will  only  lend  at  a  concession, 
either  at  less  than  current  interest 
rates;  or  "flat,"  that  is,  without  in- 
terest; or  actually  at  a  premium, 
according  to  the  lu-gency  of  the 
demand. 

1  See  also,  on  this  subject,  Lindley 
on  Companies,  5th  ed.,  pp.  500-516. 

2  Ch.  XXVI,  m/ro. 
'♦See  ch.  XX,  supra. 
*  First  Nat.  Bank  v.  Hoch,  89  Pa. 

St.  334  (1879);  Weckler  v.  First  Nat. 
Bank,  43  Md.  581  (1875).  But  Will- 
iamson V.  Mason,  12  Hun,  97  (1877), 


holds  that  a  bank  has  power  to  take 
stock  from  a  customer  and  agree  to 
sell  it  and  credit  the  customer  with 
the  proceeds,  and  that  the  bank  is 
liable  for  the  conversion  of  such  stock 
by  its  cashier. 

5  Ruchizky  v.  De  Haven,  97  Pa.  St. 
203  (1881).  Tlie  transactions  in  this 
case  were  held  to  be  gambling  con- 
tracts. Heath  v.  Mahoney,  13  Week. 
Dig.  404  (1881).  The  broker  himself 
may  be  an  infant  and  may  repudiate 
his  obligations.  See  4  Law  Notes, 
314 

6Nickalls  v.  Merry,  L.  R  7  H.  L. 
530  (1875);  Heritage  v.  Pauae,  L.  R.  3 
Ch.  D.  594  (1876).  The  first  case  holds 
hiiii  liable  although  ignorant  of  the 
infancy  of  his  customer.  See  same 
case,  jNIerry  v,  NickaUs,  L.  R.  7  Ch. 
App.  733  (1872).  The  broker  is  liable 
although  the  name  of  the  infant  was 
passed  to  him  by  another  broker. 
Dent  V.  Nickalls,  29  L.  T.  Rep.  536 
(1873).  It  is  no  defense  to  the  broker 
that  the  infant's  father  was  the  real 
customer.  Nickalls  v.  Eaton,  23  L.  T. 
Rep.  689  (1871).  See  also  §  250,  supra, 
as  to  liability  to  the  corporation. 


§§  447,  448.]  BEOKEKS   AJSD    THEIE   CONTEACTS. 


[cH.  xxy. 


seller  or  purchaser,  such  customer  is  liable  to  the  broker  for 
liabilities  thereby  incurred  bv  the  latter.^ 

§  447.  Facts  malcing  lierson  a  'brolter  or  customer  uninten- 
tionally.—  The  relationship  of  broker  and  customer  may  be 
established  and  exist  although  one  of  the  parties  is  personally 
ignorant  of  such  a  relationship.^  A  broker  also  may  be  liable 
as  such  in  transactions  where  he  had  no  intention  of  incurring 
any  liability.'  A  broker  is  nothing  more  nor  less  than  an  agent 
for  a  special  purpose.  The  agency  may  arise  by  the  acts  of  the 
parties  without  any  specific  agreement. 

§  448.  Brolier  must  oley  specific  orders  of  customer. —  A 
broker  is  bound  to  obey  and  carry  out  strictly  the  orders  of  his 
customer  in  the  purchase  or  sale  of  stock.  This  rule  is  rigidly 
insisted  upon  by  the  courts.  The  orders  of  the  customer  may 
be  such  as  he  wishes  to  give,  and  when  given  they  must  be 
obeyed,  or  liability  will  be  incurred  by  the  broker.*  "When  the 
customer  fixes  a  limit  at  which  the  broker  m.a.j  purchase,  the 
latter  cannot  bind  the  customer  by  a  purchase  at  a  higher  fig- 


1  Peppercorne  v.  Clench,  26  L.  T. 
Rep.  G36  (1873). 

2  Thus,  the  customer  may  be  bound 
by  the  acts  of  his  clei'k.  "Webb  v.  Chal- 
loner,  2  Fost.  &  F.  120  (1860).  As  to 
dealings  with  a  stock-broker's  clerk, 
see  Spooner  v.  Browning,  78  L.  T. 
Rep.  98  (1898).  So  also,  where  the 
firm  does  a  broker  business  through 
its  agents,  the  transactions  by  tlie 
agents  on  their  own  private  accounts, 
but  ostensibly  for  the  fii'm,  will  bind 
the  firm.  Wells,  etc.  Co.  v.  Welter, 
15  Nev.  276  (1880).  Cf.  Masterton  v. 
Boyce,  6  N.  Y.  Supp.  65  (1889).  A 
customer's  statement  that  he  would 
like  to  make  a  dollar  if  he  could  is 
not  sufficient  authoi'ity  for  a  broker 
to  buy  stocks  for  him.  Hopkins  v. 
Clark,  7  N.  Y.  App.  Div.  207  (1896). 

3  As  where  he  continues  to  allow 
his  name  to  remain  in  the  firm  name 
after  its  dissolution.  Hixon  v.  Pix- 
ley,  15  Nev.  475  (1880).  Also  where 
one  of  the  firm  is  a  trustee  and  de- 
faults therein,  the  firm  having  charge 
of  the  trust  estate's  stocks.    De  Ri- 


beyre  v.  Barclay,  23  Beav.  107  (1857). 
As  a  silent  partner  he  cannot  pre- 
vent a  customer  from  setting  off 
against  a  liability  a  debt  personal  to 
the  ostensibly  sole  broker.  Read  v. 
Jaudon,  35  How.  Pr.  303  (1868).  A 
stock-broker  is  bound  to  obey  orders 
promptly.  Galigher  v.  Jones,  129  U.  S. 
193  (1889). 

4  Parsons  v.  Martin,  77  Mass.  Ill 
(1858).  Thus,  where  the  customer  au- 
thorizes a  sale  if  the  stock  goes  down 
to  51,  but  the  broker  sells  when  it 
goes  down  to  52,  he  is  liable  for  an 
tmauthorized  sale.  Clarke  v.  Meigs, 
10  Bosw.  337  (1863).  Cf.  Whelan  v. 
Lynch,  60  N.  Y.  469  (1875);  Jones  v. 
Marks,  40  III  313  (1866).  But  the 
broker  may  correct  a  palpable  error 
in  the  order  given  him  by  his  cus- 
tomer. Luffman  v.  Hoy,  13  N.  Y. 
Week.  Dig.  324  (1881).  Where  the 
customer  tells  the  broker  that  unless 
he  sells  at  once  he  must  bear  any 
further  loss,  the  customer  is  not  lia- 
ble for  further  losses.  Zimmerman 
V.  Heil,  86  Hun,  114  (1895). 
94 


on.  XXV.]  BEOKEKS   AND   THEIE   CONTEACTS.  [§  4:4:9. 

ure.'  Frequently  the  customer  gives  to  the  broker  a  "stop 
order,"  which  is  an  order  to  sell  or  buy,  as  the  case  may  be,  at 
a  certain  specified  figure,  or  upon  a  specified  contingency. 
Under  this  order  the  broker  must  sell  or  buy  when  the  price  or 
contingency  occurs,  but  not  until  after  it  occurs.  If  the  market 
changes  too  quickly  for  him,  he  must  sell  or  buy  at  the  market 
price  immediately  after  the  fixed  price  or  contingency  arises.^ 
The  customer  may  leave  it  in  the  discretion  of  the  broker  as  to 
the  best  time  for  buying  or  selling.'  "When  this  is  done  the 
broker  must  exercise  such  discretion  in  good  faith  and  with 
reasonably  good  judgment  and  care.*  A  stock-broker  is  not 
liable  for  contracts  which  he  knew  nothing  about,  and  which 
were  agreed  to  in  his  name  by  an  assistant  of  one  of  his  em- 
ployees, especially  where  the  customer  knew  such  to  be  the 
fact.* 

§  4A9.  Must  act  in  good  faith  and  in  reasonaNe  time. —  The 
broker  must  make  the  purchase  or  sale  in  good  faith  on  the  best 
terms  possible,  and  must  give  the  customer  the  advantage  of 
the  transaction  as  actually  made.  Any  material  failure  to  do 
this,  or  to  make  the  sale  or  purchase  as  directed,  will  release 
the  customer  from  the  transaction,  although  it  was  reported  to 

1  Whether  a  limit  was  fixed  is  a  "  short "  sale  on  a  "  stop  order,"  and 
question  for  the  jury,  if  the  facts  are  purchases  before  the  price  of  the 
disputed.  Cf.  Smith  v.  Bouvier,  70  "  stop  order  "  is  reached,  and  the  cus- 
Pa.  St.  325  08"2).  The  customer  may  tomer,  a  week  later,  then  orders  the 
ratify  the  unauthorized  purchase,  broker  to  purchase,  the  pm-chaser 
Genin  v.  Isaacson,  6  N.  Y.  Leg.  Obs.  may  recover  the  profit  that  a  pur- 
213  (1848).  If  the  power  to  sell  de-  chase  at  the  latter  date  would  have 
pends  on  the  construction  of  writ-  netted.  Campbell  u.  "Wright,  118  N.  Y. 
ings,  it  is  a  question  of  law  only.  594  (1890).  Brokers  cannot  disregard 
Davis  V.  Gwynne,  57  N.  Y.  676  (1874);  a  "stop  order,"  and  act  before  that 
S.  C,  4  Daly,  218  (1871).  But  the  writ-  price  is  reached,  even  though  prices 
ten  order  may  be  subsequently  modi-  are  fluctuating  rapidly.  Campbell  u 
fied  by  parol.  Burkitt  v.  Taylor,  13  Wright,  118  N.  Y.  594  (1890).  See  also 
N.  Y.  Week.  Dig.  75  (1881);  Clarke  v.  §  459,  infra. 

Meigs,  10  Bosw.  337  (1863).  Or  be  3  Such  discretion,  when  given,  is  re- 
waived.  Hope  V.  Lawrence,  50  Barb,  voked  only  by  clear  notice  of  revo- 
258  (1867).  cation.   Davis  v.  Gwynne,  4  Daly,  218 

2  Porter  v.  Wormser,  94  N.  Y.  431  (1871). 

(1884);  Bertram  v.  Godfray,  1  Knapp        *  Han-is  v.  Tumbridge,  83  N.  Y.  93 

P.  0.  381  (1830).    The  latter  case  in-    (1880). 

volved    an   absolute    order    to   sell       ^Timpson  v.  Allen,  149  N.  Y.  513 

should  the   stock    reach   a  certain    (1896).     Cf.  note  2,  p.  794. 

price.    Where  a  broker  is  carrying  a 

795 


4:60.'] 


BKOKEKS  AND  THEIE  CONTEACTS. 


[CH.  XXV. 


him  as  made  in  accordance  with  orders.^  The  broker  is  allowed 
a  reasonable  time  within  which  to  make  the  sale  or  purchase.^ 
§  450.  Cannot  jnircliase  from  or  sell  to  himself. —  A  broker 
cannot,  in  behalf  of  his  customer,  buy  or  sell  with  himself  as 
the  other  principal.     The  law  will  not  allow  him  to  act  both 


1  Where  the  broker  buys  in  his  own 
name  at  a  price  less  than  the  price 
reported  to  the  customer,  sells  with- 
out notice,  and  subsequently  pretends 
to  sell  again,  the  whole  transaction  is 
void  as  to  the  customer.  Levy  v. 
Loeb,  85  N.  Y.  365  (1881);  89  N.  Y.  386. 
So,  likewise,  where  he  pvirchases  an 
option  instead  of  cash  purchase,  and 
reports  a  higher  price  than  that  paid. 
Voris  V.  lilcCredy,  16  How.  Pr.  87 
(1856).  So,  likewise,  where  the  broker 
varies  the  order  from  a  cash  purchase 
to  an  option,  he  himself  taking  the 
risk  of  the  option.  Day  v.  Holmes, 
103  Mass.  306  (1869);  Pickering  v.  De- 
merritt,  100  Mass.  416  (1868).  A  broker 
who  sells  bonds  and  then  reports  no 
sale,  but  loans  money  to  the  customer 
on  the  bonds  as  collateral,  may  be 
held  liable  to  account  for  the  sale. 
Bischoffsheim  v.  Brown,  34  Fed.  Rep. 
156  (1888).  Where  an  agent  or  broker 
is  employed  to  buy  stock  for  a  "  pool," 
and  agrees  to  do  so  for  a  compensa- 
tion consisting  of  a  part  of  the  profits, 
he  is  liable  in  damages  for  fraud  if 
he  charges  the  "  pool "  more  than  the 
stock  cost  him.  Manville  v.  Lawton, 
19  N.  Y.  Supp.  587  (1892). 

2  Fletcher  v.  Marshall,  15  M.  &  W. 
755  (1846).  Cj.  Dickenson  v.  Lilwal, 
1  Starkie,  128  (1815),  which  holds  that 
tlie  tran.saction  must  be  carried  out 
on  tlie  day  of  the  order.  The  broker 
is  entitled  to  his  commission  although 
his  customer  fails  before  the  transac- 
tion is  mada  Inchbald  v.  Western, 
etc.  Co.,  34  L.  J.  (C.  P.)  15  (1864).  The 
contract  is  to  be  carried  out  within  a 
reasonable  tim&  A  broker's  custom 
is  evidence  as  to  what  is  reasonable 
time.  Stewart  v.  Cauty,  8  M.  &  W. 
160  (1811).    A  few  liours'  notice  held 


insufficient.  Johnson  v.  Mulvy,  51 
N.  Y.  634  (1872).  "  Usually  the  broker 
is  entitled  to  a  fair  and  reasonable 
opportunity  to  perform  his  obliga- 
tion, subject  of  course  to  the  right  of 
the  seller  to  sell  independently.  But 
that  having  been  granted  him,  the 
right  of  the  principal  to  terminate 
his  authority  is  absolute  and  unre- 
stricted, except  only  that  he  may  not 
do  it  in  bad  faith  and  as  a  mere  device 
to  escape  the  payment  of  the  broker's 
commissions."  Sibbaldv.  Bethlehem 
Iron  Co.,  83  N.  Y.  378,  384  (1881).  A 
customer  is  under  no  obligation,  when 
he  learns  that  his  broker  has  not  sold 
stock  as  ordered,  to  notify  the  broker 
that  he  abandoned  any  claim  to  the 
stock  and  held  the  broker  responsible 
for  their  value.  Nor  is  he  obliged  to 
redeem  the  stock  from  the  sub-broker. 
Allen  V.  McConihe,  124  N.  Y.  342 
(1890).  In  this  case  the  court  allowed 
as  damages  against  a  broker  who  de- 
layed selling  when  ordered  to  sell,  the 
difference  between  the  price  wlien 
the  order  was  given  and  the  price 
when  the  sale  was  actually  made. 
Where  for  four  years  both  the  broker 
and  the  customer  have  apparently 
abandoned  an  alleged  purchase  of 
stock  on  a  margin,  it  is  a  question 
for  the  jury  whether  there  was  an 
abandonment  or  whether  the  cus- 
tomer continued  to  be  liable.  Selig- 
man  v.  Rogers,  113  Mo.  642  (1893).  A 
broker  ordered  to  purchase  stock  on 
a  margin  need  not  actually  purchase 
at  once.  It  is  sufficient  if  he  is  ready 
to  fulfill  when  called  upon  so  to  do  at 
the  price  on  the  day  of  the  giving  of 
the  order.  Ingraham  v.  Taylor,  58 
Conn.  503  (1889). 


796 


OH.  XXV.] 


BEOKEKS    AND   THE  IK   CONTEACTS. 


[§  451. 


as  agent  and  as  principal  at  the  same  time.  Such,  an  act  is  a 
constructive  fraud  on  account  of  his  fiduciary  relation,  and 
will  be  set  aside.*  Custom  or  usage  cannot  legalize  such  a 
transaction.'^  The  broker  may,  however,  show  by  parol  evi- 
dence that  he  did  not  deal  with  himself,  though  writings  indi- 
cate otherwise.'  And  there  is  no  rule  which  prevents  the 
broker  from  acting  as  agent  both  for  the  selling  and  the  buy- 
ing customer.*  Where  the  broker  turns  over  his  own  stock  to 
the  client's  account  instead  of  buying,  and  sells  the^  client's 
stocks  without  orders  so  to  do,  and  afterwards  buys  them  back, 
all  without  his  client's  knowledge,  he  cannot  recover  commis- 
sions.^ 

§  451.  Duties  and  liaMlities  of  customer  towards  hroTcer. — 
A  stock-broker  is  but  the  agent  of  his  customer.     As  such  he 


1  Mayo  V.  Knowlton,  134  N.  Y.  250 
(1892);  Conkey  v.  Bond,  36  N.  Y.  427 
(1867);  Brookman  v.  Eothschild,  3 
Sim.  153  (1829);  Marye  v.  Strouse,  5 
Fed.  Rep.  483  (1880);  Robinson  v. 
Mollett,  L.  R.  7  H.  L.  802,  818,  826 
(1875).  Even  though  the  purcliase 
was  in  good  faith  and  at  a  lower  fig- 
ure than  the  market  price.  Taussig 
V.  Hart,  58  N.  Y.  425  (1874);  Gillett 
V.  Peppercorne,  3  Beav.  78  (1840).  In 
Bryan  v.  Baldwin,  52  N.  Y.  232  (1873), 
the  court  said:  "The  plaintiff,  being 
pledgee  of  the  stock,  and  in  that 
character  exposing  it  for  sale,  could 
not  become  the  pui'chaser  unless  the 
defendant  assented  to  sucli  purchasa 
Story  on  Bailments,  §  319;  Torrey  v. 
Bank  of  Orleans,  9  Paige,  649  (1842); 
Hawley  v.  Cramer,  4  Cow.  717,  736 
(1825).  This  sale  to  the  plaintiff  was 
not  void,  but  voidable  at  the  election 
of  the  defendant.  Edwards  on  Bail- 
ments, 260,  261.  The  defendant  was 
at  liberty  to  ratify  the  sale,  and  had 
he  done  so  it  would  have  been  valid 
for  all  purposes.  The  ratification 
woijld  have  made  it  lawful,  and  re- 
lieved it  from  any  imputation  of 
being  tortious  as  to  him.  .  .  .  But 
the  defendant  has  not  done  this,  but 
has  elected  to  treat  the  purchase  by 


the  plaintiff  as  illegal.  This  avoids 
the  sale,  and,  that  being  avoided 
by  the  defendant,  the  parties  are  re- 
mitted to  their  I'ights  the  same  as 
though  no  sale  had  been  attempted." 
It  seems  that  where  a  broker  has  an 
order  to  sell  from  one  customer  and 
an  order  to  buy  from  Another,  he 
may  employ  a  fellow-broker  to  pur- 
chase on  the  exchange  when  the  sale 
is  made.  Terry  v.  Birmingham,  etc. 
Bank,  99  Ala.  566  (1893). 

2  Commonwealth  v.  Cooper,  130 
Mass.  285  (1881).  The  custom  of 
brokers  to  buy  in  large  quantities 
and  sell  in  small  quantities  is  illegaL 
Robinson  v.  MoUett,  L.  R  7  H.  L.  803 
(1875). 

3  Porter  v.  Wormser,  94  N.  Y.  431 
(1884). 

4  Knowlton  v.  Fitch,  52  N.  Y.  288 
(18'f3). 

sSkelton  v.  Wood,  71  L.  T.  Rep. 
616  (1894).  Where  a  broker,  instead 
of  selling  directly  to  a  purchaser,  seUs 
through  another  person  at  a  less  fig- 
ure in  order  to  cheat  his  customer, 
he  cannot  collect  commissions  imless 
the  customer  knew  of  the  fraud  at 
the  time  he  closed  the  transaction- 
Hafner  v.  Herron,  46  N.  E.  Rep.  211 
(IlL,  1896). 


r97 


§  ^51.] 


BKOKEKS   AKD   THEIE   CONTKACTS. 


[CH.  XXV. 


may  bind  his  customer  by  acts  within  the  scope  of  his  author- 
ity, and  compel  the  customer  to  respond  to  his  liability.  Thus, 
the  broker  may  proceed  to  close  the  transaction,  paying  out 
his  own  money  as  though  it  was  his  own  business,  and  may  then 
compel  the  customer  to  repay  to  him  the  money  so  expended 
in  the  customer's  behalf.^  Or,  if  his  customer  refuses  to  carry 
out  the  transaction,  the  broker  may  settle  with  the  opposite 
party  by  paying  the  loss  incurred  by  bu}dng  or  selling  the  stock 
elsewhere,  and  may  then  sue  his  customer  for  the  differences 
thus  paid.^  He  may  also  recover  his  disbursements,  commis- 
sions, and  interest.^  The  customer  is  liable  to  the  broker  for 
stock  purchased,  although  the  stock  turns  out  to  be  spurious  or 
unauthorized.*  If  the  broker,  however,  seeks  to  recover  the 
full  value  of  the  stock,  he  must  first  tender  the  stock  to  the 
customer,^  or  he  must  sell  it  after  due  notice  to  the  customer, 
and  thus  accurately  ascertain  the  loss. 


iBayley  v.  Wilkins,  7  C.  B.  886 
(1849);  Whitehouse  v.  Moore,  13  Abb. 
Pr.  142  (1861);  Dails  v.  Lloyd,  12  Q.  B. 
531  (1848).  Cf.  Ex  parte  Neilson,  3 
De  G.,  M.  &  G.  556  (1853).  See  also 
§  4G1,  infra. 

2  Durant  u  Burt,  98  Mass.  161  (1867); 
Baj-'iffe  v.  Butterworth,  5  Railw.  Cas. 
283,  per  Parke,  B.  (1847);  Marten  v. 
Gibbon,  33  L.  T.  Rep.  561  (1876);  Bied- 
erman  v.  Stone,  L.  R.  2  C.  P.  504  (1867). 

3  Where  the  commissions  and  inter- 
est were  paid  to  other  brolcers,  it  may 
bo  charged  to  the  customer.  Robin- 
son V.  Norris,  51  How.  Pr.  442  (1874). 
Even  though  that  interest  be  usuri- 
ous. Smith  V.  Heath,  4  Daly,  123 
(1871).  On  commissions,  see  Inchbald 
V.  AVestem,  etc.  Co.,  34  L.  J.  (C.  P.)  15 
(1864).  Excessive  expenses  will  not  be 
allowed,  although  customarj'.  Marye 
V.  Strouse,  5  Fed.  Rep.  483  (1880).  But 
the  broker  is  entitled  to  commissions 
only  when  he  has  rendered  some 
service  to  the  customer.  Sibbald  v. 
Bethlehem  Iron  Co.,  83  N.  Y.  378 
(1881);  Hoffman  v.  Livingston,  46 
N.  Y.  Super.  Ct.  552  (1880).  The  case 
of  Hatch  V.  Douglas,  48  Conn.  116 
(1880),  holds  that  the  broker's  cus- 


If  he  is  seeking  to  re- 


tomary  monthly  charges  and  inter- 
est thereon  are  not  usurious.  Cf. 
Robinson  v.  Norris,  6  Hun,  233  (1875). 
The  broker  may  recover  from  the 
principal  the  purchase  price  of  stocks 
bought  by  the  broker,  but  not  deliv- 
ered, before  the  corporation  became 
insolvent.  Chapman  v.  Shepherd,  L. 
R.  2  C.  P.  228  (1867).  Members  of  a  syn-. 
dicate  are  jointly  liable  to  a  broker 
employed  by  them.  Sternberger  v. 
Bernheimer,  121  N.  Y.  194  (1890). 

*  See  Adamson  v.  Jarvis,  4  Bing.  66 
(1827);  Peckham  v.  Ketchum,  5  Bosw. 
506  (1859).  So,  also,  for  spurious  stock 
innocently  given  to  the  broker  to  sell. 
Westropp  V.  Solomon,  8  C.  B.  345 
(1849). 

5  Merwin  v.  Hamilton,  6  Duer,  244 
(1856);  Bowlby  v.  Bell,  3  C.  B.  284 
(1846).  But  after  once  tendering  it 
he  need  not  continually  keep  it  on 
hand.  AVynkoop  v.  Seal,  64  Pa.  St. 
361  (1870). 

6  Monroe  v.  Peck,  8  Daly,  128  (1869). 
In  Rosenstock  v.  Tormey,  32  Md.  169 
(1869),  the  necessary  allegations  were 
held  to  be  a  purchase  of  stock  accord- 
ing to  an  order,  at  fair  market  price, 
wliich  was  paid,  and  the  customer 


(98 


CH.  XXV.] 


BKOKEES    AND   THEIK   CONTRACTS. 


[§  452. 


cover  for  differences  paid  the  opposite  broker  in  settlement, 
assumpsit  is  his  remedy.^  He  must  clearly  prove  that  the  cus- 
tomer authorized  the  order.^ 

§  452.  Duties  and  UciMlities  of  a  IroJcer  toivards  customer. — 
The  broker  also  owes  certain  duties  and  incm-s  certain  liabili- 
ties in  his  relations  with  his  customer.  It  is  said  that  he 
cannot  sell  on  credit,  since  that  is  not  the  usual  course  of  his 
business.'  He  is  liable  in  damages  for  failure  to  buy  or  sell  in 
accordance  mth  his  express  orders.*  "WTiere  the  customer  fails 
to  carry  out  the  transaction,  but  the  broker  does  carry  it  out  at 
a  profit,  the  profit  belongs  to  the  customer.'  But  the  customer 
is  not  entitled  to  stock  held  for  him  by  the  broker  until  he  pays 
the  broker  all  his  reasonable  disbursements  thereon.^  The  bro- 
ker may  deposit  a  margin  with  the  opposite  broker,  according 
to  custom,  and  not  be  responsible  to  his  customer  if  it  is  lost,^ 
although  the  rule  may  be  otherwise  as  to  a  delivery  of  the  stocks 
themselves.^  The  broker  is  required  to  exercise  reasonable  dili- 
gence and  care,  and  no  more.^    The  broker  has  a  lien  on  the 


notified  and  payment  demanded; 
willingness  to  deliver  the  stock;  re- 
fusal of  customer  to  pay;  notice  of 
sale;  a  proper  sale;  and  loss. 

iPoUock  V.  Stables,  13  Q.  B.  765 
(1848).  Contra,  CMld  v.  Morley,  8 
T.  R.  610  (1800). 

2  Ward  v,  Van  Duser,  2  Hall  (N.  Y.), 
162  (1829).  In  Wliite  v.  Baxter,  71 
N.  Y.  254  (1877),  the  court  held  that  a 
customer's  contract  with  his  broker 
to  protect  the  latter  against  loss  by 
expulsion  from  the  stock  exchange 
for  non-compliancs  with  its  rules  is 
a  valid  and  enforceable  contract. 

3  2  Kent,  Com.  622  (b),  14th  ed. 
*Speyer   v.   Colgate,   4  Hun,   622 

aSTo);  Wlielan  v.  Lynch,  60  N.  Y. 
469  (1875),  the  case  of  a  wool-broker. 
See  also  Jones  v.  Marks,  40  EL  313 
■(1866).  The  damages  may  sound  in 
tort,  thus  preventing  a  release  in 
bankruptcy  from  barring  the  action. 
Parker  v.  Crole,  5  Bing.  63  (1828). 
Under  the  New  York  code  he  may 
be  an-ested  if  he  does  not  use  the 
money  for  the  pxu-pose  designated. 


Dubois  V.  Thompson,  1  Daly,  309  (1863). 
And  in  England  he  is  liable  crimi- 
nally. Eegina  v.  Cronmire,  54  L.  T. 
Rep.  580  (1886). 

5  Fowler  v.  New  York  Gold  Exch. 
Bank,  67  N.  Y.  138  (1876). 

6  See  McEwen  v.  Woods,  11  Q.  B. 
13  (1847),  where  the  broker  paid  calls 
made  on  the  stock  after  its  sale. 

^Gheen  v.  Johnson,  90  Pa.  St.  38 
(1879). 

8  Brown  v.  Boorman,  11  CL  &  F.  1 
(1844). 

apiiiUips  V.  Moir,  69  EL  155  (1873); 
Gheen  v.  Johnson,  90  Pa.  St.  38  (1879). 
As  to  the  construction  of  a  contract 
wherein  the  broker  invests  the  cus- 
tomer's money  as  the  broker  sees  fit, 
and  the  broker  guarantees  the  return 
of  the  capital  and  interest  and  all 
profits  made,  see  Vermilye's  Case,  43 
N.  J.  Eq.  146  (1887).  As  to  the  liabH- 
ity  of  stock-brokers  and  jobbers  and 
vendees  towards  the  vendors,  see  also 
1  White  &  T.  Lead.  Cas.,  6th  Eng.  ed., 
pp.  922-929. 


§  452.]  BEOKEES   AND   THEIE   COin?EACTS.  [CH.  XXV. 

customer's  property  in  his  hands  for  all  debts  due  to  the  former.^ 
But  he  has  no  such  lien  if  he  knows  that  the  customer  is  acting 
as  agent  for  another.^  It  is  a  question  of  doubt  whether  a  bro- 
ker who  has  received  in  good  faith  commissions  from  a  person 
guilty  of  embezzlement  is  liable  to  pay  over  to  the  persons  in- 
jured by  his  customer  commissions  so  received.^  A  broker  may, 
by  bill  of  discovery,  be  compelled  to  disclose  acts  amounting 
to  misconduct.*  Where  the  brokers  do  not  make  actual  pur- 
chases and  sales  as  ordered,  but  carry  the  same  on  their  books 
and  report  fictitious  transactions,  they  are  guilty  of  fraud,  and 
the  customer  may  recover  back  money  paid,  even  though,  if  the 
transactions  had  been  carried  out,  the  customer  would  have  lost 
his  money.  The  records  of  the  stock-exchange  clearing-house 
may  be  competent  evidence.*  A  broker  is  not  responsible 
where  he  in  good  faith  loans  his  customers  money,  in  compli- 
ance with  his  authority,  on  certificates  of  stock  as  collateral, 
even  though  they  turn  out  to  be  forged,  provided  he  was  not 
guilty  of  negligence.  The  latter  is  a  question  for  the  jury,  and 
the  burden  of  proof  is  on  the  broker.  The  broker  is  not  bound 
to  present  the  certificates  to  the  company  for  verification.^ 
Where  the  broker  deposits  money  in  a  bank,  the  bank  has  a 

1  Jones  uPeppercorne,Jolins.(V.-C.)  broker  to  tjie  president.  A  broker 
(1858).  who  takes  money  as  a  margin,  know- 

2  Fisher  v.  Brown,  104  Mass.  259  ing  that  the  money  comes  from  a 
(1870);  Pearson  v.  Scott,  L.  R.  9  Ch.  D.  trustee  and  is  trust-estato  money,  is 
198  (1878).  liable  to  the  estate  for  money  lost 

3  See  Butler  v,  Finck,  21  Hun,  210  thereby.  Leake  v.  Watson,  58  Conn. 
(1880).  The  case  of  Taft  v.  Cliapman,  332  (1890).  A  broker  taking,  in  pay- 
60  N.  Y.  4-15  (1872),  seems  to  hold  that  ment  of  losses  by  an  individual, 
the  broker  is  not  liable  where  he  acted  checks  drawn  by  him  as  an  officer 
without  knowledge  of  his  customer's  of  a  corporation,  must  refund  the 
acts.  See  also  S.  C.  sub  novi.  Brown-  money.  Huie  v.  Allen,  87  Hun,  516 
son  V.  Chapman,  63  N.  Y.  025  (1875).  (1895). 

See  also  Porter  v.  Parks,  49  N.  Y.  564  *  Green  v.  Weaver,  1  Sim.  404  (1827). 

(1872);  g  350,  n.,  supra.    The  case  of  See  Rawlings  v.  Hall,  1  Car.  &  P.  11 

Kissam  v.  Anderson,  145  U.  S.  435  (1823). 

(1892),  reversed  the  decision  below  5  Pi-out  v.  Chisolm,  21  N.  Y.  App. 

(Anderson  v.  Kissam,  35  Fed.  Rep.  Div.  54  (1897). 

099,  holding  the  broker  liable)  on  the  « Isham  v.  Post,  141  N.  Y.  100  (1894). 

groimd  that  it  was  for  the  jury  to  say  See  also  chs.  XXI  and  XVII,  sujpra, 

whether  the  bank,  whose  funds  were  and  Andrews  v.  Clark,  72  Md.  396 

used  by  the  president  to  pay  the  bro-  (1890). 

ker,  had  notice  of  payment  by  the 

800 


CH.  XXV.]  Br.OKEES   AND   THEIK   CONTEACTS.  [§§  453,  454. 

banker's  lien  on  it,  althougli  the  money  really  belongs  to  the 
broker's  client.^ 

§453.  Method  ofcomjyletwga  Tyrolccfs  contract. —  The  for- 
malities and  method  of  completing  a  stock-broker's  contract 
are  governed  largely  by  the  usages  of  the  stock  exchange.  It 
is  well-established  law  that,  when  a  man  sells  or  buys  shares 
through  his  broker  on  the  stock  exchange,  he  enters  into  an 
implied  contract  to  sell  or  buy  according  to  the  custom  and 
usages  prevalent  in  that  body.^  These  usages  and  customs  are 
to  be  found,  for  the  most  part,  in  the  rules  of  the  stock  ex- 
change, so  far  as  the  formalities  of  completing  the  contracts 
are  concerned.  Occasionally,  however,  such  formalities  are 
reviewed  and  sanctioned  by  the  courts.' 

§  454.  Privity  of  contract  between  hrolcer  and  ojyposite  par- 
ties.— A  broker  who  buys  or  sells  stock  does  so  subject  to  cer- 
tain liabilities  towards  the  parties  to  whom  he  sells  or  from 
whom  he  buys.  If  he  does  not  send  in  the  name  of  his  cus- 
tomer, he  is  liable  on  the  transaction  as  though  he  were  the 
principal  himself.*  He  has  been  held  liable  for  a  forgery  per- 
petrated by  his  customer.*  Where,  however,  the  broker  hands 
in  the  name  of  his  customer,  and  that  name  is  accepted,  the 
broker  is  thereby  discharged,^  unless,  of  course,  the  name  is 
unauthorized,  or  is  that  of  an  infant.'^  Upon  the  disclosure  by 
the  broker  of  his  customer's  name,  the  opposite  party  has  the 

1  Thomson    v.    Clydesdale    Bank,  *  Royal  Exch.  Ins.  Co.  v.  Moore,  11 
[1893]  A.  C.  282.  W.  R  592  (1863).     The  broker  herein 

2  See  §  462,  infra.  sold  in  his  own  name,  but  the  op- 

3  Thus,  a  usage  by  which  the  ulti-  posite   party  knew  he   acted   as  a 
mate  piu-chaser's  name  is  handed  to  broker. 

the  seller  for  the  purpose  of  having  •>  Maxted  v.  Paine,  L.  R.  6  Exch. 
the  latter  execute  a  transfer  to  the  132  (1871),  holding  that  the  broker 
former  is  upheld.  Sheppard  v.  Mur-  does  not  guarantee  his  customer's 
phy,  16  W.  R.  948  (1868).  The  cus-  responsibility,  nor  that  he  is  the  real 
tom  (in  the  oil  trade)  of  giving  the  purchaser.  So  also  of  the  stock- 
seller  time  to  investigate  and  object  jobber.  Grissell  v.  Bristowe,  L.  R  4 
to  a  purchaser  may  be  insisted  on  C.  P.  86  (1868).  Contra,  Cryse  v. 
by  the  seller.  Sumner  v.  Stewart,  Paine,  L.  R  6  Eq.  641  (1868). 
69  Pa.  St.  331  (1871).  The  pm-chaser  ^See  §  446,  supra.  Broker  hand- 
may  be  compelled,  by  a  bill  in  equity,  ing  in  the  name  of  a  ciostomer  with- 
to  register  the  transfer  made  through  out  authority  is  himself  liable.  Max- 
brokers,  Paine  v.  Hutchinson,  L.  R.  sted  v.  Morris,  21  L.  T.  Rep.  535  (1869). 
3  Eq.  257  (1866).  Cf.  Shepherd  v.  Gillespie,  L.  R  5  Eq. 

*  Wynne  v.  Price,  3  De  G.  &  Sm.  293  (1867). 
310  (184!)). 

51  801 


§  455.] 


EEOKEES   AND   THELB   CONTKACTS. 


[cH.  xxr. 


option  of  holding  either  the  broker  or  his  customer  responsible, 
but  cannot  hold  both.^  Where  a  stockholder  of  record  sells  the 
certificate  of  stock  to  a  broker  and  delivers  the  same  indorsed 
in  blank,  and  the  broker  transfers  the  same  to  his  principal, 
the  broker  is  not  liable  to  indemnify  the  vendor  against  a  statu- 
tory liability  Avhich  the  vendor  has  to  pa}''.^ 

§  455,  Privity  of  contract  ietiveen  the  opposite  customers. — 
"When  the  broker  of  one  customer  has  agreed  with  the  broker  of 
another  customer  on  the  terms  of  a  purchase  and  sale  of  stock, 
there  immediately  arises  a  privity  of  contract  between  the  two 
customers.  The  purchasing  customer  is  liable  to  the  selling 
customer  for  all  calls  and  liabilities  arising  on  the  stock  after 
the  broker's  contract  is  made,  if  the  selling  customer  is  obliged 
to  pay  such  liabilities  by  reason  of  his  being  the  registered  stock- 
holder.^ So  also  the  purchasing  customer  may  hold  the  selling 
customer  responsible  for  the  carrying  out  of  the  contract.*  It 
has  been  held  that  the  remedy  may  be  an  action  at  law  ®  or  in 
equity.^  The  right  of  set-off  for  other  debts  applies  as  between 
the  t\vo  customers,''  but  not  for  debts  due  from  one  of  the  bro- 
kers to  the  opposite  customer.^ 


1  Watson  V.  MiUer,  11  W.  N.  18 
(187G).  A  custom  or  usage  releasing 
the  broker  from  this  liability  is  void. 
Magee  v.  Atkinson,  2  M.  &  W.  440 
(1837).  Cf.  Jones  v.  Littledale,  1  Nev. 
&  P.  677  (1837),  the  sale  being  of  hemp. 
Also  Thomson  v.  Davenport,  9  B.  & 
C.  78  (1839),  holding  that  the  pur- 
chaser's option  remains  open  until 
the  name  of  the  undisclosed  principal 
is  given.  It  is  for  the  jury  to  say 
which  one  the  opposite  customer 
gave  credit  to,  irrespective  of  a  stock- 
exchange  custom,  Mortimer  v.  Mo- 
Callan,  G  M.  &  W.  58  (1810). 

2  Boultbee  v.  Gzowski,  24  Ont.  App. 
Eep.  502  (1897). 

.  3  Hawkins  v.  Maltby,  L.  R  4  Ch. 
App.  200  (1869),  ail'g  S.  C,  L.  R.  6  Eq. 
505;  Evans  v.  Wood,  L.  R.  5  Eq.  9 
(1867);  Hodgkinson  v.  Kelly,  L.  R  6 
Eq.  496  (1868);  Remfrey  v.  Butler,  1 
E.,  B.  &E.  887(1858);  Allen  u  Graves, 
L.  R  5  Q.  B.  478  (1870).  A  stock-ex- 
change custom,  makuig  the  broker  a 
principal,  does  not  prevent  the  cus- 


tomer suing  as  principal.  Langton 
V.  Waite,  L.  R  6  Eq.  165  (1868).  The 
refusal  of  the  directors  to  register  the 
sale  does  not  enable  the  purchasing 
customer  to  recover  back  the  pur- 
chase price.  Stray  v.  Russell,  1  EL  & 
El.  888  (1859). 

*  Even  though  the  selling  customer 
did  not  authorize  the  use  of  his  name, 
but  knew  of  it  and  did  not  object. 
Shepherd  v.  Gillespie,  L.  R  5  Eq.  293 
(1867). 

*  Street  v.  Morgan,  L.  R.  4  Exch. 
384  (1869),  cited  in  Davis  v.  Haycock, 
L.  R  4  Exch.  373  (1869). 

«  Sheppard  u  Murphy,  16  W.  R  948 
(1868). 

7  Carr  v.  Hinchliff,  4  B.  &  C.  547 
(1825). 

8  Fish  V.  Kempton,  7  C.  B.  687  (1849). 
See  also  Sweeting  v.  Pearce,  7  C.  B. 
(N.  S.)  449  (1859).  Unless,  possibly, 
where  tlie  customer  supposed  the  oi> 
posite  broker  was  the  principal.  See 
Kelley  v.  JMunson,  7  Mass.  318  (1811). 


803 


CH.  XXV.]  BEOKEES    AND   THEIE   CONTEACTS.  [§  456. 

§  456.  Intervening  siib-hrolcers  and  siib-ciistomers. —  "WTiere  a 
customer's  broker  employs  another  broker  to  transact  the  busi- 
ness, the  customer  cannot  compel  the  second  broker  to  complete 
the  contract  as  he  might  compel  the  first  broker.^  The  second 
broker  cannot  claim  a  lien  on  the  stock  for  debts  due  him  from 
the  first  broker.-  The  broker  cannot  offset  against  the  customer 
of  the  sub-broker  a  debt  due  the  broker  from  the  sub-broker. 
l^ot  even  a  custom  of  the  stock  exchange  to  that  effect  binds 
the  customer  unless  he  agreed  to  it.'  If  the  first  broker  merely 
introduces  the  parties  he  cannot  charge  a  commission  therefor, 
although  custom  allows  it.*  The  real  customer  may  hold  an 
intermediate  customer  liable.  A  sub-broker  or  correspondent 
broker  is  not  obliged  to  ascertain  the  relations  and  agreements 
between  the  chief  broker  and  the  customer.  The  sub-broker 
may  hold  all  stocks  as  security  for  all  accounts  between  him- 
self and  the  chief  broker,  there  being  no  notice  given  of  the 
customer's  rights.  If  there  is  any  surplus  after  the  sub-broker's 
debt  is  paid,  a  customer  who  placed  his  own  stock  in  the  chief 
broker's  hands  to  seU  is  preferred  to  another  customer  who  had 
purchased  on  a  margin  and  left  the  stock  as  security.*  Where 
the  customer  orders  his  broker  to  buy  stock,  and  the  broker 
does  buy  it  through  a  sub-broker,  and  the  broker  then  notifies 
the  customer  that  the  stock  has  been  bought,  the  broker's  title 
to  the  stock  thereby  passes  to  the  customer,  subject  to  any 
amount  due  from  the  customer  to  the  broker  and  to  any  lien 
of  the  sub-broker.  The  subsequent  insolvency  of  the  broker 
does  not  prevent  a  customer  notifying  the  sub-broker  not  to 
sell  out  the  stock  without  notifying  him,  the  customer ;  and  the 
customer  may  insist  that  the  sub-broker  resort  to  other  stocks 
belonging  to  the  broker  and  remaining  in  the  sub-broker's 
hands  to  pay  the  broker's  debts  to  the  sub-broker  before  resort- 

1  Booth  V.  FieldiBg,  1  W.  N.  245  s'wUlard  v.  White,  56  Hun,  581 
(1866).  (1890).    See  also  §§  460,  473,  infra.    A 

2  Fisher  v.  Brown,  104  Mass.  259  sub-broker  who  knows  that  the  stock 
(1870).  deposited  as  collateral  with  the  chief 

3  Blackburn  v.  Mason,  68  L.  T.  Rep.  broker  belongs  to  the  customer  is  lia- 
510  (1893).  ble  in  damages  for  conversion  where 

<  Gibson  v.  Crick,  1  HurL  &  C.  142  he  receives  such  stock  on  f  m-ther  or- 
(1862).  He  may  hold  the  intermediate  ders  and  it  transpires  that  such  use 
customer  or  agent  liable  for  set-off  of  the  stock  was  unauthorized.  Ry- 
due  from  the  latter  to  the  broker,  man  v.  Gerlach,  153  Pa.  St.  197  (1893). 
Jaycox  V.  Cameron,  49  N.  Y.  645  (1872). 

803 


§  457.]  BEOE.EKS    AXD    THEIK   CONTEACTS.  [CH.  XXV, 

ing  to  tlie  above  stock.^  If  brokers  in  New  York  take  orders- 
through  a  local  broker  in  another  place,  they  are  liable  for 
false  and  fictitious  orders  given  to  them  by  him  in  the  nam© 
of  a  customer.^ 

§  457.  Purcliases  or  sales  on  margins  —  Brolier  as  a  jileclgee. 
By  far  the  larger  part  of  a  stock-broker's  business  consists  of 
pm'chases  and  sales  of  stock  on  what  is  called  a  "  margin."  * 
The  customer  deposits  with  the  broker,  as  security,  a  sum  of 
money  equal  to  but  a  small  part  of  the  value  of  the  stock  in- 
volved. This  sum  of  money  is  the  "  margin."  If  the  custom- 
er's order  is  to  purchase,  then  the  broker  keeps  both  the  margin 
and  the  purchased  stock  as  security  against  loss  in  the  final 
closing  of  the  transaction.  If  the  customer's  order  is  to  sell, 
then  the  broker  sells;  but,  having  no  stock  to  deliver,  he  bor- 
rows the  same  from  other  pa-rties  and  delivers  it  to  the  pur- 
chaser, the  broker  still  keeping  the  margin  as  security.  Fre- 
quently no  stock  passes,  nor  is  intended  to  pass,  but  merely  the 
ultimate  profit  or  loss,  caUed  "  differences,"  is  paid ;  the  losing 
customer  loses  the  whole  or  part  of  his  margin,  the  winning 
customer  getting  back  his  margin  and  also  the  profits,  less  com- 
missions. This  is  a  gambling  contract,  and,  like  all  gambling 
contracts,  whether  in  or  out  of  a  stock  exchange,  is  not  enforce- 
able.* But  a  purchase  or  sale  of  stock  on  margins,  where  there 
is  no  proof  of  an  intent  not  to  actually  deliver  the  stock,  is 
legal.*    The  relation  between  a  customer  and  his  broker,  in 

1  Le  Marchant  v.  Moore,  150  N.  Y.  acter,  effect,  and  non-enforoeability 
209  (1896).  of  a  broker's  gambling  contracts  are 

2  Caswell  V.  Putnam,  120  N.  Y.  153  fully  treated.  A  "  margin  "  transac- 
(1890).  tion  is  not  necessarily  gambling  and 

»  A  margin  "  means,  in  the  broker's  invalid.  The  important  case  of  Hatch 

lexicon,  additional  collateral  security  v.  Douglas,  48  Conn.  116  (1880),  clearly 

against  loss  to  the  broker  while  .  .  .  sets  out  the  legality  of  such  contracts, 

carrying  stock   for    his    employer."  The  com't  said:  " It  is  pretty  evident 

McNeil  V.  Tenth  Nat  Bank,  55  Barb,  that  the  parties  did  not  contemplate 

59  (18G9).  that  the  stock  should  be   actually 

*  McBurney  v.  Martin,  6  Rob.  (N.  Y.)  transferred  to  the  defendant.   .  .  . 

502  (1860).     A  broker  cannot  recover  The  defendant  [customer],  through 

com  missions  or  disbursements  from  his  agents,  the    plaintiffs,  actually 

bis  customer,  where  the  transactions  purchased  the  stock,  and  there  was 

were  gambling  aud  intended  so  to  be  an  actual  delivery  —  not  to  tlie  prin- 

by  both.   Harvey  v.  Merrill,  150  Mass.  cipal,  but  to  the  agents  for  the  prin- 

1  (1889).  cipal."    The  brokers  "  knew  that  the 

'  See  ch.  XX,  siqjra,  where  the  char-  defendant  was  speculating,  and  that 

804 


CH.  XXV.] 


BEOKEES    A^J)   THEIE   COXTEACTS. 


[§  ^5T. 


cases  Trliere  the  broker  buys  for  his  customer  and  retains  the 
stock  as  security,  is  the  relation  of  a  pledgor  towards  a  pledgee, 
the  customer  being  the  pledgor,  the  broker  being  the  pledgee, 
and  the  stock  being  the  article  pledged,^  Some  of  the  most 
important  questions  connected  with  brokers'  contracts  arise 
out  of  this  pledgee  relationship.  This  subject,  ho\7ever,  is  fully 
treated  in  the  following  chapter.  Like  an  ordinary  pledgee  of 
stock,  the  broker  may  have  the  stock  transferred  into  his  own 
name; 2  he  is  not  allowed  to  repledge  the  stock;'  and  he  can 


they  advanced  him  money  for  that 
purpose.  But  that  was  neither  illegal 
nor  immoral.  .  .  .  No  case  has  been 
oited  which  declares  such  a  contract 
illegaL  If  we  should  so  hold,  it  would 
be  difficult,  if  not  impossible,  to  draw 
the  line  between  legal  and  illegal 
transactions."  The  California  con- 
stitution renders  void  a  transaction 
wherein  a  broker  buys  stock  for  the 
customer  with  the  broker's  money 
■and  holds  the  stock  as  security  and 
charges  the  customer  interest  and 
■commissions.  Caslmian  v.  Root,  89 
CaL  373  (1891).  A  broker  holding  as 
pledgee  stock  purchased  for  a  cus- 
tomer on  margin  need  not  keep  that 
identical  stock  on  hand,  and  it  is 
sufficient  if  he  keeps  an  equal  quan- 
tity on  hand  over  and  above  stock  of 
the  same  kind  held  by  him  for  other 
customers.  Caswell  v.  Putnam,  120 
N.  Y.  153  (1890).  In  Massachusetts  it 
is  held  that  a  broker  carrying  stocks 
on  a  margin  is  not  a  pledgee.  Covell 
V.  Loud,  135  Mass.  41  (1883).  A  broker 
holding  stock  as  collateral  security 
on  a  margin  does  not  hold  the  stock 
in  a  fiduciary  capacity.  McBumey 
V.  Martm,  6  Eob.  (N.  Y.)  502  (186G); 
Lambertson  v.  Van  Boskerk,  49  How. 
Pr.-  266,  4  Hun,  628  (1875).  In  Eng- 
land the  can-ying  of  stock  by  a  broker 
•on  a  margin  is  called  "  contango,"  and 
the  broker  is  held  to  be  the  owner  of 
the  stock.  In  the  case  of  Bentinck 
V.  London,  etc.  Bank,  [1893]  2  Ch.  120, 
the  court  said:  "In  all  these  trans- 
actions, therefore,  when  money  is 
borrowed  from  a  stock-broker  in  this 


way  on  "contango"  or  continua- 
tion, whether  the  money  is  obtained 
from  the  dealer  or  from  other  stock- 
brokers, or  from  bankers,  the  result 
is  the  same:  the  arrangement  is  one 
by  which  the  broker  becomes,  as  be- 
tween himself  and  his  client,  the 
owner  of  the  shares  in  question,  al- 
though he  is  under  a  contract  to 
provide  an  equal  amount  of  similar 
shares  at  a  futui-e  date." 

1  Approved  in  Skiff  v.  Stoddard,  63 
Conn.  198  (1893);  Markliamu.  Jaudon, 
41  N.  Y.  235  (1869);  Baker  v.  Drake,  66 
N.  Y.  518  (1876).  The  broker  is  bound  to 
keep  constantly  on  hand  the  amount 
of  stock  so  held  on  margin,  i,  e., 
pledged.  Taussig  v.  Hart,  58  N.  Y. 
425  (1874);  Rogers  v.  Gould,  6  Hun, 
229  (1875).  See  also  §  469,  infra.  In 
fact,  the  broker  is  obliged  to  conform 
to  the  rules  governing  pledges  of 
stock — a  subject  treated  in  ch.  XXVI, 
infra.  The  broker  is  a  pledgee,  and 
without  express  contract  has  a  lien 
on  the  stock  for  the  balance  due 
under  a  purchase,  but  not  for  any  gen- 
eral balance  due.  Leahy  v.  Lobdell, 
etc.  Co.,  80  Fed.  Rep.  665  (1897).  The 
customer  as  pledgor  may  claim  his 
stock  from  the  broker's  assignee  for 
the  benefit  of  creditors  if  the  cus- 
tomer can  identify  it.  Chamberlain 
V.  Greenleaf,  4  Abb.  N.  Cas.  178  (1878). 
See  Boylan  v.  Huguet,  8  Nev.  345 
(1873). 

2Horton  v.  Morgan,  19  N.  Y.  170 
(1859). 

3  See  §  471,  infra. 


805 


§  458.]  BKOKEKS    AJSTD   THEIR    CONTKACTS.  [CH.  XXV. 

put  his  customer  in  default  only  by  tendering  tlie  stock  and 
demanding  payment  for  their  whole  value  less  the  margin.^  A 
broker  or  pledgee  need  not  sell  the  stock  held  as  collateral  be- 
fore bringing  an  action  against  the  pledgor  for  the  amount  due, 
and  a  brokers'  custom  cannot  compel  it,^  Such  stock  may  be 
redeemed  from  the  assignee  of  the  broker,  provided  the  stock 
may  be  identified.'  A  broker  who  wrongfully  pledges  his 
customer's  stock  *is  guilty  of  conversion  and  may  be  arrested 
therefor.* 

§  458.  Broiler's  rights  and  duties  on  failure  of  margin. — 
When  the  "  margin  "  which  the  customer  deposits  with  his 
broker  happens  to  become  exhausted  by  the  fluctuations  of  the 
market  adversely  to  the  customer,  difficult  questions  arise  as 
to  the  several  rights  and  duties  of  the  broker  and  of  the  cus- 
tomer. If  the  broker  is  under  orders  to  close  the  transaction 
when  the  margin  becomes  exhausted,  he  of  course  is  obliged 
to  do  so.'  But,  otherwise,  the  rule  is  that  the  broker  cannot 
summarily  close  the  transaction,  even  though  he  has  fear  of 
greater  loss,  involving  a  loss  by  himself.  He  is  obliged  to  de- 
mand fm*ther  margin  from  his  customer,  at  the  same  time 
notifying  him  that  the  previous  margin  is  exhausted ;  also  that, 
in  case  the  margin  is  not  made  good,  he  will  close  the  trans- 
action, holding  the  customer  liable  for  the  loss;  also  stating 
the  time  and  place  of  such  threatened  sale.^    The  notice  must 

iRead   v.  Lambert,   10    Abb.   Pr.  ^In  the  usual  short  sale  of  stock 

(N.  S.)  428  (1871).  through  a  broker  on  a  margin,  tha 

2  De  Cordova  v.  Barnuin,  130  N.  Y.  brokers  "  were  bound  to  carry  the 
615  (1892).  stock  until  plaintiff  directed  them 

3  Skiff  V.  Stoddard,  63  Conn.  198  to  close  the  transaction,  so  long  as  he 
(189o).  complied  with  the  terms  of  the  cou- 

<  Oregon,  etc.  Co.  u  Hilmers,  20  Fed.  tract  on  his  part,  and  to  give  the 
Rep.  717  (1881);  Barry  v.  Calder,  48  plaintiff  reasonable  notice  of  the 
Hun,  449  (1888).  See  also  §  576,  tn/m.  want  of  sufficient  margin,  and  of 
Brokers  holding  a  certificate  of  stock  their  intention  to  buy  in  the  stock 
as  security  for  the  balance  of  the  pur-  and  cover  his  short  accoxmt  if  tlie 
chase  price  due  from  the  customer  margin  was  not  made  good,  in  accord- 
are  pledgees,  and  if  the  broker,  in  ance  with  the  terms  of  the  notice,'* 
violation  of  the  express  contract,  re-  Rogers  v.  Wiley,  131  N.  Y.  527  (1892). 
pledges  or  sells  such  stock  without  Where  a  customer  who  is  selling  on 
authority  from  the  customer,  he  is  a  margin  desires  to  close  the  trans- 
guilty  of  a  conversion  for  which  action,  but  his  broker  dissuades  him 
trover  will  lie.  Cliew  v.  Louchheim,  by  promising  to  carry  the  stock,  th& 
80  Fed.  Rep.  500  (1897).  broker  cannot  close  the  transaction 

6  See  §  448,  sujira.  without  notica    Rogers  v.  Wiley,  131 

806 


CH. 


XXV.] 


BKOKEKS    AND   THEIK   CONTKACTS. 


[§  ^oO. 


be  given  a  reasonable  time  before  sncli  closing  of  tbe  trans- 
action, and  notice  may  be  sent  by  mail.^  If  the  broker  fails 
to  comply  with  these  rules,  and  sells,  he  is  guilty  of  conversion 
of  the  stock.2  "Where  the  broker  is  merely  authorized  to  sell 
he  is  not  bound  to  sell.' 

§  459.  What  will  excuse  notice  and  demand  for  more  margin. 
All  these  rights  of  the  customer  to  notice  of  failure  of  margin, 
demand  of  more  margin,  notice  of  intent  to  sell,  and  of  time 


N.  Y.  527  (1892).  Brokers,  before  sell- 
ing a  customer's  stock  which  they 
hold  as  pledgees,  the  stock  haviag 
been  piu-chased  on  a  margin,  are 
bound  to  demand  further  margin  and 
give  notice  of  intent  and  time  and 
place  of  sale.  If  they  fail  to  do  so,  but 
sell  and  then  sue  the  customer  for 
the  loss,  tliey  cannot  recover  any- 
thing. They  cannot  claim  that  their 
loss  has  been  greater  than  defend- 
ant's loss  due  to  their  conversion. 
Gillett  V.  Whitmg,  120  N.  Y.  402  (1890) ; 
Markham  v.  Jaudon,  41  N.  Y.  235 
(1869),  overruling  Hanks  v.  Drake,  49 
Barb.  186  (1867),  and  Sterling  v.  Jau- 
don, 48  Barb.  459  (1867).  See  also 
Kenfield  v.  Latham,  2  CaL  Leg.  Rec. 
235  (1879),  and  §  461,  infra.  Cf. 
Woi-thington  v.  Tormey,  34  Md.  182 
(1870);  and  see  ch.  XXVI,  infra. 
Leaving  notice  at  office  was  held  in- 
sufficient where  it  did  not  reach  the 
customer.  Bryan  v.  Baldwin,  52  N.  Y. 
233  (1873).  A  formal  demand  for  fur- 
ther margin  is  insufficient  where, 
subsequently  to  that  demand,  the 
broker  negotiates  with  the  customer 
and  teUs  him  that  he  will  consider 
what  to  do.  McGinnis  v.  Smythe,  1 
Silvern.  23  (1886).  The  broker's  tele- 
grams and  conversations  with  his 
customers  may  amount  to  a  waiver 
of  his  right  to  demand  fm-ther  mar- 
gin. Rogers  v.  Wiley,  14  N.  Y.  Supp. 
622  (1891);  aff'd,  131  N.  Y.  527  (1892). 
When  called  upon  for  fm"ther  mar- 
gin, a  customer  may  make  a  "  stoi> 
order,"  the  price  fixed  in  such  order 
being  within  the  margin  already  fur- 


nished. Campbell  v.  Wright,  118  N.  Y. 
594  (1890).  The  giving  of  a  note  to  a 
broker  pledgee  does  not  extend  the 
time  within  which  the  pledgor  was 
to  deposit  fiu'ther  margin.  Gould  v. 
Trask,  10  N.  Y.  Supp.  619  (1890). 

1  Worthington  v.  Tormey,  34  Md, 
182  (1870).  Two  days'  notice  held 
sufficient.  Stewart  v.  Drake,  46  N.  Y. 
449  (1871).  See  also,  in  general,  §  477, 
infra.  A  notice  after  the  sale  is 
insufficient,  and  the  question  of 
whether  a  notice  was  given  is  for  the 
jury  if  it  is  denied.  Gillett  v.  Whit- 
uag,  120  N.  Y.  402  (1890).  The  broker 
is  bovmd  to  give  the  customer  rea- 
sonable notice  to  fui-nish  more  mar- 
gin. Lazare  v.  Allen,  20  N.  Y.  App. 
Div.  616  (1897). 

2  Baker  v.  Drake,  66  N.  Y.  518  (1876). 
Cf.  Gregory  v.  Wendell,  40  Mich.  432 
(1879),  involving  a  purchase  of  corn. 
It  is  only  in  stock  transactions  that 
the  relation  of  pledgor  and  pledgee 
arises.  Where  the  broker  closes  the 
transaction  without  notice,  and  later 
the  customer  gives  an  order  which, 
if  the  transaction  had  not  been 
closed,  woiild  have  yielded  a  profit, 
the  customer  may  recover  damages 
to  the  amount  of  that  profit.  Rogers 
V.  Wiley,  131  N.  Y.  527  (1892).    , 

3  Robinson  v.  Norris,  51  How.  Pr. 
442  (1874);  Esser  v.  Linderman,  71 
Pa.  St.  76  (1872).  Cf  Harris  v.  Tmn- 
bridge,  83  N.  Y.  92  (1880).  On  a  short 
sale  of  grain  the  broker  is  not  bound 
to  sell  as  soon  as  the  principal  refuses 
to  advance  more  margin.  Perin  v. 
Parker,  126  IlL  201  (1888). 


807 


4  'r'JOi  >'y 


§  ^^0.] 


BKOKEES    iJSrD   THEIR   COXTKACTS. 


[CH.  XXY. 


and  place  of  sale,  maybe  waived;  and  brokers  generally  re- 
quire tbeir  customers  to  sign  written  contracts  to  that  effect. 
Where  the  customer,  upon  being  presented  with  his  account, 
does  not  object,  but  promises  to  pay  the  amount,  he  thereby 
waives  his  right  to  object  to  a  sale  as  being  without  notice.^ 
It  is  doubtful  whether  the  death  of  the  customer  will  authorize 
the  broker  to  close  the  transaction  without  notice.'  A  custom 
of  brokers  to  dispense  with  these  notices  is  void,  and  not  bind- 
ing on  the  customer.*  The  fact  that  a  panic  occurs,  or  unusual 
fluctuations  of  the  market  happen,  does  not  excuse  a  broker 
from  giving  such  notice.^ 

1  Thus,  a  written  authority  to  the 
brokers,  "to  sell,  in  their  discretion, 
at  public  or  private  sale,  .  .  .  with- 
out any  notice  whatever,  the  stocks, 
bonds,  or  gold  which  they  might  be 
carrying  [for  the  plaintiff]  whenever 
my  margin  shall  fall  below "  a  cer- 
tain figure,  waives  all  the  customer's 
rights  herein.  Wicks  v.  Hatch,  62 
N.  Y.  585  (1875).  See  also  Cameron 
V.  Durkheim,  55  N.  Y.  435  (1874).  See 
also  §  477,  infra.  The  customer  may 
waive  his  rights  after  the  broker  has 
made  tlie  unauthorized  sale.  Stew- 
art V.  Drake,  46  N.  Y.  449  (1871);  Mil- 
liken  V.  Dehon,  27  N.  Y.  364  (1863). 
But  authority  "  to  close  the  account, 
without  notice,  by  purchase  or  sale, 
at  public  or  private  sale,"  does  not 
waive  riglit  to  notice  of  failure  of 
margin  and  demand  for  more.  Sten- 
ton  V.  Jerome,  54  N.  Y.  480  (1873); 
Kenfield  v.  Latliam,  2  Cal.  Leg.  Eec. 
235  (1879).  The  demand  for  further 
margin  may  be  waived,  and  waiver 
may  be  inferred  from  the  negotia- 
lions  and  proposition.  Harris  v. 
J'ryor,  18  N.  Y.  Supp.  128  (1892).  A 
<"ommon  form  of  the  contract  which 
tlie  broker  reipiires  the  customer  to 
8ign  is  the  following: 

" hereby  agrees  to  maintain  with  you 

at  all  times  a  margin  of per  centum  of 

tlie  par  value  of  all  stocks  and  bonds  against 
which   you  have  made   or   may  hereafter 

make  advances  to ,  and  a  like  margin  on 

stocks  or  Ijonds  which have  borrowed  or 

may  hereafter  borrow  through  you  to  make 


deliveries  on  sales  made  for account  or 

otherwise. 

"  In  case margin  should  become  im- 
paired and  the  same  is  not  promptly  made 
good  in  response  to  personal  notice  or  notice 

sent  by  wire  or  letter  and  directed  to 

usual  address,  you  are  authorized  in  your 
discretion  to  buy  or  sell  at  the  New  York 
Stock  Exchange  or  at  public  or  private  sale, 
without  further  notice,  such  securities  as 
may  be  necessary  to  place  the  account  in 
condition  satisfactory  to  you,  or  to  close  the 
same  entirely,  as  you  may  prefer. 

"  In  case  of  my  decease  you  are  hereby 
authorized  to  close  my  account  by  purchase 
or  sale  of  securities,  as  the  same  may  re- 
quire.     ." 

2Gmett  V.  Whiting,  141  N.  Y.  71 
(1894). 

'The  broker  wiU  be  protected  in 
continuing  the  transaction  iintil  per- 
sonal representatives  are  appointed. 
Hess  V.  Eau,  95  N.  Y.  359  (1884).  Cf. 
Lacey  v.  Hill,  L.  R.  8  CIi.  App.  921 
(1873). 

*  Markham  v.  Jaudon,  41  N.  Y.  235 
(1869);  Taylor  v.  Ketchum,  35  How. 
Pr.  289  (1867);  S.  C,  5  Rob.  (N.  Y.)  507. 
Contra,  Appleman  v.  Fisher,  34  Md. 
540  (1871),  a  case  of  a  gold-broker;  also 
Colket  V.  EUis,  10  Phila.  375  (1875), 
where  both  parties  were  brokers  and 
knew  the  custom-  If  the  customs  are 
expressly  made  a  part  of  the  con- 
tract, insolvency  of  the  customer  au- 
thorizes sale  without  notice,  such 
being  the  custom.  Lacey  v.  Hill, 
L.  R.  18  Eq.  182  (1874). 

5  Markham  v.  Jaudon,  41  N.  Y.  235 
(1869);  Brass  v.  AVorth,  40  Barb.  648 


803 


CH.  XXV.]  BEOKEES   AKD   THEIE   CONTEACTS.  [§  460. 

§  460.  Customer's  remedies  and  damages  herein. —  For  an  un- 
authorized sale  by  a  broker  of  stock  held  upon  a  margin,  the  cus- 
tomer has  ample  remedies.  He  may  claim  the  benefit  of  the 
sale,  or  may  claim  the  value  of  the  stock.^  Or  the  customer 
may  require  the  broker  to  replace  the  stock,  and,  upon  his  fail- 
ure so  to  do,  the  customer  may  replace  it  himself  and  charge 
the  broker  with  the  loss.^  Or  the  customer  may  recover  the 
advance  in  the  market  price  from  the  time  of  the  sale  up  to  a 
reasonable  time  to  replace  the  stock  after  notice  of  the  sale.' 
The  unauthorized  sale  by  the  broker  herein  is  not  necessarily  a 
fraudulent  sale.'*  The  customer  cannot  enjoin  the  broker  unless 
the  latter  is  insolvent.'  The  suit  should  be  at  law,^  and  demand 
and  tender  need  not  be  alleged.'^  An  illegal  sale  of  the  pledge 
by  the  pledgee  is  a  conversion,  and  a  complaint  for  such  con- 
version will  not  be  construed  as  a  complaint  for  breach  of  con- 
tract.* 

Where  a  broker  buys  or  sells  stock  on  his  customer's  account 
in  violation  of  the  terms  of  his  contract,  and  thereby  makes  a 
profit,  the  customer  has  his  option  either  to  repudiate  the  trans- 
action altogether  and  sue  for  damages,  or  he  may  adopt  it  and 

(1863) ;    Ritter  v.   Cushman,  7  Rob.  had  sold  the  pledge  before  the  note 

(N.  Y.)  294  (1867).    See  also  §  448,  was  due,  the  court  said:  "It  is  very 

supra.  questionable,  I  think,  whether  a  de- 

1  Taussig  V.  Hart,  58  N,  Y.  425  (1874) ;  mand  after  default  in  payment  of  the 
Strong  V.  National,  etc.  Assoc,  45  debt  for  which  property  is  pledged 
N.  Y.  718  (1871).  as  security  will  render  a  refusal  to 

2  Baker  v.  Drake,  53  N.  Y.  211,  217  deliver  the  pledged  property  a  tor- 
(1873);  Colt  V.  Owens,  90  N.  Y.  868  tious  conversion  of  it.  No  doubt  the 
(1882).  pledgor  can  redeem  upon  a  tender  of 

» Colt  V.  Owens,  90  N.  Y.  368  (1882),  the  debt,  or  he  may  recover  the  dif- 

holding    that  prices  witliin    thirty  ference  between   the  value  of  the 

days  after  the  sale  is  a  reasonable  pledge  and  the  debt.     But  to  lay  the 

rula     See  also  Gruman  v.  Smith,  81  foundation  for  an  action  for  conver- 

N.  Y.  25  (1880) ;  Capron  v.  Thompson,  sion,  I  am  of  opinion  that  an  offer 

86  N.  Y.  418  (1881).     Cf.  Andrews  v.  and  demand  must  be  made  on  the 

Clerke,  8  Bosw.  585  (1858).  day,  and  is  not  sufficient  if-  made 

*  Stratford  v.  Jones,  97  N.  Y.  586  after  the  day  on  which  the  debt  has 

(1885).  become  payable." 

5  Park  V.  Musgrave,  2  Thomp,  &  C.  "  Clarke  v.  Meigs,  22  How.  Pr.  340, 

571  (1874).                                      •  13  Abb.  Pr.  467  (1861). 

•Delevan  v.   Simonson,  35  N.  Y.  » Smith  v.  Hall,  67  N.  Y.  48  (1876), 

Super.  Ct.  243  (1873).     In  Butts  v.  distinguishing  Austin  v.  Rawdon,  44 

Burnett,  6  Abb.  Pr.  (N.  S.)  302  (1869),  N.  Y.  63  (1870). 
involving  the  arrest  of  a  broker  who 

809 


§  460.] 


BEOKEES    AITD   THEIE   CONTEACTS. 


[cn. 


XXV. 


claim  for  himself  the  benefit  made  by  his  agent.^  It  has  been 
held  that,  where  the  broker  fails  to  buy  according  to  the  in- 
structions of  his  customer,  and  the  customer  suffers  a  loss  by 
reason  of  the  failure,  the  object  of  the  purchase  being  to  cover 
a  short  sale,  the  measure  of  damages  is  the  difference  between 
the  price  at  which  the  stock  was  sold  short  and  the  market 
price  upon  the  day  when  the  order  was  given  to  the  broker  to 
h\xy  in.  In  other  words,  the  plaintiff  may  in  such  a  case  recover 
the  profits  which  he  would  necessarily  have  made  had  his  order 
been  properly  executed.^  And  the  rule  is  the  same  when  the 
loss  to  the  customer  results  from  the  failure  of  the  broker  to 
sell  as  instructed,  or  where  the  broker  sells  at  an  improper  or 
manifestly  unfavorable  time.'    A  customer  who  owns  particu- 

1  Kimber  v.  Bjarber,  L.  R.  8  Ch.  App. 
56  (1872);  Marsh  v.  Keating,  1  Bing. 
N.  C.  198  (1834);  Taussig  v.  Hart,  49 
N.  Y.  301  (1872);  S.  C,  58  N.  Y.  425 
(1874);  Pickering  v.  Demerritt,  100 
Mass.  416  (1868);  Day  v.  Holmes,  103 
Mass.  306  (1869).  For  the  measure  of 
damages  where  a  broker  converts 
his  customer's  securities,  and  then  is 
unable  by  reason  of  his  insolvency  to 
replace  them,  see  Chamberlain  v. 
Greenleaf,  4  Abb.  N.  Cas.  178  (1878). 
Sometimes  an  advance  in  the  price  of 
the  stock,  vrithin  a  reasonable  time 
after  notice  of  the  conversion  is  re- 
ceived, is  allowed.  Gruman  v.  Smith, 
81  N.  Y.  25  (1880).  See  §  475.  And 
what  is  a  reasonable  time  in  such  a 
case  is  a  question  for  the  jury.  Baker 
V.  Drake,  66  N.  Y.  518  (1876);  Stevens 
V.  Hurlbut  Bank,  31  Conn.  14G  (1862); 
Stewart  v.  Cauty,  8  K  &  W.  160 
(1841);  Field  v.  Lelean,  6  H.  &  N.  617 
(1861).  Cf.  AUen  v.  Dykers,  3  HUl, 
593  (1842).  As  to  the  measure  of  dam- 
ages in  an  action  against  a  broker 
for  fraud,  inducing  the  plaintiff  to 
invest  in  "  Grant  and  Ward  "  securi- 
ties, see  James  v.  Work,  70  Hun,  296 
(1893). 

2  In  an  action  to  recover  damages, 
where  a  firm  of  stock-brokers  sold 
for  a  customer,  upon  his  order  and 
for  his  account,  three  hiindred  shares 


of  stock,  short,  at  186,  and  subse- 
quently, without  the  customer's  order 
or  knowledge,  bought  in  stock  to 
cover  the  sale,  and  then  a  few  days 
later,  the  stock  having  declined  sev- 
eral points,  the  customer  ordered 
them  to  cover  their  sale,  to  which 
order  no  attention  was  paid,  it  was 
held  that  the  proper  measure  of  dam- 
ages was  the  difference  between  the 
price  at  which  the  stock  was  sold 
short  and  the  market  price  upon  the 
day  when  the  order  was  received  to 
purchase,  with  interest,  deducting 
commissions,  etc.  White  v.  Smith, 
54  N.  Y.  522  (1874).  See  Magee  v.  At- 
kinson, 2  M.  &  W.  440  (1837).  In 
Allen  V.  McConihe,  124  N.  Y.  342 
(1891),  the  court  allowed  as  damages 
against  a  broker  who  delayed  selling 
when  ordered  to  sell,  the  difference 
between  the  price  when  the  order 
was  given  and  the  price  when  the 
sale  was  actually  made. 

3  In  HaiTis  v.  Tumbridge,  83  N.  Y. 
92  (1880),  it  appears  that  the  plaintiff 
purchased  through  the  agency  of  the 
defendant  a  stock  option,  a  privilege 
known  as  a  "straddle,"  upon  which 
the  defendant  guaranteed  that  the 
fluctuations  in  the  stock  during  the 
pendency  of  the  contract  should 
amoxint  to  eight  per  cent.  On  the 
next  day  after  the  purchase  defend- 


810 


CH.  XXV, 


BEOKEES   Am)   THEIE   CONTEACTS. 


[§  ico. 


lar  certificates  of  stock  and  pledges  them  with  his  broker  may 
reclaim  such  certificates  from  the  broker's  assets  upon  the  in- 
solvency of  the  latter,  but  he  cannot  claim  any  particular  stocks 
which  the  broker  has  purchased  for  him,  even  though  he  is  able 
to  identify  them  as  being  the  ones  which  were  purchased  for 
him,  inasmuch  as  his  equities  are  no  better  than  the  equities  of 
other  customers.^  "Where  a  broker,  by  custom  and  authority 
impliedly  given,  repledges  stock  carried  by  him  on  a  margin, 
the  customer  cannot,  upon  the  failure  of  the  broker,  have  all 
the  broker's  stock  of  that  class  first  applied  in  discharge  of  his 
claim.2  Where  a  party  telegraphs  to  sell  a  certain  stock,  the 
sale  to  be  "  short "  and  speculative,  the  damages  for  failure  of 
the  telegraph  company  to  deliver  the  message  are  too  remote 


ant  sold  tlie  stock  short,  which  re- 
sulted in  a  loss  to  the  plaintiff,  who 
had  at  the  time  of  the  purchase  au- 
thorized defendant,  as  her  agent,  to 
exercise  the  option.  As  to  the  meas- 
ure of  damages  the  coui-t  said:  "An 
objection  is  taken  to  the  rule  of  dam- 
ages. It  is  insisted  that,  as  plrintiff 
never  gave  any  directions  to  '  put '  or 
'  caU '  the  stock,  she  shotdd  not  have 
recovered  as  if  she  had.  But  in  the 
absence  of  such  directions  it  was 
defendant's  duty,  under  the  circum- 
stances of  this  case,  as  we  have  al- 
ready said,  to  have  closed  the  '  strad- 
dle '  contract  by  exercising  the  option 
at  the  most  favorable  time,  and  to 
have  acted  for  her  in  that  respect 
with  reasonable  care  and  skilL  As 
he  did  not  do  so,  she  is  entitled  to  re- 
cover what  she  has  lost  by  his  neg- 
lect ;  and  the  price  of  the  stock  from 
day  to  day  dtu'ing  the  running  of  the 
option  having  been  shown,  it  was  for 
the  juiy  to  determine  that  amount." 
Cf.  Speyer  v.  Colgate,  4  Hun,  622 
(1875).  Where  a  broker  sold  stock 
for  his  customer  without  authority 
and  in  violation  of  an  agreement  not 
to  sell,  and  it  appeared  that  for  thirty 
days  after  notice  Avas  given  to  the 
customer  of  the  sale  the  stock  could 
liave  been  purchased  in  the  market 
for  the  price  at  which  it  was  sold  or 


even  for  less,  it  was  held,  in  an  ac- 
tion to  recover  damages,  that  the 
customer,  having  had  a  reasonable 
time  after  he  was  notified  of  the  sale 
of  his  stock  to  replace  it  at  the  same 
or  a  lower  price,  was  entitled  only  to 
nominal  damages.  Colt  v.  Owens,  90 
N.  Y.  368  (1882).  Cf,  Randall  v.  Al- 
bany  City  Nat.  Bank,  1  N,  Y.  St.  Rep. 
592  (1886).  See  also  McArthur  v.  Sea- 
forth,  2  Taunt.  257  (1810).  But  when 
the  action  of  the  broker  is  fraudulent 
the  customer  may,  upon  obtaining 
knowledge  of  the  facts,  repudiate  the 
whole  transaction  and  recover  back 
the  money  paid.  Levy  v.  Loeb,  89 
N.  Y.  386  (1882),  reversing  S.  C,  47 
N.  Y.  Super.  Ct.  61.  Cf.  Stewart  v. 
Drake,  46  N.  Y.  449  (1871).  In  Baker 
V.  Drake,  66  N.  Y.  518  (1876),  where  a 
broker,  unauthorized  to  do  so,  sold 
stock  which  he  was  carrying  for  his 
customer,  it  was  held,  in  an  action 
for  damages,  that  the  measure  of 
damages  was  the  advance  in  the 
mariiet  price  from  the  time  of  the 
sale  up  to  a  reasonable  time  to  re- 
place it  after  notice  of  sale. 

1  Sillcocks  V.  Gallaudet,  66  Hun,  522 
(1892).  As  to  sub-brokers  or  corre- 
spondent brokers,  see  §  456,  supra. 
See  also  §  473,  infra. 

2  Skiff  V.  Stoddard,  63  Conn.  193 
(1893). 


811 


§  461.] 


BKOKEKS   AND   THEIK   CONTRACTS. 


[c:?.  XXV. 


and  speculative,  even  though  the  stock  goes  down  on  the  mar- 
ket.^ The  question  of  the  customer's  rights,  where  the  broker 
has  repledged  the  stock  and  then  failed,  is  considered  elsewhere.' 

§461.  Broliers'  remedies  and  damages  herein. —  If  a  broker 
sells  out  his  customer's  stock  without  notice,  he  may  recover 
any  loss  from  the  customer,  where  the  broker's  loss  is  greater 
than  the  customer's  damages  for  the  conversion.^  But  where 
the  broker's  act  is  strictly  according  to  law,  he  is  of  course  en- 
titled to  recover  from  his  customer  any  loss  that  has  been  sus- 
tained in  excess  of  the  margin.*  And  where  a  broker  purchases 
stock  on  an  order  and  demands  payment  of  the  price,  the  broker 
may  sell  the  stock  for  non-payment,  after  waiting  a  reasonable 
time,  such  being  the  custom  of  the  market.* 

It  is  a  well-settled  rule  that  if  a  broker,  acting  in  good  faith 
and  without  default,  incurs  personal  loss  or  damage  in  the  course 
of  transacting  the  business  of  his  agency,  or  in  following  the 
instructions  of  his  principal,  he  may  recover  from  the  principal 
full  compensation  therefor.®    Accordingly,  where  a  broker  buys 


1  Cahn  V.  Western  U.  TeL  Co.,  48 
Fed.  Rep.  810  (1891),  46  Fed.  Eep.  40. 
The  measure  of  damages  for  error  in 
the  deliveiy  of  telegraph  messages 
to  buy  stock  "  is  the  difference  be- 
tween the  market  value  of  the  shares 
at  the  time  when  the  dispatch  should 
have  been  delivered  and  the  sum  paid 
for  them  in  the  market  on  the  receipt 
of  the  message."  Pearsall  v.  Western 
U.  TeL  Co.,  124  N.  Y.  256  (1891). 

2  See  §§471-473,  infra. 

3  Minor  v.  Beveridge,  141  N.  Y.  399 
(1894),  practically  overruling  Gillett 
V.  Wliiting,  120  N.  Y.  402,  and  hold- 
ing that  the  broker  may  sue  the  cus- 
tomer for  losses,  even  though  he  sold 
witliout  notice,  and  that  the  cus- 
tomer is  entitled  to  a  counter-claim 
only.  To  same  effect,  see  Gruman  v. 
Smith,  81  N.  Y.  25  (1880).  See  also 
Capron  v.  Thompson,  86  N.  Y.  418 
(1881);  §  458,  supra;  and  §  475,  infra. 
In  Ellis  V.  Pond,  78  L.  T.  Rep.  125  (1897), 
the  court  held  that  even  though 
a  broker  sold  his  principal's  stock, 
which  the  broker  held  as  pledgee. 


prior  to  the  time  to  which  the  broker 
liad  agreed  to  carry  the  stock,  yet 
that  the  broker  might  recover  from 
his  principal  any  loss  in  such  sale  as 
compared  with  the  price  at  which  the 
broker  originally  bought  the  stock, 
but  that  the  client  could  counter- 
claim for  the  damage  due  to  the  sale 
being  made  prior  to  the  agreed  time. 
The  court  held,  however,  that  where 
by  the  contract  the  broker  was  to  ac- 
cept delivery  of  certain  stock  at  a 
certain  time  for  his  principal,  but 
before  that  time  the  broker  sold  such 
stock,  contrary  to  his  agreement  with 
his  principal,  the  broker  could  not 
recover  any  damages  for  the  loss. 

^Schepeler  v.  Eisner,  3  Daly,  11 
(1869). 

5  Taylor  v.  Bailey,  48  N.  E.  Rep.  200 
(111.,  1897). 

6Sedg%vick  on  Damages  (7th  ed.), 
86;  Lindley  on  Companies  (5th  ed.), 
pp.  512-516;  Sutton  v.  Tatham,  10  Ad. 
&  E.  27  (1839);  Bayliffe  v.  Butter- 
worth,  1  Exch.  425  (1847);  Bowlby  v. 
BeU,  3  C.  B.  284  (1846) ;  Bayley  v.  Wil- 


813 


CH, 


XXV.] 


BKOKEKS   AXD   THEIK    CONTKACTS. 


[§  4<32. 


stock  upon  Ms  customer's  order  and  pays  for  it,  and  upon  a  de- 
cline in  value  tlie  customer  refuses  to  accept  it,  the  broker  may 
recover  the  price  paid  by  hiin,  and  not  merely  the  difference 
between  that  price  and  the  market  value  on  the  day  of  his  de- 
mand.^ The  guaranty  by  a  third  party  of  the  customer's  account 
may  be  enforced.^ 

§  462.  Broliers'  customs  and  usages. —  It  has  been  a  greatly 
disputed  question  as  to  how  far  and  when  a  custom  or  usage 
among  stock-brokers  or  at  stock  exchanges  may  enter  into  and 
govern  stock-brokers'  contracts.  At  an  early  day  the  rule  was 
laid  down  by  the  English  courts  that  he  who  buys  or  sells  stock 
through  a  stock-broker  must  be  considered  as  dealing  with  him 
according  to  the  usages  of  the  market  in  which  he  deals,  and 
the  customs  which  prevail  in  relation  to  that  species  of  busi- 
ness.^   A  late  decision,  however,  seems  to  hold  that  a  stock- 


kins,  7  C.  B.  886  (1849);  McEwen  v. 
Woods,  3  Car.  &  K  330  (1846);  Taylor 
V.  Stray,  2  C.  B.  (N.  S.)  175  (1857); 
Stray  v.  Russell,  1  EL  &  EL  888  (1859); 
Chapman  v.  Shepherd,  L.  R.  2  C.  P. 
228  (1867);  Biederman  v.  Stone,  L.  R. 
2  C.  P.  504  (1867);  Robinson  v.  Mollett, 
L.  R  7  H.  L.  802  (1875);  S.  C,  L.  R  7 
C.  P.  84;  L.  R  5  C.  P.  646;  Pollock  v. 
Stables,  12  Q.  B.  765  (1848);  Lacey  v. 
HiU,  L.  R.  8  Ch.  App.  921  (1873).  See 
also  Dos  Passos  on  Stock-brokers, 
pp.  123,  803. 

iGiddings  v.  Sears,  103  Mass.  311 
(1869).  Cf.  Field  v.  Kinnear,  4  Kan. 
476  (1868).  Where  there  is  a  rescis- 
sion of  a  contract  for  the  sale  of  stock, 
the  measure  of  the  damages  is  the 
value  of  the  stock  at  the  time  and 
place  of  the  proposed  delivery.  White 
V.  Salisbvuy,  33  Mo.  150  (1863);  Vance 
V.  Tourne,  13  La.  225  (1839). 

2  Oppenheim  v.  Waterbury,  86  Hun, 
122  (1895). 

3  In  Biedertnan  v.  Stone,  L.  R.  2  C.  P. 
504  (1867),  the  court  said:  "It  has 
been  held  in  a  great  number  of  cases 
that  persons  buying  or  selling  stock 
or  shares  through  members  of  the 
stock  exchange  are  bound  by  the 
rules  which  govern  the  transactions 


of  that  body."  To  the  same  effect, 
see  Bayliffe  v.  Butterworth,  5  Railw. 
Cas.  283  (1847),  per  Parke,  B.;  Mitch- 
ell V.  Newhall,  15  M.  8c  W.  308  (1846); 
Maxted  v.  Paine,  L.  R  6  Exch.  133 
(1871);  Grissell  v.  Bristowe,  L.  R.  4 
C.  P.  36, 47  (1868) ;  Appleman  v.  Fisher, 
34  Md.  540  (1871);  Coles  v.  Bristowe, 
L.  R.  4  Ch.  App.  3  (1868) ;  Stray  v.  Rus- 
seU,  1  EL  &  EL  888  (1859);  Davis  v. 
Haycock,  L.  R  4  Exch.  373  (1869); 
Nickalls  v.  Merry,  L.  R  7  H.  L.  530 
(1875).  Cf.  Pollock  V.  Stables,  12  Q.  B. 
765  (1848);  Taylor  v.  Stray,  2  C.  B. 
(N.  S.)  175  (1857);  Morrice  v.  Hunter, 
14  L.  T.  Rep.  897  (1866>;  Kingsbury  v. 
Kirwin,  43  N.  Y.  Super.  Ct.  451  (1878); 
aff'd,  77  N.  Y.  612.  But  the  usage 
must  not  be  illegaL  Robinson  v.  Mol- 
lett, L.  R  7  H.  L.  803,  818,  826  (1875); 
Hodgkinson  v.  Kelly,  L.  R.  6  Eq.  496 
(1868);  Tiiyler  v.  Great  Indian,  etc. 
R'y,  4  De  G.  &  J.  559,  573  (1859).  Nor 
may  the  custom  be  established  by 
that  one  transaction.  Westropp  v. 
Solomon,  8  C.  B.  345  (1849).  It  must 
be  reasonable.  Goldschmidt  v.  Jones, 
23  L.  T.  Rep.  220  (1870).  A  usage  that 
is  contrary  to  an  act  of  parliament, 
requiring  the  broker  to  notify  his  cus- 
tomer of  the  particular  niimbers  of 


81c 


§  iC2.] 


BKOKEKS    Ai^^D    TDEIK   CONTEACTS. 


[CH.  XXY. 


exchange  custom  does  not  bind  the  customer,  unless  he  knew  of 
it  and  agreed  to  it.^  The  American  rule  allows  usages  of  bro- 
kers to  interpret  the  language  of  the  contract,  and  where  it  is 
obscure  to  ascertain  its  nature  and  extent,  but  not  to  vary  its 
terms,  introduce  new  conditions,  or  authorize  acts  contrary  to 
its  provision.^  The  customer  may,  however,  by  express  agree- 
ment, waive  his  common-law  rights  and  allow  usage  to  govern 
the  transaction.'    A  customer  directing  a  purchase  of  stock  in 


the  shares  purchased  on  his  account, 
is  void.  Perry  v.  Barnett,  L.  K.  15 
Q.  B.  D.  388  (1885).  Cf.  Seymour  v. 
Bridge,  L.  R.  14  Q.  B.  D.  460  (1885). 

1  Blackburn  v.  Mason,  68  L.  T.  Rep. 
510  (1893). 

2  "  Usage  can  be  admitted  to  inter- 
pret the  language  of  a  contract  where 
it  is  obscure,  but  not  to  change  its  legal 
character,  or  derogate  from  the  rights 
of  parties,  or  authorize  acts  contrary 
to  its  provisions. "  German  Sa v.  Bank 
V.  Renshaw,  28  AtL  Rep.  281  (IVId., 
1894);  Parsons  v.  Martin,  77  Mass.  Ill 
(1858);  Hopper  v.  Sage,  112  N.  Y.  530 
(1889);  Lombard'o  v.  Case,  30  How. 
Pr.  117  (1865);  1  Addison,  Contracts 
(8th  Eng.  ed.,  1883),  *p.  60;  21  Am. 
L.  Reg.  (N.  S.)  176,  note;  Marye  v. 
Strouse,  5  Fed.  Rep.  483  (1880).  Cf. 
Winans  v.  Hassey,  48  Cal.  634  (1874). 
The  case  of  Baker  v.  Drake,  66  N.  Y. 
518  (1876),  holds  that  stock-brokers' 
usage  cannot  add  to  or  make  part  of 
the  contract.  Cf.  Horton  v.  Morgan, 
19  N.  Y.  170  (1859);  Peckhara  v. 
Ketchum,  5  Bosw.  506(1859);  White- 
house  V.  Moore,  13  Abb.  Pr.  142  (1861). 
If  there  is  doubt  as  to  the  existence 
of  the  usage  the  question  is  for  the 
jury.  Dent  v.  Nickalls,  29  L.  T.  Rep. 
536  (1873).  The  usage  may  be  intro- 
duced in  evidence  to  show  how  the 
business  is  to  be  transacted,  but  it 
must  not  be  unreasonable.  Rosen- 
stock  V.  Tormey,  32  Md.  169  (1869), 
holding  also  that  the  broker's  corre- 
spondence with  his  city  broker  is  not 
competent  to  prove  purchases  and 
sales.    Upon  the  effect  of  usage  in 


other  transactions,  see  Com  Ex- 
change Bank  v.  Nassau  Bank,  91 
N.  Y.  74  (1883);  Richmond  v.  Union 
Steamboat  Co.,  87  N.  Y.  240  (1881); 
Walls  V.  Bailey,  49  N.  Y.  464  (1872); 
Vail  V.  Rice,  5  N.  Y.  155  (1851);  Dela- 
field  V.  Illinois,  26  Wend.  192  (1841); 
Dawson  v.  Kittle,  4  HiU,  107  (1843); 
Boardman  v.  Gaillard,  1  Hun,  217 
(1874);  Minnesota  Cent.  R'y  v.  Mor- 
gan, 52  Barb.  217  (1868);  Sipperly  v. 
Stewart,  50  Barb.  62,  68  (1867);  Du- 
guid  V.  Edwards,  50  Barb.  288  (1867); 
Haskins  v.  Warren,  115  Mass.  514, 536 
(1874);  Dickinson  v.  Gay,  89  Mass.  29 
(1863);  Parrott  v.  Thacher,  26  Mass. 
426  (1830);  Greenleaf  v.  Moody,  95 
Mass.  363  (1866);  Tilley  v.  Cook 
County,  103  U.  S.  155  (1880);  National 
Bank  v.  Burkhardt,  100  U.  S.  686 
(1879);  Vermilye  v.  Ad.ims  Exp.  Co., 
21  Wall.  138  (1874);  Forrestier  v. 
Bordman,  1  Story,  43  (1839);  S.  C,  9 
Fed.  Cas.  459;  Oelricks  v.  Ford,  23 
How.  49  (1859);  Renner  v.  Bank  of 
Columbia,  9  Wheat.  581  (1824);  Cope 
V.  Dodd,  13  Pa.  St.  33  (1850);  Corbett 
V.  Underwood,  83  lU.  324  (1876) ;  Phil- 
lips V.  Moir,  69  111  155  (1873);  Bissell 
V.  Ryan,  23  III  566  (1860);  Williams 
V.  Gilman,3  Me.  276  (1825);  Partridge 
V.  Forsyth,  29  Ala.  200  (1856);  Hal- 
werson  v.  Cole,  1  Spears  (S.  C),  321 
(1843);  Hogg  v.  Snaith,  1  Taunt.  346 
(1808);  Gibson  v.  Crick,  1  Hurlst.  & 
C.  142  (1862);  Fleet  v.  Murton,  L.  R. 
7  Q.  B.  126  (1871).  Brokers'  usages 
cannot  vary  fixed  principles  of  law. 
Hopper  V.  Sage,  112  N.  Y.  530  (1889). 
'  In  Robinson  v.  Norris,  51  How.  Pr. 


814 


CH.  XXV.] 


BEOKEES    AISTD   THEIK    CONTKACTS. 


[§  ^62. 


the  l^ew  York  Stock  Exchange  is  bound  by  the  usages  and  cus- 
toms of  that  exchange.!  Although  a  transfer  of  stock  is  on  a 
separate  piece  of  paper,  and  is  not  acknowledged  as  required 
by  a  rule  of  the  stock  exchange,  nevertheless  the  pledgee  may 
be  a  lonafde  holder.^ 

Phila.  375  (1875);  Sutton  v.  Tatlaam, 
10  A(L  &  EL  27  (1839);  Bayley  v.  Wil- 
kins,  7  C.  B.  886  (1849);  Duncan  v. 
Hill,  L.  E.  6  Exch.  255  (1871);  Shep- 
pard  V.  Murphy,  Ir.  Rep.  2  Eq.  544 
(1868);  Bowring  v.  Shepherd,  L.  R  6 
Q.  B.  309  (1871);  Evans  v.  Wain,  71 
Pa.  St.  69  (1872);  Sweeting  v.  Pearce, 
7  C.  B.  (N.  S.)  449  (1859);  Shaw  v. 
Spencer,  100  Mass.  382  (1868);  Day  v. 
Hohnes,  103  IVIass.  306  (1869).  See 
also  §  477,  infra, 

1  Taylor  v.  Bailey,  48  N.  K  Rep.  200 
(IlL,  1897). 

«  Smith  V.  Savin,  141 N.  Y.  315  (1891). 


442  (1874),  the  court  said:  "It  has 
been  settled  by  our  court  of  appeals 
that  no  custom  among  brokers  can 
deprive  parties  of  rights  which  the 
law  gives  them,  but  they  have  not 
decided  that  those  rights  may  not  be 
waived  by  agreement.  I  think  it 
Pierfectly  clear  that  if  the  broker  in- 
forms his  customer  of  the  terms  upon 
which  he  will  act  for  him  as  his  bro- 
ker, and  in  view  of  that  notice  the 
customer  gives  an  order,  he  is  bound 
by  the  terms  on  which  the  broker 
proposed  to  act  for  him."  See  also 
Baker  v.  Drake,  66  N.  Y.  518  (1876). 
See,  in  general,  Colket  v.  Ellis,  10 


815 


CHAPTEE  XXYL 


PLEDGES  AND  MORTGAGES  OF  STOCK. 


463.  Definitions   of  pledge,  mort- 

gage, and  lien. 

464.  Mortgages     and    pledges    of 

stock. 

465.  How  a  pledge  of  stock  arises 

or  is  made  —  Pledge  by  the 
corporation  itself. 

466.  Pledgee  may  have  the  stock 

registered  in  his  own  name 
or  the  name  of  another. 

467.  Stock-broker  purchasing  stock 

for  a  customer  on  a  margin 
is  a  pledgee. 

468.  Miscellaneous  rights  of  pledgee 

and  pledgor  —  The  equity  of 
redemption, 

469.  Pledgee  need  not  retain  or  re- 

turn to  the  pledgor  the  iden- 
tical certiticates  or  shares  of 
stock  which  were  pledged, 
but  must  have  equal  quan- 
tity always  on  hand. 

470.  Pledgee's  liability  on  subscrip- 

tion aud  statutory  liability 
on  stock. 

471.  Pledgee  has  no  right  to  sell  or 


repledge  the  stock,  even  tem- 
porarily, except  upon  notice, 
unless  the  debt  is  assigned 
with  the  stock. 
§  472.  Purchasers  or  pledgees  of 
stock  from  pledgee  with  no- 
tice are  not  protected. 

473.  Bona  fide  repledgees  or  pur- 
chasers of  pledged  stock  are 
protected  —  Pledgor's  reme- 
dies —  Arrest  —  Marshaling 
the  assets. 

474  Pledges  by  agents,  trustees,  ex- 
ecutors, etc.,  legally  and  in 
breach  of  trust. 

475.  Pledgor's  remedies. 

476.  Pledgee's  remedies  when  debt 

secured  is  not  paid  —  Sale 
and  deficiency. 

477.  Notice   of  sale    of   stock  by 

pledgee  to  apply  to  debt  se- 
cured —  Waiver  of  notice. 

478.  Formalities  of  sale. 

479.  If  the   pledgee  himself  pur- 

chases at  the  sale,  then  the 
sale  is  voidable. 


§  463.  Definition  of  ijledge,  mortgage,  and  lien. —  A  pledge 
may  be  defined  to  be  a  delivery  of  personal  property  as  a  se- 
curity for  some  debt  or  engagement.  A  mortgage  of  person- 
alty, on  the  other  hand,  is  a  sale  with  the  condition  attached 
that,  if  the  mortgagor  performs  some  act,  the  sale  shall  be  void. 
In  a  pledge  the  title  remains  in  the  pledgor,  and  the  pledgee 
has  a  special  property  in  the  thing  pledged.^  In  a  mortgage 
the  title  passes  to  the  mortgagee,  subject  to  being  revested  in 
the  mortgagor  upon  payment  of  the  debt.  In  pledges  the  thing 
pledged  must  be  delivered  to  the  pledgee.  In  mortgages,  gen- 
erally, the  possession  of  the  thing  mortgaged  remains  with  the 
mortgagor. 

1  See  Pars.  Cont.  I,  p.  5G9;  II,  p.  113;  stock,  he  does  not  break  the  contract 

III,  p.  272.    "Where  an  employee  is  by  by  pledging  his  stock.     McMullan  v. 

contract  entitled  to  a  certain  salary  Dickinson  Co.,  63  Minn.  405  (1896). 
so  long  as  he  should  own  certain 

ai6 


OH.  XXYI.] 


PLEDGE    OF   STOCK. 


[§  4.64:. 


A  pledge  differs  also  from  a  lien.  A  pledge,  by  implication, 
gives  the  pledgee  a  power  to  sell  on  due  notice,  in  case  the 
debt  is  not  paid  at  matm-it  j,  while  a  lien  gives  merely  the 
power  of  detention  until  the  debt  is  paid.^ 

§  461.  Mortgages  and  2)1  edges  ofstoclc. —  Shares  of  stock  may 
be  the  subject  of  a  mortgage  or  pledge.^  A  mortgage  of  stock, 
however,  is  not  often  made;  and,  unless  there  is  a  clear  intent 
to  the  contrary,  the  courts  will  treat  the  transaction  as  a  pledge 
rather  than  a  mortgage.'  In  fact  it  is  difficult  to  ascertain  from 
the  cases  how  shares  of  stock  may  be  mortgaged ;  and  a  few 
early  decisions,  which  held  certain  transactions  to  be  mortgages, 
would  to-day  be  held  to  be  pledges.*    There  are  but  few  clear 


1  Donald  v.  Suckling,  L.  R  1  Q.  B. 
585,  G04  (1806).  "  A  simple  lien  —  that 
is  to  say,  a  right  to  detain  chattel 
property  until  a  given  debt  be  paid, 
but  without  any  right  to  sell  and 
apply  the  proceeds  in  payment  —  is 
one  thing;  a  pledge,  since  it  implies 
the  right  in  the  depositary'  to  sell  the 
deposit  and  apply  the  proceeds  to  the 
debt  it  was  given  to  secure,  is  an- 
other. Shares  of  stock  put  up  as  col- 
lateral secvu-ity  constitute  a  pledge." 
First  Nat.  Bank  v.  lUinois  T.  &  S. 
Bank,  84  Fed.  Eep.  34  (1897). 

2"Notliing  is  better  settled  than 
that  shares  in  the  capital  stock  of 
a  corporation  are  the  subject  of 
pledge."  Dayton  Nat.  Bank  v.  ]\Ier- 
chants'  Nat.  Bank,  37  Ohio  St.  208 
<1881).  "It  was  formerly  doubted 
whether  it  [stock]  could  be  the  sub- 
ject of  a  pledge,  but  it  is  now  held 
tliat  it  can  be."  Newton  v.  Fay,  92 
Mass.  505  (1865).  As  to  pledges  to 
secure  parties  who  advance  money  to 
the  company,  see  ch.  XX  and  §  76, 
supra. 

3  Newton  v.  Fay,  92  Mass.  505  (1865); 
Nabring  v.  Bank  of  Mobile,  58  Ala.  204 
(1877);  Merchants'  Bank  v.  Cook,  21 
Mass.  405  (1836);  Mechanics',  etc. 
Assoc.  V.  Conover,  14  N.  J.  Eq.  219 
(1862);  Doak  v.  Bank  of  the  State,  6 
Ired.  L.  (N.  C.)  309  (1846),  In  England 
security  is  given  by  a  process  called 


a  sale  with  a  contract  of  repurchase. 
The  coWt  holds  that  this  is  not  a 
pledge.  "  An  essential  term  of  a 
pledge  is  that  on  fulfillment  by  the 
pledgor  of  the  conditions  of  the  bar- 
gain, commonly  called  redemption, 
the  pledgee  is  boimd  to  hand  back  to 
the  pledgor  the  very  thing  deposited 
with  him,"  whereas  in  a  sale  and 
contract  of  repurchase,  the  identical 
p^pperty  in  numbers,  etc.,  need  not 
be  returned.  Simmons  v.  London. 
J.  S.  Banlr,  [1891]  1  Ch.  270. 

*  Thus,  in  Huntington  v.  Mather,  3 
Barb.  538  (1848), the  court  said:  "There 
are  two  leading  considerations  to  be 
regarded  in  determining  whether  the 
transaction  is  a  pledge  or  a  moiir 
gage:  namely,  the  title  and  the  pos- 
sessioru  If  it  is  a  mortgage,  the  legal 
title  passes  to  and  is  vested  in  the 
creditor.  "With  a  pledge  it  is  differ- 
ent ;  the  legal  title,  until  a  sale  on  de- 
fault of  payment  or  redemption,  con- 
tinuing in  the  pledgor.  .  .  .  The 
essential  difference  as  to  matter  of 
right  is  that  in  one  the  titlp  passes 
and  in  the  other  it  does  not.  But  the 
difference  in  substance  and  fact  is 
that,  in  the  case  of  a  pawn  or  plet\ge, 
the  possession  must  pass  out  of  the 
pawner,  but  in  the  case  of  a  mortgage 
it  need  not."  The  court,  however, 
influenced  probably  by  the  eqmties 
of  the  case,  held  the  transaction  to 


53 


817 


§  ^04.] 


PLEDGE   OF    STOCK. 


[CH.  XXVI, 


cases  of  a  mortgage  of  stock  to  be  found.  It  seems  that  a 
formal  instrument  of  chattel  mortgage  of  stock,  duly  executed 
and  registered  at  the  municipal  clerk's  office,  as  required  by 
law  in  case  of  chattel  mortgages,  would  not  constitute  an  ef- 
fectual mortgage  of  stock,  and  the  mortgagee  would  not  be 
protected  where  he  does  not  receive  the  certificate  of  stock 
from  the  mortgagor,  or  does  not  obtain  a  registry  of  transfer 
on  the  corporate  books.*    Where  a  railroad  company  o^vns 


be  a  mortgage,  and  that  tlie  right  of 
the  debtor  to  redeem  was  ban-ed  by 
the  ten-year  statute  of  limitations. 
In  the  case  of  Smith  v.  Forty-nine  and 
Fifty-six  Quartz  Min.  Co.,  14  Cal.  243 
(1859),  the  coiirt  held  the  transaction 
to  be  a  mortgage  rather  tnfcn  a  con- 
ditional sale  of  the  stock.  The  ques- 
tion of  pledge  was  not  considered. 
!Manns  v.  Brookville  Nat.  Bank,  73 
Ind.  243  (1881),  speaks  of  the  trans- 
action as  a  mortgage;  and  William- 
son V.  New  Jersey,  etc.  R.  R.,  26  N.  J. 
Eq.  398  (1875),  says  that  such  a  mort- 
gage need  not  be  recorded  in  the 
municipal  clerk's  office,  as  required 
by  the  chattel-mortgage  act.  In  both 
cases  the  transaction  might  better 
have  been  treated  as  a  pledge.  In 
Adderly  v.  Storm,  6  Hill  (N.  Y.),  624 
(1844),  the  court  said:  "I  have  al- 
ready said  that  this  was  not  a  pawn 
or  pledge  of  tlie  stock;  neither  was 
it  strictly  a  mortgage."  At  the  pres- 
ent day  it  would  be  held  to  be  a 
pledge.  Wilson  v.  Little,  2  N.  Y.  448 
(1849);  Hasbrouck  v.  Vandervoort,  4 
Sandf.  74  (1850).  In  Brewster  v.  Hart- 
ley, 37  Cal.  15  (1869),  the  court  said: 
"  The  transfer  in  writing  of  shares  of 
stock  not  only  does  not  prove  that 
the  transaction  is  not  a  pledge,  but 
the  stock,  irnless  it  is  expressly  made 
assignable  by  the  delivery  of  the 
certificates,  cannot  be  pledged  in  any 
other  manner."  In  Thompson  v.  Hol- 
laday,  15  Oreg.  34  (1887),  a  chattel 
mortgage  on  sliares  of  stock  was  in- 
volved. It  was  declared  void  because 
it  was  given  to  a  receiver  wlio  pre- 


viously held  the  stock  as  receiver. 
Sonretimes  a  chattel  mortgage  of 
stock  arises  where  a  railroad  mort- 
gage covers  not  only  real  estate,  but 
also  all  personal  property,  bonds,  and 
stock  which  are  or  shall  be  owned 
by  the  mortgagor  corporation. 

1  The  clearest  and  most  satisfactory 
case  is  Spalding  v.  Paine,  81  Ky.  416 
(1883),  where  a  chattel  mortgage  of  a 
share  of  stock  was  duly  recorded  iu 
the  proper  county,  the  mortgagor 
retaining  the  certificate  of  stock. 
The  mortgagor  subsequently  sold 
and  transferred  the  certificate  of 
stock  to  a  bona  fide  purchaser.  The 
coiu-t  held  that  the  recording  of  the 
mortgage  was  of  no  avail,  that  there 
could  be  no  mortgage  of  choses  in 
action,  and  that  the  bona  fide  trans- 
feree took  the  stock.  Pryor,  J.,  well 
said :  "  Much  of  the  bvisiness  of  the 
country  is  conducted  on  the  faith  of 
the  pledge  of  such  stock  as  collater- 
als; and  to  adjudge  that  the  holder 
of  the  stock  by  transfer  on  the  books 
of  the  corporation,  or  by  indorsement 
and  delivery  by  the  owner,  is  subor- 
dinate in  his  claim  to  the  mortgagee, 
upon  the  doctrine  of  constructive  no- 
tice, M'ould  paralyze  trade  and  open 
a  wide  field  for  the  fraudulent  dispo- 
sition of  such  valuable  interests  at 
the  expense  of  honest  and  confiding 
purchasers."  The  right  of  a  subscriber 
to  demand  a  certificate  of  stock  may 
be  attached  before  such  certificate  is 
issued  and  delivered,  and  such  at- 
tachment has  precedence  over  a  mort- 
gage, even  though  the  mortgage  is 


818 


CH,  XXVI.] 


PLEDGE    OF   STOCK. 


[§  ^64. 


shares  of  stock  in  an.  elevator  company,  sucli  stock  is  not  sub- 
ject to  the  general  mortgage  executed  by  the  raikoad  company.^ 
A  pledge  of  stock  without  a  delivery  is  not  strictly  and  legally 
a  pledge.  It  "  may  have  amounted  to  a  mortgage,  but  it  could 
amount  to  nothing  more ;  and  if  a  mortgage,  it  did  not  place 
the  mortgagee  in  possession,  but  gave  him  merely  a  naked  right 
to  have  the  property  appropriated  and  applied  to  the  payment 
of  his  debt."  2 


recorded  with  the  register  of  deeds, 
no  notice,  however,  of  such  mortgage 
being  given  to  the  corporation  itself. 
Gates  V.  Baxter,  97  Tenn.  443  (1896). 
Cf.  Manns  v.  Brookville  Nat.  Bank, 
73  Ind.  243  (1881);  Foster  v.  Potter,  37 
Mo.  525  (1866);  Vowell  v.  Thompson, 
3  Cranch,  428  (1829);  S.  C,  28  Fed.  Gas.* 
1308.  See  alio  Holyoke  v.  McMurtry, 
33  Neb.  548  (1891).  A  mortgage  of 
stock  is  valid  as  between  mortgagor 
and  mortgagee  without  a  transfer  of 
certificates.  The  mortgagee  after 
foreclosure  may  compel  the  corpora- 
tion to  transfer  without  making  the 
transferee  a  party.  Tregear  v.  Eti- 
wanda  Water  Co.,  76  GaL  537  (1888). 
Stock  may  be  mortgaged  and  no  de- 
livery of  the  certificates  need  be 
made.  Though  a  foreclosure  is  made 
irregularly,  the  mortgagor  may  ratify 
it,  or  may  be  barred  by  the  six-year 
statute  of  limitations.  Campbell  v. 
Woodstock  Iron  Co.,  83  Ala.  351  (1887). 
The  pledgor  may,  by  an  instrument 
in  writing,  assign  his  equity  of  re- 
demption to  one  of  his  creditors. 
Such  assignment  need  not  be  re- 
corded as  a  chattel  mortgage  and  is 
not  fraudulent,  even  though  it  be  kept 
secret  from  the  other  creditors  of  the 
pledgor.  National  H.  R.  Bank  v. 
Chaskin,  28  N.  Y.  App.  Div.  311  (1898). 
1  Humphreys  v.  jMcKissock,  140 
U.  S.  304  (1891).  A  chattel  mortgage 
does  not  include  shares  of  stock,  al- 
though broad  enough  in  its  terms  to 
do  so,  where  both  parties  testify  that 
it  was  not  the  intent  to  include  the 
stock,  and  the  mortgagee  allowed 


the  mortgagor's  assignee  to  take 
away  the  stock.  Yovmkin  v.  Collier, 
47  Fed.  Rep.  571  (1891). 

2  Christian  v.  Atlantic,  etc.  R.  R., 
133  U.  S.  233,  242  (1890).  A  pledge  to 
secure  the  debt  of  another  is  not 
waived  by  temporarily  allowing  that 
other  to  have  the  pledge  for  a  short 
time.  Wing  v.  Holland  T.  Co.,  5 
N.  Y.  Supp.  384  (1889).  An  agree- 
ment that  certain  bonds  in  the  pos- 
session of  a  third  party  shall  be  held 
in  pledge  is  not  a  good  pledge.  Act- 
ual delivery  is  necessary  to  consti- 
tute a  pledge.  Seymour  v.  Hendee, 
54  Fed.  Rep.  563  (Vt,  1893).  Where 
stock  is  placed  in  a  trustee's  hands, 
and  a  trustee's  certificate  is  taken 
therefor,  a  pledge  of  the  trustee's 
certificate  is  not  a  pledge  of  the 
stock  sufficient  to  cut  off  subsequent 
attachments  of  the  stock.  Bidstrup 
V.  Thompson,  45  Fed.  Rep.  452  (1891). 
Where  one  party  loans  money  to  an- 
other party  to  buy  stock  in  a  certain 
company,  such  stock  to  be  delivered 
to  the  former  party  in  pledge,  and 
the  latter  party  uses  the  stock  for 
another  piu'pose,  the  loan  of  the 
money  is  not  a  mere  loan,  but  the 
money  is  impressed  with  a  trust,  and 
this  trust  follows  the  stock  except 
as  against  bona  fide  holders.  Bar- 
nard V.  Hawks,  111  KG.  333  (1892). 
A  pledge  made  by  a  separate  written 
assignment  of  the  stock,  the  certifi- 
cates remaining  in  the  pledgor's  pos- 
session and  continuing  to  stand  in 
his  name  on  the  corporate  books,  is 
not  good  as  against  the  pledgor's  re- 


819 


§  4Gi.]  PLEDGE    OF   STOCK.  [CH.  XXVI. 

"Where,  on  tlie  other  hand,  the  certificate  of  stock  is  delivered 
to  the  creditor  as  security,  it  is  evident  that  possession  of  the 
property  is  given  to  the  creditor,  but  that  the  debtor  still  con- 
siders the  stock  to  be  his.  Such  a  transaction  is  a  pledge  and 
not  a  mortgage;  and  consequently,  since  the  giving  of  stock 
certificates  as  security  is  almost  invariably  effected  by  a  deliv- 
ery of  the  certificates,  a  mortgage  of  stock  may  be  said  to  be 
possible,  but  not  technically  a  correct  use  of  the  word.  The 
delivery  of  a  certificate  of  stock  with  a  blank  power  of  attor- 
ney, as  collateral  security,  constitutes  a  pledge  and  not  a  mort- 
gage ;  ^  and  the  same  rule  prevails  even  though  an  absolute 
transfer  or  registry  is  made  on  the  corporate  books.^  A  mort- 
gage on  shares  of  stock  is  sometimes  made  by  transferring  the 
stock  to  the  trustee  of  the  mortgage.'  A  mortgage  on  shares 
of  stock  does  not  prevent  the  -corporation  controlled  by  such 
stock  from  issuing  a  mortgage  on  its  property ;  and  it  is  no 
breach  of  trust  for  the  trustee  of  the  first  mortgage  to  be  the 
trustee  of  the  second  mortgage,  where  the  first  mortgage  does 
not  prohibit  such  second  mortgage,  the  stock,  by  the  terms 
of  the  mortgage,  remaining  in  the  name  of  the  mortgagor,* 
A  contract  whereby  a  stockholder  delivers  certain  stock  for 
money  to  be  paid  to  the  corporation,  the  money  to  be  repaid 
out  of  dividends  and  in  other  ways  and  the  stock  then  to  be 
returned,  is  a  conditional  sale,  and  not  a  loan  to  the  corpora- 
tion.^ It  seems  that  a  stockholder  may  lease  his  stock.  He 
may  for  a  certain  sum  assign  to  another  all  dividends  during 
the  specified  time,  and  give  to  the  lessee  the  right  to  vote  the 
stock  during  that  time.® 

ceiver  who  takes  possession  of  the  and  the  party  who  financed  the  mat- 

certifioatea     Atkinson  v.  Foster,  134  ter  for  him  was  discussed  in  Griggs 

111.  472  (1890).  V.  Day,  58  N.  Y.  Super.  Ct.  385  (1890). 

1  Meclianics',  etc.  Assoc,  v.  Conover,  3  gee  gg  777, 852,  infra.  Where  stock 

14  N.  J.  Eq.  219  (1862);  Lewis  v.  Gra-  is  mortgaged   and  delivered   to  tlie 

liam,  4  Abb.  Pr.  106  (1857).    But  see  trustee    of  the  mortgage,  this  is  a 

Greene  v.  Dispeau,  14  R.  I.  575  (1884).  moi'tgage  and  not  a  pledge.    Toler  v. 

A  delivery  of  the  certificates  as  se-  East  Tennessee,  etc.  R'y,  67  Fed.  Rep. 

curity  is  a  pledge  and  not  a  mort-  168,  178  (1801). 

gage.    George,  etc.  Co.  v.  Range,  etc  *  Gasquet  v.  Fidelity,  etc.   Co.,  75 

Co.,  50  Pac.  Rep.  630  (Utah,  1897).  Fed.  Rep.  343  (1896). 

2Nabring  v.   Bank  of  Mobile,   58  ^Crimp  v.  McCormick  Const.  Co., 

Ala.  204  (1877);  Wilson  v.  Little,  2  71  Fed.  Rep.  356  (1896). 

N.  Y.  443    (1849).    The  question  of  « Zachry  v.  Nolan,  66  Fed.  Rep.  467 

whether  a  sale  or  pledge  was  involved  (1895). 
in  the  relations  between  a  contractor 

820 


CH.  XXVI.] 


PLEDGE   OF    STOCK. 


[§  ^65. 


§  4G5.  Hoiv  ai)le(lge  of  stocli  arises  or  is  made  — Pledge  hij 
the  corporation  itself.— A  pledge  of  stock  is  genorally  made  by 
a  delivery  of  the  certificates  of  stock  indorsed  in  blank  to  the 
pledgee,  and  a  memorandum  in  writing  to  the  effect  that 
the  stock  is  held  in  pledge  is  generally  signed  and  given  to  the 
pledgor,  and  a  copy  thereof  attached  to  the  certificates  of 
stock.  The  pledge  may  be  to  a  third  person  for  the  benefit  of 
the  creditor.^  A  mere  direction  to  the  corporation  cannot  con- 
stitute a  pledge.'^  But  where  no  certificate  has  been  issued  to 
the  stockholder  he  may  pledge  the  stock  by  an  instrument  in 
writino-.3  A  pledge  does  not  exist  although  the  president  of  a 
railroad  company  has  its  bonds  in  his  possession  and  states  that 
he  holds  them  in  pledge  for  a  syndicate  of  which  he  is  a  mem- 
ber.   Actual  delivery  is  necessary.    An  equitable  pledge  may 


1  Where  a  corporation  guarantees 
certain  bonds,  and  a  person  holding 
stock  of  the  company  indorses  on  the 
guaranty  that  he  holds  the  stock  to  se- 
cure the  performance  of  the  guaranty, 
he  cannot  afterwards  claim  that  he 
has  a  prior  lien  as  pledgee  of  the 
stock.  Mercantile  Trust  Co.  v.  At- 
lantic Trust  Co.,  86  Htm,  213  (1895). 
Where  the  pledge  is  deposited  with  a 
third  party,  the  pledgor  and  pledgee 
may  modify  their  agreement  as  to 
the  pledge.  The  depositary  of  the 
pledge  cannot  act  upon  a  provision 
in  the  original  agreement  relative  to 
an  independent  and  outside  transac- 
tion, and  in  an  action  by  the  pledgee 
to  realize  on  the  stock  cannot  set 
up  that  by  reason  of  the  modified 
agreement  between  the  pledgor  and 
pledgee  the  depositary  in  its  outside 
transaction  has  suffered  damage. 
Mercantile  Trust  Co.  v.  Atlantic 
Trust  Co.,  69  Hun,  264  (1893).  A  party 
receiving  money  paid  on  subscrip- 
tions for  stock  does  not,  merely  be- 
cause he  places  in  a  tin  box  in  a  safe- 
deposit  company  a  declaration  that 
certain  securities  owned  by  him  are 
held  as  collateral  security  therefor, 
create  a  pledge  for  the  benefit  of  the 
corporation  to  secure  the  paying  over 


of  snch  subscriptions  to  the  corpora- 
tion. Girard  Trust  Co.  v.  Mellor,  156 
Pa.  St.  579  (1893). 

2  Gumming  v.  Prescott,  2  Y.  &  C. 
Excli.  488  (1837);  Lallande  v.  Ingram, 
19  La,  Ann.  364  (1867),  the  court  say- 
ing: "  In  all  cases  of  pledges  the 
pledgee  must  be  put  in  possession  of 
the  thing  pledged;  and,  if  it  be  a 
claim,  the  evidence  of  the  obligation 
must  be  transferred  and  delivered. 
Shares  in  stock  cannot  be  pledged 
unless  they  be  evidenced  by  certifi- 
cates, which  must  be  transferred  and 
delivered  to  the  pledgee."  If  the 
certificates  of  stock  are  not  delivered 
to  the  pledgee  nor  to  any  one  for  him 
there  is  no  pledge.  Succession  of 
Lanaux,  46  La.  Ann.  1036  (1894).  As  to 
how  a  pledge  is  made,  see  g  464,  supra. 

3 'First  Nat.  Bank  v.  Gifford,  47 
Iowa,  575  (1877),  where  such  a  pledgee 
was  protected  against  a  third  person 
who  had  advanced  the  money  to  the 
pledgor  to  pui'chase  the  stock.  See 
also  Brigham  v.  Mead,  92  Mass.  245 
(1865);  Thorp  v.  Woodluill,  1  Sandf. 
Ch.  411  (1844).  Unissued  stock  may 
be  pledged  by  the  person  entitled  to 
it.  When  issued,  it  at  once  becomes 
a  pledge.  Harris's  Appeal,  12  AtL 
Pep.  743  (Pa.,  1888). 


821 


§  iG5.] 


PLEDGE  OF  STOCK. 


[CH.  XXVI. 


be  enforced  by  the  court,  but  only  where  there  is  a  contract  by 
the  pledgor  corporation  applpng  to  specific  property.^  A 
pledgee  does  not  waive  his  pledge  although  he  returns  the 
stock  to  the  pledgor  to  be  sold.^  In  a  few  cases  a  mere  deliv- 
ery of  the  certificate  without  a  written  transfer  has  been  held 
sufficient  to  constitute  a  pledge.^  A  delivery  of  the  certifi- 
cate of  stock  indorsed  in  blank  is  sufficient  to  constitute  a 
pledge,  without  any  memorandum  in  wi'iting  to  that  effect,  and 
Avithout  a  registry  of  the  same  being  made  on  the  corporate 
books.*  Not  even  a  provision  of  the  charter  or  a  by-law  of  the 
corporation  to  the  effect  that  transfers  are  not  valid  until  reg- 
istered on  the  corporate  books  can  prevent  a  pledge  of  stock 
being  made  by  a  mere  delivery  of  the  certificates  indorsed  in 
blank,  or  indorsed  to  the  pledgee,  without  such  registry ^^   The 


1  Hook  V.  Ayers,  80  Fed.  Eep.  978 
(1897).  On  the  question  of  the  neces- 
sity of  a  delivery  in  order  to  consti- 
tute a  pledge,  see  also  Fidelity,  etc. 
T.  Co.  V.  Roanoke,  etc.  Co.,  81  Fed. 
Eep.  439  (1896). 

2  Winslow  V.  Harrlman  Iron  Co.,  42 
S.  W.  Rep.  698  (Tenn.,  1897). 

3  See  Brewster  v.  Hartley,  37  CaL 
15  (1809);  Robinson  v.  Hurley,  11 
Iowa,  410  (1800) ;  but  see  Lallande  v. 
Ingram,  19  La.  Ann.  364  (1867).  Corir 
tra,  Nisbit  v.  Macon,  etc.  Co.,  12  Fed. 
Rep.  680  (1882).  See  also  §  375,  infra. 
A'pledge  of  the  certificates  of  stock  is 
effective  witliout  notice  to  the  cor- 
poration. Crescent  City,  etc.  Co.  v. 
Deblieux,  40  La.  Ann.  155  (1888).  A 
pledge  witliout  a  transfer  confers  no 
legal  title.  Wagner  v.  Marple,  10 
Tex.  Civ.  App.  505  (1895).  A  decision 
of  a  state  com-t  that  a  donatio  causa 
mortis  of  bank  stock  was  effective, 
although  the  donor  merely  delivered 
the  certificates  of  stock  without 
transferring  the  same  on  the  back 
thereof,  does  not  raise  a  federal 
question,  even  though  the  stock  was 
national-bank  stock.  Leyson  v.  Davis, 
170  U.  S.  36  (1898). 

^Spreckels  v.  Nevada  Bank,  113 
CaL  272  (1896);  Mount  Holly,  etc.  Co. 


V.  Ferree,  17  N.  J.  Eq.  117  (1864);  Fin- 
ney's  Appeal,  59  Pa.  St.  398  (1868); 
Jarvis  v.  Rogers,  13  Mass.  105  (1816) ; 
Blouin  V.  Hart,  30  La.  Ann.  714  (1878); 
Merchants'  Nat.  Bank  v.  Richards,  6 
Mo.  App.  454  (1879);  aff'd,  74  Mo.  77; 
Broadway  Bank  v.  McElrath,  13  N.  J. 
Eq.  24  (1860);  'Cornick  v.  Richards,  3 
Lea  (Tenn.),  1  (1879);  Baldwins.  Can- 
field,  26  Minn.  43  (1879) ;  Bitot  v.  John- 
son, 33  La.  Ann.  1286  (1881);  New 
Orleans,  etc.  Assoc,  v.  Wiltz,  10  Fed. 
Rep.  330  (1881);  Continental  Nat. 
Bank  v.  Eliot  Nat.  Bank,  7  Fed.  Rep. 
309  (1881);  U.  S.  v.  Cutts,  1  Sumner, 
133  (1832);  S.  C,  25  Fed.  Cas.  745.  Cf. 
State  V.  Jeffersonville  Nat.  Bank,  89 
Ind.  302  (1883).  A  pledge  may  be 
made  by  signing  in  blank  on  the  back 
of  the  certificate  and  pinning  the 
certificate  to  the  note.  McClintock 
V.  Central  Bank,  120  Mo.  127  (1894). 
As  to  how  a  pledge  may  be  made,  see 
also  Winslow  v.  Harriman  Iron  Co., 
42  S.  W.  Rep.  698  (Tenn.,  1897).  The 
pledgor  may,  by  word  of  mouth,  ex- 
tend stock  already  pledged  to  f  uither 
advancements  by  the  pledgee.  Van 
Blarcom  v.  Broadway  Bank,  9  Bosw. 
532  (1862). 

5  McNeil  V.  Tenth    Nat.  Bank,  46 
N.  Y.  325  (1871);  Dickinson  v.  Central 


822 


CH.  XXVI.] 


PLEDGE   OF   STOCK. 


[§  ^05. 


provision  requiring  such  registry  would  seem  not  to  concern, 
the  pledgee  in  any  way,  except  that  he  could  not  claim  the 
dividends  without  the  registry;  and  in  a  few  states,  where  an. 
attachment  of  the  stock  for  the  pledgor's  debts  would  cut  off 
a  previous  unregistered  vendee's  or  pledgee's  rights,  he  by  not 
registering  encounters  that  risk.^  Although  a  transfer  is  on  a 
separate  piece  of  paper,  and  is  not  acknowledged  as  required 
by  a  rule  of  the  stock  exchange,  nevertheless  the  pledgee  may 
be  a  honafide  holder.^  A  transfer  of  stock,  whether  registered 
on  the  corporate  books  or  not,  may  be  shown  to  be  a  pledge, 
and  parol  evidence  is  admissible  to  prove  that  fact.' 


Nat.  Bank,  129  Mass.  279  (18S0);  Fra- 
fieru  Charleston,  11  S.  C.  486  (1878); 
Factors',  etc.  Ins.  Co.  v.  Marine,  etc. 
Co.,  31  La.  Ann.  149fl879);  Pitot  v. 
Johnson.  33  La.  Ann.  1286  (1881);  Con- 
tinental Nat.  Bank  v.  Eliot  Nat.  Bank, 
12  Rep.  35  (1881);  S.  C,  7  Fed.  Rep. 
369 ;  Lowiy  v.  Commercial,  etc.  Bank, 
Taney.  310  (1848);  S.  C,  15  Fed.  Cas. 
1040;  Blouin  v.  Hart,  30  La.  Ann.  714 
<1878);  Lightner's  Appeal,  83  Pa.  St. 
301  (1876);  U.  S.  u  Cutts,  1  Sumner. 
133  (1832);  S.  C,  25  Fed.  Cas.  745; 
Leitch  V.  Wells,  48  N.  Y.  585  (1872); 
■Commercial  Bank  v.  Kortright,  23 
Wend.  348  (1839),  aff'g  20  Wend.  91; 
Otis  V.  Gardner,  105  lU.  436  (1883). 
As  regards  such  provisions  requiring 
registry,  a  pledge  of  stock  stands  on 
the  same  footing  as  a  sale  of  stock. 
See  also  §  379,  supra.  Stocks  are  not 
goods  and  chattels  within  the  mean- 
ing of  the  act  concerning  chattel 
mortgages.  State  v.  King  County 
Super.  Ct,  13  Wash.  607  (1896).  Where 
a  person,  as  preliminary  to  making  a 
loan  with  stock  as  collateral,  indorses 
his  stock  over  to  the  lender  and  leaves 
it  with  the  corporate  secretary,  and 
then  the  loan  is  abandoned,  the  sec- 
retary is  boim.*d  to  deliver  back  the 
stock.  Galvtn  v.  Mac  Mining,  etc. 
Co.,  14  Mont.  508  (1894).  The  unreg- 
istered pledge  is  protected  against 
the  pledgor's  assignee  in  bankruptcy. 
He  Shelley,  34  L.  J.  (Bankr.)  6  (1864). 
1  Thus,  in  states  where  an  attach- 


ment has  precedence  over  not  only 
transfers  without  registry  made  after 
the  attachment  is  levied,  but  over 
unregistered  transfers  made  before 
the  levy  of  attachment,  a  pledge,  like 
a  sale  of  stock,  is  protected  against 
attachment  on  the  pledgor's  debts 
only  l^  registry.  Weston  v.  Bear 
River,  etc.  Co.,  5  Cal.  186  (1855);  Will- 
iams V.  Mechanics'  Bank,  5  Blatchf. 
59  (1863);  S.  C,  29  Fed.  Cas.  1376; 
State  Ins.  Co.  v.  Sax,  3  Tenn.  Ch.  507 
(1875);  State  v.  First  Nat.  Bank,  89 
Ind.  303  (1883);  Shipman  v.  JEtnsi  Ins. 
Co.,  29  Conn.  245  (1860);  Pinkerton  v. 
Manchester,  etc.  R.  R.,  43  N.  H.  434 
(1861);  Oxford  Turnp.  Co.  v.  Bimnel, 
6  Conn.  553  (1837).  Cf.  Strout  v.  Na- 
toma  W.  &  M.  Co.,  9  CaL  78  (1858). 
But  the  purchaser  at  the  execution 
sale  is  not  protected  against  the 
pledgee,  if  he  purchased  with  notice. 
Weston  V.  Bear  River,  etc.  Co.,  6  CaL 
435  (1856).  And  if  notice  of  the 
pledge  is  given  to  the  corporation, 
the -pledgee  is  protected  against  at- 
tachments, although  no  registry  is 
had.  State  Ins.  Co.  v.  Gennett,  3 
Tenn,  Ch.  100  (1874).  See  also  §486 
et  seq.,  infra.  As  to  the  dividends, 
the  pledgee  is  entitled  to  them  as 
against  the  pledgor,  but  of  course 
can  obtain  them  from  the  corpora- 
tion only  by  obtaining  registry. 

2  Smith  V.  Savin,  141 N.  Y.  315  (1894). 

3  Brick  V.  Brick,  98  U.  S.  514  (1878); 
Wilson  V.  Little,  3  N.  Y.  443  (1849); 


823 


§  405.] 


PLEDGE  OF  STOCK. 


[cn. 


XXVI. 


A  corporatipn  may  pledge  its  unissued  stock,^  but  there  is  a 
difference  of  opinion  as  to  whether  the  pledgee  is  liable  as  an 


Ginz  V.  Stumph,  73  Ind.  209  (1880); 
Newton  v.  Fay,  92  Mass.  505  (1865) ;  Mo 
Mahon  v.  Macy,  51  N.  Y.  155  (1872); 
Becher  v.  Wells,  etc.  Co.,  1  Fed.  Rep. 
276  (1880);  Burgess  v.  Seligman,  107 
U.  S.  20(1882);  Pinkerton  r.  Manches- 
ter, etc.  R.  R.,  42  N.  H.  424(1861); 
Butman  v.  Howell,  144  Mass.  66  (1887) : 
Ayer  v.  Seymour,  5  N.  Y.  Supp.  650 
(1889).  A  certificate  of  stock  indorsed 
in  blank  may  be  sliown  to  have  been 
delivered  in  pledge.  Riley  v.  Hamp- 
shire County  Nat.  Bank,  164  Mass. 
482  (1895).  It  may  be  a  question  of 
fact  whether  the  delivery  of  certifi- 
cates of  stock  is  made  as  a  sale,  or 
as  collateral  security.  The  presump- 
tion is  that  it  is  collateral  security 
where  the  facts  show  a  prior  debt, 
and  there  is  no  proof  as  to  tbe  pur- 
jxjse  of  the  transfer.  Borland  v.  Ne- 
vada Bank,  99  CaL  89  (1893).  A 
depositor  in  a  bfink  who  has  been  in- 
duced to  take  from  the  bank  its  stock 
as  security  may  show  by  parol  evi- 
dence that  he  took  such  stock  as 
collateral  security  and  not  in  liqui- 
dation of  his  deposit.  "Williams  v. 
American  Nat.  Bank,  85  Fed.  Rep. 
376  (1898).  An  apparent  sale  of  stock 
is  not  proven  to  be  a  pledge  on  the 
evidence  of  plaintiff,  contradicted  by 
defendant,  when  the  full  value  of  the 
stock  was  paid  and  a  receipt  there- 
for given  by  the  plaintiff.  Travers 
V.  Leopold,  124  111.  431  (1888).  A 
pledgor  may  bring  a  suit  for  an  ac- 
covmting  and  to  establish  the  fact 
that  the  transfer  of  stock  was  a 
pledge,  and  he  may  restrain  a  suit 
by  the  pledgee  against  the  corpora- 
tion for  the  stock.  ^IcDowell's  Ap- 
peal, 123  Pa.  St.  381  (1889). 

1  Burgess  v.  Seligman.  107  U.  S. 
20  (1882);  Combination  Tnist  Co.  v. 
Weed,  2  Fed.  Rep.  24  (1880):  Melvin 
V.  Lamar  Ins.  Co.,  80  111.  446  (1875); 
Protection  Life  Ins.  Co.  v.  Osgood,  93 


IlL  69  (1879) ;  Re  City  Terminus  Hotel 
Co.,  14  Eq.  10  (1872);  Union  Sav. 
Assoc.  V.  Seligman,  92  Mo.  635  (1884>, 
overruling  Griswold  v.  Seligman,  73 
Mo.  116.  Contra,  Brewster  v.  Hartley, 
37  Cal.  15  (1869).  See  g  247,  supra, 
p.  477,  note  1.  Where  a  corporation 
pledges  its  own  stock,  the  pledgee 
may  sell  that  stock  for  non-payment 
of  the  debt  at  less  than  par.  This 
rule  prevails  even  though  the  charter 
provides  that  the  stock  shall  not  be 
sold  below  par.  Peterborough  R.  R. 
V.  Nashua,  etc.  R.  R.,  59  N.  H.  385 
(1879).  Unissued  stock  may  be  issued 
by  the  corporation  as  a  pledge  to  se- 
cure a  loan,  and  the  corporation  can- 
not set  up  that  it  was  issued  at  less 
than  par  in  violation  of  the  constitu- 
tion. The  issue  is  good  in  the  hands 
of  the  pledgee  to  the  extent  of  the 
loan.  Casquet  v.  Crescent  City  B.  Co., 
49  Fed.  Rep.  496  (1892).  Where  the 
company  issues  its  stock  as  collateral 
security  to  notes  given  to  it  by  its  sub- 
scribers in  payment  for  such  stock, 
and  then  sells  the  notes,  the  stock 
follows  the  notes  and  may  be  sub- 
jected to  the  payment  of  judgments 
on  the  notes.  If  the  corporation  has 
issued  the  stock  to  others  it  must  pay 
the  judgments.  Houston,  etc.  R'y  v. 
Bremond,  66  Tex.  159  (1886).  A  mort- 
gage is  valid  as  against  the  corpora- 
tion giving  it,  although  the  officers 
give  to  the  mortgagee  their  individ- 
ual notes  as  additional  security  and 
cause  the  corporation  to  issue  stock 
to  themselves  without  payment, 
which  they  deposit  also  as  collateral 
with  the  mortgagee.  The  giving  of 
the  mortgage  is  not. an  increase  of 
indebtedness  such  as  is  prohibited 
by  the  Pennsylvania  constitution. 
Powell  V.  Blair,  133  Pa.  St.  550  (1890). 
Questions  relative  to  the  pledge  by  a 
company  of  its  own  bonds  are  con- 
sidered elsewhere.    See  §  763,  infra. 


824 


CH.  XXVI.] 


PLEDGE    OF   STOCK. 


[§  ^QQ- 


absolute  stocldiolder  on  such  stock.^  The  question  of  usury  in 
the  note  secured  by  a  pledge  of  stock  may  affect  the  j)ledge 
itself.^  A  pledge  is  not  illegal  though  it  secures  a  greater 
amount  than  the  pledgee  bank  is  entitled  to  loan  to  one  person.' 
A  honajlde  pledgee  of  stock  is  protected  against  claims  of  for- 
mer owners  of  that  stock  to  the  same  extent  that  an  absolute 
purchaser  of  the  stock  would  be  protected,  with  the  single  ex- 
ception that  the  power  of  a  trustee  or  agent  to  sell  stock  does  not 
give  him  power  to  pledge  it.*  The  quasi-negotiability  of  cer- 
tificates of  stock  protects  a  pledgee  and  a  vendee  alike.*  The 
negotiability  of  a  note  is  not  destroyed  by  a  provision  that  cer- 
tain bonds  are  given  as  collateral  security  for  its  payment.® 

§  466.  Pledgee  may  have  the  stoclc  registered  in  his  own  name 
or  the  name  of  another. —  Where  certificates  of  stock  indorsed 
in  blank  are  delivered  to  a  person  in  pledge  as  collateral  secu- 
rity for  a  debt  or  for  any  other  purpose,  the  pledgee  may  fiU.  in 
the  blanks  and  have  the  stock  registered  in  his  own  name  on 


The  unissued  stock  of  a  corporation 
may  be  issued  to  one  of  its  creditors 
as  collateral  security.  Parberry  v. 
Woodson  Sheep  Co.,  18  Mont.  317 
(1896).  The  appointment  of  a  re- 
ceiver does  not  affect  the  rights  of  a 
pledgee  from  the  corporation  prior 
to  such  appointment.  The  pledgee 
may  sell.  National,  etc.  Bank  v.  Ben- 
brook,  etc.  Co.,  27  S.  W.  Rep.  297  (Tex., 
1894).  A  corporation  may  pledge 
treasury  stock  to  a  director.  Where 
treasury  stock,  instead  of  being  given 
to  the  corporation,  is  placed  in  the 
hands  of  trustees  under  a  trust  agree- 
ment, such  agreement  may  be  modi- 
fied by  a  new  agreement,  and  the 
stock  turned  over  to  the  corporation. 
Kinsman  v.  Fisk,  83  Hun,  494  (1895). 

1  See  ^§  247,  309-314,  sxipra. 

2  See  Little  v.  Barker,  1  Hoffm.  Ch. 
487  (1840);  and  see  Frost  v.  Stokes,  55 
N.  Y.  Super.  Ct.  76  (1887),  holding 
that  the  New  York  statute  of  1882 
allows  any  interest  if  the  debt  is  on 
demand  and  is  over  $5,000,  and  stock 
is  pledged.  If  the  loan  secured  by 
the  pledge  of  stock  is  usurious,  the 


pledgor  may  recover  back  the  stock 
without  payment.  The  pledge  is 
void.  Cousland  v.  Davis,  4  Bosw.  619 
(1859).  If  stock  is  pledged  to  secure 
an  usurious  note,  the  pledgor  may, 
under  the  New  York  statute,  sxie  to  re- 
cover back  the  stock  without  paying 
the  debt.  Dickson  v.  Valentine,  G 
N.  Y.  Supp.  540  (1889).  See  also  Birds- 
eye's  Statutes,  2d  ed.,  p.  1696.  The 
New  York  statute  of  1882,  as  to  bank- 
ers loaning  on  collateral,  was  applied 
in  Thomas  v.  Coffin,  62  Fed.  Rep.  665 
(1894),  a  case  in  which  the  taking  of 
commissions  was  also  involved. 

3  McClintock  v.  Central  Bank,  etc., 
120  Mo.  127  (1894). 

*  See  §§  326,  351,  supra. 

*  See  §  432,  supra. 

6  Valley  Nat.  Bank  v.  Cro well,  148 
Pa.  St.  284  (1892).  The  fact  that  a 
promissory  note  negotiable  in  form 
recites  that  it  is  secured  by  collateral 
and  that  the  latter  may  be  sold  does 
not  destroy  the  negotiability  of  the 
note.  1  Daniel,  Neg.  Inst.,  4th  ed., 
SS  1774-1784. 


825 


§  467.]  PLEDGE    OF   STOCK.  [CH.  XXVI. 

the  corporate  books ;  ^  or  the  pledgee  may  have  the  stock  reg- 
istered in  the  name  of  another  person,  in  order  that  lie  may 
protect  his  special  property  in  the  stock  and  at  the  same  time 
not  be  liable  thereon.^  It  is  proper  and  legal  for  a  corporation 
to  add  to  the  name  appearing  on  the  stock  certificate  the  words 
"as  pledgee,"  or  "as  collateral  security,"  or  similar  words.' 
In  some  states  there  are  statutes  as  well  as  decisions  to  the 
effect  that  notice  to  the  corporation  that  a  person  holds  as 
pledgee  certain  certificates  of  stock,  which  stand  on  the  books 
of  the  company  in  the  pledgor's  name,  prevents  an  attachment 
against  the  pledgor  from  reaching  more  than  the  equity  of  re- 
demption in  such  stock.* 

§  467.  Stoch-hrolier  imrcliasing  stock  for  a  customer  on  a 
maryin  is  a  i)leclgee  of  the  stock. —  It  has  been  well  established 
that,  where  a  stock-broker  purchases  stock  on  an  order  from 
his  customer,  and  the  customer  does  not  pay  for  the  stock,  but 
deposits  with  the  broker  a  smn  of  money  called  a  "  margin," 
to  protect  the  broker  against  loss,  the  broker  is  bound  to  have 
on  hand  the  stock  so  purchased  during  the  entire  time  of  the 
contract,  and  has  the  rights,  duties,  and  liabilities  of  a  pledgee, 

1  Skiff  V.  Stoddard,  63  Conn.  198  pledge  stock,  but  gives  the  creditor 

(1893);  Hubbellu  Drexel,  llFed.  Rep.  the  legal  title  and  unlimited  power 

115  (1882);  Re  Angelo,  5  De  G.  &  S.  of  disposition,  the  creditor  may,  by 

278  (1852);  Horton  v.  Morgan,  19  N.  Y.  suit  in  equity,  compel  the  company 

170  (1859);  Union,  etc.  Bank  v.  Far-  to  allow  a  transfer,  and  the  trans- 

rington,  13  Lea  (Tenn.),  333  (1884);  ferrer  need  not  be  made  a  party  to 

Hiatt  V.  Griswold,  5  Fed.  Rep.  573  the  suit.   Skinner  v.  Fort  Wayne,  etc. 

(1881),  holding  also  that  a  surety  is  R.  R.,  58  Fed.  Rep.  55  (1893).   In  Cali- 

not   thereby  discharged ;    Smith  v.  f  ornia  a  pledgor  may  enjoin  a  pledgee 

Traders'  Nat.  Bank,  82  Tex.  368  (1891) ;  from  transferring  stock  into  his  name 

Day  u  Holmes,  103  Mass.  306  (1869);  for  the  pui-pose    of  controlling  an 

Fitchburg  Sav.  Bank  v.  Torrey,  134  election,  which  otherwise  the  pledgor 

Mass.  239  (1883),  also  holding  that  a  would  control,  where  the  statutes  of 

release  of  the  stock  by  the  pledgee  the  state  provide  for  recordmg  such  a 

releases  a  surety;  Fay  v.  Gray,  124  pledge  without  a  transfer  of  the  stock 

Mass.  500  (1878).    Cf.  State  v.  Smith,  itself.  Spreckels  v.  Nevada  Bank,  113 

15  Oreg.  98, 114  (but  see  p.  132)  (1887).  Cal.  272  (1896);  53  Pac.  Rep.  845. 

The  pledgee  may  sue  to  have  the  ^Dayy.  Holmes,  103  Mass.  306 (1869); 

pledge  transferred  to  himself  and  de-  Hiatt  v.  Griswold,  5  Fed.  Rep.  573 

termine  the  rights  of  other  claim-  (1881);    Anderson     v.     Philadelphia 

tints.  NewcombeuLottimer,12N.  Y.  Warehouse  Co.,  Ill  U.  S.  479  (1884). 

Supp.   381  (1890).     The  corporation  See  also  §  470,  infra. 

must  allow  the  registry.     Cornick  3  Qqq  g  247,  supra,  and  ch.  XXVII, 

V.  Ricliards,  3  Lea  (Tenn.),  1  (1879).  infra. 

Where  a  contract  does  not  merely  *  See  cli.  XXVII,  infra. 

826 


CH. 


XXVI.] 


PLEDGE    OF    STOCK. 


[§  iCS. 


with  the  customer  as  a  pledgor.^  The  broker  under  such  cir- 
cumstances must  conform  to  all  the  rules  governing  a  pledgee's 
attitude  towards  a  pledgor.  He  cannot  repledge,-nor  can  he 
sell  without  due  notice,  unless  such  rights  are  given  by  the  cus- 
tomer, the  pledgor.^ 

§  46S.  Miscellaneous  rights  of  jyledgee  and  pledgor — The 
equity  of  redemption. —  Dividends  declared  during  the  continu- 
ance of  the  pledge  belong  to  the  pledgee,  even  though  the  lat- 
ter is  not  registered  as  owner  on  the  corporate  books,*  provided 


1  Baker  v.  Drake,  66  N.  Y.  518  (1876); 
]\Iarkham  v.  Jaudon,  41  N.  Y.  235 
(1869);  and  see  ch.  XXV,  supra.  A 
broker  holding  stock  as  collateral  se- 
cui'ity  on  a  margin  does  not  hold  the 
stock  in  a  fiduciary  capacity.  Mc- 
Bumey  v.  Martin,  6  Rob.  (N.  Y.)  503 
(1866);  Lambertson  v.  Van  Boskerk, 
49  How.  266,  4  Hun,  628  (1875).  A 
broker  may  pledge  his  customer's  se- 
curities for  an  amount  not  exceeding 
the  amount  due  from  the  customer, 
but  the  broker  must  not  put  the  se- 
curities beyond  the  reach  of  tlie  cus- 
tomer, nor  mingle  such  securities 
with  others  and  hypothecate  all  of 
them  for  a  larger  amount,  the  reason 
Oif  this  decision  being  that,  so  long  as 
the  customer  could  go  to  the  pledgee 
and  redeem  the  securities  without 
loss,  he,  the  customer,  was  not  in- 
jured. Douglas  V.  Carpenter,  17  N.  Y. 
App.  Div.  329  (1897). 

2  See  ch.  XXV,  supra.  A  broker 
has  no  right  to  repledge  stock  held 
by  him  for  a  customer  to  secure  mar- 
gins, and,  even  if  the  customer  author- 
izes him  to  repledge,  this  authority 
sustains  a  repledge  only  to  the  extent 
of  the  amount  due  from  the  cus- 
tomer, and  the  broker  must  be  ready 
at  all  times  to  return  the  stock  to 
the  customer  upon  the  latter  paying 
tlie  debt.  The  repledgee,  under  the 
usual  transfer  in  blank  on  the  back 
of  the  certificate,  is  not  a  ^ona  fide 
pledgee.  German  Sav.  Bank  v.  Ren- 
ehaw,  28  Atl.  Rep.  281  (Md.,  1894). 

^Herrman  v.   Maxwell,    47   N.  Y. 


Super.  Ct.  347  (1881).  And  the  pledgor 
who  collects  them  holds  them  in 
trust  for  the  pledgee.  Hill  v.  Newich- 
awanick  Co.,  8  Hun,  459;  affirmed,  71 
N.  Y.  599  (1877).  In  Central,  etc.  Bank 
V.  Wilder,  32  Neb.  454  (1891),  it  was 
held  that  not  only  was  the  pledgee 
entitled  to  the  dividends,  but  was  en- 
titled to  them  although  the  stock 
stood  on  the  corporate  boo"ks  in  the 
name  of  the  pledgor,  where  the  offi- 
cers knew  all  about  the  pledge. 
Where  a  pledge  of  stock  is  renewed 
and  a  new  note  given,  dividends  ac- 
ci-uing  before  the  renewal  go  to  the 
pledgor.  Fairbank  v.  Merchants'  Nat. 
Bank,  132  111.  120  (1889).  A  pledgee 
is  entitled  to  collect  the  dividends, 
and  in  some  instances  may  do  so  even 
though  the  stock  is  not  transferred 
to  him  on  the  books,  it  being  shown 
that  the  officers  knew  of  the  pledge. 
Guarantee  Co.  v.  East  Rome  Town 
Co.,  96  Ga.  511  (1895).  A  pledgee  of 
stock,  even  though  not  recorded  as  a 
stockholder,  is  entitled  to  dividends 
declared  after  the  pledge  was  made, 
as  against  a  claim  of  the  corporation 
against  the  pledgor  as  an  offset. 
Gemmell  v.  Davis,  75  Md.  546  (1892). 
Where  a  stockholder  of  record  pledges 
liis  certificates  of  stock,  and  no  trans- 
fer is  made  on  the  books,  and  subse- 
quently a  dividend  is  declared,  and 
after  such  dividend  is  payable,  but 
before  it  is  actually  paid,  the  pledgee 
presents  to  the  company  the  stock 
for  transfer,  with  a  written  request 
of  the  pledgor  to  the  same  effect,  to- 


827 


§  -468.] 


PLEDGE    OF    STOCK. 


[cn.  XXVI, 


notice  lias  been  given  to  the  corporation.  The  pledgee  is  en- 
titled to  the  dividends  on  the  stock,  but  must  account  for  them 
when  the  pledge  is  redeemed.^  A  pledgee  may  surrender  his 
certificate  to  the  corporation  and  take  a  new  certificate,  where 
the  corporation  has  decreased  the  par  value  of  the  stock.^ 

Where  the  pledgor  pledged  the  stock  to  secure  the  debts  of 
another  at  a  bank,  and  renewals  thereof,  the  pledge  continues 
though  the  pledgor  dies.'  But  a  pledge  of  stock  to  secure  an- 
other person's  debt  is  released  by  an  extension  of  that  debt.* 
An  indorser,  however,  is  not  released  by  a  change  in  the  security, 
except  to  the  extent  that  the  security  is  decreased.*    Where  a 


gether  with  an  assignment  by  the 
pledgor  to  the  pledgee  of  the  divi- 
dend, it  is  no  defense  to  the  com- 
pany tliat  it  has  a  claim  against  the 
pledgor  for  a  personal  debt,  or  for 
a  debt  of  a  firm  in  which  he  is  in- 
terested. American,  etc.  Bank  v. 
NashviUe,  etc,  Co.,  36  S.  AV.  Rep. 
960  (Tenn.,  1896).  The  corporation 
is  liable  to  a  pledgee,  to  whom  the 
stock  has  been  transferred  on  the 
books,  for  dividends  paid  to  the 
pledgor.  The  acceptance  of  part  pay- 
ment, etc.,  by  the  pledgee  from  the 
pledgor  does  not  waive  his  cause  of 
action  against  the  company.  Boyd 
V.  Conshohocken  Worsted  JMills,  149 
Pa.  St.  363  (1892).  In  Maine  it  has 
been  held  that  while  a  corporation 
may  pay  an  ordinary  dividend  to  a 
stockliolder  of  record,  yet  that  a  divi- 
dend paid  in  the  liquidation  and 
winding  up  of  the  corporation  must 
be  paid  to  the  holder  of  the  certifi- 
cate, even  though  such  holder  be  a 
transferee  who  has  not  been  recorded 
as  such  on  the  books  of  the  company, 
and  that  the  company  is  liable  to 
him  for  dividends  in  liquidation, 
even  though  it  has  paid  them  to  the 
registered  stockholder,  and  that  tliis 
rule  applies  to  a  pledgee  of  a  certifi- 
cate of  stock  as  well  as  a  purcliaser 
of  a  certificate  of  stock.  Bath  Sav. 
Inst.  r.  Sagadahoc  Nat.  Bank,  89  ]\Ie. 
500  (1897).     Where  a  certificate  is 


issued  by  the  corporation  to  the 
pledgee  as  pledgee,  on  the  face  of 
the  certificate,  the  dividends  must 
be  paid  to  him,  and  if  the  corpora- 
tion pays  the  dividends  to  the  pledgor 
it  is  liable  therefor  to  the  pledgee. 
Hunt  V.  Laconia,  etc.  Ry,  39  Atl. 
Rep.  437  (N.  H.,  1896).  In  insolvency 
proceedings  a  pledgee  is  entitled  to 
dividends  without  giving  up  his  se- 
curity, and  the  federal  court  will  not 
follow  the  state  decisions  on  this 
point  in  receivership  cases.  London, 
etc.  Bank  v.  Willamette,  etc.  Co.,  80 
Fed.  Rep.  226  (1837).  See  §  763,  infra, 
on  this  point.  The  pledgee  is  en- 
titled to  the  dividends,  even  though 
the  stock  stands  in  the  name  of  the 
pledgor  on  the  books  of  the  company. 
George,  etc.  Co.  v.  Range,  etc.  Co.,  50 
Pac.  Rep.  630  (Utah,  1897). 

1  Ilasbrouck  v.  Vandervoort,  4 
Sandf.  74  (1850);  Edw.  Bailm.,  §  300. 

2  Donnell  v.  Wyckoff,  49  N.  J.  L.  48 
(1887). 

3  Cotton  V.  Atlas  Nat.  Bank,  145 
Mass.  43  (1887). 

*  Price  V.  Dime  Sav.  Bank,  124  IlL 
317  (1888). 

5  Nelson  v.  First  Nat.  Bank,  69  Fed. 
Rep.  798  (1895).  A  pledgee  may  en- 
force his  claim  against  the  principal 
debtor,  although  the  stock,  which 
had  been  pledged  by  a  third  person 
to  the  pledgee  to  secure  the  debt, 
has  been  exchanged  for  stock  in  a 


€n.  XXYI.]  PLEDGE    OF    STOCK;.  [§  4GS. 

pledge  is  deposited  in  third  parties'  hands  for  the  benefit  of 
both  parties,  the  creditor  is  not  bound  to  see  to  the  return  of  the 
pledge.^  A  pledge  to  secure  indebtedness  of  specified  parties 
is  not  security  for  their  individual  debts.^  A  pledge  to  secure 
the  note  of  another  person,  past  due,  is  not  binding,  where 
there  is  no  extension  of  the  time  of  payment.'  If  a  person 
agrees  to  deposit  stock  to  secure  the  debt  of  another,  and  fails 
to  do  so,  he  is  liable,  not  for  the  debt,  but  for  the  value  of  the 
stock.*  The  pledge  may  be  for  a  running  liability,  and  is  not 
released  by  an  extension  of  any  particular  debt.*  Stock  may 
be  given  by  the  debtor  to  his  creditor  to  sell  for  the  benefit 
of  the  creditor,  and  the  surplus  to  be  returned  to  the  debtor.® 
The  pledge  may  be  to  secure  the  carrying  out  of  a  contract.^ 
The  pledge  of  stock  may  provide  that,  for  part  payments  of 
the  debt,  the  pledgor  may  withdraw  part  of  the  stock  pledged.^ 
A  pledge,  to  secm-e  a  certain  note  and  all  other  present  or 
future  demands  of  any  kind,  due  or  not  due,  is  good  as  a  pledge 
for  the  note  specified,  but  does  not  apply  as  a  pledge  to  another 
note  due  five  years  later,  the  payment  of  which  is  secured  by 
real  estate.  Upon  payment  of  the  first  note  the  pledgor  may 
file  a  bill  in  equity  to  obtain  the  stock.®  By  a  custom  of  banks 
in  a  particular  locality,  stock  held  by  the  bank  against  the 
pledgor  as  collateral  for  one  loan  may  be  held  as  collateral  for 
all  loans.'"  The  statute  of  limitations  may  be  a  bar  to  the  debt 
and  yet  not  to  the  pledge." 

A  pledgee  has  the  right  to  vote  on  the  pledged  stock  where 
he  is  registered  as  a  stocldiolder,^-  but  the  pledgor  may  compel 
him,  by  legal  proceedings,  to  give  a  proxy  for  voting  purposes 

reorganized  company  with  the  con-  ^  Beckwith  v.  Burrough,  13  R.  L 

sent  of  the  owner  of  the  stock,  but  294  (1881),     Such  action  would  prob- 

without  the  consent  of  the  debtor  or  ably  make  the  creditor  the  agent  of 

its  receiver.    McKusick  v.  O'Gorman,  the  debtor. 

69  N.  W.  Rep.  317  (Minn.,  1896).  "?  Vaupell  v.  Woodward,  2  Sandf. 

1  Robertson  v.  Sully,  2  N.  Y.  App.  Ch.  143  (1844). 

Div.  153  (1896).  8  First  Nat.  Bank  v.  Root,  107  Ind. 

2  Haldeman  v.  German,  etc.  Bank,    224  (1886). 

44  S.  W.  Rep.  383  (Ky.,  1898).  9  First  Nat.  Bank  v.  Illinois  T.  &  S. 

3  Haldeman  v.  German,  etc.  Bank,    Bank,  84  Fed.  Rep.  34  (1897). 

44  S.  W.  Rep.  383  (Ky.,  1898).  lo  Bacon's  Adm'r  v.  Bacon's  Trustees, 

4  Hite  Nat.  Gas  Co.'s  Appeal,  118  27  S.  E.  Rep.  576  (Va.,  1897). 
Pa.  St.  436  (1888).  "  See  §  476,  infra. 

5  Merchants'  Nat.  Bank  v.  Hall,  83       12  See  §  612,  infra. 

N.  Y.  338  (1881). 

829 


§  4GS.]  f PLEDGE    OF    STOCK.  [CH.  XXVI. 

where  there  are  equitable  reasons  for  so  doing.^  A  pledgee  is 
not  bound  to  protect  the  stock  from  forfeiture  for  non-payment 
of  calls.^  A  pledgee  of  certificates  of  stock  is  protected  against 
further  sales  or  pledges  of  the  same  stock  by  the  pledgor,  such 
other  sales  or  pledges  being  without  the  delivery  of  any  cer- 
tificate, the  same  as  the  vendee  of  a  certificate  of  stock  is  pro- 
tected against  another  sale  of  the  stock  to  a  purchaser  who- 
takes  without  any  certificate.'  The  possession  of  the  certifi- 
cate protects  the  pledgee  herein.  The  pledgee  is  not  liable 
for  a  loss  of  the  pledge  by  theft,  there  being  no  negligence  on 
his  part.* 

A  pledgee  of  a  certificate  of  stock  is  not  bound  by  an  agree- 
ment of  all  the  stockholders  to  surrender  to  the  corporation  a 
part  of  theif  stock,  which  part  is  to  be  then  considered  pre- 
ferred stock  and  is  to  be  sold  by  the  corporation  for  the  purpose 
of  paying  corporate  debts.^  The  stockholders  of  a  corporation 
may,  together  with  the  directors,  cause  th^  corporate  property 
to  be  sold  to  a  new  corporation  in  exchange  for  the  stock  of 
the  latter.  A  pledgee  of  stock  in  the  former  corporation  can- 
not after  the  sale  undo  it,  nor  hold  the  latter  corporation  liable. 
His  remedy  is  against  the  pledgor  and  the  first  corporation.^ 

1  See  §  612,  infra.  agreement  to  be  stamped  on  the  new 

'  Southwestern  E.  R.  Bank  v.  Doug-  certificates  issued  to  such  purchaser, 

las,  2  Spears  (S.  C),  329  (1844).  The  court  will  order  a  transfer  free 

3  Maybin  v.  Kirby,  4  Rich.  Eq.  (S.  C.)  from  t]ie   agreement.     Campbell  v. 

105  (18ol).     See  §  321,  supra.     The  American  Zylonite  Co.,  122  N.  Y.  455 

cases  therein  cited  are  partly  cases  (1890).     "A  stockholder  of  a  corpo- 

of  pledge  and  partly  of  sale  of  cer-  ration  is  so  far  a  privy  to  a  judg- 

tificates  of  stock.     The  rule  applies  ment  against  the  corporation  that 

equally  to  both.    A  person  to  whom  he  cannot  attack  the  judgment  in. 

a  pledgor  fraudulently  transfers  his  any  collateral  proceeding."  National 

equity  and  who  redeems  the  stock  Foundry,  etc.  Works  v.  Oconto  Water 

cannot  be  compelled  to  turn  it  over  Co.,  68  Fed.  Rep.  1006  (1895),  applying 

to  creditors  except  uiion  repayment  the  rule  to  pledgees  also.    See  also 

of  the  amount  so  paid  by  him.   Ham-  §  209,  supra. 

ilton  Nat.  Bank  v.  Halsted,  56  Ilun,        ^  Leathers  v.  Janney,  41  La.  Ann. 

530  (1890).  1120  (1889).     A  pledgee  of  common 

*  Fleming    v.    Northampton    Nat.  stock  cannot  object  to  the  merging 

Bank,  9  Fed.  Cas.  204  (1881).  of  preferred    stock    into    mortgage 

5  Although  all  the  other  stock  has  bonds.    Havemeyer  v.  Bordeaux  Co., 

had  this  agreement  stamped  on  the  8  Nat.  Corp.  Rep.  127  (III  C.  C,  1894). 

certificates,  yet  the  corporation  can-  In  Allis  v.  Jones,  45  Fed.  Rep.  148 

not  insist  that'the  purchaser  of  the  (1891),  it  is  intimated  that  a  pledgee 

stock  so  pledged  shall  allow  the  same  has  not  the  same  right  to  attack  an 

830 


CH.  XXVI.]        •  PLEDGE    OF    STOCK.  [§  468. 

Although  the  pledgor  of  stock  votes  the  stock  in  favor  of  a 
lease  of  the  corporate  property  on  such  terms  that  no  dividends 
on  the  stock  are  possible,  jet,  in  the  absence  of  fraud,  the  pledgee 
is  bound.^  A  pledgor  of  stock  may  enforce  a  claim  against  the 
corporation,  even  though  thereby  the  corporation  will  become 
insolvent  and  the  stock  be  rendered  worthless.  Although  the 
pledgor  has  made  an  assignment  for  the  benefit  of  creditors, 
yet  his  assignee  cannot  be  enjoined  by  the  pledgee  from  en- 
forcing the  claim  against  the  corporation.^ 

The  fact  that  the  pledgee,  a  corporation,  gave  through  its 
president  incorrect  information  to  the  pledgor,  whereby  the 
pledgor  did  not  sell  the  stock  in  pledge  and  liquidate  the 
debt,  is  no  defense  to  an  action  on  the  debt.^  A  person 
loaning  mo'iey  to  an  individual  and  taking  bank  stock  as 
collateral  security  cannot  hold  the  bank  liable,  in  an  action 
for  damages  for  deceit,  on  the  ground  that  its  published  state- 
ments were  false  and  fraudulent  and  that  he  relied  on  those 
statements.*  Where  stock  has  been  pledged,  and  the  pledgor 
makes  a  contract  with  a  third  person,  by  which  the  latter  agrees 
to  pay  the  debt  and  take  the  stock,  the  pledgor  may  enforce 
this  contract  without  tendering  the  stock.*  Where  a  bank 
states  to  a  pledgee  that  it  holds  certain  negotiable  bonds  in 
pledge  to  secure  the  debt,  and  the  bonds  are  produced,  shown, 
and  handed  back  to  the  bank,  the  latter  cannot  afterwards  claim 
that  it  held  these  bonds  subject  to  a  prior  pledge  by  the  same 
pledgor  to  another  person.^    Pledgees   of  a  majority  of  the 

ultra  vires  corporate  debt  that  the  ^  Gibson  v.  Richmond,  etc.  R.  R.,  37 
pledgor    has,    especially  where   the  Fed.  Rep.  743  (1889). 
stock  is  worthless.     Cf.  §  735,  infra.  2  janney  v.  Merchants',  etc.  Bank, 
In  McCaleb  v.  Goodwin,  21  S.  Rep.  98  Ala.  515  (1893). 
967  (Ala.,  1897),  one  street  railway  ^inyestment  Co.  v.  Eldridge,  175 
purchased  all  the  stock  of  another  Pa.  St..  287  (1896). 
street  railway  and  paid  the  stock-  ■*  IMerchants'  Nat.  Bank    v.    Arm- 
holders  therefor  by  issuing  the  moi-t-  strong,  65  Fed.  Rep.  932  (1895). 
gage  bonds  of  the  latter  street  rail-  5  Gilbert  v.  Adams,  68  N.  W.  Rfep. 
way    company.     The    former    then  883  (Iowa,  1896). 

placed  the  stock  under  its  own  mort-  ^  Gibson  v.  Lenhart,  111  Pa.  St.  624 

gage,  and,  this  mortgage  having  been  (1886).    Where  a  coi-poration  guaran- 

foreclosed,  the  purchaser   attacked  tees  certain  bonds,  and  a  person  hold- 

the  validity  of  the  first-mentioned  ing  stock  of  the  company  indorses  on 

mortgage.    The  court  sustained  the  the  guaranty  tliat  he  holds  stock  to 

mortgage,  however,  on  the  ground  secure  the  performance  of  the  guar- 

ihat  aU  the  stock  had  voted  therefor,  anty,   he  cannot  afterwards    claim 

831 


§  i68.] 


PLEDGE  OF  STOCK. 


[CH. 


XXVI. 


corporate  stock,  who  by  voting  their  stock  cause  men  of  their 
choice  to  be  elected  directors,  are  not  liable  for  the  miscon- 
duct of  such  directors.^  "  The  bailee  owes  a  direct  duty  to  the 
pledgor  to  be  reasonably  careful  that  no  harm  shall  come 
through  his  custody  to  the  subject-matter  of  the  pledge."  ^ 

The  pledgor  may  by  an  instrument  in  writing  assign  his 
equity  of  redemption  to  one  of  his  creditors.  Such  assignment 
need  not  be  recorded  as  a  chattel  mortgage,  and  is  not  fraudu- 
lent even  though  it  be  kept  secret  from  the  other  creditors  of 
the  pledgor.'  A  judgment  creditor  of  the  pledgor  may  file  a 
bill  to  reach  the  equity  of  redemption  in  a  pledge  of  stock.* 

that  he  has  a  prior  lien  as  pledgee  of    and  thus  obtain  the  stock  himself, 

the  pledgor  may  call  the  pledgee  to 
account  for  the  loss  siiffered  from 
this  conspiracy  and  wrong.  The 
court  held  also  that  although  the 
damage  was  directly  to  the  corpora- 
tion, yet  that  indirectly  it  was  a 
damage  to  the  pledgor,  and  that 
hence  the  pledgor  could  sue  in  his 
own  behalf  alone,  and  that  the  meas- 
ure of  damage  is  the  difference  be- 
tween the  market  value  at  tlie  time 
of  suit  and  what  it  would  have  been 
if  the  conspiracy  had  not  been  set  on 
foot.  The  court  held,  however,  in  the 
case  before  it,  that  tlie  proofs  did  not 
sustain  the  allegations. 

3  National  H.  R.  Bank  v.  Chaskin, 
28  N.  Y.  App.  Div.  311  (1898). 

4  Ritchie  v.  McMullen,  79  Fed.  Rep. 
522  (1897).  Where  a  judgment  cred- 
itor of  a  person  files  a  bill  in  equity 
to  reach  the  equity  of  that  person  in 
a  pledge  of  stock  which  he  has  made 
to  other  parties,  and  the  pledgees 
are  joined  as  parties  defendant,  the 
accounts  and  claims  between  tlie 
pledgor  and  pledgees  may  be  ad- 
justed in  the  same  suit.  Ritcliie  v. 
McMullen,  79  Fed.  Rep.  522  (1897). 
The  equity  of  redemption  of  the 
pledgor  may  be  reached  by  garnishee 
process,  and  the  property  sold  by  a 
receiver  to  pay  the  pledgee,  and  the 
balance  to  the  other  creditor,  where 
the  pledgee  consents  and  his  debt  is 


the  stock.    Mercantile  Trust  Co.  v. 
Atlantic  Trust  Co.,  86  Hun,  213  (1895). 

1  Higgins  V.  Lansingh,  154  lU.  301 
(1895).  Where  stock  is  pledged  and 
the  pledgee  is  in  control  of  the  com- 
pany, and  instead  of  declaring  divi- 
dends he  honestly  and  intelligently 
applies  the  profits  to  improvements, 
the  pledgor  cannot  hold  him  liable 
for  not  declaring  dividends,  and  for 
not  thiis  decreasing  the  debt  for 
which  the  stock  was  given  in  pledge. 
Zellerbach  v.  Allenberg,  99  CaL  57 
<1893).  A  pledgor  of  stock  cannot,  in 
a  suit  brought  by  his  creditor  to  reach 
the  equity  in  a  pledge,  raise  an  issue 
as  to  the  mismanagement  of  the  cor- 
poration. McMullen  v.  Ritchie,  57 
Fed.  Rep.  104  (1893).  It  is  no  defense 
to  a  note  secvu-ed  by  stock  that  the 
pledgee,  by  means  of  the  stock,  con- 
trolled the  company  and  managed  it 
so  badly  that  the  stock  became  worth- 
less. Dunliam  v.  Boyd,  04  Con:-u  397 
(1894). 

2  Ritchie  v.  Mc]Mullen,  79  Fed.  Rep. 
522, 533  (1897).  In  this  case  the  court 
held  that  if  a  pledgee,  being  in  con- 
trol of  the  corporation,  refuses  to 
develop  the  property  and  to  accept 
subsidies  wliicli  are  offered,  and  to 
accept  profits  under  a  contract  whicli 
are  possible,  and  to  sell  the  property 
at  a  large  price,  all  for  tlie  purpose 
of   depreciating  the  pledged  stock 


832 


en. 


XXVI.] 


PLEDGE    or   STOCK. 


[§  468. 


Where  the  pledgee  is  notified  by  a  person  that  the  latter  is 
entitled  to  the  collateral,  subject  to  the  pledge,  and  the  pledgee 
upon  payment  of  the  debt  returns  the  collateral  to  the  pledgor, 
the  pledgee  is  liable  to  such  third  person.^ 

"Where  the  pledgee  allows  the  pledgor  to  take  the  pledge 
and  pledge  it  for  another  loan,  and  then  the  second  pledgee  al- 
lows the  same  thing  to  be  done  for  a  third  loan,  and  the  third 
pledgee  sells  out  the  pledge,  and  the  second  pledgee  buys,  the 
first  pledgee  may  redeem  from  the  second  by  paying  both 
loans.2  A  pledgee  may  deduct  from  the  proceeds  of  a  sale 
reasonable  expenses  in  keeping  and  caring  for  the  pledge, 
paying  taxes  and  liens,  preserving  title,  or  rendering  it  avail- 
able.^ The  pledgee  cannot  set  up  the  title  of  a  third  per- 
son as  against  the  pledgor,  however  tortious  the  possession 
of  the  latter,  unless  the  owner  has  claimed  the  pledge  and 
the  pledgee  has  yielded  to  the  claim.*  A  pledgee  is  not  bound 
to  prosecute  suits  to   protect  the  pledge,  nor  to  sell,  and  a 


past  due.  Kimbrough  r.  Orr  Shoe 
Co.,  98  Ga.  537  (1896).  An  attaching 
creditor  cannot  complain  that  the 
pledgee,  who  has  prior  rights,  settled 
with  the  pledgor  after  the  attach- 
ment and  then  sold  the  stock.  The 
creditor  must  offer  to  redeem  or  have 
a  sale  subject  to  the  pledga  Mc- 
Clintock  V.  Central  Bank,  etc.,  120 
Mo.  127  (1894).  Where  a  worthless 
equity  of  redemption  in  land  is 
turned  in  for  stock,  and  then  the 
stock  is  pledged  with  the  mortgagee 
of  the  land,  and  then  "  scrip  "  is  taken 
from  the  corporation  by  the  parties 
pledging  the  stock,  this  scrip  recit- 
ing that  it  represents  the  equity  of 
the  right  to  the  certificates  of  stock 
after  the  mortgage  is  paid  off,  such 
scrip  is  valid  and  may  be  sold,  it  hav- 
ing been  treated  as  valid  for  twenty 
years,  even  though  it  was  issued 
without  consideration.  Higgins  v. 
Lansingh,  154  Ili  301  (1895).  In  Mich- 
igan garnishee  process  lies  against 
the  pledgee  of  stock  in  behalf  of  a 
creditor  of  the  pledgor,  and  enables 
such  creditor  to  reach  the  equity  in 
the  stock.  Old  Second  Nat.  Bank  v. 
53  83 


Williams,  71  N.  W.  ^tep.  150  (]Mich., 
1897).  Where  stock  is  placed  in  es- 
crow, to  become  the  property  of  a 
person  in  case  he  is  obliged  to  pay 
a  certain  obligation,  and  he  is  so 
obliged  to  pay,  the  creditors  of  the 
party  placing  the  stock  in  escrow 
cannot  reach  the  stock  nor  redeem 
it.  Pabst,  etc.  Co.  v.  Montana,  etc. 
Co.,  48  Pac.  Rep.  234  (Mont.,  1897). 

1  Hughes  V.  Settle,  36  S.  W.  Eep. 
577  (Tenn.,  1S05). 

2  Manhattan  Tnist  Co.  v.  Sioux 
City,  etc.  Pt.  E.,  65  Fed.  Eep.  559  (1895). 

3  Fumess  v.  Union  Nat.  Bank,  147 
HL  570  (1893).  While  the  pledgee  is 
entitled  to  defend  his  title,  yet  in  his 
suit  to  foreclose  the  pledge  he  can- 
not be  allowed  disbursements  made 
to  counsel  in  defending  liis  title  in 
another  suit  brought  by  the  real 
owner  of  the  stock,  the  pledge  being 
in  fraud  of  such  owner's  rights,  but 
the  pledgee  being  bona  fide.  Work 
I'.  Tibbits,  87  Hun,  352  (1895). 

4  Sedgwick  v.  Macy,  24  N.  Y.  App. 
Div.  1  (1897),  the  court  refusing  to 
follow  the  English  rule  on  tliis  sub- 
ject. 


§  469.] 


PLEDGE  OF  STOCK, 


[CH. 


XXVI. 


provision  that  tlie  pledgee  may  claim  repayment  of  any  sums 
expended  in  the  prosecution  of  claims  is  not  an  agreement  of 
the  pledgee  to  prosecute.^  If  a  note  is  secured  by  collateral,  an 
accommodation  indorser  is  not  liable  if  the  collateral  is  released 
from  its  deposit  as  security  for  the  note.^  A  pledge  for  any 
"note  or  claim  against  me"  applies  to  a  claim  against  the 
pledgor's  firm.^    The  pledgee  cannot  be  taxed  on  the  stock.* 

§  4G9.  Pledgee  need  not  retain  or  return  to  tlie^pledgor  the 
identical  certificates  or  shares  of  stoclc  which  tv ere  pledged,  hut 
must  have  equal  quantity  always  on  hand. —  One  share  of  stock 
does  not  differ  from  another  share  of  the  same  capital  stock. 
Each  is  but  an  undivided  interest  in  the  corporate  rights,  privi- 
leges, and  property.  Accordingly,  it  is  held  that  a  pledgee  of 
stock  need  not  retain  in  his  possession  the  identical  shares  of 
stock  which  were  pledged  to  him,  but  that  the  rights  of  the 
pledgor  are  fully  preserved  if  similar  stock  is  retained  by  the 
pledgee  until  the  termination  of  the  pledge.'    The  pledgee 


1  Ciilver  V.  WUkinson,  145  U.  S.  205 
(1892).  The  pledgee  may  claim  cred- 
its for  defending  the  pledge  against 
attacks  by  law  suits,  and  in  some 
cases  for  adding  to  its  value  by 
aiding  the  subject  of  the  pledge. 
Cridge's  Appeal,  18  AtL  Rep.  1010 
(Pa.,  1890). 

2  Smith  V.  Traders'  Nat.  Bank,  82 
Tex-  368  (1891). 

3  Hallowell  v.  Blackstone  Nat.  Bank, 
154  Mass.  359  (1891).  A  pledge  of 
stock  to  secure  future  liabilities  does 
not  apply  to  past  liabilities.  Frank- 
lin Bank  v.  Harris,  77  Md.  423  (1893). 

*  See  ^  504,  note,  infra. 

5  Caswell  V.  Putnam,  120  N.  Y.  153 
(1890);  Skiff  v.  Stoddard,  63  Conn.  198 
(1893);  Nourse  v.  Prime,  4  Johns.  Ch, 
490  (1820);  S.  C,  7  Johns.  Ch.  69 
(1823);  Horton  v.  Morgan,  19  N.  Y. 
170  (1859) ;  Barclay  v.  Culver,  30  Hun,  1 
(1883);  Noyes  u  Spaulding,  27  Vt.  420 
(1855);  Atkins  v.  Gamble,  42  Cal. 
86  (1871);  Price  v.  Cover,  40  Md.  102 
(1874);  Gilpin  u  Howell,  5  Pa.  St.  41 
(1847);  Hardenbergh  v.  Bacon,  33  CaL 
350  (1867);  Taylor  v.  Ketchum,  35 
How.   Pr.   289   (1867);   Thompson  v. 


Toland,  48  CaL  99  (1874);  Le  Croy  v. 
Eastman,  10  Mod.  499  (1722);  Hard- 
ing V.  Field,  1  N.  Y.  App.  Div.  391 
(1896);  Douglas  v.  Carpenter,  17  N.  Y. 
App.  Div.  329  (1897);  HubbeU  v. 
Dresel,  11  Fed.  Rep.  115  (1882);  Boy- 
Ian  V.  Huguet,  8  Nev.  345  (1873).  Cf. 
Langton  v.  Waite,  L.  R.  6  Eq.  165 
(1868).  In  the  case  of  Dykers  v.  iUlen, 
7  HHl,  497  (1844),  the  pledgee  at  one 
time  seems  to  have  had  no  stock  on 
hand.  In  selling  the  pledgor's  stock 
on  notice  for  non-payment  of  the 
debt,  the  pledgee  need  not  sell  the 
identical  stock  pledged.  Berlin  v. 
Eddy,  33  Mo.  426  (1863).  In  Mayo  v. 
EJiowlton,  134  N.  Y.  250  (1892),  the 
com-t  said:  "The  stock  had  no  ear- 
mark; one  share  was  the  same  as 
another,  and  coiild  not  be  identified 
or  distinguished  therefrom."  Wliere 
a  customer  knows  that  the  broker  is 
insolvent,  and  has  not  kept  on  hand 
the  stock  which  the  customer  had 
deposited  on  margin,  and  the  broker 
purchases  stock  in  order  to  satisfy 
the  demand  of  the  customer,  tlio 
transaction  is  a  preference,  in  viola- 
tion  of  the  statutes  of  Massachu- 


834 


CH.  XXTI.]  PLEDGE   OF    STOCK.  [§§  470,  471. 

must  have  on  liaiid  at  all  times  the  full  amount  of  the  stock 
pledged,  whether  the  debt  secured  is  due  or  not,  since  the  law 
^yill  not  allow  the  pledgee  to  speculate  or  deal  with  the  stock 
of  another  as  thouo-h  it  were  his  own.^  It  is  not  enough  that 
he  can  at  once  procm^e  the  stock  from  one  to  whom  it  is  loaned,^ 
or  that  he  had  sufficient  on  hand  for  the  plaintiff  pledgor,  but 
not  enough  for  all  the  pledgors  whom  he  had  at  any  particular 
time.^  The  law  requires  him  to  set  aside  as  much  stock  as  has 
been  pledged  to  him. 

§  470.  Pledgee's  liaMlity  on  siibscription  and  statutory  lia- 
MUtij  on  stoclcJ — A  pledgee  who  has  obtained  registry  on  the 
corporate  books  appears  to  third  parties  as  a  full  stockholder. 
Accordingly,  in  case  the  corporation  becomes  insolvent,  the 
registered  pledgee  is  held  liable  on  his  stock,  as  though  he  were 
an  absolute  stockholder.  In  order  to  avoid  this  danger,  the  law 
allows  the  pledgee  to  have  the  pledged  stock  registered  on  the 
corporate  books  in  the  name  of  a  nominee  of  the  pledgee.* 
AVhere  such  a  registry  is  obtained,  the  pledgee  has  the  advan- 
tage of  a  control  of  the  stock,  and  at  the  same  time  escapes  the 
danger  of  liability  as  a  stockholder. 

§  471.  Pledgee  has  no  right  to  sell  or  repledge  the  stock  even 
temporarily^  except  upon  notice,  unless  the  deht  is  assigned 
with  the  stocJc. —  "Equity  will  not  tolerate  a  separation  of  the 
pledge  from  the  debt,  and  they  must  stand  together,  and  will 
force  upon  a  wrong-doer  the  character  of  a  trustee,  and  thus 
compel  him  to  do  justice."  Such  is  the  language  of  the  l^ew 
York  court  of  appeals.^  In  no  other  way  can  the  pledgee  le- 
gally part  with  the  possession  of  such  stock  by  a  sale  or  repledge 
of  it.     If  he  does  so  he  is  guilty  of  a  conversion,^  and  in  ISTew 

setts.    "Weston  v.  Jordan,  168  Mass.  3  Fay  v.  Gray,  124  Mass.  500  (1878). 

401  (1897).     Contra,  75  N.  W.  Rep.  443.  4  See  ch.  XIV,  §  247,  supra. 

^Ex  parte  Dennison,  3  Ves.  Jr.  553  &  Newry,  etc.  R'y  v.  Moss,  14  Beav. 

(1797);  Taussig  v.  Hart,  58  N.  Y.  425  64  (1851).     See  §  466,  siqjra. 

(1874);  Thompson  v.  Toland,  48  CaL  "Bennett  v.  Austin,  81  N.  Y.  308, 

99  (1874);  Hubbell  v.  Drexel,  11  Fed.  322  (1880).     Cf.  Easton  v.  Hodges,  18 

Rep.  115  (1882).    The  pledgor   may  Fed.  Rep.  677  (1883). 

waive   this   restriction    by   express  "^  Oregon,  etc.   Co.  v.  Hilmers,  20 

agreement.      Ogden  v.  Lathrop,   65  Fed.  Rep.  717  (1884);  Gass  v.  Hamp- 

N.  Y.  158  (1875).  ton,  16  Nev,  185  (1881).     Brokers  hold- 

2  Allen  V.  Dykers,  3  Hill,  593  (1843);  ing  a  certificate  of  slO-k  as  security 

aff 'd,  Dykers  v.  Allen,  7  Hill,  497  (1844) ;  for  the  balance  of  the  purchase  price 

Ex  parte  Dennison,  3  Ves.  Jr.  552  due  from  the  customer  are  pledgees, 

<1797).  and  if  the  broker,  in  violation  of  the 

835 


§  iTL] 


PLEDGE  OF  STOCK. 


[CH.  XXVI. 


York  state  may  be  arrested.^  A  broker  has  no  riglit  to  repledge 
bis  customer's  stocks  or  bonds,  carried  by  the  broker  as  collat- 
eral or  on  a  margin,  unless  the  debt  is  transferred  at  the  same 
time,  or  unless  an  express  contract  authorizes  such  repledge.^ 


express  contract,  repledges  or  sells 
such  stock  without  authority  from 
the  customei',  he  is  guilty  of  a  con- 
version for  which  trover  will  lie. 
Chew  V.  Louchheim,  80  Fed.  Rep.  500 
(1897).  The  case  of  Ex  parte  Sar- 
gent, L.  R  17  Eq.  273  (1874),  con- 
tained a  dictum  giving  a  contrary 
rule;  but  France  v.  Clark,  L.  R.  22 
Cli.  D.  830  (1883),  disapproves  such 
dictum  and  says:  "  As  a  general  rule 
the  pawnee  of  chattels  has  no  right 
to  sell  them,  unless  a  time  was  orig- 
inally fixed  for  their  redemption,  and 
that  time  has  expired,  or  unless  he 
has  made  a  demand  upon  the  pawnor 
for  the  payment  of  what  is  due  to 
him."  Fay  v.  Gray,  124  Mass.  500 
(1878),  holds  that  the  pledgee  has  no 
right  to  sell",  lend,  or  repledge  the 
stock.  In  the  notes  in  21  Am.  Law 
Reg.  (N.  S.)  454-461,  a  contention  is 
made  tliat  the  pledgee  should  be  al- 
lowed to  repledge,  but  it  is  admitted 
that  the  weight  of  authority  holds 
otherwise.  The  following  cases  are 
cited:  Merchants'  Nat.  Bank  v.  Tren- 
holm,  12  Heisk.  (Tenn.)  520  (1873); 
First  Nat.  Bank  v.  Bryce,  19  Am.  L. 
Reg.  (N.  S.)  503  (1880);  Work  v.  Ben- 
nett, 70  Pa.  St.  484  (1872) ;  Wood  v. 
Hayes,  81  Mass.  375  (18G0);  Thompson 
V.  Patrick,  4  Watts  (Pa.),  414  (1835); 
and  see  §  4G9,  supra.  In  Lawrence 
V.  Maxwell,  53  N.  Y.  19  (1873),  the 
court  said :  "  Ordinarily,  and  in  the 
absence  of  any  agreement  or  assent  by 
tlie  pledgor,  tlio  pledgee  would  have 
no  right  to  use  the  tiling  pledged, 
and  a  use  of  it  woiild  be  illegal.  But, 
under  special  circumstances  depend- 
ing somewhat  upon  the  nature  of  the 
pledge,  and  in  all  cases  with  the  as-^" 
sent  of  the  pledgor,  express  or  im- 
plied, the  property  pledged  may  be 


used  by  the  pledgee  in  any  way 
consistent  with  the  general  owner- 
ship and  the  vdtimate  rights  of  the 
pledgor."  Where  the  pledgee  has  an 
option  to  purcliase  the  stock,  but,  in- 
stead of  purchasing,  he  repledges  it 
illegally,  the  pledgor  may  consider 
this  as  an  exercise  of  the  option.  Up- 
ham  V.  Barbour,  65  Minn.  364  (1896). 
Where  the  pledgee  transfers  the 
stock  to  another  person  as  security 
that  a  proposed  contract  between  the 
corporation  and  another  corporation 
will  be  ratified  at  a  stockholders' 
meeting,  and  such  other  person  votes 
said  stock  at  such  stockholders'  meet- 
ing, the  pledgee  is  guilty  of  conver- 
sion of  the  stock.  Upham  v'.  Barbour, 
65  Minn.  364  (1896). 

1  Oregon,  etc.  Co.  v.  Hilmers,  20 
Fed.  Rep.  717  (1884);  Barry  u  Colder, 
48  Hun,  449  (1888).  See  also  §  457, 
supra,  and  §  576,  infra. 

2  Dykers  u  Allen,  7  Hill,  497  (1844); 
Where  it  was  understood  between  a 
firm  of  brokers  and  its  customers, 
for  whom  and  on  whose  order  it 
bought  stocks  on  the  security  of  a 
margin,  that  the  firm  might,  accord- 
ing to  the  usual  course  of  business, 
pledge  or  bypothecate  as  security  for 
loans  to  the  firm  the  stocks  thus 
bought,  it  was  held  that  a  mere  pledge 
of  such  stocks  would  not  be  of  itself  a 
conversion.  Chamberlain  v.  Green- 
leaf,  4  Abb.  N.  Cas.  178  (1878).  See 
also  Lawrence  v.  Maxwell,  58  Barb. 
511  (1871);  6  Lans.  469;  53  N.  Y.  19. 
In  Wood  V.  Hayes,  81  Mass.  375  (1860), 
it  was  held  that  "  a  broker  who  ad- 
vanced money  to  buy  stock  for  an- 
other, and  held  it  in  his  own  name, 
might,  so  long  as  he  had  not  been 
paid  or  tendered  the  amount  of  his 
advances,  pledge  it  as  security  for 


830 


CH,  XXYI.] 


PLEDGE    OF    STOCK. 


[§  ^Tl. 


In  Pennsylvania  it  is  a  penal  offense  for  the  pledgee  to  re- 
pledge  the  stock.^  Although,  apparently,  the  pledgor  vrould 
not  be  injured  by  the  pledgee's  separating  the  stock  from  the 
debt  and  by  transferring  to  another  the  stock  pledged  as  col- 
lateral security,  yet  the  law  rigidly  protects  the  interests  of 


his  own  debt  to  a  third  person,  with- 
out making  himself  liable  to  an  ac- 
tion by  his  employer;  and  this  upon 
the  ground  that  the  contract  was 
conditional  to  deliver  tlie  shares  upon 
the  payment  of  the  money."  Ap- 
proved in  Covell  v.  Loud,  135  Mass. 
41  (1883),  where  it  was  held  that, 
where  the  customer  is  unable  to  ad- 
vance further  margin,  and  tells  the 
broker  to  do  the  best  he  can,  he  may 
seU  without  notice.  The  decided 
weight  of  authority,  however,  holds 
that,  unless  the  power  is  expressly 
given  to  the  broker  to  repledge  the 
stock,  he  cannot  legally  repledge  it. 
A  broker  has  no  right  to  repledge 
the  stocks  held  by  him  as  collateral 
to  advances  to  a  customer,  especially 
so  after  the  customer  has  repaid  the 
advances.  Van  Voorhis  v.  Rea,  153 
Pa.  St.  19  (1893).  Where  a  broker,  a 
gratuitous  bailee  of  corporate  stock, 
delivers  the  same  to  the  company 
without  authority,  and  the  stock  is 
converted  to  the  use  of  the  company, 
the  bailee  is  liable  for  its  value,  irre- 
spective of  what  his  intentions  were 
in  the  premises.  In  such  case  the 
bailor  may  recover  the  value  of  the 
stock  at  the  time  of  conversion,  with 
all  dividends  paid  from  the  time  of 
delivery,  together  with  interest  on 
the  value  of  the  stock  from  date  of 
conversion,  and  on  the  dividends 
from  date  of  respective  payments. 
HubbeU  v.  Blandy,  87  Mich.  209  (1891). 
A  broker  has  no  implied  power  to  re- 
pledge. Skiff  V.  Stoddard,  63  Conn. 
198  (1893).  Where  a  broker  repledges 
stock  carried  by  him  on  a  margin, 
the  customer  cannot,  upon  the  fail- 
ure of  the  broker,  have  all  the  bro- 
ker's stock  of  that  class  first  applied 


in  discharge  of  the  claim.  Skiff  v. 
Stoddard,  63  Conn.  198  (1893);  Jami- 
son's Assigned  Estate,  8  Pa.  Dist.  217 
(1894).  Where  the  pledgee  converts 
the  pledge  by  selling  it,  and  then  as- 
signs for  the  benefit  of  creditors,  the 
pledgor  comes  in  as  any  other  cred- 
itor, and  not  as  a  preferred  creditor. 
Re  Jamieson's  Estate,  163  Pa.  St.  143 
(1894),  holding  also  that  the  debt  due 
from  the  pledgor  to  the  pledgee  may 
be  set  off.  AVliere  the  pledgee,  with- 
out the  knowledge  of  the  pledgor, 
sells  one  of  the  notes,  and  gives  with 
it  a  part  of  the  collateral  as  security, 
the  pledgor  may  pay  that  note  and 
take  all  the  security  so  given  to  the 
repledgee.  The  first  pledgee  cannot 
claim  any  lien  on  the  part  so  re- 
pledged.  McDonald  v.  Grant,  N.  Y. 
L.  J.,  July  16,  1895,  Supr.  Ct.  Sp.  T. 
A  broker  may  pledge  liis  customer's 
securities  for  au  amount  not  exceed- 
ing the  amount  due  from  the  cus- 
tomer, but  the  broker  must  not  put 
the  securities  beyond  the  reach  of 
the  customer,  nor  mingle  such  secu- 
rities with  others  and  hypothecate 
all  of  them  for  a  larger  amount;  the 
reason  of  this  decision  being  tliat,  so 
long  as  the  customer  could  go  to  the 
pledgee  and  redeem  the  seciu-ities 
without  loss,  he,  the  customer,  was 
not  injured.  Douglas  v.  Carpenter, 
17  N.  Y.  App.  Div.  329  (1897). 

^  Act  of  May  25, 1878,  modified  as 
to  purchases  by  broker  on  margin  by 
act  of  June  10,  1881  (P.  L.  1881,  107). 
Section  1784  of  the  code  of  Alabama 
forbids  an  assignment  of  a  pledge 
without  an  assignment  of  the  debt 
it  secures.  Dexter  v.  McCleUan,  23 
S.  Rep.  461  (Ala.,  1897). 


837 


•1.] 


PLEDGE  OF  STOCK. 


[CH.  XXVI. 


the  debtor  and  pledgor,  and  will  not  compel  liini  to  submit  to 
the  danger  of  such  transfers  by  the  pledgee.  There  may,  of 
course,  be  an  express  agreement  or  understanding  to  the  con- 
trary.^ Where  an  agent  has  wrongfully  pledged  his  principal's 
stock,  and  the  pledgee  then  wrongfully  converts  the  pledge, 
the  principal  may  ratify  the  act  of  his  agent  and  sue  the  pledgee 
for  conversion.  The  pledgee  may  offset  the  amount  actually 
due  him.'^ 

A  pledgee  may  assign  the  principal  debt  to  a  third  person 
and  "  give  him  the  benefit  of  the  collateral  securities  to  se- 
cure the  payment  of  the  principal  debt.  So  long  as  nothing 
is  done  to  deprive  the  pledgor  of  the  right  to  redeem  on  pay- 
ment of  the  amount  due  on  the  principal  debt,  the  pledgor  ia 
not  injured." '    "  ISTothing  is  better  settled  than  the  right  of  a 


1  Chouteau  v.  Allen,  70  Mo.  290  (1879). 
A  broker  has  no  right  to  repledge 
stock  held  by  h'im  for  a  customer  to 
secure  margins,  and,  even  if  the  cus- 
tomer authorizes  him  to  repledge, 
this  authority  sustains  a  repledge 
only  to  the  extent  of  the  amount  due 
from  the  customer,  and  the  broker 
must  be  ready  at  all  times  to  return 
the  stock  to  the  customer  \ipon  the 
latter  paying  the  debt.  In  this  case 
it  was  held  also  that  the  repledgee, 
tmder  the  usual  transfer  in  blank  on 
the  back  of  the  certificate,  is  not  a 
bona  fide  pledgee.  German  Sav.  Bank 
V.  Renshaw,  28  Atl.  Rep.  281  (Md., 
1894). 

•i  Smith  V.  Savin,  141  N.  Y.  315  (1894). 

3  Chapman  v.  Brooks,  31  N.  Y.  75, 84 
(18C5);  Duncomb  v.  New  York,  etc. 
R.  R.,  84  N.  Y.  190,  208  (1881).  The 
pledgee  may  assign  his  interest  in 
the  pledge  and  transfer  the  pledge 
to  such  assignee.  Overton,  Liens, 
§§  168,  172;  Schoul.  Baihn.  (2d  ed.), 
§  218,  etc.  Story,  Bailm.,  §  324,  says 
the  pawnee  "  may  sell  or  assign  all  his 
interest  in  the  pawn,  or  he  may  con- 
vey the  same  interest  conditionally, 
by  way  of  pawn  to  another  i^erson, 
without  in  either  case  destroying  or 
invalidating  his  security."    See  also 


Talty  V.  Freedman's  Sav.  etc.  Co.,  93 
U.  S.  321  (1876);  2  Kent,  Com.  579; 
Jarvis  v.  Rogers,  13  Mass.  105  (1816), 
15  Mass.  389,  408;  Mores  v.  Conham^ 
Owen,  123  (1610);  Ratcliffe  v.  Davis, 
1  Bulst.  29  (1611);  Anon.,  2  Salk.  522 
(1694).  The  right  of  the  pledgee  to  re- 
pledge may  exist  by  force  of  a  custom 
xmderstood  by  both  parties.  Cham- 
berlain V.  Greenleaf,  4  Abb.  N.  Cas. 
178  (1878).  In  Lewis  v.  Mott,  36  N. 
Y.  394  (1867),  where,  after  the  debt 
was  due  and  unpaid,  the  pledgee 
turned  over  the  debt  and  security  to 
another  without  a  foreclosure  or  sale 
on  notice,  the  court  held  that  the  lat- 
ter could  hold  the  collateral  stock  un- 
til the  pledgor  tendered  the  amoimt 
of  the  debt.  The  latest  English  case& 
hold  that,  although  the  repledge  may 
be  wrong,  yet  that  the  pledgor  can- 
not reclaim  the  stock  from  the  re- 
pledgee  until  the  former  pays  the 
debt  for  which  the  pledge  was  made. 
Donald  v.  Suckling,  L.  R.  1  Q.  B.  585 
(1866);  Halliday  v.  Holgate,  L.  R.  3 
Excli.  299  (1868).  Where  a  broker, 
holding  stock  in  pledge  on  a  margin, 
repledges  it  without  the  consent  of 
his  customer,  it  has  been  lieM  that 
he  cannot  recover  the  value  of  the 
stock  from  the  customer  on  a  tender 


838 


CH.  XXVI.]  PLEDGE   OF    STOCK.  [§  472. 

transferee  of  a  pledge  to  hold  it  until  the  debt  for  which  it 
Avas  given  is  paid."  ^  "Where  a  pledgee  repledges  both  the  note 
and  the  stock,  an  agreement  between  the  original  pledgor  and 
the  second  pledgee,  whereby  the  second  pledgee  sells  the  stock 
and  takes  in  pajTnent  notes  of  the  purchaser,  is  illegal  as  re- 
gards the  rights  of  the  first  pledgee.  As  against  the  second 
pledgee  the  first  pledgee  is  entitled  to  be  credited  with  the 
value  of  the  stock  at  the  time  of  the  sale.'^  The  pledgee  of 
securities,  who  turns  them  in  to  a  reorganization  and  takes  new 
securities  without  the  consent  of  the  pledgor,  is  guilty  of  a  con- 
version, but  the  pledgor  can  recover  only  the  actual  value  of 
the  securities  so  tm^ned  in.  The  pledgee  is  not  bound  to  aid 
the  pledgor  in  using  the  pledge  in  a  reorganization,  nor  is  the 
pledgee  bound  to  delay  the  reorganization  on  account  of  any 
demand  of  the  pledgor.^ 

§  472.  Furchasers  or  pledgees  of  stock  from  pledgee  with  no- 
tice are  not  protected. —  A  person  who  purchases  or  takes  in 
pledge  stock  which  he  knows  is  held  in  pledge  by  the  person 
from  whom  he  takes  it  is  not  a  lonajlde  holder  of  such  stock, 
and  is  not  entitled  to  the  rights  of  such.  At  the  best  he  stands 
merely  in  the  place  of  the  pledgee  from  whom  he  receives  the 
stock.  He  must  restore  the  stock  to  the  owner  in  case  the 
pledgee  would  be  obliged  to  restore  it,  had  no  second  sale  or 
pledge  been  made.*  The  second  pledgee  or  vendee,  with  no- 
tice that  he  was  taking  pledged  stock,  has  no  rights  which  the 
fii'st  pledgee  has  not.  He  is  but  an  equitable  assignee  of  the 
latter,  and  can  be  compelled  by  the  owner  to  deliver  the  stock 
in  any  case  where  the  first  pledgee  could  be  so  compelled.* 

of  the  certificate.  Clarkson  v.  Snider,  that  the  pledgee  might  repledge  the 

5  Can.  L.  T.  587  (1885).    In  Langton  stock  so  far  as  he  had  an  interest 

V.  Waite,  L.  R.  6  Eq.  165  (1868),  the  in  it. 

covirt  said  that  the  law  was  clear  i  Philler  v.  Yardley,  63  Fed.  Rep. 

that,  in  the  absence  of  express  con-  645,  649  (1894). 

tract  to  the  contrary,  a  pawnee  can-  2  Pauly  v.  "Wilson,  57  Fed  Rep.  548 

not  sell  without  the  express  permis-  (1893). 

sion  of  the  owner,  and  that  if  he  does,  ^  Griggs  v.  Day,  21  N.  Y.  App.  Div. 

the  owner  can  charge  him  with  the  442  (1897).    To  same  effect  see  S.  C, 

excess  of  the  price  over  the  loan.  136  N.  Y.  152, 162  (1892). 

The  court,  however,  seemed  to  think  *  Quoted  and  approved  in  German 

that  the  pledgee  could  repledge  the  Sav.  Bank  v.  Renshaw,  28  AtL  Repi 

stock.     In  Gould  v.  Farmers'  L.  &  T.  281  (Md.,  1894). 

Co.,  23  Hun,  323  (1880),  the  court  said  5  Any  fact,  such  as  usury  in  the 

839 


4Y3.] 


PLEDGE   OF    STOCK. 


[CH.  XXVI. 


The  same  rule  applies  whether  the  pledgee  assigns  or  repledges 
both  the  debt  and  the  stock  or  the  stock  alone.^  Where  a 
pledo-ee  has  been  fraudulently  induced  to  sell  the  stock  to  a 
person,  the  pledgor  may  file  a  bill  in  equity  against  such  per- 
son to  obtain  a  retransfer  of  the  stock  to  himself  and  also  the 
dividends  which  have  been  paid,  and  need  not  join  the  pledgee 
as  a  party .2 

§  473.  Bona  fide  repJeclgces  or  purchasers  of  pledged  stock 
are  protected  —  Pledgor's  remedies  —  Arrest— Marshaling  the 
assets. —  Where,  however,  a  pledgee  of  certificates  of  stock  in- 
dorsed in  blank  takes  the  certificates  and  sells  or  pledges  them 
to  another,  who  takes  such  certificates  in  good  faith  and  for 
value,  and  without  notice  that  his  vendor  or  pledgor  held  them 
as  a  pledge,  the  purchaser  or  pledgee  from  the  pledgee  is  as 
fully  protected  in  his  rights  as  though  the  person  with  whom 
he  dealt  was  the  absolute  owner  of  the  stock.^    This  rule  arises. 


second  transaction,  which  prevents 
the  second  pledgee  or  purchaser  from 
being  a  bona  fide  purchaser,  applies 
to  a  repledgee  of  stock.  The  re- 
pledgee  is  not  protected.  Felt  v. 
Heye,  23  How.  Pr.  359  (1862);  Little 
V.  Barker,  1  Hoffm.  Ch.  487  (1840).  So 
also  in  Pennsylvania,  where  the  re- 
pledgee  takes  in  consideration  of  a 
pre-existing  indebtedness.  Ashton's 
Appeal,  73  Pa.  St.  153  (1873).  In  gen- 
eral, see  also  Duncan  v.  Jaudon,  15 
Wall.  165  (1872);  Shaw  v.  Spencer,  100 
Mass.  382  (1868);  Ellis's  Appeal,  8  W. 
N.  Cas.  (Pa.)  538  (1880);  Porter  v. 
Parks,  49  N.  Y.  564  (1872);  Chouteau 
V.  Allen,  70  Mo.  290  (1879).  A  pledgee 
taking  with  notice  that  the  pledge  is 
in  breach  of  trust  is  not  protected. 
Kern's  Estate,  176  Pa.  St.  373  (1896). 
Even  though  it  be  illegal  for  an  irri- 
gation company  to  subscribe  for  the 
stock  of  a  land  company,  yet  where 
it  does  so  subscribe  and  turns  in  prop- 
erty in  payment,  and  the  stock  is 
taken  in  the  name  of  its  secretary  in- 
dividually and  not  as  secretary,  the 
company  may  compel  him  to  turn 
over  the  stock,  even  though  he  has 
pledged  it  for  his  personal  debt,  the 


pledgee,  however,  having  taken  with 
knowledge  of  all  the  facts.  Bear 
River,  etc.  Co.  v.  Ilanley,  50  Pac  Eep. 
611  (Utah,  1897).  In  Hampton,  etc. 
R.  R.  V.  Bank,  26  S.  E.  Rep.  238  (S.  C, 
1897),  where  a  railroad  had  issued 
stock  and  bonds  to  a  finance  com- 
pany for  money  to  be  paid  in  the 
future,  and  the  finance  company  had 
not  paid  the  money,  but  on  the  con- 
trary had  pledged  some  of  the  stock 
to  a  bank,  the  court  held  that  the 
bank  was  bound  to  take  notice  of  a 
provision  in  the  charter  to  the  effect 
that  no  sale  of  stock  should  relieve  an 
original  owner  from  his  obligations 
to  the  company,  and  hence  was  not 
protected  as  pledgee. 

iFelt  V.  Heye,  23  How.  Pr.  359 
(1862).  Nor  can  the  repledgee  claim 
the  benefit  of  the  debt  not  assigned 
to  him.  Felt  v.  Heye,  23  How.  Pr. 
359  (1862).  See  also  Talty  v.  Freed- 
man's,  etc.  Co.,  93  U.  S.  321  (1876). 

2  Smith  V.  Lee,  77  Fed.  Rep.  779 
(1896). 

3  The  important  case  of  IMcNeil  v. 
Tenth  Nat.  Bank,  46  N.  Y.  325  (1871), 
was  on  the  rights  of  a  bona  fide  re- 
pledgee of  stock,  and  fuUy  sustains 


840 


OH.  XXVI.] 


PLEDGE   OF   STOCK. 


[§  473. 


not  on  the  ground  that  the  certificate  of  stock  is  negotiable,  but 
for  the  reason  that  the  owner  is  held  to  have  enabled  his  pledgee 
to  sell  the  stock  as  the  pledgee's  own,  and  that  as  between  the 
owner  and  the  honafide  purchaser  or  pledgee  from  the  pledgee 
the  owner  must  bear  the  loss.  The  law  of  estoppel  prevents 
his  denying  the  right  of  his  pledgee  to  sell  or  pledge  as  against 
a  hona  fide  purchaser  or  pledgee  from  the  pledgee.  So,  also, 
tills  principle  arises  under  the  well-established  rule  that,  where 
one  of  two  innocent  parties  must  suffer  from  the  fraud  of  a 
third,  the  loss  must  fall  upon  him  who  enabled  the  third  party 

the  general  rule.  See  also  Fatman  v. 
Lobach,  1  Duer,  354  (,1852);  Nelson  v. 
Owen,  113  Ala.  372  (1896);  Wood's  Ap- 
peal, 93  Pa.  St.  379  (1880);  Gass  v. 
Hampton,  16  Nev.  185  (1881);  Mount 
Holly,  etc.  Co.  v.  Ferree,  17  N.  J.  Eq. 
117  (1864);  Otis  v.  Gardner,  105  IlL 
436  (1883);  Ex  parte  Sargent,  L.  R.  17 
Eq.  273  (1874);  Cherry  v.  Frost,  7  Lea 
(Tenn.),  1  (1881),  the  court  saying  that 
in  general  a  pledgee  of  personal  prop- 
erty cannot  convey  a  good  title  to 
another;  but  "if  the  owner  entrusts 
to  another  not  merely  the  possession 
of  the  property,  but  also  written  evi- 
dence over  his  own  signature  of  title 
thereto  and  of  vmconditional  power 
of  disposition  over  it,  the  case  is 
vastly  different."  Thus,  a  pledgee, 
without  notice,  of  bonds  from  a 
pledgor,  who  turns  out  to  have  held 
the  bonds  as  securities  for  the  can- 
cellation of  a  mortgage,  is  protected 
in  his  pledge.  Saloy  v.  Hibernia  Nat. 
Bank,  39  La.  Ann.  90  (1887).  In  Orti- 
gosa  V.  Brown,  47  L.  J.  (Ch.)  1G8 
(1878),  the  court,  following  the  Eng- 
lish doctrine  that  an  unregistered 
transferee  of  certificates  of  railway 
stock  has  no  more  rights  than  his 
transferrer,  refused  to  protect  the 
unregistered  repledgee  of  stock.  A 
bona  fide  purchaser  of  pledged  stock 
is  protected  in  l^is  title.  Krovise  v. 
Woodward,  110  CaL  638  (1895).  Where 
stock  is  pledged  as  collateral,  and  the 
pledgee  sells  to  a  honafide  purchaser 
without    notice,  such   purchaser  is 


protected,  even  though  he  at  the  same 
time  purchases  the  note  for  which 
the  stock  is  collateraL  Strickland  v. 
Leggett,  21  N.  Y.  Supp.  356  (1892).  A 
hona  fide  transferee,  absolutely  or  in 
pledge  from  a  broker,  holding  his 
customer's  stock  in  pledge,  is  pro- 
tected to  the  extent  of  the  transfer, 
the  transferee  having  no  notice  of 
the  fact  that  the  stock  was  held  in 
pledge  by  the  broker.  Thompson  v, 
Toland,  48  Cal.  99  (1874);  Zuhck  v. 
Markham,  6  Daly,  129  (1875);  and  see 
many  cases  in  §  321,  supra.  These 
cases  apply  equally  whether  the  per- 
son transferring  contrary  to  law  is 
an  agent  or  a  pledgee,  and  equally, 
also,  whether  he  sells  or  only  re- 
pledges.  In  a  recent  case  in  Mary- 
land an  important  distinction  is 
drawn  between  the  rights  of  a  hona 
fide  purchaser  and  a  honafide  pledgee. 
It  is  held  that  the  usual  form  of 
transfer  on  the  back  of  certificates 
of  stock,  signed  by  the  stockholder, 
with  the  name  of  the  transferee  left 
blanji,  does  not  protect  a  hona  fide 
pledgee.  The  pledgee  is  chai-geable 
with  notice  of  all  the  facts  and  equi- 
ties. Under  this  decision  it  woiild 
seem  to  be  necessary  in  lilarjdand  to 
enlarge  the  terms  and  form  of  the 
usual  assignment  and  power  of  at- 
torney on  the  back  of  certificates  of 
stock.  German  Sav,  Bank  v.  Ren- 
shaw,  28  Atl.  Rep.  281  (Md.,  1894),  a 
case  wherein  a  broker  holding  stock 
on  a  margin  repledged  it  at  a  bank. 


841 


§  4T3.] 


PLEDGE    OF    STOCK. 


[CH. 


XX  VL 


to  perpetrate  tlie  fraud.  If  tlie  pledgee  has  repledged  the  stock, 
the  owner  can  obtain  the  stock  only  by  paying  to  the  repledgee 
the  amount  of  the  latter's  advancement  to  the  first  pledgee.^ 
The  pledgor  of  stock,  under  these  rules,  has  practically  no  pro- 
tection as  to  his  stock  except  the  honesty  and  responsibility  of 
his  pledgee.  The  hona  fide  purchaser  or  pledgee  from  the 
pledgee  is  equally  protected  whether  the  certificates  of  stock 
are  indorsed  by  the  pledgor  or  vendor,  or  are  indorsed  in  blank 
by  some  previous  holder.^  The  repledgee  or  vendee  is  held  to  be 
a  honafide  holder  only  where  he  would  be  held  so  to  be  in  cases 
of  23romissory  notes  and  other  similar  cases.'  The  general  rule 
of  law  is  that  a  pledgee  holding  various  securities  may  resort 
to  any  one  security  which  he  chooses.  He  is  not  bound  to  re- 
sort to  those  securities  upon  which  other  creditors  have  no- 
claim.*  Under  such  circumstances,  however,  as  give  a  court  of 
equity  power  so  to  do,  especially  where  a  repledgee  has  other 
collateral  for  his  debt,  a  court  of  equity  may  marshal  the  assets 
and  compel  resort  to  such  other  collateral  first.*    Where,  by 


1  Wood's  Appeal,  92  Pa.  St.  379 
(1880);  Fatman  v.  Lobach,  1  Duer,  354 
(1832);  Ex  parte  Sargent,  L,  R  17  Eq. 
273  (1874);  Cherry  v.  Frost,  7  Lea 
(Tenn.),  1  (1881),  holding,  however, 
that  payments  on  the  subscription 
by  the  o^mer  subsequently  to  the  re- 
pledge  do  not  enure  to  the  benefit  of 
the  repledgee.  See,  in  general,  Don- 
ald V.  Suckling,  L.  R.  1  Q.  B.  585 
(18GG);  Moore  v.  Conham,  Owen,  123 
(1010);  Katcliff  u  Davis,  Yelv.  178 
(1611);  Jarvis  v.  Rogers,  15  Mass.  389 
(1819). 

2Gos3  V.  Hampton,  16  Nev.  185 
(1881). 

3  In  California  the  peculiar  doctrine 
is  sustained  that  the  word  "  trustee  " 
on  the  face  of  the  certificate  is  no 
notice,  and  does  not  deprive  the 
pledgee  of  his  character  of  being  a 
hona  fide  holder.  Brewster  v.  Sime, 
42  Cal.  139  (1871);  Thompson  v.  To- 
land,  48  Cal.  09  (1874).  In  New  York 
a  pledgee  is  not  hona  fide  when  he 
takes  bonds  in  pledge  for  a  precedent 
debt.    Dimcomb  v.  N.  Y.  etc.  R.  R., 


84  N.  Y.  190  (1881);  Gould  v.  Farmers' 
L.  &  T.  Co.,  23  Hun,  322  (1880).  A 
pledgee  is  not  such  in  hona  fide  when 
the  name  of  another  pledgee  in  the 
certificate  is  erased  and  his  own  in- 
serted. Denny  v.  Lyon,  38  Pa.  St.  98 
(1860).  Where  a  party  receives  from 
his  debtor  certain  stock  as  security 
for  the  purchase  of  other  stock,  and 
holds  it  for  the  old  debt,  and  sells  it 
after  being  notified  that  it  belongs 
to  another  party,  he  is  liable  to  the 
latter  party  for  conversion.  Niles  v. 
Edwards,  90  Cal.  10  (1891). 

*  Jennings  v.  Loefiier,  39  AtL  Rep. 
214  (Pa.,  1898). 

5  Gould  V.  Farmers'  L.  &  T.  Co.,  23 
Hun,  322  (1880);  Herbert  v.  Mechan- 
ics' Bldg.  etc.  Assoc,  17  N.  J.  Eq.  497 
(1864),  reversing,  on  this  point.  Me- 
chanics', etc.  Assoc.  V.  Conover,  14 
N.  J.  Eq.  219  (1862).  Where  the  pledgee 
repledges  the  stock  illegally  with 
other  stock,  the  first  pledgor  may 
enjoin  the  second  pledgee  from  sell- 
ing the  stock  until  the  other  stock  of 
the  ijledgee  is  sold,  and  an  account 


842 


CH.  XXVI.] 


PLEDGE    OF    STOCK. 


[§  -TS. 


custom,  a  broker  repledges  the  stock  of  his  customer,  together 
with  other  stock,  the  customer  cannot  insist  that  the  broker's 
stock  be  first  applied  to  the  debt.  "Where,  however,  the  cus- 
tomer had  not  authorized  the  broker  to  repledge  the  stock, 
then  the  stock  owned  by  the  broker  and  pledged  together  with 
the  stock  of  the  customer  will  first  be  applied  to  the  debt.* 
Where  the  pledgee  has  repledged  the  stock  illegally  to  hona 
fide  holders,  the  latter,  upon  being  informed  of  the  fact  by  the 
first  pledgor,  are  bound  to  apply  the  proceeds  of  the  other  se- 
curities held  by  them  before  resorting  to  the  stock  owned  by 
him,  the  first  pledgor.'^    Where  a  customer  pledges  his  stock 


rendered,  and  notice  of  intent  to  sell 
the  remainder  given.  Myers  v.  Mer- 
chants' Nat.  Bank,  16  N.  Y.  Supp.  58 
(1891).  The  pledgor  himself  cannot 
enjoin  a  sale  by  the  pledgee,  unless 
the  pledgee  is  insolvent.  The  pledg- 
or's remedy  is  at  law.  Park  v.  Mus- 
gi-ave,  2  Thomp.  &  C.  (N.  Y.)  571 
(1874).  Where  a  broker  pledgee,  with 
the  assent  of  the  pledgor,  has  re- 
pledged  the  stock,  the  second  pledgor, 
having  no  notice  of  who  the  first 
pledgor  is,  may  hold  all  stocks  imtil 
all  debts  from  the  second  pledgor  to 
him  are  ijaid.  A  person  M-ho  gave 
stock  to  the  first  broker  to  sell  is  pre- 
ferred to  one  who  piirchased  stock 
on  a  margin.  Willard  v.  White,  56 
Hun,  581  (1890).  Where  pledged  stock 
is  repledged  and  sold  out  by  the  re- 
pledgee,  together  with  various  other 
stock  held  as  collatei'al  by  the  re- 
pledgee,  a  court  of  equity  will  mar- 
shal the  assets.  Smith  v.  Savin,  9 
N.  Y.  Supp.  106  (1890);  aff'd,  69  Him, 
311,  and  141  N.  Y.  315  (1894).  Where 
the  pledgee  sells  the  securities  and 
has  a  sui-plus,  he  cannot  interplead 
between  two  claimants  where  he  is 
sued  by  one  of  them  for  more  than 
he  admits  the  surplus  amoimts  to. 
Dodge  V.  Lawson,  N.  Y.  L.  J.,  April  20, 
1892.  A  pledgee  need  not  resort  to 
the  pledge  in  order  to  obtain  pay- 
ment, but  if  the  pledgor  becomes  in- 
solvent the  court  will  marshal  the 


assets.  Chemical  Nat.  Bank  v.  Arm- 
strong, 50  Fed.  Rep.  798  (1892).  See 
also  g§  476,  763,  infra,  and  §§  456, 460, 
supra. 

1  Skiff  V.  Stoddard,  26  AtL  Rep.  874 
(Conn.,  1893).  A  customer  who  de- 
posits stock  with  a  broker  to  secure 
a  marginal  contract  may  redeem  the 
same  from  the  assignee  of  the  broker 
for  the  benefit  of  the  creditors,  but 
the  identity  of  the  stock  must  be  es- 
tablished. If  there  is  not  sufficient  • 
stock  to  satisfy  all  claims  on  that 
class  of  stock,  the  stock  is  prorated 
among  all  claimants.  Skiff  v.  Stod- 
dard, 63  Conn.  198  (1893). 

2  The  latter  cannot  object  to  the 
mode  of  selling  the  other  securities. 
Smith  V.  Savin.  141  N.  Y.  315  (1894), 
holding,  moreover,  that  the  first 
pledgor  may  hold  such  second  pledgee 
liable  for  a  sale  without  notice,  there 
being  no  waiver  of  notice.  "Wliere 
the  pledgee  wrongfully  rehypothe- 
cates the  pledge,  together  with  other 
securities,  the  pledgor  may  pay  the 
debt  due  to  the  repledgee  and  take 
all  the  securities  and  sell  them  all 
out,  and  may  also  sue  the  pledgee  for 
conversion.  The  court  will  require 
the  pledgor  to  indorse  upon  the  judg- 
ment for  conversion  a  suitable  credit 
for  the  amomit  realized  out  of  such 
sale  of  the  secru'ities  by  the  pledgor. 
The  court  said  that  if  a  hona  fide  re- 
pledgee  is  informed  of  the  conversion 


843 


§  ^Ti.] 


PLEDGE   OF   STOCK. 


[CH.  XXVI. 


with  tlie  broker,  and  tlie  latter  wrongfully  repledges  it  and 
fails,  and  the  customer  notifies  the  repledgee  of  his  claim  and 
demands  notice  of  any  sale,  the  repledgee  is  liable  if  he  sells 
without  notice  to  the  former  and  turns  the  surplus  over  to  the 
assignee  of  the  broker.^   Arrest  is  considered  elsewhe-e.'^ 

§  474.  Pledges  l)y  agents^  trustees,  executors,  etc.,  legally  and 
in  hreach  of  trust. — It  is  within  the  power  of  an  executor  or 
administrator  to  pledge  shares  of  stock  belonging  to  the  estate, 
and  the  pledgee  is  protected  even  though  he  knew  that  the  ex- 
ecutor pledged  it  as  an  executor.^  A  trustee,  on  the  other 
hand,  has  no  implied  power  to  pledge  or  sell  corporate  stock 
belonging  to  the  trust/  An  agent's  pledges  of  his  principal's 
stock  follow  the  same  rules  as  where  a  pledgee  repledges  the 

iLe  Marchant  v.  Moore,  79  Htin, 
352  (1894);  aff'd,  150  N.  Y.  209. 

2  See  §  475,  infra. 

3  Goodwin  v.  American  Nat.  Bank, 
48  Conn.  550  (1881);  Wood's  Appeal, 
92  Pa.  St.  379  (1880);  Carter  v.  Manu- 
facturers'Nat.  Bank,  71  Me.  448  (1880); 
§  329,  supra;  Manhattan  Bank  v. 
Walker,  130  U.  S.  267  (1889).  A 
pledgee   from    an    executor  is  pro- 


by  tlie  original  pledgee,  the  repledgee 
is  then  bovmd,  in  case  he  sells  out  the 
securities,  to  turn  over  the  surplus  to 
the  pledgor.  The  court  also  held  that 
the  repledgee,  upon  receiving  notice, 
was  bound  to  resort  to  other  col- 
lateral before  selling  the  collateral 
wrongfully  repledged  by  the  pledgee 
to  the  repledgee.  A  receiver  of  the 
pledgee  has  no  greater  rights  than 
the  pledgee  himself.   Union  Pac.  R'y  >  tected.    Gottberg  v.  U.  S.  Nat.  Bank, 


V.  Schiff,  78  Fed.  Eep.  216  (1897). 
AVhere  the  pledgee  wrongfully  re- 
pledges the  securities,  and  the  origi- 
nal pledgor  takes  up  the  securities 
from  the  repledgee  and  agrees  to 
protect  the  repledgee,  the  original 
pledgor  cannot  subsequently  repu- 
diate the  transaction  and  hold  tlie 
repledgee  liable  for  the  securities 
originally  repledged.  Union  Pac. 
R'y  V.  Schiff,  74  Fed.  Rep.  674  (1896). 
Where  the  pledgor  sues  tlie  i)ledgee 
for  conversion,  in  that  the  pledgee 
repledged  the  collateral,  and  the 
pledgor  obtains  judgment  for  the 
difference  between  the  value  of 
the  stock  and  the  amount  due  from 
the  pledgor,  and  subsequently  the 
pledgee  or  his  receiver  recovers  back 
some  of  the  stock  so  repledged,  the 
pledgor  cannot  reclaim  such  stock. 
Deitz  V.  Field,  10  N.  Y.  App.  Div.  425 
(1896). 


13  N.  Y.  Supp.  841  (1890).  If  a  pledge 
of  stock  by  an  executor  is  illegal,  the 
pledgee  is  not  protected  where,  not 
trusting  to  the  executor's  power  as 
executor,  he  causes  the  stock  to  be 
transferred  first  to  a  legatee.  Moore 
V.  American  L.  &  T.  Co.,  115  N.  Y.  65 
(1889).  Where  an  executor  pledges 
stock  for  his  own  debt,  the  pledgee 
knowing  the  fact  so  to  be,  the  latter 
becomes  trustee,  and  the  statute  of 
limitations  does  not  run  against  re- 
demption until  after  the  pledgee  has 
notified  the  cestui  que  trust  of  the 
estate  that  he  holds  the  stock  ad- 
versely. Marshall's  Estate,  138  Pa.  St 
285  (1890).  Pledgees  from  the  trustee 
for  antecedent  debts  are  not  bona  fide 
holders  without  notice,  even  though 
the  form  of  a  public  sale  was  gone 
througli.  Darling  v.  Potts,  118  Mo. 
506  (1893). 
4  See  ch.  XIX,  ^'g  323-327, 465,  supra. 


844 


en.  XXVI.]  PLEDGE    OF    STOCK.  [§  4T5. 

stock  given  to  liim  in  pledge.  A  lonafide  liolder  for  value 
and  without  notice  is  protected,  while  one  who  takes  with  no- 
tice is  not  protected.  Where,  however,  the  one  taking  stock  in 
pledge  from,  an  agent  knows  that  the  latter  is  acting  as  agent, 
he  is  bound  to  inquire  whether  the  principal  has  authorized  his 
agent  to  pledge  the  stock,  since  a  power  to  pledge  cannot  be 
presumed  from  a  power  to  sell.^  The  right  of  corporations  and 
persons  to  give  and  take  stock  in  pledge  is  considered  else- 
where.^ The  authority  of  a  guardian  given  by  the  court  to  sell 
stock  does  not  authorize  him  to  pledge  the  stock.^  Power  of 
an  agent  to  sell  does  not  give  him  power  to  pledge  for  his  own 
use,  and  where  the  corporation  with  knowledge  of  the  facts 
allows  a  transfer  it  is  liable  to  the  owner.*  The  power  of  a  cor- 
porate agent  to  sell  bonds  does  not  give  him  power  to  pledge 
them  even  to  secure  corporate  debts.  Holders  not  lona  fide 
are  not  protected.*  A  l>ona  fide  pledgee  of  stock  indorsed  in 
blanlv  on  the  back  is  protected.® 

§  475.  Pledgor'' s  remedies. —  The  pledgor  cannot  enjoin  a  sale 
of  the  pledge  by  the  pledgee  or  by  a  repledgee,  unless  the 
pledgee  is  insolvent.  The  pledgor's  remedy  is  at  law.''  The  fact 
that  a  pledgor  claims  that  the  pledgee  owes  him  more  money 
than  he  owes  the  pledgee  is  not  sufficient  to  sustain  a  bill  in 
equity  to  enjoin  the  pledgee  from  selling  the  stock  in  order  to 
pay  the  amount  due.  Some  other  ground  of  equitable  jurisdic- 
tion must  be  set  forth.^  "Where  the  pledgee  of  stock  has  been 
guilty  of  a  conversion  of  it,  the  pledgor's  reinedy  against  him  is 

1  See  cli.  XIX,  §  321,  supra.  ''  Park  v.  Musgrave,  2  Thomp.  &  C. 

2  See  ch.  XIX,  supra.  (N.  Y.)  571  (1874).     Cf.  note,  p.  849, 

3  0'HeiTcii  V.  Gray,  168  Mass.  573    infra. 

(1897).  8  Elliott  V.  Sibley,  101  Ala.  344  (1893). 

*  Read  v.  Cumberland  TeL  etc.  Co.,  In  a  suit  in  equity  by  a  stockholder 

93  Tenn.  482  (1894).  to  enjoin  a  sale  of  his  stock  by  the 

5  Shaw  V.  Saranac,  etc.  Co.,  144  N.  Y.  corporation  for  a  debt  due  the  corpc- 
220  (1894).  Where  one  party  author-  ration,  the  corporation  is  a  necessary 
izes  another  party  to  pledge  the  for-  party  defendant.  The  complainant 
mer's  stock  for  a  certain  purpose,  must  aver  a  readiness  to  pay  what- 
and  the  latter  pledges  it  for  a  differ-  ever  may  be  found  due.  Elliott  v. 
ent  purpose,  the  pledgee  is  not  pro-  Sibley,  101  Ala.  344  (1893).  In  a  sale 
tected  if  he  took  the  stock  with  by  a  bank  as  pledgee,  the  bank  can- 
notice.  Bowen  v.  Cleary,  35  S.  W.  not  be  enjoined  on  the  gi-o\md  that 
Eep.  281  (Ky.,  1896).  the  president  had    secretly  agreed 

6  Gilbert  v.  Erie  Bldg.  Assoc,  39  that  the  collateral  would  not  be  re- 
AtL  Rop.  291  (Pa.,  1898).  sorted  to.    Breyfogle  v.  Walsh,  71 

845 


§  iT5.] 


PLEDGE  OF  STOCK. 


[CH.  XXYI. 


generally  by  an  action  at  law  for  damages.  He  need  not  tender 
to  the  pledgee  the  amount  of  the  debt  secm-ed  by  the  pledge, 
since  the  pledgee  may  recoup  to  that  extent  and  thus  decrease 
the  damages  of  the  pledgor.^  The  pledgor's  damages  are  meas- 
ured by  the  market  value  of  the  stock  at  the  time  of  the  conver- 
sion, together  with  interest  and  subsequent  damages.^    The 

requires."  Fletcher  v.  Dickinson,  89 
Mass.  23  (1863).  A  pledgor's  vendee 
may  tender  the  amount  of  the  debt 
and  demand  the  stock  as  a  condition 
of  payment.  Trover  lies  for  a  re- 
fusal of  pledgee  to  deliver.  The 
pledgee  is  liable  for  depreciations  of 
stock  after  such  tender.  An  attach- 
ment of  stock  against  the  pledgor, 
but  after  sale  by  him,  is  no  defense 
to  the  pledgee.  Loughborough  v. 
McNevin,  74  CaL  250  (1887).  An  as- 
signee of  the  pledgor  of  stock  may 
tender  the  amoiint  due  and  demand 
the  stock.  The  pledgee  cannot  refuse 
because  the  stock  has  been  attached, 
the  assignee  not  being  a  party  thereto. 
Tender  is  siifficient  without  paying 
the  money  into  court.  Loughborough 
V.  McNevm,  74  CaL  250  (1887).  See 
also  Thompson  v.  St.  Nicholas  Nat. 
Bank,  113  N.  Y.  325  (1889),  and  §  461, 
supra.  The  pledgee  sued  for  conver- 
sion may  set  off  the  debt  due  him. 
Van  Shaick  v.  Ramsey,  90  Hun,  550 
(1895).  Where  the  pledgee  buys  the 
security  at  the  public  sale  and  then 
sells  it,  and  then  sues  the  pledgor  for 
the  deficiency  on  the  first  sale,  the 
pledgor  may  claim  a  set-off  for  the 
full  value  of  the  securities  \rrong- 
fully  resold,  and  need  not  make  a 
tender.  Rush  v.  First  Nat.  Bank,  71 
Fed.  Rep.  102  (1895),  reviewing  the 
authorities  on  tender  in  such  cases. 
2  See  ch.  XXXV,  infra.  In  Fowle 
V.  Ward,  113  Mass.  548  (1873),  the 
court  said  the  damages  should  be  "a 
sum  of  money  which  would  enable 
him  to  purchase  seventeen  new 
shares  to  replace  those  which  have 
been  taken  from  him,  with  such  ad- 
ditional sum  as  would  indemnify  him 


Fed.  Rep.  898  (1894).  Where  the 
pledgee  illegally  includes  another 
debt  in  his  claims  and  advertises  the 
stock  for  sale,  and  a  biU  is  then  filed 
to  enjoin  the  sale  and  to  redeem,  and 
the  pledgee  then  offers  to  take  the 
amount  justly  due,  but  does  not  give 
the  pledgor  reasonable  time  in  which 
to  pay,  and  the  sale  takes  place,  and 
the  pledgee  buys  the  stock  and  then 
sells  a  part  of  it,  the  pledgor  in  the 
bill  so  filed  may  have  damages  for 
the  value  of  all  the  stock  with  in- 
terest, less  the  amount  justly  due. 
Blood  V.  Erie,  etc.  Loan  Co.,  164  Pa. 
St.  95  (1894). 

1  AUen  V.  Dykers,  8  Hill  (N.  Y.),  593 
(1842);  aff'd,  Dykers  v.  AUen,  7  Hill 
(N.  Y.),  497;  New  York,  etc.  R.  R.  v. 
Da  vies,  38  Hun,  477  (1886);  Work  v. 
Bennett,  70  Pa.  St.  484  (1872);  Fisher 
V.  Brown,  104  Mass.  259(1870);  Neiler 
V.  Kelley,  69  Pa.  St.  403  (1871);  Lang- 
ton  V.  Waite,  L.  R.  6  Eq.  165  (1868); 
Felt  V.  Heye,  23  How.  Pr.  359  (1862); 
Lewis  V.  Graham,  4  Abb.  Pr.  106 
(1857) ;  Cortelyou  v.  Lansing,  2  Caines' 
Cas.  200  (1805).  However,  a  later  case 
in  Massachusetts  —  Cumnock  v.  New- 
buryport  Sav.  Inst.,  142  Mass.  342 
(1886)  —  holds  that  a  tender  of  pay- 
ment of  a  debt  is  necessary  to  enable 
a  pledgor  to  maintain  trover  for  a 
conversion  of  property  pledged,  im- 
less  the  lien  created  by  the  pledge 
has  been  otherwise  discharged. 
"After  the  sale  by  the  pledgee,  the 
pledgor  need  not  make  a  tender  of 
the  amount  due  nor  a  demand  of  the 
securities  before  bringing  his  action. 
...  A  formal  tender  of  the  amount 
of  the  notes  would  have  been  a  use- 
less ceremony,  such  as  the  law  never 


846 


CH. 


XXVI.] 


PLEDGE   OF    STOCK. 


[g  175. 


pledgor  may  be  barred  from  his  action  for  damages  by  a  waiver 
of  the  particular  act  of  conversion  by  the  pledgee.^  Pie  has  the 
option,  however,  of  ratifying  the  transaction  and  claiming  the 
proceeds,  or  he  may  repudiate  the  sale  and  sue  for  conversion,- 
and  in  Isew  York  state  may  arrest  the  pledgee.^  The  remedy 
at  law  may  be  on  contract  or  in  tort.^    An  illegal  sale  of  the 

plaintiff  seeks  to  recover  as  damages 
the  full  value  of  the  shares  alleged 
to  have  been  converted,  though  in- 
formal, is  good  as  a  complaint  in  case. 
Sharpe  v.  Birmingham  Nat.  Bank,  87 
Ala.  6M  (1888).  This  case  discussed 
also  the  difference  between  assump- 
sit and  case  in  such  an  action.  In 
Butts  V.  Burnett,  6  Abb.  Pr.  (N.  S.) 
302  (1869),  involving  the  arrest  of  a 
broker  who  had  sold  the  pledge  be- 
fore the  note  was  due,  the  coui't  said : 
"It  is  very  questionable,  I  think, 
whether  a  demand  after  default  in 
payment  of  the  debt  for  which  prop- 
erty is  pledged  as  security  will  ren- 
der a  refusal  to  deliver  the  pledged 
property  a  tortious  conversion  of  it. 
No  doubt  the  pledgor  can  redeem 
upon  a  tender  of  the  debt,  or  he  may 
recover  the  difference  between  the 
value  of  the  pledge  and  the  debt. 
But  to  lay  the  foundation  for  an  ac- 
tion for  conversion,  I  am  of  opinion 
that  an  offer  and  demand  must  be 
made  on  the  day,  and  is  not  sufficient 
if  made  after  the  day  on  which  the 
debt  has  become  payable."  As  to 
the  complaint  in  action  by  pledgor 
against  pledgee  for  not  returning 
goods  pledged,  see  3  Chitty,  PL  69; 
Stantgn  v.  Collier,  3  El.  &  BL  274 
(1854).  An  answer  is  not  good  where 
it  merely  denies  the  conversion  and 
does  not  deny  the  possession  by  tlie 
defendant  of  certain  stocks  belong- 
ing to  the  plaintiff,  nor  the  tender  of 
the  balance  due,  nor  the  demand  for 
such  stocks,  nor  the  non-delivery  of 
the  same.  Dubois  v.  Sistare,  N.  Y. 
L.  J.,  Dec.  9,  1890.  See  Smith  v. 
Savin,  141  N.  Y.  315  (1894).  Where 
the  repledgee    converts  the    stock. 


for  the  dividends  which  he  has  lost 
since  the  sale,  and  also  an  equitable 
allowance  for  interest."  Where  the 
pledgee  refuses  to  deliver  up  the 
stock  upon  a  tender  of  the  debt,  he 
is  liable  in  damages  for  the  value  of 
the  stock  on  the  day  of  the  tender 
and  demand,  less  the  amount  ten- 
dered- Franklin  Bank  v.  Harris,  77 
Md.  423  (1893). 

1  See  cases  in  note  2,  p.  850,  infra. 

2  Atkins  V.  Gamble,  42  Cal.  86,  91 
(1871).  If  there  are  several  pledgors, 
and  the  pledge  is  redeemed,  and  the 
pledgee,  at  the  request  of  one  of  the 
pledgors,  transfers  the  stock  to  third 
parties,  the  pledgee  is  liable  to'  the 
other  pledgors  for  the  loss  incurred 
thereby.  Magnus  v.  Queensland  Nat. 
Bank,  L.  R  36  Ch.  D.  25  (1887). 

8  See  §  471,  supra. 

*  The  form  of  a  complaint  or  dec- 
laration in  an  action  by  a  pledgor 
against  a  pledgee  for  the  conversion 
of  the  stock  held  in  pledge  may  be 
in  tort  or  in  assumpsit,  but  not  in 
both.  Stevens  v.  Hurlbut  Bank,  31 
Conn.  146  (1862).  It  is  a  conversion 
for  the  pledgee  to  retain  the  stock 
after  the  principal  of  the  debt  is 
paid,  nothing  being  said  about  inter- 
est. Kullman  v.  Greenebaum,  92  CaL 
403  (1891).  A  complaint  which,  after 
stating  that  shares  of  stock  had  been 
pledged  to  defendant,  avers  that 
"  defendant,  in  consideration  of  the 
premises,  then  and  there  undertook 
and  promised  to  plaintiff"  to  hold 
the  stock  only  as  pledgee,  but  that, 
in  violation  of  its  promise,  defend- 
ant sold  and  converted  the  stock  to 
its  own  use,  without  giving  plaint- 
iff notice  of  the  sale,  and  in  which 


847 


§  ^^T5.] 


TLEDGE    OF    STOCK. 


[CII.  XXVI. 


pledge  by  the  pledgee  is  a  conversion,  and  a  complaint  for  such 
conversion  will  not  be  construed  as  a  complaint  for  breach  of 
contract.^  The  pledgor  may,  if  he  prefers,  begin  suit  in  a  court 
of  equity,  when  the  pledgee  has  converted  the  stock,  and  com- 
pel him  either  to  replace  the  stock  or  give  compensation  in 
damages.  The  jurisdiction  of  a  court  of  equity  in  such  a  case 
has  been  denied,^  but  in  certain  cases  may  be  sustained  on  the 
ground  that  only  a  court  of  equity  can  compel  a  retransfer  of 
the  stock  or  an  accounting  of  the  dividends  declared  while  the 
pledge  was  running,  or  an  accounting  by  third  persons  to  whom 
the  pledgee  has  assigned  the  debt  and  pledge,  or  enjoin  an  illegal 
transfer  of  the  stock.'    A  pledgor  may  by  suit  in  equity  compel 


the  remedy  for  conversion  is  with 
the  first  pledgee,  not  with  the  first 
pledgor.  Thompson  v.  Toland,  48  Cal. 
99  (1874).  Contra,  Smith  v.  Savin,  69 
Hun,  311  (1893).  See  S.  C,  9  N.  Y. 
Supp.  106,  and  141  N.  Y.  815.  A 
pledge  of  stock  to  secure  future  lia- 
bilities does  not  secure  past  liabili- 
ties. If  the  pledgee  refuses  to  sur- 
render the  stock'  on  demand  and 
tender,  the  pledgor  may  recover  the 
value  of  the  stock  on  that  day,  less 
the  amount  tendered.  Franklin  Bank 
V.  Harris,  77  Md.  428  (1898).  Where 
the  pledgor  learns  of  the  illegality  of 
the  sale  after  he  has  commenced  suit 
for  the  surplus,  he  will  be  allowed 
to  amend  and  sue  for  conversion- 
Smith  V.  Savin,  141  N.  Y.  315  (1894). 

1  Smith  V.  Hall,  67  N.  Y.  48  (1876), 
distinguishing  Austin  v.  Rawdon,  44 
N.  Y.  63  (1870). 

2Lacombe  v.  Forstall's  Sons.  123 
U.  S.  562  ( 1887) ;  Genet  v.  Howland,  45 
Barb.  500  (1866).  The  remedy  of  the 
pledgor  is  at  law  after  a  tender,  not 
by  bill  in  equity  to  redeem.  Doak 
V.  Bank  of  the  State,  6  Ired.  L.  (N.  C.) 
309  (1846).  Where  the  pledgee  has 
sold  the  stock,  the  pledgor  cannot 
compel  him  to  restore  it  by  a  bill  in 
equity,  even  though  he  alleges  that 
the  sale  was  to  a  person  who  holds  the 
stock  as  trustee  for  the  pledgee.  The 
pledgor's  remedy  is  at  law.    Hinck- 


ley u  Pfister,  83  Wis.  64  (1892).  A 
bill  in  equity  does  not  lie  for  dam- 
ages due  to  an  illegal  sale  of  stock 
by  a  pledgee.  Henry  v.  Travelers' 
Ins.  Co.,  45  Fed.  Rep.  299  (1891).  A 
pledgor  cannot  file  a  bill  in  equity  to 
hold  the  pledgee  liable  for  selling  the 
stock  in  violation  of  the  pledge,  there 
being  no  disputed  accounts.  Roland 
V.  Lancaster,  etc.  Bank,  135  Pa.  St. 
598  (1890);  Angus  v.  Robinson,  62  Vt. 
60  (1890).  It  is  well  settled  that  a 
bill  in  equity  will  not  ordinarily  lie 
to  redeem  property  from  a  pledge. 
Kemp  V.  Westbrook,  1  Ves.  Sr.  278 
(1749);  Story,  Eq.  Jur.,  §  1033.  The 
reason  is  obvious.  The  legal  title  to 
the  thing  pledged  does  not  pass  to 
the  pledgee,  as  it  does  to  a  mortgagee 
in  possession  in  the  case  of  a  mort- 
gage. The  pledgor  retains  the  legal 
title  and  parts  only  with  posses- 
sion and  a  special  property.  Jones, 
Pledges,  §  552.  He  has  therefore  a 
legal  right  to  redeem,  and  upon  ten- 
dering the  amount  due  to  the  pledgee 
he  may  bring  replevin  for  the  collat- 
eral or  an  action  to  recover  its  value. 
It  is  only  when  his  legal  remedies 
are  insufficient  that  the  pledgor  can 
come  into  equity.  Jones,  Pledges, 
§  556,  and  cases  cited. 

3  Bryson  v.  Raynor,  25  Md.  424  (1866) ; 
Conyngham's  Appeal,  57  Pa.  St.  474 
(1838);  Hasbrouck  v.  Vandervoort,  4 


848 


CH.  XXVI.] 


PLEDGE   OF   STOCK. 


[§  475. 


the  pledgee  to  deliver  up  the  stock  in  pledge,  and  if  the  pledgee 
has  sold  the  pledged  stock,  but  has  sunilar  stock,  he  may  be 


Sandf.  74  (1850) ;  Koons  v.  Jeflferson- 
viUe  Nat.  Bank,  89  Ind.  178  (1883); 
Smith  V.  Anderson,  8  Tex.  Civ.  App. 
188  (1894).  An  action  to  redeem  may- 
be sustained  in  equity  where  the 
transaction  is  a  complicated  one. 
Higgins  V.  Lansingh,  154  IlL  301 
(1895).  Where  the  pledgee  has  trans- 
ferred the  stock  held  in  pledge,  and 
is  insolvent,  the  pledgor  may  lile  a 
bill  in  equity,  and  bring  in  all  par- 
ties interested.  Nelson  v.  Owen,  113 
Ala.  373  (1896).  The  pledgor  may  file 
a  bill  to  reach  the  excess  realized  by 
the  pledgee  on  a  sale  of  the  collateral, 
and  in  such  suit  may  enjoin  the  as- 
signee of  the  pledgee  from  using  such 
excess  to  pay  other  debts  of  the 
pledgee.  Adams  v.  Ball,  24  N.  Y. 
Ajjp.  Div.  69  (1897).  A  pledgor  may 
maintain  a  suit  in  equity  to  redeem 
his  stock,  and  the  judgment  may 
order  the  pledgee  to  deposit  the  cer- 
tificate of  stock  in  court.  Colburn 
V.  RHey,  52  Pac.  Rep.  684  (Colo.,  1898). 
The  pledgee  must  return  the  stock 
and  stock  dividends  and  account  for 
money  dividends.  Vaughan  v.  Wood, 
1 M.  &  K  403  (1833).  A  court  of  equity 
has  power  to  decree  the  return  of 
pledged  stock  and  money  deposited 
as  collateral.  Post  v.  Simmons,  9 
N.  Y.  Supp.  112  (1890);  Brown^  v. 
Runals,  14  Wis.  693  (1861).  A  pledgor 
may  file  a  bill  in  equity  to  have  a 
surplus  delivered  up  and  the  notes 
for  which  the  collateral  was  given 
delivered  up  also.  Cahoon  v.  Bank 
of  Utica,  7  N.  Y.  486  (1852),  rev'g  7 
How.  Pr.  134  In  case  of  a  wrongful 
repledge  the  pledgor  may  claim  the 
proceeds  or  redeem  the  stock  from 
the  second  pledgee.  Chamberlain  v. 
Greenleaf,  4  Abb.  N.  Cas.  178  (1878). 
Where  the  second  pledgee  has  sold 
the  stock  for  non-payment  of  his 
debt,  the  first  pledgor  may  claim  the 
excess,  the  amount  retained  by  the 


repledgee  being  more  than  the  first 
pledgor's  debt.  Re  Bonner,  8  Daly, 
75  (1878).  See  also  Fowle  v.  Ward,  113 
Mass.  548  (1873).  In  England  an  ac- 
tion to  redeem  a  pledge  of  stock  is  to 
be  tried  without  a  jury,  even  though 
the  defendant  sets  up  a  counter-claim 
of  false  representations.  Lynch  v. 
Macdonald,  L.  R.  37  Ch.  D.  227  (1887). 
Where  the  pledgee  is  about  to  sell 
the  stock  and  denies  the  pledge,  the 
pledgor  may  enjoin  the  sale.  Thielens 
V.  Dialogue,  19  AtL  Rep.  970  (N.  J., 
1890).  For  other  cases  sustaining  the 
jurisdiction  on  the  ground  that  an 
injunction  was  proper,  see  Hower  v, 
Weiss,  etc.  Co.,  55  Fed.  Rep.  356  (1893) ; 
Myers  v.  Merchants'  Nat.  Bank,  16 
N.  Y.  Supp.  58  (1891).  The  pledgor 
cannot  enjoin  a  sale  by  the  pledgee 
on  the  gi'ound  tliat  the  sale  will  be 
at  a  sacrifice.  Park  v.  Musgrave,  2 
Thomp.  &  C.  (N.  Y.)  571  (1874).  Where 
a  purchaser  of  stock  agrees  to  give  a 
long-time  note  with  the  stock  as  se- 
curity, and  subsequently,  for  the  ac- 
commodation of  the  vendor,  a  short- 
time  note  with  the  stock  as  secxu-ity 
is  delivered  to  a  third  person  named 
by  the  vendor,  and  the  vendor  then 
obtains  possession  of  the  stock  and 
note,  and,  after  the  short-time  note 
becomes  due,  proposes  to  collect  the 
note  and  sell  out  the  stock,  the 
pledgor  may  enjoin  the  sale  of  the 
stock.  In  this  case  the  stock  was  of 
uncertain  value,  and  represented  a 
controlling  interest  in  the  company, 
and  damages  for  its  conversion  woidd 
not  have  been  an  adequate  remedy. 
The  court  held  that  an  action  for  re- 
plevin was  not  adequate,  inasmuch 
as,  in  order  to  bring  replevin,  the 
pledgor  would  have  to  tender  the 
debt,  which,  according  to  the  origi- 
nal agreement,  was  not  yet  due. 
Hower  v.  Weiss,  etc.  Co.,  55  Fed.  Rep. 
356  (1893).     "  If,  for  instance,  the  col- 


54 


849 


475.] 


PLEDGE  OF  STOCK. 


[cn.  XXVT, 


compelbd  to  transfer  the  latter.^  An  unreasonable  delay  or 
laches  on  the  part  of  the  pledgor  will  bar  his  remedy  against 
the  pledgee.^    But  delay  in  bringing  suit  to  redeem  pledged 


laterals  consist  of  shares  of  stock 
which  have  been  transferred  into 
the  pledgee's  name  upon  the  books 
of  a  corporation,  an  action  in  equity 
will  lie,  for  the  reason  that  such  an 
action  is  necessary  to  secure  the  re- 
transfer  of  the  shares.  So  equity 
may  be  invoked  where  an  accounting 
or  a  discovery  is  needed  or  where  the 
pledgee  has  assigned  the  pledge." 
Stokes  V.  Stokes,  N.  Y.  L.  J.,  Nov.  15, 
1893,  p.  375.  See  also  cases  in  note  2 
below. 

1  Krouse  v.  Woodward,  110  CaL  638 
(1895).    See  also,  53  Pac.  Rep.  617. 

2  Eight  years'  delay  by  pledgor  in 
complaining  of  refusal  of  pledgee  to 
deliver  up  the  stock  on  tender  of  the 
debt,  the  stock  having  subsequently 
declined  in  value,  held  fatal  under 
the  facts  of  this  case.  Merriam  v. 
Childs,  93  Mo.  131  (1887).  Where  the 
pledgor's  executor  for  value  received 
sells  the  pledgor's  interest  to  the 
pledgee,  long  lapse  of  time  after  full 
knowledge  of  the  facts  by  all  parties 
will  raise  a  presumption  in  favor  of 
the  pledgee's  complete  ownership. 
LockwooJ  V.  Brantly,  1  Silvern.  187 
(1886) ;  S.  C,  103  N.  Y.  080.  Equity  has 
jurisdiction  to  ascertain  tlie  amoimt 
due  on  a  pledge  and  to  decree  that 
the  pledgor  may  redeem.  As  to  the 
statute  of  limitations,  see  Maynard  v. 
Tilden,  28  Fed.  Rep.  688,  703  (1886); 
Child  u.  nugg,41  CaL  519  (1871),  where 
long  delay  was  held  to  be  a  bar.  In 
Greene  v.  Dispeau,  14  R.  I.  575  (1884),  a 
pledge  of  stock  was  treated  as  a  mort- 
gage, and  the  right  to  redeem  was  held 
to  be  burred  six  years  after  the  date 
of  the  mortgage.  A  pledgor  waives 
informaUty  of  the  notice,  where,  after 
the  sale,  he,  as  an  officer  of  the  cor- 
poration, enters  a  transfer  of  the 
stock  to  the  one  who  purchased  at 
the  sala     Downer  v.  Whittier,  144 


Mass.  448  (1887).  Four  years'  delay  in 
complaining  is  fatal.  Receiving  the 
benefit  of  the  sale  is  a  waiver  of  ob- 
jections. McDowell  V.  Chicago  Steel 
Works,  124  111.  491  (1888).  Although 
the  pledgee  gives  no  public  notice  of 
the  sale,  and  although  he  purchases 
the  stock  at  the  sale,  yet  the  pledgor 
ratifies  the  sale  by  acquiescing  and 
by  negotiating  to  buy  the  stock.  Hill 
V.  Finigan,  77  CaL  267  (1888).  The 
statute  of  limitations  is  no  bar  to  an 
action  to  redeem  a  pledge  of  stock, 
unless  the  statute  was  set  running  by 
demand  of  payment  and  notice  of  in- 
tent to  sell.  Gilmer  v.  Morris,  35  Fed. 
Rep.  683  (1888).  See  S.  C,  80  Ala.  78. 
In  the  case  of  a  pledge  of  stock  to  se- 
cure future  advances,  the  statute  of 
limitations  begins  to  run  against  the 
right  of  the  pledgor  to  redeem  from 
the  time  wlien  the  pledgee,  by  some 
positive  act,  repudiates  the  pledge 
and  claims  the  property  as  his  own, 
or  improperly  disposes  of  it.  Gilmer 
V.  Morris,  43  Fed.  Rep.  456  (1890).  If 
the  pledge  is  recognized  by  extension 
to  other  debts,  tlie  statute  of  limita- 
tions runs  from  the  latter  date.  Gil- 
mer V.  Morris,  46  Fed.  Rep.  333  (1891). 
This  case,  Gilmer  v.  Morris,  80  Ala.  78, 
arose  again  in  Billing  v.  Gihner,  6G> 
Fed.  Rep.  332  (1894),  rev'g  Gilmer  v. 
Billings,  55  Fed.  Rep.  775.  The  stat- 
ute of  limitations  runs  against  a  re- 
ceipt reciting  a  first  payment  on  stock 
"  standing  in  iny  name  but  owned 
by  him,  and  he  remaining  responsi- 
ble for  the  balance  of  the  instalments 
wlien  called  in,"  there  being  no  agree- 
ment as  to  tlie  future  disi)Osition  of 
the  stock  and  of  dividends.  Cone  t\ 
Dunham,  59  Conn.  145  (1890).  A 
pledge  is  not  legally  abandoned  .al- 
though no  demand  is  made  for  it  dur- 
ing a  long  lapse  of  time.  Cridge's 
AppeaL  18  AtL  Rep.  1010  (Pa.,  1890). 


850 


CH.  XXVI.] 


PLEDGE    OF    STOCK. 


[§  ^T5. 


property  does  not  constitute  laches, when  the  debt  is  kept  alive 
until  the  suit  is  begun.^ 

Tender  of  the  debt  when  or  after  it  becomes  due  releases  the 
pledge.^  A  pledgor  cannot  compel  his  pledgee  to  sell  the  stock 
and  apply  the  proceeds  to  the  debt  by  a  notice  to  make  such  a 
sale.'  AVhen  the  pledgee  causes  the  stock  to  be  sold,  the  pledgor 
is  entitled  to  the  surplus  proceeds  of  the  sale  remaining  after 
the  debt  and  the  expenses  of  the  sale  have  been  paid.*  A 
pledgor  cannot  defeat  an  action  by  the  pledgee  on  the  debt  by 
showing  that  the  pledgee  has  converted  the  pledge.*  The 
measure  of  damages  on  an  illegal  sale  is  considered  elsewhere.® 

As  to  redemption,  laches,  etc.,  see    requested  to  do  so  by  the  pledgor. 


Schouler,  Bailm.  (3d  ed.),  §  250.  As  to 
the  rule  in  New  York,  see  Bailey  v. 
Chamberlain,  N.  Y.  D.  Eeg.,  July  23, 
1888,  and  Miner  v.  Beekman,  50  N.  Y. 
337  (1872).  Tlie  pledgee  cannot  claim 
that  he  has  held  the  stock,  adversely 
to  the  pledgor,  for  a  time  more  than 
sufficient  to  give  him  title  to  it  imder 
the  statute  of  limitations.  He  is  not 
allowed  to  assert  that  he  holds  the 
stock  adversely.  Cross  v.  Eureka 
Lake,  etc.  Co.,  73  CaL  302  (1887). 

1  Higgins  V.  Lansingh,  15-4  ILL  301 
(1895). 

2Hyams  v.  Bamberger,  10  Utah,  3 
(1891). :  53  Pac.  Rep.  815. 

*  Lawi-ence  v.  Maxwell,  53  N.  Y.  19 
(1873);  Robinson  v.  Hurley,  11  Iowa, 
410  (1860^;  O'Neill  v.  Whighara,  87 
Pa.  St.  394  (1878);  Rozet  v.  McClellan, 
48  lU.  345  (1868);  Smouse  v.  BaU.  1 
Grant  (Pa.),  397  (1856);  Taggard  v. 
Curtenius,  15  Wend.  155  (1836);  Fisher 
V.  Fislier,  98  IMass.  30?  (1867);  Napier 
V.  Central,  etc.  Bank,  68  Ga.  637  (1882), 
holding,  however,  that  where  the 
pledgee  does  not  sell,  because  he  and 
others  were  "bearing"  the  market, 
there  may  be  an  element  of  fraud 
which  gives  a  cause  of  action.  The 
pledgor  cannot  by  request  compel 
the  pledgee  to  selL  Minneapolis,  etc. 
Co.  V.  Betcher,  42  Jlinn.  210  (1889). 
If  there  is  no  agreement  so  to  do,  the 
pledgee  is  not  boiind  to  sell,  although 


Fiu-ness  v.  Union  Nat.  Bank,  147  Ilk 
570  (1893). 

*  And  the  pledgor's  assignee  for  the 
benefit  of  creditors  may  claim  it. 
The  pledgee  bank  has  no  banker's 
lien  on  the  sui-plus  for  other  debts. 
Brown  v.  New  Bedford  Sav.  Inst.,  137 
Mass.  262  (1884).  A  pledgee  bank  can- 
not refuse  to  deliver  back  the  stock  to 
pledgor  who  tenders  the  amount  due, 
on  the  ground  that  the  pledgee  owes  it 
stiU  another  debt.  Mclntire  v.  Blake- 
ley,  13  Atl.  Rep.  325  (Pa.,  1888).  If  the 
officers  of  a  pledgee  bank  refuse  to 
deliver  back  the  pledged  stock  upon 
a  tender  of  the  debt,  they  are  liable 
personally  in  damages  to  the  pledgor. 
IMcIntire  v.  Blakeley,  13  Atl.  Rep.  325 
(Pa.,  1888).  If  pledgee  has  also  other 
secui'ity,  an  unsecm-ed  creditor  of  the 
pledgor  may  compel  the  pledgee  to 
resort  to  such  other  seciu-ity  first. 
Bishop,  etc.  Assoc,  v.  Kennedy,  12 
AtL  Rep.  141  (N.  J.,  1887).  A  pledgee 
cannot,  on  sale  of  the  pledge,  apply 
the  excess  to  another  debt  due  him 
from  the  pledgor,  who  died  before 
the  sale  was  made.  Peters  v.  Nash- 
ville Sav.  Bank,  86  Tenn.  224  (1887). 

5  See  §§  461,  458,  note,  supra.  In  an 
action  by  the  pledgee  for  the  debt,  the 
pledgor  may  set  up  a  conversion  of 
the  stock  pledged.  Donnell  v.  Wyck- 
ofif,  49  N.  J.  L.  48  (1886). 
6 Seech.  XXXV,  zn/ro. 


851 


§  476.] 


PLEDGE  OF  STOCK. 


[CH.  XXVI. 


§  476.  Pledgees  remedies  when  debt  secured  is  not  imid. — 
Sale  and  defmency. —  Where  shares  of  stock  are  pledged  as 
collateral  security  for  a  debt,  and  the  debt  is  not  paid,  and  the 
pledgee  wishes  to  apply  the  stock  to  the  payment  of  the  debt, 
he  has  the  right  to  pui'sue  either  one  of  two  remedies.  He 
may  file  a  bill  in  equity  for  the  foreclosure  and  sale  of  the 
pledge.^  A  suit  to  foreclose  a  pledge  of  stock  need  not  be 
brought  at  the  domicile  of  the  corporation,  but  may  be  brought 
at  the  domicile  of  the  pledgor,-^  or  wherever  the  certificates  of 
stock  are  held  in  pledge.  Certificates  of  stock  represent  the 
stock  itself  sufficiently  to  sustain  a  suit  commenced  by  substi- 
tuted service  for  the  purpose  of  establishing  and  foreclosing  a 
pledgee's  lien,  even  though  the  corporation  is  located  in  another 
state.^  In  an  action  to  foreclose  a  pledge  of  stock,  persons 
claiming  a  lien  thereon  are  proper  parties  defendant,  and  it  is 
sufficient  to  allege  that  they  claim  some  lien.*  Second.  The 
pledgee  may  give  notice  to  the  pledgor  of  an  intent  to  sell  the 
stock,  and  may  so  sell  it  without  any  judicial  proceedings,  and 
apply  the  proceeds  to  the  payment  of  the  debt.*    ]^o  express 


1  The  pledge  may  be  made  to  secure 
the  carrying  out  of  a  contract,  and  a 
court  of  equity  will  foreclose  it  al- 
though the  damages  are  unliquidated. 
Vaupell  V.  Woodward,  2  Sandf.  Ch- 
1 43  (1 844).  From  Robinson  v.  Hurley, 
11  Iowa,  410  (1860),  it  seems  that 
where  the  pledge  was  made  without 
a  written  transfer  of  the  certificate 
this  is  the  only  remedy.  See  also 
]\lerchants'  Nat.  Bank  v.  Hall,  83  N.  Y. 
338  (1881) ;  Smith  v.  Coale,  34  Leg.  Int. 
58  (1877);  Blouia  v.  Hart,  30  La.  Ann. 
714  (1878);  Jolmson  v.  Dexter,  2  Mac- 
Arthur,  530  (1876).  A  person  holding 
and  canying  stock  for  himself  and 
others  may  file  a  bill  in  equity  to 
bring  about  a  sale  and  an  adjustment 
of  the  accounts.  Evans  v.  Goodwin, 
132  Pa.  St.  136  (1890).  A  suit  lies  for 
judgment  on  a  note,  and  for  a  sale 
of  the  collateral  and  the  application 
to  the  judgment  of  the  amount  real- 
ized on  such  sale.  Farmers',  etc.  Bank 
V.  Rogers,  1  N.  Y.  Supp.  757  (1888). 
There  is  a  dictmn  in  Ritchie  v.  Mc- 


Mullen,  79  Fed.  Rep.  522,  535  (1897), 
to  the  effect  that  where  a  pledgee 
enters  into  a  conspiracy  to  depreciate 
the  pledged  stock  the  pledgee  can- 
not maintain  a  biU  to  foreclose  the 
pledge.  A  mortgage  given  in  pledge 
may  be  foreclosed  by  bill  in  equity. 
Anderson  v.  Olin,  145  111.  168  (1893). 
In  a  suit  between  the  pledgor  and 
pledgee,  each  side  demandihg  affirm- 
ative relief,  the  com't  may  decree  that 
stock  is  held  as  collateral  and  order 
a  sale  to  satisfy  the  claim.  Zeller- 
bach  V.  AUenberg,  99  CaL  57  (1893). 

2  State  V.  King  County  Super.  Ct., 
13  Wash.  607  (1896). 

3  Merritt  v.  American  Steel  Barge 
Co.,  79  Fed.  Rep.  228  (1897).  See  also 
§  361,  siipra. 

••  Plankinton  v.  Hildebrand,  89  W  is. 
209  (1895). 

^Guinzberg  v.  H.  W.  Downs  Co., 
165  Mass.  467  (1896);  Story,  Bailm.,9th 
ed.  (1877),  §  310,  saying:  "The  law  as 
at  present  established  leaves  an  elec- 
tion to  the  pawnee.    He  may  file  a 


853 


CH.  XXTI.] 


PLEDGE    OF    STOCK. 


[§  ^T6. 


power  to  sell  need  be  contained  in  the  memorandum  of  pledge 
in  order  to  authorize  the  latter  remedj.    It  exists  by  force  of 
law. 
The  pledgee,  however,  is  not  bound  to  pursue  either  remedy 


bill  in  equity  against  the  pawnor  for 
a  foreclosure  and  sale ;  or  he  may  pro- 
ceed to  sell  ex  viero  motu,  upon  giv- 
ing due  notice  of  his  intention  to  the 
pledgor.  In  the  latter  case,  if  the 
sale  is  bona  fide  and  reasonably  made, 
it  will  be  equally  obligatory  as  in  the 
first  case."  The  leading  case,  allow- 
ing this  remedy  of  the  pledgee  against 
the  pledge,  is  Tucker  v.  AVilson,  5  Bro. 
ParL  Cas.  193  (1714),  rev'g  1  P.  Wms. 
261.  In  Brown  v.  Ward,  3  Duer,  660 
(1854),  the  court  said:  "  Since  the  time 
of  the  case  of  Hart  v.  Ten  Eyck  [3 
Johns.  Ch.  63  — 1816J,  before  Chancel- 
lor Kent,  the  right  of  the  pledgee  to 
sell  after  the  debt  is  due,  upon  reason- 
able notice,  has  been  vmquestioned, 
and  a  ciistom  has  grown  up,  and  has 
been  sanctioned  by  the  courts,  of 
selling  stocks  at  the  Merchants'  Ex- 
change." To  same  effect,  Diller  v. 
Brubaker,  53  Pa.  St.  498  (1866);  Fin- 
ney's Appeal,  59  Pa.  St.  398  (1868); 
Easton  v.  German-American  Bank, 
137  U.  S.  533  (1888);  Mount  Holly,  etc. 
Co.  V.  Ferree,  17  N.  J.  Eq.  117  (1864), 
where  the  court  said:  "A  sale  of  a 
pledge  by  the  pawnee,  where  reason- 
ably and  bona  fide  made,  and  after 
notice  to  the  pawner,  is  equally  obli- 
gatory as  if  made  by  judicial  process ;" 
2  Kent's  Com.  583,  saying  that  the 
pledgee  "  may  file  a  bill  in  chancery 
ai|d  have  a  judicial  sale  under  a  reg- 
ular decree  of  foreclosure,  .  .  .  and 
he  may  sell  without  judicial  process, 
upon  giving  reasonable  notice  to  the 
debtor  to  redeem;"  Sitgreaves  v. 
Farmers',  etc.  Bank,  49  Pa.  St.  359 
(1865);  Stearns  v.  Marsh,  4  Denio,  337 
(1847);  Markham  v.  Jaudon,  41  N.  Y. 
235,  341  (1869);  Druiyu  Cross,  7  Wall. 
299  (1868).  The  parties  may  provide 
for  any  manner  of  disposing  of  the 


pledge  to  satisfy  the  claim  upon  it 
which  is  not  in  contravention  of  stat- 
ute, against  public  policy,  or  fraudu- 
lent. In  McNeil  v.  Tenth  Nat.  Bank,  46 
N.  Y.  325, 334  (1871),  it  is  said :  "  The  dis- 
tinction between  a  lien  and  a  pledge 
is  said  to  be  that  a  mere  lien  cannot 
be  enforced  by  sale  by  tlie  act  of  the 
party,  but  that  a  pledge  is  a  lien 
with  a  power  of  sale  superadded." 
The  pledgee's  power  of  attorney  to 
sell  is  coupled  with  an  interest  and 
is  not  revocable.  Renshaw  v.  Cred- 
itors, 40  La.  Ann.  37  (1888).  A  per- 
son secured  by  a  pledge  of  stock  in 
another's  name  may  sue  the  latter 
for  the  amount  received  by  the  latter 
on  a  sale  of  the  stock.  Maynard  v. 
Lumberman's  Nat.  Bank,  11  AtL  Rep. 
539  (Pa.,  1887).  Although  the  pledgee 
has  not  advanced  all  that  he  agreed 
to,  yet,  where  he  ceased  advances 
after  the  pledgor's  default  in  pay- 
ing the  part  already  advanced,  the 
pledgee  may  proceed  to  sell  the  pledge 
after  notice.  Midland  R'y  v.  Loan, 
etc.  Co.,  N.  Y.  L.  J.,  May  24,  1890. 
The  pledgee  cannot  be  enjoined  from 
selling  the  pledge  on  notice,  merely 
because  by  legal  proceedings  he  has 
injured  the  value  of  the  pledge.  Mid- 
land R'y  11.  Loan,  etc.  Co.,  N.  Y.  L.  J., 
May  24,  1890.  A  pledgee  who  has 
brought  an  action  to  foreclose  his 
pledge  may  nevertheless  abandon  the 
suit  and  resort  to  his  remedy  of  a 
sale  after  notice.  Midland  R'y  v. 
Loan,  etc.  Co.,  N.  Y.  L.  J.,  May  24, 
1890.  A  sale  by  a  pledgee  will  not  be 
enjoined  merely  because  the  corpo- 
ration is  in  insolvency  proceedings 
in  another  state  and  the  sale  has 
been  enjoined  by  courts  of  that  state. 
Union  Cattle  Co.  v.  International 
Trust  Co.,  149  Mass.  492  (1889). 


853 


I  476.] 


PLEDGE  OF  STOCK. 


[CH.  XXVI. 


merely  because  tlie  debt  is  due  and  unpaid.^  He  need  not  sell 
the  stock  upon  the  maturity  of  the  note  secured,  nor  is  he  liable 
because  the  stock  declines  in  value.^  He  may  sue  on  the  debt 
without  tendering  back  the  stock.'  The  pledgor  cannot  compel 
him  to  sell  by  merely  giving  him  notice  so  to  do.*  ISTor  is  the 
pledgee  bound  to  sell  on  non-payment  of  the  debt,  although  the 
memorandum  of  pledge  expressly  authorizes  a  sale,  but  he  may 
file  a  bill  in  equity  to  foreclose  instead  of  pursuing  the  other 
remedy.'^  In  an  action  at  law  against  a  pledgor  on  a  debt,  the 
judgment  cannot  provide  for  a  return  of  the  pledge  upon  pay- 
ment of  the  debt.«  The  pledgee's  remedy  by  attaching  the 
stock  and  selling  it  at  an  execution  sale '  is  his  remedy  as  a 


1  O'Neill  V.  Whigham,  87  Pa.  St.  394 
(1878);  Eozet  u  McClellan,  48  IlL  345 
(1868);  Palmer  v.  Hawes,  73  Wis.  46 
(1888). 

zsimonton  v.  Sibley,  123  U.  S.  220 
(1887);  Palmer  v.  Hawes,  73  Wis.  46 
(1888 ).  Wliere  one  company  buys  out 
another  and  assumes  the  debts  of  the 
latter,  a  creditor  of  the  latter  com- 
pany may  assign  his  claim  as  collat- 
eral security,  but  the  pledgee  is  not 
bound  to  institute  suit  to  collect  such 
claim,  and  is  not  liable  for  failure  so 
to  do,  even  though  the  claim  is  finally 
lost.  Sampson  v.  Fox,  109  Ala.  663 
(1896). 

3  Taylor  v.  Cheever,  73  IMass.  146 
(1856);  Butman  v.  Howell,  144  Mass. 
66  (1887).  A  broker  or  pledgee  need 
not  sell  the  stock  held  as  collateral 
before  bringing  an  action  against  the 
pledgor  for  the  amount  due,  nor  does 
a  broker's  custom  compel  it.  De  Cor- 
dova V.  Barnum,  130  N.  Y.  615  (1893). 
A  pledgee  having  sold  the  stock,  and 
there  still  being  a  balance  due  him 
from  the  pledgor,  may  sue  for  such 
balance,  and  need  not  allege  that  the 
sale  was  on  due  notice  and  demand. 
Wallace  v.  Berdell,  24  Hun,  379  (1881). 
Where  stock  pledged  to  secure  a  note 
is  to  be  transferred  as  payment  in 
case  tlie  note  is  not  paid,  the  pledgee 
may  sue  on  the  note  if  the  pledgor 
Las  not  transferred  the  stock.     Ful- 


lerton  v.  Mobley,  15  Atl.  Rep.  856  (Pa., 
1888).  The  pledgee  may  sue  on  the 
debt  before  selling  the  collateral.  Sin- 
clair V.  Weekes,  41  S.  W.  Rep.  107 
(Tex.,  1897).  As  to  the  duties  of  the 
pledgee  towards  an  indorser  of  the 
note,  see  Payne  v.  Commercial  Bank, 
14  Miss.  24  (1846).  Misrepresentations 
by  a  pledgee  of  stock  as  to  the  value 
of  the  stock,  made  after  its  pledge,  are 
no  defense  for  the  pledgor  when  sued 
on  the  debt.  Palmer  v.  Hawes,  73 
Wis.  46  (1888).  The  maker  of  a  note  is 
liable  personally,  although  it  recites 
that  it  is  secured  by  stock  as  collat- 
eral "  without  recourse."  Rathburn 
V.  Jones,  47  S.  C.  206  (.1896). 
*  See  §  475,  supra. 

5  Cornick  v.  Richards,  3  Lea  (Tenn.), 
1  (1879);  Coffin  v.  Chicago,  etc.  Co.,  4 
Hun,  625  (1875). 

6  Robertson  v.  Sully,  3  N.  Y.  App. 
Div.  152  (1896). 

7  Lee  V.  Citizens'  Nat.  Bank,  3  Cin. 
Super.  Ct.  (Ohio),  398  (1873).  His  re»i- 
edies  as  a  pledgee  are  not  released  or 
affected  by  his  pursuit  of  other  rem- 
edies. See  Sickles  v.  Richardson,  33 
Hun,  559  (1881).  Judgment  on  the 
debt  does  not  release  the  stock 
pledged.  "  Until  the  debt  is  paid,  the 
pledgor,  imder  the  terms  of  the  bail- 
ment, has  no  right  to  have  the  pledge 
given  up  to  him."  Donnellv.  AVyck- 
off,  49  N.  J.  L.  48  (1887).    See  also  Hill 


854 


OH.  XXVI.] 


PLEDGE    OF   STOCK. 


[§  ^^Q^ 


creditor  and  not  as  a  pledgee  of  the  person  indebted  to  him. 
A  pledgee  may  prove  his  entire  claim  against  the  insolvent 
estate  of  the  pledgor,  and  obtain  his  proportionate  part  thereof.^ 
Or  the  pledgee  may  sell  out  the  collateral  in  accordance  with 
law  and  then  sue  for  the  deficiency.^  A  pledgee  may  sell  at 
public  sale  on  notice,  even  though  a  receiver  of  the  pledgor  has 
been  appointed,^    Where  stock  is  held  as  collateral  to  a  debt, 


V.  Beebe,  13  N.  Y.  556,  563,  567  (1856). 
A  person  holding  stock  in  pledge  may 
■waive  his  rights  as  pledgee  and  at- 
tach the  property  of  his  debtor.  Par- 
berry  V.  Woodson  Sheep  Co.,  18  Mont. 
317  (1896),  citing  Drake  on  Attach- 
ments, 7th  ed.,  §  35. 

1  People  V.  Remington,  121  N.  Y. 
338  (1890).  The  pledgee  may  prove 
his  entire  claim  against  the  insolv- 
ent pledgor's  estate  without  first  re- 
sorting to,  surrendering,  or  account- 
ing for  the  pledge.  Be  Ives,  11  N.  Y. 
Supp.  655  (1890).  See  also  §  473,  supra, 
and  §  763,  infra.  A  pledgee  is  en- 
titled to  a  dividend  from  the  pledg- 
or's estate  without  resorting  to  his 
pledge  and  without  delivering  it  up 
to  the  estate.  Wheeler  v.  Walton, 
etc.  Co.,  72  Fed.  Rep.  966  (1896).  The 
fact  that  a  creditor's  claim  is  secured 
by  mortgage  or  otherwise  does  not 
affect  his  right  to  prove  for  the  full 
amount  of  the  claim,  nor  does  the 
fact  that  he  has  realized  part  thereof 
out  of  the  collateral,  since  the  date 
of  the  receivership;  but  in  the  latter 
case  he  is  entitled  to  dividends  only 
tmtil  the  balance  of  his  debt  is  satis- 
fied. New  York  Secui'ity,  etc.  Co.  v. 
Lombard  Inv.  Co.,  73  Fed.  Rep.  537 
(1896).  The  pledgee  may  file  his  claim 
in  the  probate  court  against  the 
pledgor's  estate,  and  may  then  sell 
the  pledge,  and  will  be  entitled  to 
participate  in  the  estate  without  de- 


insolvent  estate  of  the  pledgor  on 
only  the  bq,lance  remaining  due  to 
him.  Philadelphia  Warehouse  Co.  v. 
Anniston  Pipe  Works,  106  Ala.  357 
(1895).  In  Nebraska,  the  com-t,  after 
reviewing  the  conflicting  rules  in  the 
different  states,  held  that  where  a 
creditor  held  collateral  he  must  de- 
duct from  his  claim  all  that  he  real- 
izes from  the  collateral,  before  he 
can  get  a  dividend,  and  must  also  de- 
liver up  his  collateral  to  the  receiver. 
State  V.  Nebraska  Sav.  Bank,  40  Neb. 
342  (1894).  Where  stock  is  pledged 
to  secure  several  debts,  some  of  wJiich 
are  secured  in  other  ways,  the  pledgee 
may  apply  the  proceeds  of  the  pledge 
to  those  debts  which  are  not  secured 
by  indorsements.  Fall  River  Nat. 
Bank  v.  Slade,  153  Mass.  415  (1891). 
Wliere  the  pledgor  gives  the  pledgee 
the  right  to  say  which  debt  or  lia- 
bility the  pledge  should  be  applied 
to,  this  right  cannot  be  controlled  by 
the  court.  DonnaUy  v.  Hearndon, 
41 W.  Va.  519  (1895).  In  a  suit  to  fore- 
close a  pledge  of  stock  where  the 
pledgee  has  other  secui-ities  also,  the 
court  will  not  compel  the  pledgee  to 
sell  the  other  secuilties  first.  Work 
V.  Ogden,  N.  Y.  L.  J.,  May  20,  1890. 
Cf.  §  473,  mpra. 

2  See  §  461,  supra.  See  also  §  763, 
infra,  as  to  pledges  of  bonds.  In  a 
suit  to  foreclose  a  pledge  of  stock,  a 
judgment  for  deficiency  cannot  be 


duction  of  the  amount  realized  on .  asked  against  a  part  of  the  defend- 


the  sale,  unless  he  would  thereby  re- 
ceive more  than  the  whole  debt.  Fui*- 
ness  V.  Union  Nat.  Bank,  147  III  570 
(1893).  Where  a  pledgee  has  realized 
on  his  security,  he  participates  in  the 


ants.    Plankinton  v.  Hildebrand,  89 
Wis,  209  (1895). 

3  Fidelity,  etc.  T.  Co.  v.  Roanoke, 
etc.  Co.,  81  Fed.  Rep.  439  (1896). 


855 


477.] 


PLEDGE    OF    STOCK. 


[CH.  xxvr. 


the  statute  of  limitations  does  not  run  as  against  the  pledge, 
and,  although  the  debt  itself  is  barred,  the  court  may  order  the 
stock  sold  to  satisfy  the  debt.^ 

§  477.  Notice  of  sale  of  stoch  Tyy  jiledgee  to  ajyijly  to  deht  se- 
cured—  Waiver  of  notice. —  In  case  the  pledgee  pursues  the 
remedy  of  selling  the  stock  without  any  judicial  proceedings^ 
he  must  give  the  pledgor  reasonable  notice  of  the  intent  to 
sell  and  of  the  time  and  place  of  sale.^  A  sale  without  a  no- 
tice is  a  conversion  of  the  stock.'  The  pledgee  must  demand 
payment  of  the  debt  secured  by  the  pledge  of  stock,  and  a 
waiver  of  notice  of  sale  is  not  a  waiver  of  a  right  to  have  such 
a  demand  made.*  But  where  the  time  of  payment  is  fixed  by 
the  note,  no  demand  of  payment  need  be  made  before  sale  of 
the  pledge.*  Where  the  indorser  of  a  note  deposits  collateral 
as  security,  the  collateral  may  be  sold,  although  notice  of  non- 
payment of  the  note  is  not  given  to  him.®  A  notice  of  intent 
to  sell,  however,  is  equivalent  to  a  demand  of  payment.'^    A 


1  Zellerbach  v.  Allenberg,  99  CaL  57 
(1893).  The  fact  that  stocks  are  de- 
ix)sited  as  collateral  security  to  a 
note  does  not  prevent  the  statute  of 
limitations  running  against  the  note. 
Be  Hartranft's  Estate,  153  Pa.  St.  530 
(1893).  Although  the  debt  is  barred 
by  the  statute  of  limitations,  the 
pledgee  may  compel  the  corporation 
to  transfer  the  stock  to  him  on  the 
books.  Miller  v.  Houston  City  St. 
R'y,  55  Fed.  Rep.  366  (1893).  A  pledgee 
may  enforce  payment  of  his  debt  by 
sale  of  stock  held  as  collateral  se- 
curity therefor,  even  though  the  debt 
itself  may  be  banned  by  the  statute 
of  limitations.  Tom  bier  v.  Palestine 
Ice  Co.,  43  S.  W.  Rep.  896  (Tex.,  1897). 

2  "  To  authorize  the  defendants  to 
sell  the  stock  purchased,  they  were 
bound,  first,  to  call  upon  the  plaint- 
iff to  make  good  his  margin;  and, 
failing  in  that,  he  was  entitled,  sec- 
ondly, to  notice  of  the  time  and  place 
where  the  stock  would  be  sold;  which 
time  and  place,  thirdly,  must  be  rea- 
sonable." Markliam  v.  Jaudon,  41 
N.  Y.  235,  243  (18G9).  See  also  Strat- 
ford V.   Jones,  97  N.   Y.  586   (1885); 


Baker  v.  Drake,  66  N.  Y.  518  (1876); 
Conyngham's  Appeal,  57  Pa.  St.  474 
(1868);  Stearns  v.  Marsh,  4  Denio,  237 
(1847);  Neiler  u  Kelley,  69  Pa.  St.  403 
(1871);  Cushman  v.  Hayes,  46  III  14i> 
(1867).  A  joint  owner  is  entitled  to 
notice.  Clark  v.  Sparhawk,  2  W.  N. 
Cas.  115  (1875);  S.  C,  5  Fed.  Cas.  928» 
sFowle  V.  Ward,  113  Mass.  548 
(1873);  Hempfling  v.  Bun-,  59  Mich. 
294  (1886);  Illinois  Nat.  Bank  r. 
Baker,  128  111.  533  (1889). 

4  Lewis  V.  Graham,  4  Abb.  Pr.  106 
(1857);  Brass  v.  Worth,  40  Barb.  648 
(1863);  Wilson  v.  Little,  2  N.  Y.  443, 
448  (1849),  saying:  "  It  is  well  settled 
that  where  no  time  is  expressly  fixed 
by  contract  between  the  parties  for 
the  payment  of  a  debt  secured  by  a 
pledge,  the  pawnee  cannot  sell  the 
pledge  without  a  previous  demand 
of  payment,  although  the  debt  is 
technically  due  immediately."  Genet 
V.  Howland,  45  Barb.  560  (1866). 

5  Franklin  Nat.  Bank  v.  Newcombe, 
1  N.  Y.  App.  Div.  294  (1896). 

« Fiske  V.  Williams,  4  N.  Y.  App. 
Div.  487  (1896). 
■'Nabring  v.  Bank  of  Mobile,   53 


856 


OH.  XXVI.] 


PLEDGE   OF    STOCK. 


[§  4:77. 


broker's  custom  to  the  effect  that  no  notice  is  necessary  is  illegal 
and  void.^  The  time  and  place  of  the  proposed  sale  must  b© 
specified  in  the  notice.^  Where  the  note  for  which  stock  is 
pledged  is  made  and  delivered  and  payable  in  Massachusetts, 
and  the  pledge  was  also  made  there,  and  the  stock  is  in  a  small 
Massachusetts  corporation  and  is  not  known  elsewhere,  it  is  un- 
reasonable for  the  pledgee  to  fix  the  place  of  sale  in  New  York, 
even  though  the  pledgee  is  a  ISTew  York  corporation;  but 
where  the  pledgor,  on  receiving  notice  of  the  proposed  sale,  does 
not  make  any  protest  or  objection  to  the  place  of  sale,  and 
takes  no  action  whatsoever  in  regard  to  it,  the  pledgor  waives 
any  objection  on  this  account.'  The  time  between  the  service 
of  the  notice  and  the  time  when  the  sale  is  to  take  place  must 
be  reasonable  in  length,  so  as  to  give  the  debtor  an  opportunity 
to  obtain  money  to  pay  the  debt.^  Four  days'  notice  is  suffi- 
cient, although  the  sale  is  made  in  l^ew  York  and  the  pledgor 
resides  in  Boston.*  A  notice  by  a  newspaper  advertisement  is 
insufficient.®    It  is  not  sufficient  notice  to  the  pledgor  to  send 


Ala.  204  (1877).  So  also  of  notice  of 
intent  to  foreclose.  Goodrich  v.  Wil- 
lard,  68  Mass.  203  (1854).  Demand  of 
payment  may  be  made  by  long  urg- 
ing for  payment,  even  though  the 
word  "  demand  "  is  not  used.  Car- 
son V.  Iowa,  etc.  Co.,  80  Iowa,  638 
(1890).  The  giving  of  a  note  to  a 
broker  pledgee  does  not  extend  the 
time  within  which  the  pledgor  was 
to  deposit  further  margin.  Gould  v. 
Trask,  10  N.  Y.  Supp.  619  (1890). 

1  Markham  v.  Jaudon,  41  N.  Y.  235 
(1869). 

'  Conyngham's  Appeal,  57  Pa.  St. 
474  (1868);  Genet  v.  Howland,  45 
Barb.  560  (1866);  Canfield  v.  Minne- 
apolis, etc.  Assoc,  14  Fed.  Rep.  801 
(1883).  See  Schouler,  Bailm.,  2d  ed., 
g  229.  It  has  been  held  in  Maryland 
that  a  notice  of  the  place  is  unneces- 
sary. Worthington  v.  Tormey,  34 
Md,  182  (1870).  But  such  decision 
would  be  imsaf  e,  and  probably  would 
not  be  followed  elsewhere.  In  New 
York,  the  place  of  sale  formerly,  by 
custom,  was  at  the  Merchants'  Ex- 
change, No.   Ill   Broadway,   but  is 

857 


now  both  there  and  at  the  Real  Es- 
tate Exchange  in  Liberty  Street. 

3  Guinzburg  v.  H.  W.  Downs  Co., 
43  N.  E.  Rep.  195  (Mass.,  1896). 

<In  Maryland  F.  Ins.  Co.  v.  Dal- 
rymple,  25  Md.  242  (1866),  a  week's 
notice  was  held  sufficient.  Lewis  v, 
Graham,  4  Abb.  Pr.  106  (1857),  hold- 
ing  that  thirty-four  days,  where  the 
pledgor  resides  in  Illinois  and  the 
sale  is  to  be  in  New  York,  is  suffi- 
cient; Bryan  v.  Baldwin,  7  Lans.  174 
(1872);  aflf'd,  52  N.  Y.  232,  holding 
that  two  days  was  sufficient;  Stevens 
V.  Hurlbut  Bank,  31  Conn.  146  (1862), 
holding  that  a  sale  on  the  same  day 
is  unreasonable  and  the  notice  in- 
sufficient. See  other  cases  in  §§  457, 
458,  supra;  Willoughby  v.  Comstock, 
3  Hill,  389  (1842),  where  two  days 
was  held  sufficient;  Edwards,  Bailm., 
§  285.  As  to  place  of  sale,  see  §§  458, 
476,  supra. 

5  Guinzburg  v.  H.  W.  Downs  Co., 
165  Mass.  467  (1896). 

6  Lewis  V.  Graham,  4  Abb.  Pr.  106 
(1857);  and  see  §  119,  supra. 


477.] 


PLEDGE  OF  STOCK, 


[CH.  XXVI. 


him  a  printed  copy  of  the  public  notice  of  sale,  the  pledged 
stock  being  included  in  a  large  amount  of  other  stock,  and 
there  being  nothing  to  indicate  an  intent  to  sell  nor  to  indicate 
that  the  pledgor  was  interested.^  The  notice  must  be  served 
personally,  and  it  seems  that  it  cannot  be  served  on  one  who 
'  has  charge  of  the  pledgor's  office  for  the  transaction  of  busi- 
ness.^ A  sale  of  bonds  as  collateral  security,  in  violation  of  the 
agreement  as  to  the  notice  to  be  given,  does  not  release  a  surety 
on  the  note  secured  by  the  bonds,  but  discharges  him  only  to 
the  extent  of  the  actual  value  of  the  bonds.^ 

By  an  express  agreement  the  pledgor  may  waive  his  right  to 
notice  of  the  time  and  place  of  the  sale.*    Such  contracts  are 


1  McCutcheon  v.  Dittman,  23  N.  Y. 
App.  Div.  285  (1897). 

2  Bryan  v.  Baldwin,  53  N.  Y.  233 
(1873).  Cf.  MilUken  v.  Dehon,  27  N.  Y. 
364  (18G3). 

3  Vose  V.  Florida  R  R.,  50  N.  Y.  369 
(1873). 

*  Maryland  F.  Ins.  Co.  v.  Dalrym- 
ple,  25  Md.  243  (18G6);  Genet  v.  How- 
land,  45  Barb.  560  (1866);  and  see 
<:;§  459,  463,  sxipra;  Milliken  v.  Dehon, 
27  N.  Y.  364  (1863);  Stevens  v.  Hurl- 
but  Bank,  31  Conn.  146  (1863);  Hyatt 
V.  Argenti,  3  Cal.  151  (1853);  Wheeler 
V.  Newbould,  16  N.  Y.  393  (1857); 
Stenton  v.  Jerome,  54  N.  Y.  480  (1873); 
Wicks  V.  Hatch,  03  N.  Y.  535  (1875); 
Butts  V.  Burnett,  6  Abb.  Pr.  (N.  S.) 
303  (1869).  The  pledgor  of  stock  may, 
by  the  terms  of  the  agreement  creat- 
ing the  pledge,  waive  his  right  to  no- 
tice of  sale  for  non-payment  of  the 
debt.  Jeanes's  Appeal,  116  Pa.  St. 
573  (1887).  Formerly  the  validity  of 
a  waiver  was  doubted.  Campbell  v. 
Parker,  9  Bosw.  323  (1862);  Wilson 
V.  Little,  2  N.  Y.  443  (1849);  Gilpin  v. 
Howell,  5  Pa.  St.  41  (1846);  Hanks  v. 
Drake,  49  Baib.  186  (1867);  Sterlmg 
V.  Jaudon,  48  Barb.  459  (1867).  Au- 
thority to  the  pledgee  to  sell  "  at  pub- 
lic or  private  sale,  at  Ids  discretion," 
thirty  days  after  notice,  waives  no- 
tice of  sale.  McDowell  v.  Chicago 
Steel  Works,  124  Ilk  491  (1888).    No- 


tice may  be  waived,  Chouteau  v. 
Allen,  70  Mo.  290  (1879).  In  Huis- 
kamp  V.  Wise,  47  Fed.  Rep.  236,  249 
(1891),  where  the  pledgee  was  author- 
ized to  sell  before  maturity  and  with- 
out notice  if  the  security  became 
insuflScient,  the  court  held  that  "  the 
pledgee  could  not  make  sale  of  the 
collateral  until  after  the  default  in 
the  payment  of  the  note,  without  no- 
tice and  demand  of  payment  to  the 
pledgor."  See  also  S.  C.  suh  nom. 
West  V.  Hmskamp,  63  Fed.  Rep.  749 
^1 894).  Where  the  pledgees  are  given 
power  to  sell  "in  such  manner  as 
they,  in  their  discretion,  may  deem 
proper,  without  notice,"  a  sale  with- 
out notice  after  the  maturity  of  the 
loan  is  legal.  Williams  v.  United 
States  Trust  Co.,  133  N.  Y.  660  (1892). 
The  pledgor  may,  subsequently  to 
the  making  of  the  pledge,  release  his 
right  to  redeem.  He  may  agree  that 
the  pledgee  may  sell  the  pledge  at 
any  time  at  private  sale,  and  that 
the  proceeds  shall,  after  repayment 
of  the  amount  loaned,  be  divided 
equally  between  the  pledgor  and 
pledgee.  Rutherford  v.  Massachu- 
setts Mut.  Ins.  Co.,  45  Fed.  Rep.  713 
(1891).  The  fact  that  the  pledgee, 
under  a  waiver  of  notice,  of  demand, 
and  of  public  sale,  sells  the  stock  and 
debt  to  an  enemy  of  the  corporation, 
does  not  invalidate  the  sale.    Carson 


858 


en.  xxYi.] 


PLEDGE    OF   STOCK. 


[§ 


frequently  entered  i»to  with  stock-brokers  by  customers  buy- 
ing stock  on  a  margin.  But  an  express  power  to  the  pledgee 
to  sell  the  pledge  on  certain  contingencies  is  not  a  waiver  of 
a  right  to  notice.^  Irregularities  in  the  notice  may  be  waived. 
Thus,  where  a  person,  upon  being  presented  with  his  account, 
does  not  object,  but  promises  to  pay  the  amount,  he  thereby 
M'aives  his  right  to  object  to  a  sale  as  being  without  notice.- 

§  478.  Formalities  of  sale. —  A  sale  of  stock  on  notice  by  a 
pledgee,  for  the  purpose  of  applying  the  proceeds  to  the  pledg- 
or's debt,  must  be  at  public  auction.^  A  private  sale  is  unau- 
thorized and  'illegal,  even  though  the  utmost  market  price  is 
obtained.^    But  a  special  contract  by  which  the  pledgor  au- 


V.  Iowa,  etc.  Co.,  80  Iowa,  638  (1890). 
Although  the  pledgor  agrees  that  the 
pledgee  may  sell  part  of  the  pledge 
without  notice  upon  default,  this 
does  not  release  the  remainder  of  the 
pledge  from  being  additional  secu- 
rity for  the  debt.  Bank  of  Africa  v. 
Salisbury,  etc.  Co.,  L.  R  17  App.  Cas. 
281  (1892). 

An  approved  form  of  a  note  and 
waiver  is  as  follows: 

"  $ .  Kew  York, ,  18—. 

" after  date promise  to  pay  to  the 

order  of , dollars,  at ,  for  value 

received,  with  interest  at  the  rate  of per 

cent  per  annum,  having  pledged  to  the  said 

the  undei'meutioned  securities  iwith 

authority  to  sell  the  same  on  non-perform- 
ance of  this  promise,  in  such  manner  as 
they,  in  their  discretion,  may  deem  proper, 
without  notice,  either  at  any  brokers'  board 
or  at  public  or  private  sale,  and  to  apply  the 
proceeds  thereon),  viz. :  . 

"In  case  of  depreciation  in  the  market 
value  of  the  security  hereby  pledged,  or 
which  may  hereafter  be  pledged,  for  this 
loan,  a  payment  is  to  be  made  on  account  gn 
demand,  so  that  the  said  market  value  shall 

always  be  at  least per  cent  more  than 

the  amount  unpaid  of  this  note.  In  case  of 
failure  to  do  so,  this  note  shall  be  deemed 
to  be  due  and  payable  forthwith,  anything 
hereinbefore  expressed  to  the  contrary  not- 
withstanding, and  the may  imme- 
diately reimburse by  sale  of  the 

security.  It  is  xmderstood  and  agreed  that 
if  such  sale  be  by  public  auction,  the  said 

shall  be  at  Uberty  to  purchase  for 

own   account   any  property  offered  at 

euch  sale;  and  it  is  fm-ther  agreed  and  under- 


859 


stood  that  the  above-mentioned  securities,  or 
substitutes  therefor,  or  additions  thereto, 
shall  also  be  held  as  collateral  and  be  ap- 
plicable to  any  other  note   or  claim  held 

against by  said ,  and  that 

in  case  the  proceeds  of  the  whole  of  the  col- 
laterals shall  not  cover  principal,  interest, 

and  expenses,  hold bound  to 

pay  on  demand  any  deflciency. 

1  Stevens  v.  Hurlbut  Bank,  31  Conn. 
146  (1862);  Lewis  v.  Graham,  4  Abb. 
Pr.  106  (1857).  See  also  Wilson  v. 
Little,  2  N.  Y.  443(1849);  Genet  v. 
Howland,  30  How.  Prl  360  (1866); 
Stenton  v.  Jerome,  54  N.  Y.  480  (1873). 
Cf.  Milliken  v.  Dehon,  27  N.  Y.  364 
(1863).  But  an  express  power  to  sell 
on  a  specified  day  is  held  to  waive 
right  of  notice.  Bryson  v.  Raynor, 
25  Md.  424  (1866). 

2  Gillett  V.  Whiting,  141  N.  Y.  71 
(1894). 

3Conyngham's  Appeal,  57  Pa.  St. 
474  (1868);  Eankin  v.  McCullough,  13 
Barb".  103(1851);  Genet  v.  Howland, 
45  Barb.  560  (1866) ;  Ogden  v.  Lathrop, 
65  N.  Y.  158  (1875);  TeiTy  v.  Birming- 
ham Nat.  Bank,  93  Ala.  599  (1891). 
An  express  power  to  sell  has  been 
held  to  authorize  a  private  sale.  Bry- 
son V.  Raynor.  25  Md.  424  (1866).  Or 
a  sale  at  a  brokers'  board.  Biyson  v. 
Raynor,  25  Md.  424  (1866). 

*  Castello  V.  City  Bank  of  Albany, 
1  N.  Y.  Leg.  Obs.  25  (1842).     Cf.  Na- 


478.] 


PLEDGE   OF    STOCK. 


[cii. 


XXYL 


thorizes  the  pledgee  to  sell  without  notice  and  at  public  or  pri- 
vate sale  has  been  upheld.^  The  pledgee  cannot  have  the  sale 
made  at  a  brokers'  board  or  in  a  stock  exchange,  since  only 
the  members  of  the  association  are  allowed  to  bid  for  stocks 
sold  therein,  while  the  law  requires  that  the  public  shall  be  al- 
lowed to  bid  at  a  pledgee's  sale.^  Frequentl}'-  a  special  agree- 
ment is  made  between  the  pledgor  and  pledgee,  especially 
between  a  customer  and  his  stock-broker,  whereby  the  pledgee 
is  allowed  to  sell  at  a  brokers'  board.'  Such  an  agreement, 
however,  does  not  authorize  a  private  sale  at  a  brokers'  board.'' 
A  sale  is  valid  though  the  stock  is  sold  for  only  a  small  part 
of  its  value.*  The  fact  that  there  is  only  one  bidder  does  not 
render  the  sale  invalid.^  The  pledgor  in  selling  must  "  exercise 
reasonable  skill  and  diligence  in  order  to  get  the  value  of  the 
property."  ^  "Where  stock  is  sold  on  a  mortgage  foreclosure,  it 
will  be  sold  "  by  offering  the  shares  in  small  blocks,  and  then  as 


bring  v.  Bank  of  Mobile,  58  Ala.  205 
(1877).  The  pledgee's  right  to  object 
is  waived  by  long  delay.  Hayward 
V.  National  Bank,  96  U.  S.  611  (1877). 
In  AVilloughby  v.  Comstock,  3  Hill, 
389  (1842),  it  was  held  that  the  pledg- 
ee's failure  to  object  when  he  received 
notice  of  intent  to  sell  at  a  brokers' 
board  was  fatal. 

1  Williams  v.  United  States  Trust 
Co.,  133  N.  Y.  660  (1892);  S.  C,  14 
N.  y.  Supp.  502.  A  private  sale  by 
the  pledgee  in  accordance  with  an 
agreement  authorizing  such  sale  was 
upheld  in  Smith  v.  Lee,  84  Fed.  Rep. 
557  (1898),  where  the  price  realized 
was,  rmder  the  circumstances,  a  fair 
price.  In  this  case  a  third  party  had 
substituted  his  stock  for  the  stock  of 
the  original  pledgor,  and  the  court 
held  that  the  substituted  stock  was 
subject  to  the  terms  of  the  original 
agreement  of  pledge  as  to  mode  of 
sale.  A  private  sale  in  accordance 
with  the  contract  allowing  said  sale 
was  held  in  Dulling  v.  Weekes,  40 
S.  W.  Rep.  178  (Tex.,  1897),  not  to  be 
invalid,  where  the  amount  realized 
was  greater  than  the  market  value. 
The  court  held  also  that  a  waiver  of 
advertisement  or  notice  waived  any 


notice  to  the  pledgor  and  also  to  the 
public. 

-'  Brass  v.  Worth,  40  Barb.  648  (1863)  j 
Rankin  v.  McCullough,  12  Barb.  103 
(1851j.  A  sale  in  New  York  is  legal 
King  V.  Texas,  etc.  Ins.  Co.,  58  Tex. 
669  (1883). 

3  Wicks  V.  Hatch,  62  N.  Y.  535  (1875). 
See  ch.  XXV,  supra. 

*  Allen  V.  Dykers,  3  Hill,  593  (1849); 
aff'd,  Dykers  v.  Allen,  7  HiU,  497 
(1844). 

5  A  bona  fide  purchaser  at  a  pledg- 
ee's sale  is  protected,  though  he  pur- 
chased for  less  than  the  real  value 
of  the  stock,  and  though  a  receiver 
had  previously  been  appointed  of  the 
pledgor's  property  and  it  had  been 
transferred  to  the  receiver.  Dudley 
V.  Gould,  6  Hun,  97  (1875). 

6  Guinzburg  v.  H.  W.  Downs  Co., 
165  Mass.  467  (1896). 

"  Guinzburg  v.  H.  W.  Downs  Co., 
165  Mass.  467  (1896).  A  pledgee  who 
is  given  power  to  manage  the  stock 
and  sell  cannot  easily  be  held  liable 
in  damages  for  mismanagement,  even 
though  it  turns  out  that  he  sold  for 
much  less  than  the  stock  was  worth. 
Hewitt  V.  Steele.  118  Mo.  463  (1893), 
See  also  76  N.  W.  Rep.  195  (Minn.,  1898). 


860 


CH.  XXVI.] 


PLEDGE    OF    stock:. 


[§  479. 


a  whole,  and  taking  tlie  bid  which  aggregates  the  larger  sum."  ^ 
But  a  sale  in  small  blocks  is  not  required  at  common  law.- 

§  4Y9.  If  the  pledgee  himself  purchases  at  the  sale,  then  the 
sale  is  voidable. —  It  is  a  well-established  rule  that,  where  a 
pledgee  pursues  the  remedy  of  selling  the  stock  upon  notice, 
the  pledgee  himself  is  disqualified  from  purchasing  the  stock.^ 
The  rule  is  based  on  the  principle  that  the  law  carefully 
protects  the  interest  of  the  pledgor,  and  will  not  open  the 
door  to  possible  devices  of  the  pledgee  for  purchasing  the  stock 
for  himself  at  a  low  price.  The  pledgee  cannot  purchase, 
either  directly  or  indirectly,  in  his  own  name  or  in  the  name 
of  another.*  The  effect  of  a  purchase  by  the  pledgee  for  him- 
self is  that  the  whole  proceeding  of  the  pledgee  for  subjecting 
the  pledge  to  the  payment  of  the  debt  is  utterly  futile,  and 
voidable  at  the  election  of  the  pledgor.  Where  the  pledgee 
buys  the  stock  at  the  sale  the  pledgor  may  elect  to  abide  by  the 
sale.*    The  pledgor  cannot  claim  that  the  pledgee  has  converted 

Ricliardson,  23  Hun,  559  (1881),\vliere 
the  sale  of  the  property  pledged  was 
on  an  attachment.  The  pledgor's 
silence  may  constitute  a  ratification 
of  the  pledgee's  purchase.  Carroll  v. 
Mullanphy  Sav.  Bank,  8  Mo.  App.  249 
(1880).  If  the  pledgee  is  a  corporation 
its  president  cannot  purchase  for  it. 
Star  F.  Ins.  Co.  v.  Palmer,  41  N.  Y. 
Super.  Ct.  267  (1876;.  Lewis  v.  Gra- 
ham, 4  Abb.  Pr.  106  (1857),  holds  that 
a  special  partner  of  the  pledgee  firm 
may  purchase.  And  see  ch.  XXV, 
§  450,  supra.  Cf.  Finney's  Appeal, 
59  Pa.  St.  398  (1868).  Where  a  pledgee 
bank  having  a  right  to  sell  at  pri- 
vate sale  and  without  notice  sells  the 
pledge  through  its  president,  who 
buys  the  pledge  himself,  and  the 
president  openly  pays  the  bank  for 
it,  long  delay  on  the  part  of  the  bank 
in  complaining  is  fatal  Raymond 
V.  Palmer,  41  La.  Ann.  425  (1889). 

<  Minnesota  Assoc,  v.  Canfield,  121 
U.  S.  295  (1887).  He  cannot  buy  in 
the  name  of  a  dummy.  Push  v.  First 
Nat.  Bank,  71  Fed.  Rep.  102  (1895). 

5  A  ppeal  of  Ilibernia  Nat.  Bank,  17 
S.  Rep.  200  (La.,  1895J. 


1  Toler  V.  East  Tennessee,  etc.  R'y, 
67  Fed.  Rep.  168,  181  (1894). 

2  Even  though  the  sheriff,  under  ex- 
ecution, sells  a  large  block  of  stock 
in  one  lot,  instead  of  dividing  and 
selling  it  in  small  lots,  and  even 
though  such  sale  realizes  $12,000, 
whereas  the  levy  was  for  only  $1,000, 
yet  the  ptu'chaser  is  protected  in  his 
purchase.  Connecticut,  etc.  R'y  v. 
Morris,  14  S.  C.  Rep.  (Can.)  318  (1887); 
Morris  v.  Connecticut,  etc.  R'y,  L.  R. 
2  Q.  B.  303  (1886). 

3  Easton  v.  German- American  Bank, 
127  U.S.  532(1888);  Bryan  v.  Bald- 
win, 52  N.  Y.  232  (1873),  the  court  say- 
ing: "The  plaintiff,  being  pledgee  of 
the  stock,  and  in  that  character  ex- 
posing it  for  sale,  could  not  become 
the  purchaser  unless  the  defendant 
assented  to  such  purchase.  .  .  .  This 
sale  to  the  plaintiff  was  not  void,  but 
voidable  at  the  election  of  the  de- 
fendant." Maryland  F.  Ins.  Co.  v. 
Dalrymple,  25  Md.  242  (1866).  Nor 
can  he  buy  where  the  pledge  is  being 
sold  on  a  forfeitiire  sale  for  non-pay- 
ment of  calls.  Freaman  v.  Harwood, 
49  Me.  195  (1859).    See  also  Sickles  v. 


801 


§  ttro.] 


PLEDGE  OF  STOCK. 


[CH. 


XXVI, 


the  stock  by  purclaasing  at  the  sale,^  but  he  may  disregard 
the  notice  and  sale  and  whole  proceeding  as  being  ineffectual 
and  voidable.  The  pledge  relationship  continues  as  though 
no  attempt  had  been  made  by  the  pledgee  to  subject  the  pledge 
to  the  payment  of  the  debt.^  Where  the  pledgee  buys  the  se- 
curity at  the  public  sale  and  then  sells  it,  and  then  sues  the 
pledgor  for  the  deficiency  on  the  first  sale,  the  pledgor  may 
claim  a  set-off  for  the  full  value  of  the  securities  wrongfully 
resold,  and  need  not  make  a  tender.'  Where,  however,  the 
pledge  is  foreclosed  by  legal  proceedings  similar  to  those  for 
the  foreclosure  of  chattel  mortgages,  either  party  may  bid  at 
the  public  judicial  sale.*    Even  though  the  pledgee  is  author- 


1  Bryan  v.  Baldwin,  52  N.  Y.  232    stock  himself,  it  is  the  same  as  though 


(1873).  If  the  pledgee  buys  it  in,  there 
is  no  conversion.  The  pledge  con- 
tinues. Terry  v.  Birmingham  Nat. 
Bank,  93  Ala.  599  (1891).  Where  the 
pledgee  buys  at  a  sale  he  cannot  be 
held  liable  for  conversion  so  long  as 
he  retains  the  property,  unless  the 
pledgor  demands  the  return  of  the 
same  and  offers  to  perform  his  part 
of  the  contract ;  but  where  the  pledgee 
sells  a  part  of  the  property  he  is  lia- 
ble for  conversion  without  any  de- 
mand or  offer  of  performance  by  the 
pledgor.  Glidden  v.  Mechanics'  Nat. 
Bank,  53  Ohio  St.  588  (1895).  Where 
the  pledgee  purchases  at  the  sale  the 
sale  is  void,  but  does  not  amount  to  a 
conversion  of  the  secui'ities.  First 
Nat.  Bank  v.  HaU,  23  N.  Y.  App.  Div. 
356  (1897). 

2Bryson  v.  Raynor,  25  Md.  424 
(186G);  Middlesex  Bank  v.  Minot,  45 
Mass.  325  (1812);  Hestonville,  etc.  R. 
R.  V.  Shields,  3  Brewst.  (Pa.)  257  (18C9). 
If  the  pledgee  purcliases  at  the  sale 
the  pledge  continues.  The  pledgor 
does  not  waive  his  riglits  by  setthng 
in  ignorance  that  tlie  pledgee  pur- 
chased. Sliarpe  v.  Birmingham  Nat. 
Bank,  87  Ala.  644  (18S8).  If  the 
pledgee  buys,  the  pledge  continues 
imless  the  pledgor  confirms  the  sale. 
Hyams  v.  Bamberger,  10  Utah,  3 
(1894).    Where  a  pledgee  buys  in  the 


no  sale  had  taken  place,  and  the  cor- 
poration is  not  liable  for  allowing  a 
transfer  of  the  stock  to  such  pledgee. 
First  Nat.  Bank  v.  Mings,  11  Tex.  Civ. 
App.  802  (1895).  Where  a  pledgee 
buys  for  himself,  and  subsequently 
takes  the  stock  into  his  possession, 
the  jjledge  continues,  and  he  cannot 
sell  a  second  time  without  due  no- 
tice. Leahy  v.  Lobdell,  etc.  Co.,  80 
Fed.  Rep.  665  (1897). 

3  Rush  V.  First  Nat.  Bank,  71  Fed. 
Rep.  102  (1895),  reviewing  the  author- 
ities on  tender  in  such  cases.  Where 
the  pledgee  sues  for  the  balance  due 
on  the  note  after  a  sale  of  the  pledge, 
and  the  pledgor  sets  up  a  counter- 
claim that  the  pledgee  had  sold  the 
stock  "  for  the  use  of  defendant  and 
converted  to  its  own  use,"  the  pledgor 
thereby  ratifies  the  sale,  and  is  enti- 
tled only  to  the  purchase  jirice  of  the 
stock,  and  not  its  actual  value.  Terry 
V.  Birmingham  Nat.  Bank,  99  Ala. 
566  (1893). 

*  Pewabic  Min.  Co.  v.  Mason,  145 
U.  S.  349  (1892).  In  Newport,  etc. 
Bridge  Co.  v.  Douglass,  12  Bush  (Ky.), 
673,  720  (1877),  the  pledgee  of  bonds 
from  the  company  issuing  them  ol> 
tained  a  foreclosure  of  the  pledge  by 
suit,  and  bought  the  bonds  in,  and 
was  then  held  to  be  the  absolute 
owner  of  them. 


862 


CH.  XXVI,] 


PLEDGE   OF    STOCK. 


[§  4:79. 


ized  to  sell  at  public  or  private  sale  without  notice,  yet  lie  can- 
not buy  for  liimself,  notwithstanding  he  has  sold  the  note  with 
the  collateral  to  another  person  who  makes  the  sale.^  The 
pledgor  may  authorize  the  pledgee  to  purchase  at  the  sale  and 
retain  the  pledge.^  Stock  held  in  pledge  to  secure  a  debt  can- 
not be  sold  before  the  debt  is  due,*  unless  there  is  a  special 
contract  to  that  effect.  The  pledgor  may  release  his  equity 
to  the  pledgee.*  A  court  of  equity  scrutinizes  with  great  care 
a  contract  between  pledgor  and  pledgee  for  transfer  of  title,  and 
will  set  it  aside  if  there  is  any  ground  for  believing  that  it  is  a 
harsh  contract,  brought  about  by  the  position  of  vantage  occu- 
pied by  the  pledgee.^ 


1  Greer  v.  Lafayette,  etc.  Bank,  128 
Mo.  559  (1895). 

'■2  Chouteau  v.  Allen,  70  Mo.  290 
(1879).  See  also  Farmers',  etc.  Co.  v. 
Toledo,  etc.  Co.,  54  Fed.  Rep.  759 
(1893),  where  bonds  were  bought  in. 
A  pledgee  cannot  himself  purchase 
the  stock  at  the  sale,  but  the  pledgor 
may  lawfully  contract  so  as  to  allow 
the  pledgee  to  purchase  at  svich  sale, 
or  may  ratify  such  pui'chase  after  it 
has  been  made.  If  there  is  no  such 
contract  or  ratifidation,  however,  the 
sale  is  void,  and  the  parties  remain 
in  the  same  position  as  though  no 
sale  had  taken  place.  Appleton  v. 
Turnbull,  81  Me.  72  (1891).  Under  a 
power  of  sale  authorizing  a  pledgee 
to  purchase,  and  waiving  notice  of 
sale,  the  pledgee  may  purchase,  and 
it  is  immaterial  that  the  sale  took 
place  at  a  time  when  stocks  and 
bonds  had  declined  in  a  panic.  The 
pledgee  need  not  wait  for  a  favor- 
able condition  of  the  market.  Frank- 
lin Nat.  Bank  v.  Newcombe,  1  N.  Y. 
App.  Div.  294  (1896).  A  provision  in 
a  contract  of  pledge  that  the  pledgee 
may,  at  a  sale  for  non-payment,  buy 
in  the  stock  for  himself,  is  legal. 
Manning  v.  Shriver,  79  Md.  41  (1894). 
In  Fidelity,  etc.  T.  Co.  v.  Roanoke, 
etc.  Co.,  81  Fed.  Rep.  439  (1896),  the 
court  sustained  a  purchase  by  the 
pledgee  himself,  where  the  agreement 
of  pledge  authorized  him  to  seU  at 


public  or  private  sale  and  without 
notice  or  demand  of  payment. 

3  Illinois  Nat.  Bank  v.  Baker,  128 
111.  533  (1889). 

4  Thomas  v.  Coffin.  62  Fed.  Rep.  665 
(1894);  Small  v.  Saloy,  42  La.  Ann. 
183  (1890).  A  pledgor  may  sell  the 
securities  pledged,  and  the  sale  may 
be  to  the  pledgee.  The  sale  may  be 
oral  and  wiU  be  upheld,  the  debt 
being  canceled  thereby.  Brown  v. 
Farmers'  L.  &  T.  Co.,  117  N.  Y.  266 
(1889).  Cf.  Ryle  v.  Ryle,  41  N.  J.  Eq. 
582  (1886).  Receiving  the  surplus  in 
ignorance  of  illegality  is  no  waiver. 
Allen  V.  American,  etc.  Assoc,  49 
Minn.  544  (1892).  A  creditor  of  an 
individual  cannot  set  aside  a  sale  by 
the  latter  of  his  stock  to  a  pledgee 
and  indorser  of  notes,  even  though 
such  sale  was  at  a  figure  much  less 
than  the  price  at  which  said  pledgee 
finally  sold  the  stock  after  putting 
in  additional  money.  Davis  v.  Yoder, 
33  Atl.  Rep.  882  (Pa.,  1896).  In  Fox 
V.  Hartford,  etc.  R.  R.,  38  Atl.  Rep. 
871  (Conn.,  1897),  the  pledgor  sold  the 
pledge  to  the  pledgee.  Where  an  in- 
solvent pledgor  sells  the  pledge  to 
the  pledgee  for  the  debt  itself,  $7,000, 
the  transaction  is  legal,  even  though 
a  jury  find  that  the  stock  was  worth 
$1,500  more.  Wachovia  L.  &  T.  Co. 
V.  Forbes,  27  S.  E.  Rep.  43  (N.  C,  1897). 

5  Ritchie  v.  McMullen,  79  Fed.  Rep. 
522  (1897). 


863 


CHAPTER  XXYIL 


LEVY  OF  ATTACHMENT  AND   EXECUTION    UPON    SHARES   OF 

STOCK. 


480.  An  execution  at  common  law- 

could  not  reach  shares  of 
stock. 

481.  Nor,  it  seems,  could  a  court  of 

equity  subject  stock  to  the 
jjayment  of  debts,  except 
when  it  had  been  conveyed 
away  fraudulently. 

482.  By  statutory  provisions  execu- 

tions are  pjenerally  sufficient 
to  reach  the  debtor's  stock  — 
Strict  compliance  necessary. 

483.  Attacliment  of  stock  as    al- 

lowed by  the  statutes  of  the 
various  states. 

484.  Levy  of  attachment  or  execu- 

tion upon  stock  held  in  pledge 
or  by  trustee,  and  of  stock 
which  the  debtor  has  fraud- 
ulently transferred  away. 

485.  Stock  can  be  attached  only  in 

the  state  creating  the  cor- 
poration. 

486.  Rights    of    an    unregistered 

transferee  of  a  certificate  of 
stock  as  against  an  attach- 
ment or  execution  levied  on 
that  stock. 

487.  In  New  York,  Pennsylvania, 

New  Jersey,  Micliigan,  Min- 
nesota, Missouri,  Tennessee, 
Kentucky,  Louisiana,  Mis- 
sissippi, Texas,  Washington, 
and  in  the  federal  courts 
passing  upon  tlio  transfer  of 
national-bank  stock,  it  is 
held  that  by  the  common 


law  the  unregistered  trans- 
feree of  a  certificate  of  stock 
is  protected  as  against  all 
subsequent  attachments  or 
executions  levied  on  that 
stock. 
§  488.  In  Illinois,  Maine,  Maryland, 
Massachusetts,  New  Hamp- 
shire, Rhode  Island,  Vir- 
ginia, Wisconsin,  West  Vir- 
ginia, and  Wyoming,  the 
statutes  have  prescribed 
that  an  unregistered  pur- 
chaser or  pledgee  of  certifi- 
cates of  stock  shall  be  pro- 
tected against  subsequent 
attachments  or  executions 
levied  upon  that  stock. 

489.  Rights  and  duties  of  the  corpo- 

ration in  such  cases. 

490.  In  Alabama,  California,  Colo- 

rado, Connecticut,  Indiana, 
Iowa,  New  Mexico,  and  Ver- 
mont, the  usual  statutes  re- 
quiring transfers  of  stock  to 
be  registered  on  the  corpo- 
rate books  are  so  construed 
as  to  give  an  attachment  or 
execution  precedence  over 
a  pi-ior  unregistered  sale  or 
pledge  of  the  certificates  of 
stock  —  Notice  of  transfer 
without  registry. 

491.  Shares  of  stock  cannot  be  sub- 

jected to  the  payment  of 
the  stockholder's  debts  by 
the  process  of  garnishment. 


§  480.  An  execution  at  common  law  could  not  reach  shares 
of  siocJc. —  A  share  of  stock  is  in  the  nature  of  a  chose  in  ac- 
tion, and  at  common  law  a  chose  in  action  could  not  be  reached 
by  or  made  subject  to  a  levy  of  execution.  Consequently  it 
has  been  uniformly  held  by  the  courts  that  at  common  law  a 
levy  of  execution  could  not  be  made  on  shares  of  stock.  Un- 
less, therefore,  the  process  of  execution  has  been  extended  by 
statute  so  as  to  reach  such  property,  the  stock  of  a  judgment 

8G4 


CH.  XXVII.] 


ATTACHMENT    AND    EXECUTION. 


[§  ^si- 


debtor  cannot  be  made  subject  to  tbe  payment  of  bis  debts  by 
means  of  an  execution.^  An  attachment,  being  entirely  stat- 
utory, can  be  levied  on  shares  of  stock  only  when  the  words  of 
the  statute  declare  that  an  attachment  may  be  levied  on  such 
property.^ 

§  481.  Nor^  it  seems,  could  a  court  of  equity  siibject  stock  to 
the  payment  of  debts,  except  wlien  it  had  been  conveyed  away 
fraudulently. —  There  is  some  doubt  whether  a  court  of  equity 
has  power  to  subject  a  judgment  debtor's  choses  in  action  to 
the  payment  of  his  debts,  where  the  only  ground  for  the  inter- 
ference of  the  court  is  that,  unless  it  does  interfere,  such  prop- 
erty cannot  be  reached  by  the  judgment  creditor.  In  N  e w  York, 
previous  to  the  statutes  regulating  this  subject,  the  jurisdiction 
of  a  court  of  equity  therein  was  emphatically  denied  in  one 
case,'  and  with  equal  emphasis  declared  to  exist  in  another  case.* 
The  English  authorities  are  quite  uniform  in  holding  that  a 


iVan  Norman  v.  Jackson  Circuit 
Judge,  45  Mich.  204  (1881);  Goss,  etc. 
Mfg.  Co.  V.  People,  4  111.  App.  510 
(1879);  Blair  v.  Compton,  33  Mich. 
414  (1876);  Slaymaker  v.  Bank  of 
Gettysburg,  10  Pa.  St.  373(1849);  Fos- 
ter V.  Potter,  37  Mo.  525  (1866);  Howe 
V.  Starkweather,  17  Mass.  240  (1821); 
Nabring  v.  Bank  of  Mobile,  58  Ala. 
204  (1877);  Denton  v.  Livingston,  9 
Johns.  (N.  Y.)  96  (1812),  per  Chan- 
cellor Kent ;  Nashville  Bank  v.  Eags- 
dale,  Peck  (Tenn.),  296  (1823).  Even 
where  the  stock  is  held  to  be  real 
estate.  Cooper  v.  Dismal  Swamp 
Canal  Co.,  2  Mvirph.  (N.  C.)  195  (1812). 
Cf.  Gue  V.  Tidewater  Canal  Co.,  24 
How.  (U.  S.)  257  (1860).  In  the  Dis- 
trict of  Columbia,  stock  in  an  incor- 
porated company  cannot  be  sub- 
jected to  the  process  of  attachment 
or  of  execution.  Barnard  v.  Insur- 
ance Co.,  4  Mackey,  63  (1885).  At 
an  early  day,  when  the  nature  of 
stock  was  little  understood,  an  at- 
tachment was  attempted  on  the  cor- 
porate property  for  the  debts  of  a 
stockholder.  It  failed.  "Williamson 
V.  Smoot,  7  Mart.  (La.)  81  (1819). 
Stock  cannot  be  taken  on  a  tax  war- 


rant. Barnes  v.  HrJl,  55  Vt.  420  (1883). 
Cf.  McNeal  v.  Mechanics',  etc.  Assoc, 
40  N.  J.  Eq.  351  (1885);  Smith  v. 
Northampton  Bank,  58  Mass.  1  (1849). 
A  tax  collector  cannot  levy  on  and 
sell  stock  under  the  law  relative  to 
attachments.  Kennedy  v.  Mary  Lee, 
etc.  R'y,  93  Ala.  494  (1891);  and  §  566, 
infra.  Execution  against  a  corpora- 
tion cannot  be  levied  on  stock  owned 
by  tlie  corporation  itself,  such  stock 
having  been  purchased  by  it  under 
statutory  authority  at  a  forfeiture 
sale  for  non-jaayment  of  calls.  Rob- 
inson V.  Spaulding,  etc.  Co.,  72  CaL 
32  (1887).  An  attachment  of  stock 
does  not  prevent  a  sale  of  property 
by  the  corporation.  Gottfried  v.  Mil- 
ler, 104  U.  S.  521  (1881).  The  question 
of  whether  an  execution  may  be  lev- 
ied on  a  seat  in  an  exchange  is  con- 
sidered in  ch.  XXIX,  infra. 

2  Plimpton  V.  Bigelow,  98  N.  Y.  592, 
602  (1883);  Merchants'  Mut.  Ins.  Co.  v. 
Brower,  38  Tex.  2^  (1878). 

3  Donovan  v.  Finn,  1  Hopk.  Cli.  59, 
67  (1823).  See  also  2  Dan.  Ch.  Pr., 
p.  1037,  n. 

4  Storm  V.  Waddell,  2  Sandf.  Ch. 
495,  511  (1845). 


55 


8G5 


§  482.] 


ATTACHMENT   AND    EXECUTION. 


[CH.  XXYII. 


court  of  equity  has  no  such  jurisdiction.^  And  in  America,  for 
the  most  part,  a  similar  conclusion  is  arrived  at.^  Where,  how- 
ever, the  debtor  has  conveyed  away  his  stock  for  the  purpose  of 
defrauding  his  creditors,  a  court  of  equity  will  aid  the  judgment 
creditor,  inasmuch  as  it  has  jurisdiction  in  all  matters  involv- 
ing fraud,  trust,  or  accident,  or  other  element  of  similar  char- 
acter.' 

§  482.  By  statutory  'provisions  executions  are  generally  suffi- 
cient to  reach  the  dedtor's  stocTc  —  Strict  compliance  necessary. — 
^Nearly  all  of  the  states  of  the  Union  have  enacted  statutes  ex- 
tending the  scope  of  executions  so  as  to  render  subject  to  them 


1  Dundas  v.  Dutens,  1  Ves.  Jr.  196 
(1790);  Bank  of  England  v.  Liinn,  15 
Ves.  Jr.  569  (1809);  Grogan  v.  Cooke, 
2  Ball  &  B.  (Ir.  Ch.)  230  (1813);  Nantes 
V,  Con-ock,  9  Ves.  Jr.  183  (1803); 
McCarthy  v.  Goold,  1  Ball  &  B. 
(Ir.  Ch.)  387  (1810),  applying  the  same 
rule  to  dividends.  In  King  v.  Dupine, 
2  Atk.  603,  n.  (1744),  a  court  of  equity 
subjected  to  the  payment  of  a  debt 
the  debtor's  reversionary  interest  in 
an  annuity.  In  Horn  v.  Horn,  Ambk 
79  (1749),  the  court  refused  aid,  inas- 
much as  the  debtor  had  been  impris- 
oned under  a  capias  ad  satisfacien- 
dum. 

2WiUiams  v.  Reynolds,  7  Ind.  623 
(1856);  Disborough  v.  Outcalt,  1  N.  J. 
Eq.  298, 306  (1831):  McFerran  v.  Jones, 
2  Litt.  (Ky.)  219  (1822);  Erwin  v.  Old- 
ham, 6  Yerg.  (Tenn.)  185  (1834).  Con- 
tra, dictum,  Watkins  v.  Dorsett,  1 
Bland's  Ch.  (Ikld.)  530  (1838).  In 
Brightwell  v.  Mallory,  10  Yerg. 
(Tenn.)  196  (1836),  the  proceeding  was 
statutory. 

3  See  §§  339,  840,  supra,  on  Statute 
of  Frauds;  also  Taylor  v.  Jones,  2  Atk. 
600  (1743),  holding  that  the  debtor's 
transfer  of  stock  in  tnist  was  in  fraud 
of  creditors;  Hadden  v.  Spader,  20 
Johns.  (N.  Y.)  554  (1823);  Scott  v.  In- 
dianapolis Wagon  Works,  48  Ind.  75 
(1874);  Van  Norman  v.  Jackson  Cir- 
cuit Judge,  45  Mich.  204  (1881);  La- 
throp  V.  McBurney,71  Ga.  815  (1883); 


Gillett  V.  Bate,  86  N.  Y.  87  (1881); 
State  Bank  v.  Gill,  28  Hun,  410  (1881), 
and  §  484,  infra;  Skowhegan  Bank 
V.  Cutler,  49  Me.  315  (1860);  State  v. 
Wan-en  F.  &  M.  Co.,  32  N.  J.  L.  439 
(1868);  Bayard  v.  Hoffman,  4  Johns. 
Ch.  450  (1820);  Moore  v.  Metropolitan 
Nat.  Bank,  55  N.  Y.  41  (1873);  Colbert 
V.  Sutton,  5  DeL  Ch.  294  (1880).  The 
fraudulent  transferee  must  be  made 
a  party  defendant.  Hyatt  v.  Swivel, 
53  N.  Y.  Super.  Ct.  1  (1885).  But  the 
fraudulent  transferee  is  not  liable 
unless  he  has  accepted  the  stock. 
Skowhegan  Bank  v.  Cutler,  49  Me. 
315  (1860);  Cartmell's  Case,  L.  R.  9 
Ch.  App.  691  (1874).  Acceptance  is  a 
question  of  fact.  Pim's  Case,  3  De  G. 
&  S.  11  (1849).  Bixt  he  cannot  plead 
the  statute  of  frauds  himself.  Smith 
V.  Forty-nine,  etc.  Min.  Co.,  14  Cal. 
243  (1859).  The  judgment  creditor 
who  institutes  the  suit  in  equity  has 
priority  in  the  distribution  of  the 
proceeds  of  his  suit.  See  Freeman 
on  Executions  (2d  ed.),  §  434  The 
pledgor  may  by  an  instrument  in 
writing  assign  his  equity  of  redemj)- 
tion  to  one  of  his  creditors.  Such 
assignment  need  not  be  recorded  as 
a  chattel  mortgage,  and  is  not  fraud- 
ulent, even  though  it  be  kept  se- 
cret from  the  other  creditors  of  the 
pledgor.  National  H.  R.  Bank  v. 
Chaskin,  28  N.  Y.  App.  Div.  811  (1898). 


866 


CH.  XXVII.] 


ATTACHMENT   AISTD   EXECUTION. 


[§  482. 


all  Glioses  in  action,  including  shares  of  stock  in  a  corporation. 
Frequently  special  provisions  are  made  applicable  to  stock,  and 
prescribing  the  steps  which  are  necessary  to  render  the  levy  of 
execution  effectual.  "Where  an  execution  is  levied  in  accord- 
ance with  such  statutes,  its  provisions  must  be  substantially 
complied  with,  and,  if  not  complied  with,  the  sale  is  not  merely 
voidable,  but  is  wholly  unauthorized  and  void,^  It  is  fatal  to 
the  levy  and  sale  if  the  sheriff  fails  to  give  to  the  corporation 
the  notice  that  is  generally  required  by  statute,^  or  if  the  Sale 
by  the  sheriff  is  not  made  promptly  as  advertised  in  accordance 
with  the  statute.^    The  sale  itself  is  not  complete  until  the 


1  Blair  v.  Compton,  33  Mich.  414 
(1876),  holding  that  where  the  sheriff 
sold  without  knowing  or  stating  how 
many  shares  of  stock  the  debtor 
owned,  and  which  were  being  sold, 
the  sale  was  void.  See  also  People  v. 
Goss,  etc.  Mfg.  Co.,  99  111.  855  (1881), 
reversing  Goss,  etc.  Mfg.  Co.  v.  Peo- 
ple, 4  III  App.  510  (1879).  The  pro- 
cedure in  levy  of  execution  on  stock, 
as  laid  down  by  the  charter  of  the 
corporation,  supersedes  the  proced- 
ure of  a  previous  general  statute. 
Titcomb  v.  Union  M.  &  F.  Ins.  Co.,  8 
Mass.  326  (1811).  And  a  statute  which 
is  subsequent  to  the  charter  super- 
sedes in  this  respect  the  latter.  Howe 
V.  Starkweather,  17  Mass.  240  (1821). 
The  sheriff  need  not  sell  the  stock  in 
parcels,  but  may  sell  the  whole  at 
once.  ]\Ionris  v.  Connecticut,  etc.  R. 
R,  (Montreal)  L.  R  2  Q.  B.  303  (1886). 
Even  thou.f^h  the  sheriff  sells  in  one 
lot  a  large  block  of  stock  under  exe- 
cution instead  of  dividing  and  sell- 
ing it  in  small  lots,  and  even  though 
such  sale  realizes  $12,000,  whereas 
the  levy  was  for  only  $1,000,  yet  the 
purchaser  is  protected  in  his  pur- 
chase. Cormecticut,  etc.  R'y  v.  Mor- 
ris, 14  S.  C.  Rep.  (Can.)  318  (1887).  An 
-execution  sale  of  stock  will  be  set 
aside  where  it  was  made  with  an 
intentional  concealment  of  the  sale 
from  the  stockholder,  the  execution 
debtor.    Voorhis  v.  Terhune,  50  N.  J. 


L.  147  (1888).  If  no  notice  is  given 
to  the  debtor  of  the  levy  on  his  stock, 
a  sale  under  the  attachment  is  not 
good.  Commercial  Nat.  Bank  v. 
Farmers',  etc.  Bank,  82  Iowa,  193 
(1891).  A  levy  and  sale  of  "all  the 
shares  "  which  defendant  owns  is  not 
good.  The  number  of  shares  must 
be  ascertained  and  stated.  Keating 
V.  Stone,  etc.  Co.,  83  Tex.  467  (1892). 
A  statute  must  be  substantially  com- 
plied witli,  and  a  failure  to  give  no- 
tice to  tlie  corporation  as  requii-ed 
by  the  statute  is  fatal  to  the  attacli- 
ment.  Deutschman  v.  Byrne,  40  S. 
W.  Rep.  780  (Ark.,  1897).  A  judg- 
ment creditor  of  a  corporation  may 
cause  its  treasuiy  stock  to  be  sold 
on  execution.  Coit  v.  Freed,  49  Pac. 
Rep.  533  (Utah,  1897).  Stock  is  per- 
sonal property,  and  may  be  seized 
under  an  execution.  Brock  v.  Rut- 
tan,  1  C.  P.  (Can.)  218  (1851). 

2  Princeton  Bank  v.  Crozer,  22  N. 
J.  L*  383  (1850),  where  no  notice  was 
given,  but  the  stock  was  merely  men- 
tioned in  the  inventory  returned  by 
the  sheriff.  Oral  notice  by  the  sher- 
iff to  the  corporation  that  stock  has 
been  attached  is  insufficient.  Moore 
V.  Marshalltown,  etc.  Co.,  81  Iowa,  45 
(1890).  75  N.  W.  Rep  952  (Wis.  1898). 

*  Titcomb  v.  Union  M.  &  F.  Ins. 
Co.,  8  Mass.  326  (1811),  and  Howe  v. 
Starkweather,  17  Mass.  240  (1821), 
where  the  sale  was  made  after  the 


867 


§  483.]  ATTACHMENT   AND    EXECUTION.  [CH.  XXVII. 

sheriff  gives  the  proper  instruments  of  title  to  the  purchaser, 
and  until  then  the  corporation  is  not  obliged  to  recognize  the 
latter  as  having  any  rights.^  A  court  of  equity  will  not  com- 
pel a  corporation  to  allow  a  transfer  of  stock  by  a  purchaser 
at  an  execution  sale,  where  the  price  paid  at  such  sale  is  so 
small  as  to  shock  the  conscience  of  the  court.^  A  person  who 
buys  stock  at  an  execution  sale  thereof  and  takes  the  sheriff's 
certificate  therefor  and  presents  the  same  to  a  corporation  for 
tratisfer,  thereby  becomes  a  stockholder  to  the  extent  at  least 
of  being  liable  for  any  unpaid  part  of  the  subscription  price  of 
such  stock.' 

§  483.  AttacJiment  of  stoclc  as  aUoived  ly  the  statutes  of  (lie 
various  states. —  The  states  of  the  Union  have  quite  generally 
passed  statutes  providing  for  the  attachment  of  a  debtor's  prop- 
erty where  the  debtor  is  a  non-resident  or  is  guilty  of  a  fraud, 
or  where  other  facts  exist  which  bring  the  case  within  the  at- 
tachment statute.  Inasmuch  as  in  modern  times  a  large  part 
of  the  property  of  individuals  consists  of  shares  of  stock  in  cor- 
porations, the  attachment  statutes  generally  provide  specially 
for  the  attachment  of  stock,  an  J  give  specific  directions  in  ref- 
erence to  the  steps  necessary  to  be  taken  in  making  such  at- 
tachment.^   In  JN'ew  York  an  attachment  of  stock  is  provided 

proper  day,  without  a  re-advertise-  is  liable  on  unpaid  subscription  the 

ment,  and  consequently  was  held  to  same  as  his  debtor  was. 
be  void.    The  court  said:  "The  sale        *  Where  both  an  attachment  and 

of  them  upon  execution  not  being  an  execution  on  stock  are  allowed  by 

justifiable  at  common  law,  the  stat-  statute,  the  former  is  said  to  be  the 

ute  must  be  strictly  pursued  to  give  preferable  remedy  when  the  corpo- 

any  property  to  the  purchaser."    An  ration  has  a  lien  on  the  stock  or  there 

execution  sale  of  stock  at  nine  o'clock  is  a  claimant  to  the  stock.    Weaver 

at  night,  when  few  are  present,  is  v.  Huntingdon,  etc.  Coal  Co.,  50  Pa. 

void.    I\rcNaughton    v.  McLean,  73  St.  314  (1865);  Lex  v.  Potters,  16  Pa. 

Mich.  250  (1889).  St.  295  (1851).     An    attachment    of 

1  Morgan  V.  Thames  Bank,  14  Conn,  stock  covers  the  dividends  also. 
99  (1840).  Upon  vacating  the  attachment  dam- 

2  See  §§  489,  850,  fn/ra.  ages  maybe  recovered.    Jacobus  v. 

3  Basting  v.  Northern  Trust  Co.,  61  Llonongahela  Nat.  Bank,  35  Fed.  Rep. 
Minn.  307  (1895).  And  is  also  liable  395  (1888).  A  decrease  in  the  value 
on  the  statutory  liability  attaching  of  the  stock,  while  subject  to  attach- 
to  such  stock-  Oswald  v.  Minneapo-  ment,  does  not  render  the  sureties 
lis  Times  Co.,  65  Minn.  249  (1896).  A  on  the  undertaking  liable  therefor, 
dictum  in  Sturges  v.  Stetson,  1  Biss.  Miller  v.  Ferry,  50  Hun,  256  (1888). 
216  (1858);  S.  C,  23  Fed.  Cas.  311,  says  An  attachment  bond  should  not  be 
that  the  .purchaser  at  execution  sale  increased  merely  because  the  price 

868 


€H.  XXVII.] 


ATTACHMEXT   AXD    EXECUTION. 


[§  483. 


for;  but  an  execution  without  a  previous  attachment  is  not 
allowed.^  It  has  been  held  that  shares  of  stock  may  be  attached 
under  the  general  provisions  of  an  attachment  law  which  does 
not  specify  shares  of  stock  as  being  subject  to  an  attachment.^ 
The  formalities  prescribed  by  the  statute  must  be  complied 
with  fully,  as  in  the  case  of  a  levy  of  execution  upon  stock.^   It 

Gratt.  (Ya.)  502  (1877),  where  stock 
was  held  to  be  included  under  the 
word  "estate,"  and  the  procedure 
prescribed  for  garnishment  was  fol- 
lowed and  upheld.  So  also  Curtis  v. 
Steever,  36  N.  J.  L.  304  (1873),  where 
an  attachment  of  stock  was  upheld 
though  the  statute  merely  allowed 
attachment  of  "rights  and  credits." 
In  Haley  v.  Reid,  16  Ga.  437  (1854), 
however,  an  attachment  of  stock 
was  not  allowed  where  the  statute 
allowed  levy  "  upon  the  estate  both 
real  and  personal."  See  also  Mer- 
chants' Mut.  Ins.  Co.  V.  Brower,  38 
Tex.  230  (1873).  It  has  been  held  that 
there  can  be  no  attachment  of  stock 
under  a  statute  which  allows  an  at- 
tachment of  "  real  and  personal  prop- 
erty." Foster  v.  Potter,  37  Mo.  525 
(1866).  Shares  of  stock  are  "  personal 
property  "  subject  to  attachment,  al- 
though the  statutes  provide  only  for 
levy  of  execution  upon  them.  Union 
Nat.  Bank  v.  Byram,  131  111.  92  (1889). 
The  ordinary  attaclunent  statute  au- 
thorizing the  attachment  of  shares 
of  stock  is  not  applicable  to  shares  of 
stock  in  a  club  organized  for  lawful 
sporting  purposes  and  being  moi'e  of 
the  nature  of  a  statutory  joint-stock 
association  than  a  corporation.  Lyon 
V.  Denison,  80  Mich.  371  (1890). 

3  Stamford  Bank  v.  Ferris,  17  Conn. 
259  (1845),  where  the  attachment 
failed  because  the  sheriff  did  not 
leave  a  copy  of  the  writ,  duly  in- 
dorsed, with  the  corporation,  even 
though  the  cashier  of  the  corpora- 
tion was  absent.  A  transfer  subse- 
quent to  such  irregular  attachment 
is  valid  and  carries  title.  See  also 
§  484,  infra. 


of  the  stock  may  go  down.  Miller  v. 
Ferry,  50  Hun,  256  (1888).  In  New 
York  shares  cannot  be  levied  on  im- 
der  execution,  although  they  may  be 
attached  and  subsequently  sold  by 
■execution  in  that  suit.  Code  Civ. 
Pro.,  §§  647,  649-651.  See  4  Wait's 
Pr.  36,  j.  Stock  toay  be  reached, 
however,  by  supplementaiy  proceed- 
ings. See,  in  general,  Barnes  v.  Mor- 
gan, 3  Hun,  703  (1875));  O'Brien  v. 
Mechanics',  etc.  Ins.  Co.,  56  N.  Y.  52 
(1874);  Smoot  V.  Heim,  1  N.  Y.  Civ. 
Pro.  208  (1881) — cases  arising  under 
the  attachment  law.  The  statute 
may  provide  for  the  sale  of  stock  at 
the  place  where  the  corporation  ex- 
ists, in  case  the  taxes  upon  such  stock 
are  not  paid.  A  purchaser  of  the 
outstanding  certificates  after  the  as- 
sessment has  been  made  takes  sub- 
ject to  the  tax  and  tax  seizure. 
Parker  v.  Sun  Ins.  Co.,  42  La.  Ann. 
1172  (1890).  Under  the  English  stat- 
utes, 1  &  2  Vict.,  c.  110,  §  14,  and  3  & 
4  Vict.,  c.  82,  §  1,  stock  in  any  public 
company  standing  in  the  name  of 
any  person  against  whom  judgment 
shall  have  been  obtained,  whether 
"  in  his  OT5T1  right  or  in  the  name  of 
any  person  in  trust  for  him,"  may 
be  charged  by  a  judge's  order  with 
the  payment  of  the  amount  of  the 
judgment.  The  statute -says:  "The 
interest  of  any  judgment  debtor, 
whether  in  possession,  remainder,  or 
reversion,  and  whether  vested  or 
contingent,"  may  be  so  reached. 
Cragg  V.  Taylor,  L.  R  2  Exch.  131 
<1867);  Baker  v.  Tynte,  2  EL  &  E.  897 
<1860). 

'  See  preceding  note.  * 

'  Chesapeake,  etc.  R.  R.  v.  Paine,  29 


809 


§  484.]  ATTACHMENT   AKD    EXECUTION.  [CH.  X5VII. 

tas  been  held  that  a  state  statute  authorizing  the  levy  of  an- 
attachment  upon  stock  does  not  apply  to  stock  in  a  national 
bank,  and  that  it  is  doubtful  whether  a  state  statute  may  legally 
authorize  an  attachment  on  national-bank  stock.^  There  ar& 
many  decisions,  however,  where  such  an  attachment  or  execu- 
tion has  been  levied.^ 

§  484.  Levy  of  attachment  or  execution  upon  stock  held  in 
pledge  or  l)y  trustee,  and  on.  stoclc  which  the  debtor  has  fraudu- 
lently transferred  aivay. —  Whether  or  not  an  execution  can  b& 
levied  on  stock  which  has  been  fraudulently  transferred  away 
by  the  judgment  debtor  depends  upon  the  wording  of  the  stat- 
ute allowing  the  levy  of  execution  on  stock.  If  it  allows  a  levy 
on  all  interests  of  the  debtor,  whether  legal  or  equitable,  then 
the  fraudulent  transfer  may  be  disregarded  and  the  stock  seized 
as  though  still  standing  in  the  name  of  the  judgment  debtor.' 
If,  however,  the  statute  does  not  expressly  provide  for  a  levy  on 
an  equitable  interest,  the  judgment  creditor's  remedy  is  not  an 
execution,  but  a  suit  in  equity  to  set  aside  the  fraudulent  trans- 
fer.* So  also  an  attachment  may  be  levied  on  shares  of  stock 
when  the  words  of  the  attachment  statute  are  so  broad  as  to 
render  subject  to  the  attachment  all  equitable  interests  of  the 
debtor  whose  stock  is  attached.  Thus,  it  has  been  held  in  Ohio,^ 
New  Jersey,  and  Ehode  Island  that,  although  the  debtor  has 
transferred  his  stock  for  the  purpose  of  defrauding  his  creditors, 
an  attachment  of  the  stock  will  lie  nevertheless.^    The  judg- 

1  Sowles  V.  National  U.  Bank,  82  ment  is  good,  even  thoiigh  the  corpo- 
Fed.  Rep.  696  (1897).  An  attachment  ration  deny  that  the  defendant  owns- 
in  accordance  with  a  state  statute  any  stock  therein;  Curtis  v.  Steever,. 
may  be  levied  upon  stock  in  a  na-  36  N.  J.  L.  Rep.  804  (1873),  the  court 
tional  bank.  Oldacre  v.  Butler,  23  saying  that  the  attachment  is  good, 
S.  Rep.  3  (Ala.,  1898).  since  the  fraudulent  transfer  is  void ;. 

2  See  cases  in  notes  to  §  487,  infra,  and  holding  that  the  transferee  may 

3  Scott  V.  Indianapolis  Wagon  bring  a  suit  for  trespass,  and  that 
"Works,  48  Ind.  75  (1874).  Cf.  State  v.  the  attaching  creditor  may  then  set 
Warren  Foundry,  etc.  Co.,  32  N.  J.  L.  up  the  fraud  in  defense;  Massey  v. 
439  (1868).  Yancey,  90  Va.  636  (1894).     Cf.  State 

4  Van  Norman  v.  Jackson  Circuit  v.  Warren  Foundry,  etc.  Co.,  32  N.  J. 
Judge,  45  Mich.  204  (1881).  See  §  481,  L.  439  (1868).  See  also,  §  482,  supra, 
supra.  Where  an  insolvent  debtor  transfers 

5  Beckwith  v.  Burrough,  14  R.  I.  366  all  his  property  to  trustees  for  the 
(1884);  New  London  Nat.  Bank  v.  benefit  of  creditors,  excepting  certain 
Lake  Shore,  etc.  R'y,  21  Ohio  St.  221  shares  of  stock  which  are  transferred 
(1871),  holding  also  that  the  attach-  to  them  in  trust  in  order  not  to  ren- 

870 


OH.  XXVII.] 


ATTACHMENT   AND   EXECTJTIOX. 


[§  ^84. 


ment  creditor  may  also  institute  a  suit  in  equity  to  set  aside  the 
fraudulent  transfer  and  subject  the  stock  to  the  payment  of  the 
judgment.^  Under  the  usual  statutes,  an  attachment  or  execu- 
tion may  be  levied  upon  stock,  Tvhere  the  stock  has  been  mort- 
gaged or  pledged,  and  the  attaching  creditor  is  seeking  to  reach 
merely  the  equity  of  redemption.^  An  attachment  is  not  the 
best  remedy  for  a  pledgee  who  wishes  to  subject  the  pledge  to 
the  payment  of  the  debt.^  His  better  remedy  is  by  foreclosure 
or  a  public  sale  on  notice  to  the  pledgor.  Dividends  on  the 
stock  which  is  attached  follow  the  stock,  and  are  covered  by 
the  attachment.*  An  attachment  on  stock  standing  on  the 
books  in  a  debtor's  name  is  not  good  where  it  is  shown  that  in 
fact  he  held  the  stock  as  trustee  for  another.*  Where  the  stock 
has  been  transferred  on  the  corporate  books  to  the  pledgee, 


der  the  trustees  liable  thereon,  and 
ten  years  later  a  creditor  levies  on 
the  equity  in  such  stock,  causes  its 
sale,  and  purchases  it  at  a  nominal 
figure,  equity  will  not  compel  the 
corporation  to  transfer  the  stock  to 
such  creditor  on  the  coi^porate  books. 
Randolph  v.  Quidnick  Co.,  135  U.  S. 
457  (1S90). 

1  See  §  481,  supra. 

2  Foster  v.  Potter,  37  Mo.  525  (1866); 
Manns  v.  Brookville  Nat.  Bank,  78 
Ind.  243  (1881);  Edwards  v.  Beugnot, 
7  Cal.  162  (1857),  holding  also  that,  if 
the  mortgage  is  recorded  on  the  cor- 
porate books,  notice  must  be  served 
on  the  mortgagee  also;  and  that, 
where  one  attachment  was  served  on 
the  corporation  and  another  on  the 
mortgagee,  the  latter  attachment 
prevails  and  takes  the  surplus;  Nor- 
ton V.  Norton,  43  Ohio  St.  509  (1885), 
holding  that  the  court  will  order  the 
stock  to  be  sold,  the  pledgee  paid,  and 
the  balance  held  under  the  attach- 
ment. See  also  Vantine  v.  Morse,  104 
Mass.  275  (1870) ;  New  England  M.  Ins. 
Co.  V.  Chandler,  16  Mass.  275  (1820). 
Cf.  Cooke  V,  Sallett,  119  Mass.  148 
(1875);  Kyle  v.  Montgomery,  73  Ga. 
337  (1884);  Seeligsonu  Brown,  61  Tex. 
114  (1884).    Nabring  v.  Bank  of  Mo- 


bile, 58  Ala.  204  (1877),  holds  that 
an  execution  cannot  reach  an  equity 
of  redemption.  See  also  §  491,  infra. 
If  a  purchaser  at  an  execution  sale 
purchases  merely  a  nominal  equity 
of  redemption  and  pays  a  fair  price 
for  the  same,  the  court  will  order  the 
corporation  to  allow  a  transfer  to 
him  in  order  that  he  may  so  redeem. 
See  dictiun  in  Randolph  v.  Quidnick 
Co.,  135  U.  S.  457  (1890).  As  to  mar- 
shaling the  assets,  see  §  473,  sujjra. 
As  to  the  remedy  of  garnishment  to 
reach  stock  or  the  equity  of  redemp- 
tion in  pledged  stock,  see  §  491,  infra, 

3  Lee  V.  Citizens'  Nat.  Bank,  2  Cin. 
Super.  Ct.  (Ohio),  298,  312  (1872).  See 
§  476,  supra. 

*  Jacobus  V.  Monongahela,  etc. 
Bank,  35  Fed,  Rep.  395  (1888);  Moore 
V.  Gennett,  2  Tenn.  Ch.  375  (1875). 

s  Mowry  v.  Hawkins,  57  Conn.  453 
(1889).  Execution  or  garnisliee  pro- 
cess cannot  be  levied  on  stock  held 
by  an  individual  as  tnistee,  where 
the  debt  is  his  individual  debt.  Nor 
can  it  be  levied  on  the  dividend  from 
such  stock.  So  held  where  stock  was 
owned  by  a  city  in  trust  for  the  citi- 
zens. Hitchcock  V.  Galveston  Wharf 
Co.,  50  Fed.  Rep.  263  (1890> 


§  485.] 


ATTACHMENT   AND    EXECUTION. 


[CH.  XXVII. 


and  afterwards  the  debt  has  been  paid,  the  stock  cannot  be 
attached  for  debts  due  from  the  pledgee.^  There  can  be  no  at- 
tachment of  stock  as  the  property  of  an  unregistered  holder 
through  whom  title  has  passed  to  another.^  In  Missouri  an 
attachment  may  be  levied  on  stock  standing  in  the  name  of 
another.*  But  in  Michigan  an  attachment  cannot  be  levied  on 
stock  standing  in  a  person's  name  as  trustee,  for  a  debt  due 
from  the  real  owner  of  the  stock,  even  though  the  trustee  is 
merely  an  agent.  Attachment  reaches  a  legal  interest  only.* 
A  wife  who  allows  stock  bought  with  her  money  to  stand  for 
several  years  in  her  husband's  name,  in  order  to  give  him  credit, 
is  estopped  to  assert  her  ownership  as  against  his  creditor^.^ 
Where  the  corporation  has  a  lien  on  stock  for  debts  due  from 
the  stockholder  to  the  corporation,  it  may  enforce  the  lien  by 
an  attachment.® 

§  4:85.  Stoclc  can  de  attaclied  only  in  the  state  creating  tlie  cor- 
poration.—  Shares  of  stock  in  a  corporation  are  personal  prop- 
erty, whose  location  is  in  the  state  where  the  corporation  is 
created.'^    It  is  true  that,  for  purposes  of  taxation  and  some 


1  Beckwith  v.  Burroughs,  13  R.  L 
294  (1884). 

2  Thus,  where'  A.,  the  registered 
stockholder,  transfers  the  certificate 
of  stock  to  B.,  and  B.  transfers  it 
to  C,  and  C.  obtains  registry  directly 
from  A.,  there  can  be  no  attachment 
of  the  stock  against  B.  Lippitt  v. 
American,  etc.  Co.,  15  R.  I.  141  (1885). 
An  attachment  against  a  person  who 
held  the  certificate  of  stock,  but  was 
not  a  stockholder  of  record,  was  u]> 
held  in  Matusevitz  v.  Citizens',  etc. 
Co.,  48  Pac.  Rep.  552  (Mont.,  1897). 

3  Tufts  V.  Volkening,  122  Mo.  631 
(1894). 

*  Gypsum,  etc.  Co.  v.  Kent  Circuit 
Judge,  97  Mich.  631  (1893).  Where 
the  real  owner  of  stock  turns  it  over 
to  his  agent  or  trustee  to  look  after 
the  stock,  the  stock  itself  being  put 
in  the  name  of  the  agent  or  trustee 
as  absolute  owner,  and  the  stock  is 
subsequenty  attached  for  a  debt  of 
sucli  agent  or  trustee  and  sold  there- 
under, the  real  owner  of  the  stock 


may  hold  the  agent  or  trustee  liable 
for  the  value  of  the  stock.  Long 
delay  is  not  a  bar  so  long  as  the  agent 
does  not  deny  the  agency  or  trustee- 
ship. Hovey  v.  Bradbury,  112  Cal. 
620  (1896).  Where  a  judgment  cred- 
itor levies  on  stock  standing  in  the 
name  of  a  "  dmnmy  "  for  the  debtor, 
the  corporation  may  practically  inter- 
plead between  such  creditor  and  an 
alleged  bona  fide  holder  of  the  stock. 
A  court  of  equity  has  jurisdiction  in 
order  to  decree  a  transfer.  Spencer 
V.  James,  10  Tex.  Civ.  App.  327  (1895). 

5  Hamlen  v.  Bennett,  52  N.  J.  Eq. 
70  (1893). 

^Sabin  v.  Bank  of  Woodstock,  21 
Vt.  353  (1849). 

■^  Evans  v.  Monot,  4  Jones,  Eq. 
(N.  C.)  227  (1858).  The  fact  that  cer- 
tificates of  stock  in  foreign  corpora- 
tions are  in  New  York  state  does  not 
render  them  subject  to  taxation  in 
that  state.  Re  James,  144  N.  Y.  6 
(1894).  As  to  the  validity  of  a  trans- 
fer of  stock  made  in  one  state,  while 


872 


CH.  XXVII.] 


ATTACHMKifT  AND   EXECUTION". 


[§  4S5. 


other  similar  purposes,  stock  follows  the  domicile  of  its  owner; 
but,  considered  as  property  separated  from  its  owner,  stock  is 
in  existence  only  in  the  state  of  the  corporation.  All  attach- 
ment statutes  provide  for  the  attachment  of  a  non-resident 
debtor's  property  in  the  state,  and  generally,  under  such  stat- 
utes, the  stock  owned  by  a  non-resident  in  a  corporation  created 
by  the  state  wherein  the  suit  is  brought  may  be  attached  and 
jurisdiction  be  thereby  acquired  to  the  extent  of  the  value  of 
the  stock  attached.^  But  a  defendant's  shares  of  stock  cannot 
be  reached  by  levy  of  attachment  in  an  action  commenced  out- 
side of  the  state  wherein  the  corporation  is  incorporated.  For 
purposes  of  attachment,  stock  is  located  where  the  corporation 
is  incorporated  and  nowhere  else.'^  The  shares  owned  by  a  non- 
resident defendant  in  the  stock  of  a  foreign  corporation  cannot 


the  corporation  issuing  the  stock  is 
located  in  another  state,  the  rule  ap- 
plies "  that  personal  property  has  no 
locality,  and  that  the  law  of  the  own- 
er's domicile  is  to  determine  the  va- 
lidity of  the  transfer  or  alienation 
thereof,  unless  there  is  some  positive 
or  customaiy  law  of  the  country 
where  it  is  found  to  the  contrary." 
Black  V.  Zacharie,  3  How.  483,  514 
(1844),  an  attachment  case.  See  also 
§  12,  supra.  A  suit  by  the  purchaser 
of  a  certificate  of  stock  to  compel  de- 
livery may  be  brought  at  the  place 
where  the  certificate  is,  and  absent 
defendants  may  be  served  by  publi- 
cation. Ryan  v.  Seaboard,  etc.  R.  R., 
83  Fed.  Rep.  889  (1897).  See  also  §  361, 
supra. 

.  1  New  London  Nat.  Bank  v.  Lake 
Shore,  etc.  R'y,210hio  St.  221  (1871); 
Chesapeake,  etc.  R.  R.  v.  Paine,  29 
Gratt.  (Va.)  502  (1877).  An  attach- 
ment and  sale  of  stock  made  on  a 
debt  not  justly  due  will  be  enjoined 
as  regards  registry  on  the  corporate 
books,  and  the  sale  declared  void. 
Seligman  v.  St.  Louis,  etc.  R.  R.,  22 
Fed.  Rep.  39  (1884). 

2  Quoted  and  approved  in  Smith  v. 
Downey,  8  Ind.  App.  179  (1893),  where 
it  was  held  that  a  citizen  of  Indiana 


could  not  attach  certificates  of  stock 
owned  by  a  non-resident  in  a  Colo- 
rado corporation,  even  though  the 
certificates  of  stock  were  in  the  state 
of  Indiana,  and  within  the  jm-isdic- 
tion  of  the  court.  Ireland  v.  Globe, 
etc.  Co.,  32  AtL  Rep.  921  (R.  L,  1895); 
Winslow  V.  Fletcher,  53  Conn.  390 
(1886),  the  court  saying  tliat  "  stock 
in  a  corporation,  for  the  purposes  of 
an  attachment,  has  its  situs  where 
the  corporation  is  located."  Under 
the  statutes  of  Tennessee,  however, 
requiring  a  foreign  corporation  doing 
business  in  that  state  to  file  its  articles 
of  incorporation  with  the  secretary 
of  state,  it  was  held  that  it  became  a 
domestic  corporation  sufiiciently  to 
authorize  an  attachment  of  stock  in 
that  state.  Young  v.  South  Tredegar 
Iron.  Co.,  85  Tenn.  189  (1886).  Bonds 
which  are  pledged  by  a  non-resident 
cannot  be  attached  by  serving  a  no- 
tice on  the  pledgee.  Tweedy  v.  Bogar  t, 
50  Conn.  419  (1888).  Certificates  of 
stock  represent  the  stock  itself  suffi- 
ciently to  sustain  a  suit  commenced 
by  substituted  service  for  the  pm-pose 
of  establisliing  a  lien,  even  though  tlie 
corporation  is  located  in  another  state. 
Merritt  v.  American  Steel  Barge  Co., 
79  Fed.  Rep.  228  (1897). 


873 


§  485.] 


ATTACHMENT   AND    EXECUTION. 


[CH.  XXVII. 


be  reached  and  levied  upon  by  virtue  of  an  attachment,  although 
officers  of  the  corporation  are  within  the  state  engaged  in  carry- 
ing on  the  corporate  business.^  Nor  can  such  an  attachment  be 
levied  although  the  foreign  corporation  has  a  branch  registry 
office  in  the  state  where  the  attachment  is  levied,  and  although 
the  certificates  of  stock  are  also  in  such  state.^  Certificates  of 
stock  are  not  the  stock  itself  —  they  are  but  evidence  of  the 
stock ;  and  the  stock  itself  cannot  be  attached  by  a  levy  of  attach- 
ment on  the  certificate.'  As  was  well  said  by  the  supreme  court 
of  Pennsylvania,  stock  cannot  be  attached  by  attaching  the  cer- 
tificate, any  more  than  lands  situated  in  another  state  can  be 
attached  by  an  attachment  in  Pennsylvania  levied  on  the  title 
deeds  to  such  land.*   Even  though  certificates  of  stock  in  a  West 

attachment  was  levied  in  Pennsyl- 
vania on  certificates  of  stock  in  Penn- 
sylvania, but  belonging  to  a  citizen 
of  Mississippi,  and  the  corporation 
was  created  by  the  laws  of  Mississippi. 
Certificates  of  stock  in  a  corporation 
cannot  be  attached  anywhere  except 
in  the  state  where  the  corporation  is 
incorporated.  Armour,  etc.  Co.  v.  St. 
Louis  Nat.  Bank,  113  Mo.  12  (1892). 

3  Christmas  v.  Biddle,  13  Pa.  St.  223 
(1850);  Moore  v.  Gennett,  2  Tenn.  Ch. 
375  (1875). 

4  Christmas  v.  Biddle,  13  Pa.  St.  323 
(1850).  In  Winslow  u  Fletcher,  53 
Conn.  390  (1886),  the  court  well  says: 
"  While  the  certificates  are  in  them- 
selves valuable  for  some  purposes, 
and  to  some  extent  may  prox^erly  be 
regarded  as  property,  yet  they  are 
distinct  from  the  holder's  interest  in 
the  capital  stock  of  the  corporation, 
and  are  not  goods  and  effects  within 
the  meaning  of  the  statute  relating 
to  foreign  attachment.  They  are  no 
more  subject  to  an  attachment  or  a 
trustee  process  than  a  promissory 
note.  The  debt  is  subject  to  attach- 
ment, but  the  note  itself,  which  is 
simply  evidence  of  the  debt,  is  not. 
So  with  stock.  That  may  be  attached, 
but  the  certificates  cannot  be."  Ne- 
gotiable bonds,  held  oiitside  of  the 
jui-isdiction  of  the  court,  cannot  be 


1  Plimpton  V.  Bigelow,  93  N.  Y.  592 
(1883),  reversing  29  Hun,  362,  the 
court  saying:  "  We  do  not  doubt  that 
shares,  for  the  purpose  of  attachment 
proceedings,  may  be  deemed  to  be 
in  the  possession  of  the  corporation 
which  issued  them,  but  only  at  the 
place  where  the  corporation  by  in- 
tendment of  law  always  remains,  to 
wit,  in  the  state  or  country  of  its 
creation.  .  .  .  Manifestly  the  res  can- 
not be  within  the  jurisdiction,  as  a 
mere  consequence  of  a  legislative 
declaration,  when  the  actual  locality 
is  undeniably  elsewhere."  To  same 
effect,  Preston  v.  Pangburn,  N.  Y. 
L.  J.,  March  7,  1892.  Garnishment 
proceedings  also  will  not  apply.  The 
defendant  may  move  to  have  the  at- 
tachment levy  set  aside.  Martin  v. 
Mobile,  etc.  R.  R,  7  Bush  (Ky.),  116 
(1870),  holds  that  a  statute  authoriz- 
ing a  foreign  corporation  to  exercise 
certain  powers  does  not  make  it  a 
domestic  corporation.  Certificates  of 
stock  in  a  corporation  of  anotlier 
state  cannot  be  subjected  to  the 
payment  of  the  stockholders'  debts, 
either  by  attachment  or  a  bill  in 
equity.  Morton  v.  Grafflin,  68  Md.  545 
(1888).  46  S.  W.  Rep.  677  (Ky.  1898). 

zciiristmas  v.  Biddle,  13  Pa.  St.  223 
(1850),  approved  in  Childs  v.  Digby, 
24  Pa.  St.  23  (1854).    In  this  case  the 


874 


CH.  XXriI.]  ATTACHMENT   AND   EXECUTION.  [§  iSG. 

Yirginia  corporation  are  within  the  state  of  Massachusetts,  yet 
a  citizen  of  Massachusetts  cannot  attach  the  same  in  a  suit  in 
Massachusetts  against  a  citizen  of  California,  the  owner  of  such 
certificates  of  stock.* 

§  486.  Bights  of  an  unregistered  transferee  of  a  certificate 
of  stocTc  as  against  an  attachment  or  execution  levied  on  that 
stoclc. —  The  most  difficult  and  unsettled  question  connected 
with  an  attachment  or  execution  levied  on  stock  is  the  question 
of  how  far  a  purchaser  of  the  certificate  of  stock  from  the 
stockholder  and  debtor  is  protected  in  his  ownership  where 
such  purchaser  does  not  have  his  transfer  registered  on  the  cor- 
porate books  before  the  attachment  or  execution  is  levied.  The 
question  is  especially  important,  since  it  affects  the  rights  of  a 
'bonaflde  purchaser  of  stock  in  the  open  market,  and  constitutes 
one  of  the  greatest  dangers  incurred  in  the  purchase  of  certifi- 
cates of  stock.  It  has  been  held  that  if  a  stockholder  whose 
stock  has  been  already  attached  or  sold  on  execution  sells  his 
certificate  of  stock  after  the  levy  of  such  attachment  or  execu- 
tion, the  vendee  or  transferee  buys  subject  to  such  levy,  even 
though  he  had  no  knowledge  of  it.  The  stock,  in  contempla- 
tion of  law,  has  already  been  seized  by  the  levy,  and  the  pur- 
chaser is  bound  to  take  notice  of  that  fact.^  The  only  means 
of  avoiding  this  danger  in  the  purchase  of  stoct  is  by  an  inquiry 
at  the  office  of  the  corporation  at  the  time  of  making  the 
purchase. 

A  different  question,  however,  presents  itself  when  the  stock- 
holder against  whose  stock  an  attachment  or  execution  is  levied 
has  already  and  before  such  levy  scld  and  transferred  his  cer- 
tificate of  stock,  but  that  transfer  has  not  been  registered  on 
the  corporate  books.     The  courts  of.  the  different  states  are  in 

attached  by  serving  tlie  attacliment  2  Young  v.  South  Tredegar  Iron  Co., 
on  the  coi'poration  which  issued  the  85  Tenn.  189(1886);  Chesapeake,  etc. 
bonds.  Von  Hesse  v.  Mackaye,  55  R.  R.  v.  Paine,  29  Gratt.  (Va.)  503 
Hun,  365  (1890);  aff'd,  121  N.  Y.  691  (1877);  Shenandoah  Valley  R.  R.-^. 
An  attacliment  cannot  be  levied  on  Griffith,  76  Va.  913  (1882).  Cf.  Dud- 
bonds  in  a  foreign  corporation,  the  ley  v.  Gould,  6  Hun,  97  (1875).  Tlie 
bonds  not  being  in  the  state.  Von  sheriff  need  not  indorse  on  his  levy 
Hesse  v.  Mackaye,  55  Hun,  365  (1890);  a  description  of  the  stocks.  A  sub- 
afi'd,  121  N.  Y.  69-4.  See  also  Tweedy  sequent  assignment  is  not  prior  in 
V.  Bogart,  56  Conn.  419  (1888).  right.    Re  Braden's  Estate,  165  Pa. 

1  Pinney  v.  Nevills,  86  Fed.  Rep.  97  St.  184  (1895). 
(1898). 

875 


§  487.]  ATTACHMENT  AXD   EXECUTION.  [CH.  XXVII. 

irreconcilable  conflict  on  this  question  of  whether  the  unregis- 
tered transferee  is  protected  in  his  purchase.  The  better  rule, 
and  the  rule  which  ultimately  will  prevail,  is  that  an  unre- 
corded transfer  of  stock  is  in  this  respect  like  an  unrecorded 
deed  of  land,  and  gives  good  title  as  against  subsequent  attach- 
ments or  executions,  even  though  the  latter  are  levied  in  igno- 
rance of  the  unrecorded  transfer  or  deed. 

§  487.  In  New  Yorh,  Pennsylvania,  New  Jersey,  MicMgan, 
Minnesota,  Missouri,  Tennessee,  KentiicJcy,  Louisiana,  Missis- 
sippi, Texas,  Washington,  and  in  the  federal  courts  passing 
iipon  the  transfer  of  national-hank  stock,  it  is  held  that  hy  the 
common  law  the  unregistered  transferee  of  a  certificate  of  stock 
is  protected  as  against  all  suhsequent  attachments  or  executions 
levied  on  that  stock. —  The  decided  weight  of  authority  holds 
that  he  who  purchases  for  a  valuable  consideration  a  certificate 
of  stock  is  protected  in  his  ownership  of  the  stock,  and  is  not 
affected  by  a  subsequent  attachment  or  execution  levied  on 
such  stock  for  the  debts  of  the  registered  stockholder,  even 
though  such  purchaser  has  neglected  to  have  his  transfer  reg- 
istered on  the  corporate  books,  thereby  allowing  his  transferrer 
to  appear  to  be  the  owner  of  the  stock  upcp.  which  the  attach- 
ment or  execution  is  levied.  Such  is  the  rule  prevailing  in  the 
federal  courts  and  in  the  courts  of  the  above-named  states.* 

1  A^eiv  Yorh:  The  case  of  Smith  v.  and  causes  a  sale  to  be  made  to  de- 

Americair  Coal  Co.,  7  Lans.  317  (1873),  prive   the   latter    of   his   stock,   he 

fully  discusses  and  sustains  this  rule,  may    hold    the    corporation    liable. 

See  also  De  Comeau  v.  Guild  Farm  Robinson  v.  New  Berne  Nat.  Bank, 

Oil  Co.,  3  Daly,  218  (1870),  where  the  95  N.  Y.  637  (1884);  Sims  v.  Bonner, 

court  says  that  the  sheriff,  "  by  the  16  N.  Y.  Supp.  801  (1891).    See  also, 

levy  of  such  an  attachment,  could  in  general,  Dunn  v.  Star  F.  Ins.  Co., 

not  acquire  any  better  or  greater  19  N.  Y.  Week.  Dig.  531  (1884).    An 

title   to  the   stock   than    a   person  assignment  of  the  certificates  to  a 

would  have  done  who  had  purchased  ■  receiver  in  anotlier  state  takes  prece- 

this  stock  of  the  person  in  whose  dence  of  an  attachment  against  the 

name  it  stood  on  the  day  of  the  levy  stock  at  the  home  of  the  corporation, 

of  the  attachment.    And  the  princi-  The  court  will  direct  the  corporation 

pie  is  well  settled  in  this  state  that  to  register  the  transfer.     Weller  v. 

such  a  purchaser  would  not  acquire  Pace  Tobacco  Co.,  5  R'y  &  Corp.  L.  J. 

any  interest  whatever  as  against  a  5  (N.  Y.  Sup.  Ct.,  1888). 

prior  purchaser  for  value."    Whei-e  Pennsylvania:  Eby  u  Guest,  94  Pa. 

the  corporation    causes    an  attach-  St.  160  (1880);    Finney's  Appeal,  59 

ment  to  be  levied  on  the  stock  of  a  Pa.  St.  398  (1868);  Commonwealth  v. 

stockliolder  of  record  who  has  sold  Watmough,  6  Whart.  117  (1840),  hold- 

his  certificates   to   another    person  ing  also  that  the  sheriff  need  not 

876 


CH.  XXVII.] 


ATTACHMENT   AND   EXECUTION. 


[§  4S7. 


Frequently  this  rule  is  justified  and  explained  on  the  ground 
that  registry  and  by-laws  or  charter  provisions  requiring  reg- 
istry of  transfers  on  the  corporate  books  are  not  for  the  pur- 
pose of  notifying  the  creditors  of  the  old  registered  stockholder 


levy  on  stock  which  he  knows  has 
already  been  sold  to  an  unregistered 
transferee.  "When  the  transferrer 
notifies  the  corporation  of  the  trans- 
fer, a  subsequent  attachment  of  the 
stock  as  the  property  of  the  transfer- 
rer is  not  good,  although  the  transfer 
was  not  recorded  in  the  corporate 
book.  Telford,  etc.  Co.  v.  Gerhab,  13 
AtL  Eep.  90  (Pa.,  1888);  U.  S.  v. 
Vaughan,  3  Binn.  394  (1811),  where 
the  unregistered  transferees  resided 
in  foreign  lands. 

New  Jersey:  Broadway  Bank  v.  Mc- 
Elrath,  13  N.  J.  Eq.  24  (1860);  aff'd, 
sub  nom.  Hunterdon  County  Bank 
V.  Nassau  Bank,  17  N.  J.  Eq.  496 
(1864);  Rogers  v.  New  Jersey  Ins.  Co., 
8  N.  J.  Eq.  167  (1849).  In  this  last 
case  the  purchaser  at  the  execution 
sale  knew  that  the  certificates  had 
been  sold. 

Michigan:  May  v.  Thoman,  75  N.  W. 
Rep.  129  (Mich.,  1898). 

Minnesota:  A  sale  and  transfer  of 
corporate  stock,  although  not  en- 
tered on  the  books  of  the  corporation, 
takes  precedence  of  a  subsequent  at- 
tachment in  behalf  of  a  creditor  of 
the  vendor.  Lund  v.  "Wheaton,  etc. 
Co.,  50  Minn.  36  (1892).  The  court  so 
held  although  the  statute  prescribed 
that  no  transfer  should  be  valid  ex- 
cept as  between  the  parties  until 
such  transfer  was  registered  on  the 
corporate  books. 

Missouri:  McClintock  v.  Central 
Bank,  120  Mo.  127  (1894).  In  this  case 
it  was  held  that  an  attaching  creditor 
cannot  complain  that  the  pledgee, 
who  has  prior  rights,  settled  with  the 
pledgor  after  the  attachment  and 
then  sold  the  stock.  The  creditor 
must  offer  to  redeem  or  have  a  sale 
subject  to  the  pledge.    The  pledgee 


of  the  certificates  was  the  corpora- 
tion itself.  In  Merchants'  Nat.  Bank 
V.  Richards,  6  Mo.  App.  454  (1879),  ap- 
plication had  been  made  to  the  cor- 
poration for  registry,  but  had  been 
refused. 

Kentucky:  See  the  emphatic  dic- 
tum in  Thvirber  v.  Crump,  86  Ky.  408 
(1887). 

Louisiana:  Pitot  v.  Johnson,  38  La. 
Ann.  1286  (1881);  Smith  v.  Crescent 
City,  etc.  Co.,  30  La.  Ann.  1378  (1878); 
Crescent  City,  etc.  Co.  v.  Deblieux,  40 
La.  Ann.  155  (1888).  The  attaching 
creditor  of  one  who  appears  on  the 
books  of  a  corporation  as  registered 
owner  of  shares  of  its  stock  cannot 
hold  the  stock  against  the  true  equi- 
table owner,  who  holds  the  certificate 
of  stock  duly  indorsed  by  the  debtor. 
Kern  v.  Day,  45  La.  Ann.  71  (1893). 
Cf.  Bidstrup  v.  Thompson,  45  Fed. 
Rep.  452  (1891),  where  the  pledge  had 
not  been  completed.  See  also  Freid- 
lander  v.  Slaughter  House  Co.,  31  La. 
Ann.  523  (1879),  holding  that  a  com- 
pany is  not  liable  to  the  purchaser  of 
the  certificate  where  such  pui-chaser 
did  not  make  any  claim  or  give  notice 
of  his  rights  until  after  the  execution 
sale  and  until  after  the  coiu-t  had 
ordered  the  corporation  to  make  a 
transfer  to  the  purchaser  at  the  exe- 
cution sale. 

Mississippi:  Goyer,  etc.  Co.  v.  "VVild- 
berger,  71  Miss.  438  (1894);  Clark  v. 
German  Security  Bank,  61  Miss.  611 
(1884),  the  com-t  holding  that  the 
holder  of  the  certificate  was  pro- 
tected although  the  statute  pre- 
scribed that  stock  should  be  trans- 
ferable "  only  "  on  the  books  of  the 
company. 

Tennessee:  Comick  v.  Richards,  3 
Lea,  1  (1879).     Contra,  State  Ins.  Co. 


877 


§  487.] 


ATTACHMENT  AND   EXECUTION. 


[CH.  XXVII. 


that  lie  no  longer  owns  the  stock,  nor  for  any  similar  purpose, 
but  are  for  the  purpose  of  protecting  the  corporation  in  paying 
dividends  and  allowing  the  stock  to  be  voted.  Another  and 
stronger  reason  is  that  the  law  favors  the  transfer  of  stock  cer- 


V.  Sax,  2  Tenn.  Ch.  507  (1875).  A  sub- 
scriber's subscription  may  be  at- 
tached before  a  certificate  of  stock  is 
issued  and  delivered,  and  such  attacla- 
ment  has  precedence  over  a  mortgage, 
even  though  the  mortgage  is  recorded 
with  the  register  of  deeds,  no  notice, 
however,  of  such  mortgage  being 
given  to  the  corporation  itself. 
Gates  V.  Baxter,  97  Tenn.  443  (1896). 

Texas:  Seeligson  v.  Brown,  61  Tex. 
114  (1884).  A  pledgee  of  the  certifi- 
cates is  protected  against  a  subse- 
quent attachment,  although  the 
transfer  is  not  recorded.  Tombler 
V.  Palestine  Ice  Co.,  43  S.  W.  Rep.  896 
(Tex.,  1897). 

Washington:  Port  Townsend  Nat. 
Bank  v.  Port  Townsend,  etc.  Co.,  6 
Wash.  597  (1893),  the  coui-t  so  hold- 
iug  although  the  statute  prescribed 
that  the  transfer  should  not  be  good 
except  as  between  the  parties  im^til 
the  same  was  registered  on  the  cor- 
porate books. 

Federal  Courts:  In  regard  to  stock 
in  national  banks,  the  federal  courts 
have  firmly  established  the  rvile  that 
the  unregistered  transferee  is  pro- 
tected against  a  subsequent  attach- 
ment or  execution.  Continental  Nat. 
Bank  v.  Eliot  Nat.  Bank,  7  Fed.  Rep. 
369  (1881),  with  a  full  review  of  the 
authorities  by  Judge  Lowell ;  Hazard 
V.  National  Excli.  Bank,  26  Fed.  Rep. 
94  (1886);  Scott  v.  Pequonnock  Nat. 
Bank,  15  Fed.  Rep.  494  (1883),  where 
the  rule  was  applied,  although  the 
national  bank  was  in  Connecticut,  a 
state  which  strongly  favors  the  op- 
posite rula  The  court  said:  "The 
tendency  of  modern  decisions  is  to 
regard  certificates  of  stock  attached 
to  an  executed  blank  assignment  and 
power   to  transfer    as    approximat- 


ing to  negotiable  securities,  though 
neither  in  form  or  character  nego- 
tiable." The  statute  of  the  state 
wherein  the  national  bank  is  located 
cannot  change  or  interfere  with  this 
rule  in  regard  to  certificates  of  stock 
in  national  banks.  Doty  v.  First  Nat. 
Bank,  3  N.  Dak.  9  (1892),  where  the 
court  refused  to  give  precedence  to 
an  attachment  as  against  a  prior  un- 
registered transfer  of  a  certificate  of 
stock  in  a  national  bank.  Even  in 
Massachusetts,  where  the  courts  up- 
held at  common  law  an  opposite  rule, 
the  state  courts  will  follow  the  above 
rule  when  the  stock  of  a  national  bank 
is  in  question.  Sibley  v.  Quinsiga- 
mond  Nat.  Bank,  133  Mass.  515  (1883), 
The  decision  in  State  v.  Jeff ersonville 
Nat.  Bank,  89  Ind.  302  (1883),  is  erro- 
neous in  various  ways.  See  Indiana, 
§  490,  infra,  p.  884.  Williams  v.  Me- 
chanics' Bank,  5  Blatchf.  59  (1862); 
S.  C,  29  Fed.  Cas.  1376,  is  not  in  ac- 
cord with  the  other  federal  decisions. 
Where  an  attachment  is  levied  on 
stock  which  has  already  been  pledged, 
the  attachment  reaches  only  the 
equitable  title  of  the  debtor  pledgor. 
Black  V.  Zacharie,  3  How.  483,  511 
(1844).  A  decision  of  a  state  court 
that  a  donatio  causa  mortis  of  bank 
stock  was  effective,  although  the 
donor  merely  delivered  the  certifi- 
cates of  stock  without  transferring 
the  same  on  the  back  thereof,  does  not 
raise  a  federal  question,  even  though 
the  stock  was  national-bank  stock. 
Leyson  v.  Davis,  170  U.  S.  36  (1898). 

In  England  the  creditor  of  a  regis- 
tered stockholder  cannot  subject  the 
stock  to  his  debt  as  against  the  owner 
of  the  certificates,  who  has  allowed 
the  stock  to  remain  in  the  name  of 
the  debtor  in  order  to  qualify  the 


CH.  XXYII.] 


ATTACHMENT  AND   EXECUTION. 


U  ^S8. 


tificates,  and  cliscountenances,  so  far  as  possible,  all  secret  dan- 
gers incurred  in  their  purchase. 

By  protecting  the  purchaser  against  subsequent  attachments 
and  executions,  the  law  removes  one  of  the  chief  risks  incurred 
by  holding  certificates  of  stock  without  a  registry,  and  thereby 
increases  the  safety  and  desirability  of  such  investments. 

§  488.  In  Illinois,  Maine,  Maryland,  Massachusetts,  Neiv 
HampsMre,  Rhode  Island,  Virginia,  West  Virginia,  Wiscon- 
sin, and  Wyoming,  the  statutes  have  i)r escribed  that  an  un- 
registered i^urchaser  or  pledgee  of  certificates  of  stock  shall  he 
protected  against  subsequent  attachments  or  executions  levied 
upon  that  stoch} — The  courts  of  Massachusetts  were  among 
the  first  to  lay  down  the  rule  which  places  an  attachment  or 


latter  as  a  director.  Cooper  v.  Griffin, 
[1892]  1  Q.  B.  740. 

In  Canada  the  unregistered  trans- 
feree is  protected.  Morton  v.  Cowan, 
25  Ont.  Rep.  (Can.)  529  (1894).  An 
execution  has  priority  over  an  unre- 
corded transfer.  Brock  v.  Ruttan,  1 
C.  P.  (Can.)  218  (1851).  An  execution 
levied  on  stock  after  a  transfer  has 
been  entered  on  the  stock  ledger  is 
not  good,  even  though  the  transferee 
has  not  yet  accepted  the  stock. 
Woodruff  V.  Harris,  11  Q.  B.  Rep. 
(Can.)  490  (1854). 

For  an  able  article  by  L  H.  Hat- 
field in  favor  of  the  doctrine  that  the 
attaching  creditor  should  be  pre- 
ferred to  the  unrecorded  transferee, 
see  30  Am.  Law  Rev.,  p.  223.  See  also 
the  detailed  review  of  the  cases  on 
this  subject  in  an  article  written  by 
Chief  Justice  CorUss  of  North  Da- 
kota in  1  Am.  &  Eng.  Corp.  Cas. 
(N.  S.),  at  the  end  of  the  volume. 
See  also  the  table  prepared  by  Lowell, 
Stimson,  &  Lowell  for  the  Boston 
Clearing  House  Association. 

^Illinoh:  Laws  1883,  page  110.  The 
case  of  People's  Bank  v.  Gridley,  91 
IlL  457  (1879),  had  previously  held  that 
at  common  law  an  attachment  or 
execution  sale  took  precedence  over 
a  prior  unregistered  sale  or  pledge 
of  certificates  of  stock.    The  statute 


was  passed  in  1883  to  change  this 
rule.  50  N.  E.  Rep.  1087. 

Maine:  Laws  of  1897,  chapter  298. 

Maryland:  In  Maryland,  by  chapter 
287,  Laws  of  188S,  a  pledgee  or  pur- 
chaser of  certificates  of  stock  is  pro- 
tected without  any  transfer  on  the 
books  of  the  corporation  as  against 
subsequent  attachments  or  execu- 
tions. Morton  v.  Grafiiia,  68  Md.  545 
(1888),  holding  also  that  the  attachiug 
creditor  cannot  reach  the  equity  by  a 
bill  in  equity  to  obtain  a  receiver  and 
to  compel  the  pledgee  to  resort  to 
other  security  first.  In  a  transaction 
arising  prior  to  the  above  statute,  the 
pledgee  made  no  effort  to  protect 
himself,  and  gave  no  notice  of  the 
pledge  until  seven  years  after  the 
stock  had  been  sold  out  on  execution- 
It  was  held  that  the  corporation  was 
not  liable  to  him.  Noble  v.  Tm-ner, 
69  Md.  519  (1888). 

Massachusetts:  Chapter  229,  Laws 
1884.    See  also  cases  in  notes  below. 

Neio  Hampshire:  Chapter  16,  Laws 
1887.  The  case  of  Pinkerton  v.  Man- 
chester, etc.  R.  R.,  42  N.  H.  424  (1861), 
held  that  an  attachment  took  prece 
dence  over  a  prior  unregistered  trans- 
fer of  stock,  except  that  the  purchaser 
of  the  certificate  of  stock  was  to  have  a 
reasonable  time  to  apply  for  registiy. 
The  case  of  Buttrick  v.  Nashua,  etc 


879 


4S0.] 


ATTACHMENT   AND    EXECUTION. 


[CH.  XXVII. 


execution  levy  ahead  of  an  unregistered  purchaser  of  the  cer- 
tificate of  stocli.  The  evil  consequences  of  the  rule,  however, 
seem  to  have  become  apparent  to  her  courts,  and  it  was  held 
that,  although  the  unregistered  purchaser  was  not  protected 
where  the  charter  of  the  corporation  required  registry,^  yet, 
where  only  the  by-laws  or  the  certificate  itself  created  such 
a  requirement,  the  unregistered  purchaser  was  protected  and 
took  precedence  over  the  attachment  or  execution.^  The  legis- 
lature of  Massachusetts  seems  to  have  had  a  still  clearer  per- 
ception of  the  demands  of  trade  and  of  the  interests  of  those 
who  invest  in  certificates  of  stock,  and  in  1884  enacted  a  stat- 
ute which  will  probably  be  construed  to  make  an  attachment 
or  execution  levied  on  stock  no  more  effective  than  in  J^ew 
York  state.'  Similar  statutory  changes  have  been  made  in  the 
other  states  mentioned  above. 

§  489.  Eights  and  duties  of  the  corimration  in  such  cases. — 
The  corporation  has  a  dangerous  duty  to  perform  when  stock 


R.  R,  62  N.  H.  413  (1883),  held  that  the 
company  itself  might  attach,  even 
though  one  of  its  directors  knew  of 
a  prior  unregistered  sale  of  the  cer- 
tificates of  stock ;  such  director,  how- 
ever, having  taken  no  part  in  levying 
the  attachment.  The  case  of  Scrip- 
ture V.  Francestown  Soapstone  Co., 
50  N.  H.  571  (1871),  held  that  the  at- 
tachment was  not  good  as  against  a 
prior  purchaser  of  the  certificate  of 
stock  from  the  president  himself,  in- 
asmuch as  the  president's  knowledge 
of  the  sale  was  sufficient  notice  to 
the  coi-poration  itself.  See  also  Stowe 
V.  Meserve,  13  N.  H.  46  (1812). 

Rhode  Island:  Cliapter  G90,  Laws 
1888. 

Virginia:  Code  of  1887,  sec.  1133. 

West  Virginia:  Section  37,  chapter 
53,  Code  1887.  In  West  Virginia  an 
assignment  of  the  certificates  cuts 
off  subsequent  attachments  obtained 
by  creditors  of  the  transferrer.  Don- 
nally  v.  Hearndon,  41  W.  Va.  519 
(1895). 

Wisconsin:  Annotated  Statutes, 
chapter   85,    section    1751,    thereby 


changing  the  law  as  laid  down  in  lie 
Murphy,  51  Wis.  519  (1881). 

Wyoming:  Rev.  Stat.,  §  2779,  pro- 
tecting pledgees  against  executions. 

1  Fisher  v.  Essex  Bank,  71  Mass. 
373  (1855);  Newell  v.  Williston,  138 
Mass.  240  (1885);  Central  Nat.  Bank 
V.  Williston,  138  Mass.  244  (1885); 
Boyd  u.Rockport,  etc.  Mills,  73  Mass. 
406  (1856);  Blanchard  v.  Dedham  Gas 
Light  Co.,  78  Mass.  213  (1858). 

2  Sargent  v.  Essex,  etc.  R'y,  26  Mass. 
202  (1829);  Boston,  etc.  Assoc,  v.  Cory, 
129  Mass.  435  (1830),  holding  that  a 
delay  of  four  years  was  not  fatal  to 
the  unregistered  purchaser's  rights. 

3  "The  delivery  of  a  stock  certificate 
of  a  corporation  to  a  bona  fide  pur- 
chaser or  pledgee  for  value,  together 
with  a  written  transfer  of  the  same, 
or  a  written  power  of  attorney  to 
sell,  assign,  and  transfer  the  same, 
signed  by  the  owner  of  the  certifi- 
cate, shall  be  a  sufficient  delivery  to 
transfer  the  title  as  against  all  par- 
ties; but  no  such  transfer  shall  affect 
the  right  of  the  coi-poration  to  pay 
any  dividend  due  upon  the  stock,  or 


8S0 


CF.  XXTII.] 


ATTACHMENT   AND    EXECUTION. 


[§  ^S9. 


has  been  attacliecl  or  sold  under  levy  of  execution,  and  a  regis- 
try is  requested  by  the  purchaser  at  such  sale  or  by  a  purchaser 
of  the  outstanding  certificate  of  stock.  If  the  purchaser  of  the 
certificate  demands  registry  before  registry  has  been  allowed 
to  the  purchaser  at  the  execution  sale,  and  if  the  former  claims 
to  have  purchased  the  certificate  before  the  attachment  or  exe- 
cution was  levied,  the  right  of  the  corporation  is  clear.  It  may 
refuse  to  allow  the  registry,  and  when  sued  therefor  may  in- 
terplead and  compel  the  claimants  to  litigate  the  matter  be- 
tween themselves.^  But  where  the  corporation  does  not  know 
whether  the  outstanding  certificate  is  in  the  hands  of  a  pur- 
chaser or  not,  and  a  registry  is  demanded  by  a  purchaser  at  an 
execution  sale,  the  rights  and  duties  of  the  corporation  are  not 
so  clear.  It  has  two  courses  open  to  it :  it  may  refuse  to  allow 
a  registry  until  compelled  to  do  so  by  a  court,  or  it  may  allow 
registry  without  being  so  compelled.  The  former  is  the  safer 
course,  since  the  corporation  will  probably  be  thereby  protected 
from  all  liability  to  a  possible  purchaser  of  the  outstanding  cer- 
tificate.'^ The  corporation,  it  seems,  is  protected  in  its  obedience 


to  treat  the  holder  of  record  as  the 
holder  in  fact,  until  such  transfer  is 
recorded  upon  the  books  of  the  cor- 
poration, or  a  new  certificate  is  issued 
to  the  person  to  whom  it  has  been 
so  transferred."  Mass.  Acts.  1884, 
ch.  229,  The  enactment  of  a  similar 
statute  is  respectfully  recommended 
to  the  states  mentioned  in  §  490,  infra. 
Since  the  first  edition  of  this  work 
was  printed,  several  states  have  en- 
acted a  statute  similar  to  this  Massa- 
chusetts statute.  It  has  been  held 
under  the  Massachusetts  statute  that 
where  a  father  delivers  stock  to  his 
son  in  order  to  qualify  the  latter  as 
director,  and  the  son  transfers  the 
certificate  back  to  his  father,  the 
creditor  of  the  son  cannot  attach 
the  stock  as  against  the  father,  al- 
though the  stock  stands  on  the  cor- 
porate books  in  the  name  of  the  son. 
Andrews  v.  Worcester,  etc.  R.  R.,  159 
Mass.  64  (1893). 

1  See  g  387,  supra.    The  proper  rem- 
edy for  the  purchaser  from  the  judg- 


ment debtor  to  pursue  under  such 
circumstances  is  to  enjoin  the  corpo- 
ration and  the  piu'chaser  at  the  exe- 
cution sale  from  registering  the  latter 
as  a  stockholder.  Smith  v.  Crescent 
City,  etc.  Co.,  30  La.  Ann.  1878  (1878). 
If  an  attachment  has  been  levied 
he  should  enjoin  that.  Cheever  v. 
Meyer,  52  Vt.  66  (1879). 

2 "Where  a  judicial  tribunal  of 
competent  jurisdiction  of  last  resort,' 
after  a  fair  contest  in  good  faith  by 
the  corporation,  orders  the  stock  to 
be  transferred  to  the  purchaser  under 
such"  seizure  and  sale,  the  corpora- 
tion cannot  be  liable  to  the  holder 
of  the  certificate  who  took  no  ^teps 
to  protect  himself."  Friedlander  v. 
Slaughter-house  Co.,  31  La.  Ann.  523 
(1879).  Where,  also,  the  tmregistered 
transferee  contested  in  the  courts  the 
right  of  the  purchaser  at  the  execu- 
tion sale,  and  was  defeated  in  the 
lower  court,  and  appealed  without 
stajdng  the  decree  below,  the  corpo- 
ration is  not  liable  for  obeying  the 


56 


881 


489.] 


ATTACHMENT   AND    EXECUTION. 


[CH.  XXVIK 


to  tlie  decree  of  a  court.^  It  is  quite  probable,  also,  that  no 
court  in  any  of  the  above-named  states  would  require  the  cor- 
poration to  issue  new  certificates  of  stock  to  a  purchaser  of 
stock  at  an  execution  sale,  unless  such  purchaser  give  to  the 
corporation  a  bond  of  indemnity,  whereby  an  unknown  pur- 
chaser of  the  outstanding  certificate  may  be  protected.^  The 
other  course  open  to  the  corporation,  that  of  allowing  a  regis- 
try by  the  purchaser  at  the  execution  sale  without  being  com- 
pelled to  do  so  by  a  court,  is  pursued  by  the  corporation  at  its 
peril.  If  it  afterwards  transpires  that  the  outstanding  certifi- 
cate had  been  purchased  before  the  attachment  or  execution 
was  levied,  the  corporation  is  liable  in  damages  to  such  pur- 
chaser for  allowing  the  registry,^  but  not  unless  such  purchaser 
gave  a  valuable  consideration  for  the  certificate  and  alleges 
that  fact  in  his  pleading.*    Until  such  purchaser  demands  a  reg- 


decree  of  the  lower  court,  although 
the  appeal  is  successful.  Chapman  v. 
New  Orleans,  etc.  Co.,  4  La.  Ann.  153 
(1849).  See  Robinson  v.  New  Berne 
Nat.  Bank,  95  N.  Y.  637  (1884). 

1  See  §§  359,  388,  swjjra. 

2  Tlie  supreme  court  of  Ohio,  in  New 
London  Nat.  Bank  v.  Lake  Shore,  etc. 
R'y,  21  Ohio  St.  221  (1871),  very  prop- 
erly and  very  distinctly  refused  to 
compel  a  registry,  although  conced- 
ing that  the  execution  purcJiaser  is 
entitled  to  dividends.  The  court  said : 
"  Can  it  be  that,  because  the  defend- 
ant refused  to  assume  the  peril  of 
deciding  between  the  contending 
claimants  by  issuing  other  certifi- 
cates for  the  same  stock  to  the 
plaintiff  upon  demand,  that  it  thereby 
became  a  wrong-doer  and  converted 
the  plaintiff's  stock  to  its  own  vise, 
and  rendered  itself  liable  to  respond 
in  the  full  value  of  the  stock  to  the 
claimant  who  could  establish  his 
right  in  a  court  of  law?  The  mere 
statement  of  the  proposition  refutes 
it."  AVhere  the  attachment  is  on 
stock  that  the  plaintiff  alleges  was 
transferred  in  fraud  of  creditors, 
mandamus  will  not  lie  to  compel  the 


corporation  to  allow  a  registry  under 
the  execution  sale.  State  v.  Warren 
Foundry,  etc.  Co.,  32  N.  J.  L.  439  (1868). 
As  to  the  mode  of  pleading  that  the 
defendant  company  has  been  com- 
pelled to  transfer  the  stock  to  a 
purchaser  at  an  execution  sale,  see 
Wyoming  Fair  Assoc,  v.  Talbott,  S 
Wyo.  244  (1889). 

3  Smith  V.  American  Coal  Co.,  7 
Lans.  317  (1873).  If  the  purchaser  at 
the  execution  sale  still  has  the  cer- 
tificates, the  purchaser  of  the  old  cer- 
tificate may  bring  suit  against  him 
and  the  corporation  to  compel  a  re- 
transfer.  Rogers  v.  New  Jersey  Ins. 
Co.,  8  N.  J.  Eq.  167  (1849).  In  a  suit 
by  a  purchaser  at  an  execution  sale 
to  cut  off  the  rights  of  a  judgment 
debtor  the  corporation  is  an  indis- 
pensable party,  since  it  alone  can 
allow  a  transfer  on  the  books.  St. 
Louis,  etc.  R'y  v.  Wilson,  114  U.  S. 
60  (1885).  See  also  the  case  of  Hazard 
V.  National  Exch.  Bank,  26  Fed.  Rep. 
94  (1886),  holding  the  corporation  lia- 
ble in  damages  to  the  purchaser  of 
the  outstanding  certificate. 

*  Littell  V.  Scranton,  etc.  Co.,  43  Pa. 
St  500  (1862). 


883 


CH, 


XXVII.] 


ATTACHMENT   AND   EXECUTION. 


[§  490. 


istry  from  the  corporation,  it  may  safely  pay  dividends  to  the 
execution  purchaser.^  These  rules  are  complicated,  but  they 
protect  all  parties.  If  the  statute  prescribes  that  the  corporation 
shall  register  as  a  stockholder  the  purchaser  at  the  execution 
sale,  the  writ  of  mandamus  will  lie  to  compel  the  corporation 
to  make  such  registry ;  ^  but  the  relator  must  allege  that  he  pre- 
sented to  the  corporation  the  required  papers,  and  was  refused 
such  registry.^  A  court  of  equity  will  not  compel  a  corpora- 
tion to  allow  a  transfer  of  stock  by  a  purchaser  at  an  execution 
sale  where  the  price  paid  at  such  sale  is  so  small  as  to  shock 
the  conscience  of  the  court.* 

§  490.  In  Alabama^  California,  Colorado,  Connecticut,  In- 
diana, lotva,  Neiv  Mexico,  and  Vermont,  tlie  usual  statutes 
requiring  transfers  of  stock  to  de  registered  on  the  corjiorate 
hooTis  are  so  construed  as  to  give  an  attachment  or  execution 
iwecedence  over  a  j)rior  unregistered  sale  or  pledge  of  the  cer- 
tificates of  stock  —  Notice  of  transfer  tvithout  registry.^ — The 
courts  of  these  states  all  hold  that,  where  a  statute  exists 


1  Smith  V.  American  Coal  Co.,  7 
Lans.  317  (1873). 

2  Bailey  v.  Strohecker,  38  Ga.  259 
(1868).    See  also  §  390,  supra. 

3  Lippitt  V.  American  Wood  Paper 
Co.,  14  R  I.  301  (1883). 

*  Mississippi,  etc.  R.  R.  v.  Cromwell, 
91  U.  S.  613  (1875);  Randolph  v.  Quid- 
nick  Co.,  135  U.  S.  457  (1890).  Inad- 
equacy of  price  is  not  sufficient  cause 
for  setting  aside  an  execution  sale  of 
stock.  Conway  v.  John,  14  Colo.  30 
(1890). 

^Alabama:  By  statute  the  attach- 
ment takes  precedence  over  a  prior 
transfer  of  the  certificates,  where 
such  transfer  is  not  recorded  on  the 
corporate  books  within  fifteen  days. 
Berney  Nat.  Bank  v.  Pinckard,  87 
Ala.  577  (1888);  Dittey  v.  First  Nat. 
Bank,  113  Ala.  391  (1896).  Under  this 
statute  the  unregistered  pledgee  is 
not  protected  against  attachments, 
but  notice  to  the  corporate  officer  of 
the  attachment  may  be  oral.  Abels 
V.  Planters',  etc.  Co.,  93  Ala.  383 
(1890).    In  Fisher  v.  Jones,  83  Ala. 


117  (1886),  the  court  held  that  the 
imregistered  pledgee  was  protected 
where  there  was  an  entry  made  on 
the  stub  of  the  certificate  book  of 
the  stock  being  held  in  pledge.  Under 
this  statute  the  attaching  creditor 
takes  title  in  preference  to  an  un- 
registered transferee,  and  the  same 
rule  prevails  where  the  registered 
holder  is  a  mere  "dummy"  for  an- 
other. White  V.  Rankin,  90  Ala.  541 
(1890).  The  statute  in  Alabama  pre- 
scribes that,  unless  a  transfer  is  made 
on  the  corporate  books  within  fifteen 
days  .after  the  transfer,  it  "  shall  be 
void  as  to  bona  fide  creditors  or  sub- 
sequent piu'chasers  without  notice." 
California:  In  this  state  the  stat- 
ute prescribes  that  "no  transfer  of 
stock  shall  be  vahd  for  any  pui-pose 
whatever  .  •  .  until  it  sliall  be  en- 
tered "  on  the  corporate  books.  Under 
this  statute  an  attachment  takes  pre- 
cedence over  an  unrecorded  prior 
transfer  of  a  certificate  of  stock.  See 
Westou  V.  Bear  River,  etc.  Co.,  5  Cal. 
186  (1855);  Farmers',  etc.  Banku  Wil- 


883 


490.] 


ATTACHMENT   AND    EXECUTION. 


[CH.  XXVII. 


requiring  a  trans-ver  of  stock  to  be  registered  on  the  corporate 
books  in  order  to  be  effectual,  an  attacliment  or  execution  lev- 
ied on  stock  standing  in  the  defendant  debtor's  name  will  cut 
off  the  rights  of  a  previous  purchaser  of  the  certificate  who 

son,  58  Cal.  600  (1881);  Naglee  v.  Pa- 
cific Wharf  Co.,  20  Cal.  529  (1862). 
The  case  of  Weston  v.  Bear  River, 
etc.  Co.,  6  CaL  425  (1856),  holds  that 
one  who  purchases  stock  at  an  exe- 
cution sale,  knowing  that  a  certifi- 
cate of  stock  had  already  been  sold 
or  pledged  by  the  execution  debtor, 
cannot  claim  a  precedence  over  a 
sale  of  the  certificates.  To  same  ef- 
fect, People  V.  Elmore,  35  Cal.  653 
(1868).  If  the  unregistered  purchaser 
buys  the  judgment  obtained  under 
the  attachment,  the  latter  is  merged. 
Strout  V.  Natoma  Water,  etc.  Co.,  9 
CaL  78  (1858).  A  sale  of  stock  after 
an  attachment  suit  has  failed,  and 
before  that  decision  is  reversed,  gives 
the  purchaser  good  title.  Loveland 
V.  Alvord,  etc.  Co.,  76  Cal.  562  (1888). 
Colorado:  In  this  state  the  statute 
prescribes  that  "  no  transfer  of  stock 
shall  be  valid  for  any  purpose  what- 
ever .  .  .  unless  it  shall  have  been 
entered"  on  the  corporate  books 
within  sixty  daj^s  from  the  date  of 
such  transfer.  See  Conway  v.  John, 
14  Colo.  30  (1890),  giving  a  preference 
to  the  attachment.  Cf.  Weber  v. 
Bullock,  19  Colo.  214  (1893),  holding 
that  the  pledgee  was  protected  where 
he  had  requested  transfer  and  been 
wrongfully  refused  by  the  corpora- 
tion. See  also  Supply  Ditch  Co.  v. 
Elliott,  10  Colo.  327  (1887).  Where  a 
statute  requires  a  transfer  on  the 
books  within  sixty  days,  and  the 
transfer  is  not  made  within  those 
sixty  days,  an  attaching  creditor 
of  the  transferrer  takes  title,  even 
though  he  knew  of  the  unregistered 
transfei'.  First  Nat.  Bank,  etc.  v. 
Hastings,  7  Colo.  App.  129  (1895). 
Where  the  piu-chaser  of  a  certificate 
of  stock  files  a  bill  in  equity  to  en- 
join an  attaching    creditor   of  the 


transferee  from  selling  the  stock  on 
execution,  and  joins  the  corporation 
as  a  party  defendant,  and  in  the  suit 
the  court  decides  that  the  stock  was 
originally  legally  issued,  this  decis- 
ion is  binding,  even  though  it  was 
not  raised  by  the  pleadings.  New- 
man V.  Bullock,  23  Colo.  217  (1896). 

Connecticut:  See  Northrup  v.  Cvir- 
tis,  5  Conn.  246  (1824);  Oxford  Turnp. 
Co.  V.  Bunnel,  6  Conn.  552  (1827) ;  Rich- 
mondville  Mfg.  Co.  v.  Prall,  9  Conn. 
487  (1833);  Button  v.  Connecticut 
Bank,  13  Conn.  493  (1840),  where  the 
recording  of  an  assignment  for  the 
benefit  of  creditors  in  the  probate 
ofiice  was  held  insufficient  notice  to 
the  company  as  against  attacJiments; 
Colt  V.  Ives,  31  Conn.  25  (1862),  hold- 
ing that,  where  a  transfer  is  wrong- 
fully refused  by  the  clerk,  a  subse- 
quent attachment  does  not  take 
precedence.  The  United  States  court 
sitting  in  Connecticut  held  in  the 
case  of  New  York  Com.  Co.  v.  Fran- 
cis, 83  Fed.  Rep.  769  (1897),  where 
stock  in  a  Connecticvit  corporation 
stood  on  the  books  of  the  corpora- 
tion in  the  name  of  a  person  wlio 
was  really  but  a  nominal  holder  for 
a  copartnership,  that  an  attachment 
levied  on  the  stock  as  the  property 
of  such  nominal  holder  was  not  good 
as  against  the  real  owner.  The  court 
distinguished  such  a  case  from  a  case 
where  a  purchaser  allowed  the  stock 
to  stand  in  the  name  of  the  vendor. 
The  court  sustained  a  bill  in  equity 
on  the  part  of  the  I'eal  owner  of 
the  stock  to  enjoin  its  sale  on  execu- 
tion. 

Indiana:  In  this  state  the  statute 
prescribing  that  stock  should  be  trans- 
ferable on  tlae  corporate  books  "  and 
not  otherwise  "  was  held  to  give  pre- 
cedence to  an  attachment  as  against 


884 


en.  XXVII.] 


ATTACHMENT   AXD    EXECUTION. 


[§  ^90'. 


has  not  completed  liis  transfer  by  registry.  Even  in  tliese 
states,  however,  it  is  well  established  that,  if  the  person  who 
levies  the  attachment  or  purchases  at  the  execution  sale  has 
notice  that  the  defendant  debtor  had  transferred  his  certificate 
before  the  attachment  or  execution  was  levied,  the  purchaser 
of  the  outstanding  certificate  may  have  his  remedy.  If  the 
attaching  creditor  has  notice  before  the  attachment  is  levied, 
the  purchaser  may  obtain  a  permanent  injunction  against  the 


tmregistered  purchasers  of  certifi- 
cates of  stock.  Coleman  v.  Spencer,  5 
Blackf,  197  (1839).  In  State  v.  Jeffer- 
sonvUle  Nat.  Bank,  89  Ind.  302  (1883), 
the  court  fell  into  the  eiTor  that  there 
could  be  no  pledge  of  stock  unless 
there  was  a  transfer  to  the  pledgee  on 
the  books  of  tlie  company.  Such  of 
course  is  not  the  law.  See  §  465, 
supra.  Moreover,  the  coui-t  did  not 
consider  the  federal  decisions  on  this 
subject,  although  national-bank  stock 
was  involved.  However,  the  court 
held  that  the  pledgee  should  have 
appeared  and  set  up  his  claim. 

Iowa:  In  Iowa  the  statute  pre- 
scribes that  transfers  shall  not  be 
valid  except  as  between  the  parties 
until  a  registiy  is  had  on  the  corpo- 
rate books.  The  court  holds  that  this 
statute  gives  an  attachment  prior- 
ity over  a  prior  unregistered  sale  or 
pledge  of  the  certificates  of  stock. 
Fort  Madison  Lumber  Co.  v.  Batavian 
Bank,  71  Iowa,  270  (1887).  This  case 
came  up  again  in  1889,  when  it  ap- 
pears that  after  the  decision  of  the 
lower  court  in  favor  of  the  pledgee, 
and  before  reversal  by  the  upper 
coiirt,  the  lower  court  ordered  a  sale 
and  the  pledgee  bought  in  the  stock, 
and  afterwards  the  stock  became 
worthless.  The  court  now  holds  (77 
Iowa,  393)  that  the  pledgee  need  re- 
store only  the  stock,  although  worth- 
less. In  Commercial  Nat.  Bank  v. 
Farmers',  etc.  Bank,  82  Iowa,  192 
(1891),  the  attaching  creditor  took  no 
title  because  a  statutory  notice  as  to 
attachments  was  not  given. 


Maine:  In  this  state  the  statute  for- 
merly prescribed  that  no  title  shoiild 
pass  by  sale  of  the  certificates  except 
as  between  the  parties  untn  registry 
had  been  had  on  the  coi-porate  books. 
This  statute  was  held  to  give  prece- 
dence to  an  attachment  or  execution 
sala  Skowhegan  Bank  v.  Cutler,  49 
Me.  315  (1860);  Fiske  u  Carr,  20  Me. 
301  (1841).  A  statute  in  Maine  has 
now  changed  the  rvde.  See  §  488, 
supra. 

Neio  Mexico:  The  statute  in  this 
state  is  substantially  the  same  as  in 
California,  and  the  same  decision  is 
made  by  the  com-ts.  See  Lyndonville 
Nat.  Bank  v.  Folsom,  7  N.  M.  611  (1894). 

Vermont:  No.  103,  Laws  1884,  pro- 
vides that  notice  to  the  corporation 
of  a  transfer  shall  be  the  same  as  a 
transfer.  The  decisions  in  this  state 
are  to  the  effect  that  the  attacliiug 
creditor  takes  precedence  over  an 
unregistered  purchaser  or  pledgee  of 
the  certificates  of  stock.  Sabin  v. 
Bank  of  Woodstock,  21  Vt  3o3,  362 
(1849);  Warren  v.  Brandon  Mfg.  Co. 
(1874),  cited  in  52  Vt.  75;  Cheever  v. 
Meyer,  52  Vt.  66  (1879),  the  com-t  hold- 
ing, however,  that  the  attachment  in 
tliis  case  did  not  take  precedence,  in- 
asmuch as  the  party  knew  about  the 
prior  sale  of  the  certificates  of  stock. 

For  a  lurid  and  yet  just  invective 
against  the  decisions  of  California, 
Indiana,  Colorado,  and  other  states 
allowing  attachments  in  those  states 
to  have  priority  against  a  prior  trans- 
fer of  stock,  see  12  Ry.  &  Corp.  L.  J. 
145. 


885 


490.] 


ATTACHMENT   AND   EXECUTION 


[CH. 


XXVII. 


attachmeiit.^  Moreover,  if  the  purchaser  at  tlie  execution  sale 
has  notice,  he  may  be  prevented  from  obtaining  registry  and 
claiming  the  stock.^ 

Actual  notice  of  an  unrecorded  pledge  of  the  certificate  is 
sufficient,  even  though  the  statute  requires  a  transfer  on  the 
books  or  the  filing  of  a  power  of  attorney.  The  company  has 
actual  notice  if  its  treasurer  learns  of  it  at  a  bank.'  In  Dela- 
ware it  seems  that  mere  notice  to  the  corporation  of  a  transfer 
is  insufficient.* 

"Where  the  unregistered  transferee  of  the  certificate  of  stock 
has  notified  the  corporation  thereof  and  demanded  registry, 
which  is  not  granted,  any  attachment  or  execution  levied  sub- 
sequently to  the  improper  refusal  by  the  corporation  to  register 

1  Cheever  v.  Meyer,  52  Vt.  66  (1879) ;    is  levied  without  notice  of  an  unre- 


Scripture  v.  Francestown  Soapstone 
Co.,  50  N.  H.  571  (1871);  Black  v.  Zach- 
arie,  3  How.  483  (1845).  A  purchaser 
at  an  execution  sale  takes  no  title  as 
against  a  prior  purchaser  of  the  cer- 
tificate where  the  former  knew  of 
the  latter's  purchase  when  the  exe- 
cution sale  took  place.  Wilson  v.  St. 
Louis,  etc.  R'y,  103  Mo.  588  (1891).  If 
the  purchaser  at  the  execution  sale 
buys  with  knowledge  that  the  judg- 
ment debtor  does  not  own  the  stock 
at  the  time  of  the  sale,  he  takes  no 
title  to  the  stock.  Blakeman  v.  Puget 
Sound  Iron  Co.,  73  CaL  321  (1887). 

2  People  V.  Elmore,  35  Cal.  653  (1868) ; 
Weston  V.  Bear  River,  etc.  Co.,  6  CaL 
425  (1856);  Van  Cise  v.  Merchants' 
Nat.  Bank,  4  Dak.  485  (1887);  Farm- 
ers' Nat.  Gold  Bank  v.  Wilson,  58  CaL 
600  (1881),  holding  also  that  the  exe- 
cution sale  will  not  be  enjoined,  since 
the  claimant  may  attend  and  give  no- 
tice of  his  claim;  Newberry  v.  De- 
troit, etc.  Mfg.  Co.,  17  Mich.  141,  158 
<1868),  per  Cooley,  J.  Where  the  cor- 
poration bought  for  itself  at  the  exe- 
cution sale  and  had  notice,  it  is  liable 
in  tort  to  the  unregistered  purchaser 
of  the  old  certificates.  Bridgewater 
Iron  Co.  V.  Lissberger,  116  U.  S.  8 
(1885).  Jones  v.  Latham,  70  Ala.  164 
(1881),  holds  that,  if  the  execution 


corded  transfer,  a  subsequent  notice 
before  the  sale  to  the  purchaser  at  tlie 
sale  is  ineffectual,  and  does  not  affect 
the  latter.  Where  the  creditor  of  the 
vendor  knows  of  the  pledge  of  the  cer- 
tificates at  the  time  he  sells  the  stock 
on  execution,  he,  the  creditor,  is  not 
protected  in  such  sale.  George,  etc. 
Co.  V.  Range,  etc.  Co.,  50  Pac.  Rep.  630 
(Utah,  1897).  In  Iowa  the  attaching 
creditor  has  priority  even  though  he 
knew  at  the  time  of  his  attachment 
that  the  certificates  of  stock  had  been 
sold  by  his  debtor  and  that  notice 
thereof  had  been  given  to  the  corpo- 
ration. Ottumwa,  etc.  Co.  v.  Stod- 
ghill,  72  N.  W.  Rep.  009  (Iowa,  1897). 

3  Hotchkiss,  etc.  Co.  v.  Union  Nat. 
Bank,  68  Fed.  Rep.  76  (1895). 

*  In  Trimble  v.  Vandegrif  t,  7  Houst. 
(DeL)  451  (1887),  the  court  ordered 
stock  to  be  sold,  although  the  corpo- 
ration stated  at  the  time  of  the  at- 
tachment that  it  had  received  notice 
that  the  stock  had  already  been  sold. 
Where  a  statute  requires  a  transfer 
on  the  books  within  sixty  days,  and 
the  transfer  is  not  made  within  those 
sixty  days,  an  attaching  creditor  of 
the  transferrer  takes  title,  even 
though  he  knew  of  the  unregistered 
transfer.  First  Nat.  Bank,  etc.  v.  Hast- 
ings, 7  Colo.  App.  129  (1895). 


886 


CH.  XXVII.]  ATTACHMENT   AND    EXECUTION.  [§  490. 

does  not  take  precedence  over  such  purchaser.^  If  the  corporar 
tion  improperly  refuses  to  allow  the  transferee  of  stock  to  reg- 
ister his  transfer,  and  the  stock  is  afterwards  attached  by  a 
creditor  of  the  stockholder,  the  transferee  may,  if  he  chooses, 
hold  the  corporation  liable  in  damages  for  its  refusal  to  allow 
the  registry.2  Where  the  transferee  of  the  certificate  has  re- 
peatedly demanded  a  transfer  of  the  company,  but  been  refused, 
a  subsequent  attachment  by  a  creditor  of  the  transferrer  does 
not  take  precedence,  even  though  the  statutes  require  a  registry 
within  sixty  days.'  It  is  proper  and  legal  for  a  corporation  to 
add  to  the  name  appearing  on  the  stock  certificate  the  words 
*'as  pledgee"  or  "as  collateral  security,"  or  similar  words.* 
Where  the  unregistered  purchaser  is  cut  off  by  an  attachment, 
he  cannot  compel  a  purchaser  from  him  to  pay  for  the  stock 
which  is  made  valueless  by  the  attachment.* 

It  may  be  added,  in  regard  to  this  whole  subject,  that  the 
decisions  and  statutes  of  the  various  states  show  conclusively 
that  public  policy  and  the  legitimate  demands  of  trade  have 
gradually  caused  the  courts  and  legislatures  of  the  various  states 
to  establish  the  rule  that  a  sale  or  pledge  of  certificates  of  stock 
has  precedence  over  a  subsequent  attachment  levied  on  that 
stock  for  the  debt  of  the  vendor  or  pledgor,  and  that  the  fail- 
ure of  the  pledgee  or  purchaser  of  the  certificate  to  obtain  a 
registry  on  the  corporate  books  is  not  fatal  to  his  interest  in 

1  Merchants'  Nat.  Bank  v.  Eicliards,  tachment,  even  though  the  transferee 

6  Mo.  App.  454  (1879) ;  aff'd,  74  Mo.  77;  has  not  formally  accepted  the  stock 

Colt  V.  Ives,  31  Conn.  25  (1882) ;  State  as  required  by  statute.    Woodruff  v. 

Ins.  Co.  V.  Gennett,  2  Tenn.  Ch.  100  Harris,  11  U.  C.  (Q.  B.)  490  (1854).    A  .. 

(1874);  Plymouth  Bank  v.  Bank  of  memorandum  on  the  stock  book  that 

Norfolk,  27  Mass.  454  (1830);  Sargent  the  stock  has  been  transferred  as 

V.  Franklin  Ins.  Co.,  25  Mass.  90  (1829).  collateral  security  is  sufficient  to  give 

Contra,  Ficke   v.   Carr,  20  Me.  301  the  transfer  precedence  over  an  at- 

(1841).      But   not  if  the  transferee  taclmient.    Moore  v.  Marshalltown, 

merely  sends  a  letter  to  the  corpora-  etc.  Co.,  81  lovra,  45  (1890). 

tion  requesting  a  transfer,  without  2  Eobinson  v.  National  Bank  of  New 

sending  the  evidences  of  his  title  and  Berne,  95  N.  Y.  637  (1884).    See  also 

the  old  certificate.    Newell  v.  "Willis-  Plymouth  Bank  v.  Bank  of  Norfolk, 

ton,  138  Mass.  240  (1885).    The  corpo-  27  Mass.  454  (1830). 

ration  is  liable  in  damages  if  it  levies  «  Weber  v.  Bullock,  19  Colo.  214 

the  attachment  under  such  circimi-  (1893). 

stances.   Sargent  v.  Franklin  Ins.  Co.,  *  See  §§  247,  466,  supra. 

25  Mass.  90  (1829).    Where  registry  is  »  Eock  v.  Nichols,  85  Mass.  342  (1862). 
allowed  it  cuts  off  a  subsequent  at- 

887 


491.] 


ATTACHMENT   AND    EXECUTION. 


[CH.  XXVII. 


the  stock.  In  the  great  commercial  centers,  where  certificates 
of  stock  pass  from  hand  to  hand  and  are  pledged  to  banks  and 
financial  institutions  daily  to  secure  great  smns  of  money,  the 
necessity  of  such  a  rule  is  imperative,  and  the  fact  that  so  many 
states  have,  by  legislative  enactment,  adopted  the  New  York 
rule,  while  no  state  has  changed  from  the  New  York  rule  to 
the  New  England  rule,  demonstrates  in  itself  the  justice  and 
advisability  of  the  rule  which  prevails  in  New  York  state. 

In  Delaware,^  North  Carolina,^  and  North  Dakota,^  the  ques- 
tion of  the  precedence  of  attachments  over  unregistered  sales 
or  pledges  of  certificates  of  stock  has  arisen  only  in  an  inci- 
dental way. 

§  491.  Shares  of  stoclc  cannot  le  subjected  to  the  payment  of 
the  stoclcholder' s  debts  by  the  process  of  garnishment. — The  pro- 


"^  Delaware:  In  Trimble  v.  Vande- 
grift,  7  Houst.  451  (1887),  the  coiirt 
ordered  stock  to  be  sold  on  an  execu- 
tion, although  the  corporation  stated 
at  the  time  of  the  attachment  that  it 
had  received  notice  that  the  stock 
liad  already  been  sold.  It  appeared, 
however,  that  the  statement  made 
by  the  corporation  did  not  tell  to 
whom  the  sale  had  been  made,  and 
did  not  state  that  a  transfer  had 
been  made  on  the  corporate  books, 
and  it  appeared  also  that  the  attach- 
ing creditor  had  no  way  of  testing 
his  right  to  priority,  unless  the  sale 
was  allowed  to  take  place,  and  that 
the  sale  would  not  necessarily  cut  off 
the  right  of  the  holder  of  the  certifi- 
cate of  stock  to  litigate  the  priority 
of  his  title.  In  "Wilmington,  etc. 
Turnp.  Co.  v.  Bush,  1  Ilarr.  44  (1832), 
the  court  held  that  the  company 
could  not  defend  against  a  suit  for 
dividends  on  the  ground  that  an  at- 
tachment had  been  levied  against 
the  stock  as  the  property  of  a  former 
registered  owner  of  the  stock,  it  ap- 
pearing that  the  corporation  had  is- 
sued new  certificates  of  stock  with- 
out a  transfer  on  the  books  being 
made  by  the  former  owner  of  the 
Btock. 


^  North  Carolina:  In  Morehead  t\ 
Western  N.  C.  R.  R.,  96  N.  C.  363 
(1887),  there  is  a  dictum  to  the  eflect 
that  the  attachment  has  precedence. 
There  was  no  proof  that  the  sale  of 
the  certificate  was  prior  to  the  at- 
tachment, and  moreover  the  court 
said  that  the  purchaser  of  the  certifi- 
cate might  thereafter  litigate  his 
rights  in  another  suit,  inasmuch  as 
he  was  not  a  party  to  the  suit  at  bar. 

3  North  Dakota:  In  Re  Argus  Print- 
ing Co.,  1  N.  Dak.  434, 444  (1891),  there 
is  a  dictum  giving  priority  to  an  at- 
tachment. In  Doty  V.  First  Nat. 
Bank,  3  N.  Dak.  9  (1892),  the  court  de- 
clined to  pass  upon  the  question,  in- 
asmuch as  national-bank  stock  was 
involved,  and  the  court  followed  the 
decisions  of  the  federal  courts  on  this 
subject.  In  a  decision  in  Dakota 
Territory  the  court  held  that  where 
an  attaching  creditor  knew  of  tlie 
priority  of  the  certificates  of  stock  he 
was  not  protected.  Van  Cise  v.  Mer- 
chants' Nat.  Bank,  4  Dak.  485  (18^7). 

Arkansas:  In  Arkansas,  in  business 
corporations,  an  attachment  takes 
precedence  by  statute,  unless  a  certifi- 
cate of  transfer  is  filed  with  the  county 
clerk.  R.  S.,  ^  970;  Masury  v.  Arkan- 
sas Nat.  Bank,  87  Fed.  Rep.  381  (1898). 


CH.  XXVII.] 


ATTACHMENT   AND    EXECUTION. 


[§  491. 


cess  of  garnisliment  is  proper  only  wliere  a  debt  is  due  from  a 
third  person  to  the  defendant  debtor.  It  is  not  a  proper  rem- 
edy for  reaching  shares  of  stock  owned  by  the  debtor.^  The 
corporation  owes  the  stockholder  no  debt,  and  by  no  fiction  of 
law  can  it  be  held  to  be  a  debtor  of  the  defendant  debtor.  Con- 
sequently, where  the  sheriff  levies  an  attachment,  not  according 
to  the  procedure  governing  attachments,  but  according  to  the 
procedure  of  garnishment,  the  whole  proceeding  is  void,  and 
a  subsequent  transfer  of  the  stock  by  the  defendant  debtor  is 
valid.2 


1  Planters',  etc.  Bank  v.  Learens,  4 
Ala.  (N.  S.)  753  (1843);  Foster  v.  Pot- 
ter, 37  Mo.  525  (1866);  Ross  v.  Ross,  25 
Ga.  297  (1858),  where  the  court  said: 
"  Is  stock  in  this  railroad  such  a  debt 
('indebtedness')  of  the  railroad  to 
the  stockholder  that  a  garnishing 
creditor  of  the  stockliolder  can  enter 
up  judgment  for  it  against  the  rail- 
road? It  is  not;  it  is  a  debt  which 
the  railroad  dares  not  pay,  even  to 
the  stockholder  himself.  The  road 
may  pay  him  dividends  on  it,  but 
•that  is  all."  Stock  held  as  collateral 
is  property  subject  to  garnishment 
imder  the  statutes  of  Texas.  Smith 
V.  Traders'  Nat.  Bank,  74  Tex.  457 
(1889),  and  §  484,  note,  supra.  In  Mich- 


igan garnishee  process  lies  against 
the  pledgee  of  stock  in  behalf  of  a 
creditor  of  the  pledgor,  and  enables 
the  latter  to  reach  the  equity  in  the 
stock.  Old  Second  Nat.  Bank  v.  Wil- 
liams, 71  N.  W.  Rep.  150  (Mich.,  1897). 
2Mooar  v.  Walker,  46  Iowa,  164 
(1877).  Cf.  Chesapeake,  etc.  R.  R.  v. 
Paine,  29  Gratt.  (Va.)  502  (1877).  Bixt 
see  HaiTell  v.  Mexico  Cattle  Co.,  73 
Tex.  612  (1889).  Garnishee  process 
must  conform  to  the  statute  relative 
to  attachments,  and  if  served  on  the 
holders  of  the  certificates  instead  of 
on  the  corporation  it  is  ineflfectuaL 
Younkin  u  Collier,  47  Fed.  Rep.  571 
(1891). 


889 


CHAPTER  XXYIII. 


CONSTITUTIONALITY  OF  AMENDMENTS  TO  CHARTERS- 
OF  A  STOCKHOLDER  TO  OBJECT. 


■RIGHT 


492. 


493. 


A  corporate  charter  is  a  con- 
tract between  three  par- 
ties—  tlie  state,  the  coriDorar 
tion,  and  the  stockholders. 
The  charter  as  a  contract  be- 
tween the  corporation  and 
the  stockholders. 

494.  Charter  as  a  contract  between 
the  state  and  the  corpora- 
tion. 

495, 496.  Cliarter  as  a  contract  be- 
tween the  state  and  the 
stockholders. 

497.  Charter  amendments  imposed 

upon  the  stockholders. 

498.  Charter  amendments  offered 

to  the  stockholders. 


499.  Auxiliary  and   incidental 

amendments  are  constitu- 
tional, though  some  of  the 
stockholders  dissent. 

500.  Material  amendments  offered 

to  the  stockholders  can  be 
accepted  only  by  a  unani- 
mous vote. 
601.  Amendments  under  the  re- 
served power  of  the  state  to 
alter  or  amend  the  charter. 

502.  Dissenting  stockholder's  rem- 

edy against  an  illegal  amend- 
ment. 

503.  Assent  and  acquiescence  as  a 

bar  to  the  stockholder's  rem- 
edy. 


§  492.  A  corporate  charter  is  a  contract  hetween  three  par- 
ties—  the  state,  the  corporation,  and  the  stoclcholders. —  The 
cliarter  of  a  corporation  having  a  capital  stock  is  a  contract 
between  three  parties,  and  forms  the  basis  of  three  distinct  con- 
tracts.^ The  charter  is  a  contract  between  the  state  and  the 
corporation ;  second,  it  is  a  contract  between  the  corporation 
and  the  stockholders ;  third,  it  is  a  contract  between  the  stock- 
holders and  the  state. 

§  493.  The  charter  as  a  contract  hetiveen  the  corporation  and 
the  stoclcholders. —  That  the  charter  is  a  contract  between  the 
corporation  and  the  stockholders  has  within  the  last  fifty  years 


1  See  State  Bank  v.  Knoop,  16  How. 
369  (18D3);  Port  Edwards,  etc.  R'y  v. 
Arpin,  80  Wis.  214  (1891);  Northern 
R.  R.  V.  Miller,  10  Barb.  200  (1851); 
Cooley,  Const.  Lim.  (5th  ed.),  p.  337, 
where  the  learned  author  says: 
"Those  charters  of  incorporation, 
however,  which  are  granted,  not  as  a 
part  of  the  machinery  of  the  govern- 
ment, but  for  the  private  benefit  or 
purposes  of  the  corporators,  stand 
upon  a  different  footing,  and  are  held 


to  be  contracts  between  the  legisla- 
ture and  the  corporators,  having  for 
their  consideration  the  liabilities  and 
duties  which  the  corporators  assrnne 
by  accepting  them ;  and  the  grant  of 
the  franchise  can  no  more  be  resvmied 
by  the  legislature,  or  its  benefits  di- 
minished or  impaired  without  the 
consent  of  the  grantees,  than  any 
other  grant  of  property  or  valuable 
thing,  unless  the  right  to  do  so  is  re- 
served in  the  charter  itself." 


890 


C'd.  XXVIII.]  AMENDMENTS   TO    CHAETEES.  [§  494. 

been  firmly  established,  and  is  now  unquestioned  la"^.  The 
cases  of  Katusch  v.  Irving  ^  in  England,  and  Livingston  v.  Lynch  ^ 
in  this  country,  followed  by  a  long  line  of  supporting  decisions, 
distinctly  hold  that  the  charter  is  a  contract  prescribing  to  the 
corporation  that  it  shall  not  attempt  to  materially  change, 
extend,  alter,  or  abandon  the  particular  business  which  that 
charter  authorizes  the  corporation  to  do.  Any  attempt  of  the 
corporation  to  make  such  a  change,  extension,  alteration,  or 
abandonment  of  that  business  is  called  an  ultra  vires  act.  It  is 
an  act  which  a  single  stockholder  may  prevent  by  injunction 
or  set  aside  by  a  suit  in  equity.  This  subject,  however,  is  fully 
treated  in  another  part  of  this  work.' 

§  494.  Charter  as  a  contract  'between  the  state  and  the  corim- 
ration. —  As  between  the  state  and  the  corporation  the  corpo- 
rate charter  is  a  contract,  protected  by  that  provision  of  the 
United  States  constitution  which  prohibits  a  state  from  passing 
any  law  which  will  impair  the  obligation  of  the  contract.* 
Hence  it  is  beyond  the  power  of  the  state  to  repeal  or  mate- 
rially annul  such  a  corporate  charter,  unless  the  power  of 
amendment  and  repeal  has  been  expressly  reserved  by  the 
state,  or  unless  all  the  parties  to  the  contract  consent  to  the 
change.  All  the  franchises,  privileges,  and  express  and  implied 
poAvers  necessary  and  essential  to  carrying  out  the  corporate 
purposes  are  protected  by  this  contract.*    This  branch  of  the 

1  This  case,  decided  by  Lord  Eldon  tion  is  not  superior  to  the  powers  of 

in  1824,  is  reported  in  Gow  on  Part-  parliament,  and  consequently  the  rule 

nership,  398 ;  also  2  Cooper's  Cli-  358.  is  different.    In  that  country,  as  is 

24  Johns.  Ch.  573  (1820);  Clearwater  said  by  Lord  Coke,  "the  power  and 

V.  Meredith,  1  WalL  25  (1863).  jurisdiction  of  parliament  is  so  tran- 

3  See  ch.  XL,  infra.  scendental  and  absolute  tliat  it  can- 

*  This  rule  of  law,  first  enunciated  not  be  controlled  or  confined,  either 

in  the  case  of  Dartmouth  College  v.  for  causes  or  purposes,  within  any 

Woodward,  4  Wheat.  518  (1819),  by  bomids."    Stevens   v.  Rutland,  etc. 

Marshall,   C.  J.,  has    become    thor-  R.  R,  29  Vt.  545(1851);  Thorpe  u  Rut- 

oughly  established.    As  early  as  1806  land,  etc.  R.  R.,  27  Vt.  140  (1857); 

a  court  said:    "We  are  also  satisfied  Dartmouth  College  u  Woodward,  4 

that  the  riglits  legally  vested  in  this  Wheat.  518, 643  (1819).  Consequently, 

or  in  any  corporation  cannot  be  con-  the  English  authorities  are  of  little 

trolled  or  destroyed  by  any  subse-  use  in  this  chapter, 
quent  statute,  unless  a  power  for  that        ^  State  Bank  v.  Knoop,  16  How.  369 

pui-pose  be  reserved  to  the  legisla-  (1853);  Thorpe  v.  Rutland,  etc.  R.  R, 

ture  in  the   act  of  incorporation."  27  Vt.  140  (1857),  per  Redfield,  C.  J. 

Wales  V.  Stetson,  2  Mass.  143  (1806).  The  latter  case  discusses  the  nature 

In  England  the  unwritten  constitu-  of  the  privilege  thus  protected. 

891 


§  ^04.] 


AMENDMENTS    TO    CHAKTEKS. 


[cii.  XXVIII 


law  is  important  to  stockholders  in  cases  where  tlie  corpora- 
tion neglects  or  refuses  to  protect  itself  against  legishitive 
amendments  or  repeals  violating  the  charter  contract  between 
the  corporation  and  the  state.  In  such  cases  the  stockhoUler 
may  enjoin  or  remedy  the  wrong  by  bringing  an  action  in 
place  of  and  on  behalf  of  the  corporation,  making  it  a  ]»arly 
defendant,  together  with  the  parties  who,  under  tlie  authority 
of  the  state,  have  violated  the  contract.*  A  stockholder's  ac- 
tion to  prevent  the  payment  of  a  tax  levied  upon  the  corpora- 
tion in  violation  of  a  statutory  exemption  from  taxation  is  an 
action  of  this  character .^  Corporate  charters,  however,  are  sul> 
ject  to  constitutional  provisions  enacted  subsequently  to  the 
ffrantino;  of  the  charters,  unless  there  is  a  clear  contract  to  the 
contrary.'  Thus,  although  a  special  charter  gives  the  right  to  a 
railroad  corporation  to  consolidate  with  other  roads,  yet  a  sul> 
sequent  general  statute  may  take  away  this  power  except  so  far 
as  the  same  has  been  already  exercised.*  But  a  statute  cannot 
tm-n  over  the  property  of  an  educational  institution  to  another 
educational  institution.* 


1  Greenwood  v.  Union  Freight  R.  R., 
105  U.  S.  13  (1881).  See  also  §§  900, 
901,  infra,  on  this  subject.  The  char- 
acter of  such  an  action,  also  the  par- 
ties, pleadings,  and  rules  of  relief,  are 
explained  in  Part  IV,  infra. 

2  Dodge  V.  Woolsey,  18  How.  331 
(1855);  State  Bank  v.  Knoop,  16  How. 
309  (1853).  See  also  Wilmington  R. 
R.  V.  Reid,  13  Wall.  264  (1871);  Dela- 
ware R.  R.  Tax,  18  Wall  206  (1873). 
See  also  §  503,  infra. 

3  Pennsylvania  R.  R.  v.  Miller,  133 
U.  S.  75  (1889).  Where  by  an  amend- 
ment an  insurance  charter  is  changed 
into  a  banking  charter,  an  exemption 
from  taxation  may  be  lost  thereby 
by  reason  of  a  constitutional  pro- 
vision enacted  after  the  original  char- 
ter was  granted  but  before  the  amend- 
ment was  granted.  Memphis  City 
Bank  v.  Tennessee,  161 U.  S.  186  (1896). 

''Pearsall  v.  Great  Northern  R'y, 
161  U.  S.  646  (1896).  Mr.  Justice 
Brown's  opinion  in  this  case  contains 
a  clear  exposition  of  the  law  on  this 
subject,  and  on  the  various  and  far- 


reaching  applications  and  restrictions 
of  the  Dartmouth  College  case.  In 
this  case  the  court  spoke  of  the  Dart- 
mouth College  case  as  follows  (p.  660; : 
"  The  doctrine  of  this  case  has  been 
subjected  to  moi'c  or  less  criticism 
by  the  courts  and  the  profession,  but 
has  been  re-affirmed  and  applied  so 
often  as  to  have  become  firmly  estab- 
lished as  a  canon  of  American  juris- 
prudence." An  amendment  which 
grants  to  a  street  railway  company 
an  exclusive  right  to  certain  streets 
may  be  amended  or  repealed,  even 
though  it  was  granted  at  the  session 
of  the  legislatiu'e  which  granted  the 
original  charter.  Philadelphia,  etc. 
R'y's  Appeal,  103  Pa.  St.  123  (1883). 
The  statute  authorizing  a  corpora- 
tion to  amend  its  articles  without 
changing  substantially  its  purposes 
does  not  authorize  a  gas  and  power 
company  to  change  itself  into  a  street 
railway  company.  State  v.  Steuben- 
ville,  etc.  Co.,  44  N.  E.  Rep.  513  (Ohio, 
1896). 
5  Ohio  V.  Neff,  53  Ohio  St.  375  (1895). 


893 


CH.  XXYIII.] 


AMEXDME^'TS    TO    CHAETEES. 


[§§  495-497. 


§§  495,  49G.  Charter  as  a  contract  Ictwecn  the  state  and  the 
stockholders. —  As  between  the  state  and  the  stockholders,  also, 
the  corporate  charter  is  a  contract  protected  by  the  United 
States  constitution.*  In  consequence  thereof  the  state  cannot 
materially  amend  the  charter,  except  by  the  unanimous  con- 
sent of  the  stockholders,  unless  the  power  of  amendment  is 
expressly  reserved  by  the  state  at  the  time  of  granting  the  char- 
ter. It  is  this  contract  which  constitutes  the  subject  of  the 
present  chapter. 

§  497.  Charter  amendments  imjwsed  vpon  the  stocliholders. — 
The  right  of  the  legislature  to  amend  a  charter  against  the  will 
of  the  stockholders  has  been  the  subject  of  much  litigation. 
Such  amendments  are  clearly  divisible  into  two  kinds.  The 
first  are  those  which,  by  their  terms,  are  absolute  and  compul- 
sory, and  become  a  part  of  the  charter  irrespective  of  the  action 
or  willingness  of  the  corporation  or  the  stockholders  to  accept 
them.  Such  amendments,  excepting  those  which  are  made  as 
police  regulations,-  are  unconstitutional  and  void,  unless  made 
under  a  reserved  power  to  amend.'   Of  such  a  kind  are  amend- 


1"A  charter  of  incorporation 
pranted  by  a  state  creates  a  contract 
between  the  state  and  tlie  corporators 
wliicli  tlie  state  cjinnot  violate."  This 
ha-i  been  held  so  often  by  this  court 
that  it  is  "  a  work  of  supererogation  " 
to  rejjeat  it  Wilmington  R.  R.  v. 
Reid,  13  WalL  2G4  (1S71).  It  "has 
been  the  settled  law  of  this  court 
since  the  decision  in  the  Dartmouth 
College  case."  Delaware  R.  R.  Tax, 
18  "SValL  200  (1873).  To  the  same 
effect,  see  Zabriskie  v.  Hackensack, 
etc  R,  R,  18  N.  J.  Eq.  178  (1SG7);  Lo- 
throp  V.  Stedman,  -42  Conn.  583  (1875); 
Stevens  v.  Rutland,  etc.  R,  R,  29  Vt 
545  (1851).  "An  act  granting  corpo- 
rate privileges  to  a  body  of  men  is, 
when  accepted,  a  contract  between 
the  state  and  the  corporators.  ...  It 
is  sustained  by  everything  that  we 
are  bound  to  regard  as  authority," — 
by  tlie  courts,  by  the  opinion  of  the 
legal  profession,  and  by  the  acqui- 
escence of  the  people.  Erie,  etc.  R.  R. 
V.  Casey,  26  Pa.  St  287  (185G),  per 


Jeremiah  Black,  J.  See  also  Sink- 
ing Fund  Cases,  99  U.  S.  700  (1878). 
"  That  an  act  of  incorporation  is  a 
contract  between  the  state  and  the 
stockhoMers  is  held  for  settled  law 
by  the  federal  courts  and  by  every 
state  court  in  tlie  Union.  All  the 
cases  on  the  subject  are  saturated 
with  this  doctrine.  It  is  sustained 
not  by  a  current  but  by  a  torrent  of 
authorities.  No  judge  who  has  a 
decent  respect  for  the  principle  of 
stare  decisis — that  great  principle 
which  is  the  sheet-anchor  of  our  ju- 
risprudence— can  deny  that  it  is  im- 
jnovably  established."  "  If  anytliing 
is  settled  it  is  this  rule  of  construc- 
tion that  a  corporation  takes  noth- 
ing by  its  charter  except  what  is 
plainly,  expressly,  and  unequivocally 
granted."  Per  Black,  J.,  Bank  of 
Pennsylvania  v.  Commonwealth,  19 
Pa.  St  144  (1852). 

2See§  901,  infra. 

'Such  ."s  an  amendment  changing 
the  route  and  terminus.    Ames  «. 


893 


§  497.] 


AMENDMENTS    TO    CHARTERS. 


[cn.  XXVIII, 


ments  repealing  an  exemption  of  stockholders  troin  taxation.* 
So,  also,  a  statute  passed  subsequently  to  the  granting  uf  u 
charter,  and  increasing  the  liability  of  a  stockholder  on  liis 
stock  for  the  debts  already  incurred,  is  unconstitutional  and 
void  unless  the  legislature  has  reserved  the  right  to  alter  or 
amend  the  charter,^     Under  such  a  reservation  the  statute  is 


Lake  Superior,  etc.  R.  R.,  21  31  inn. 
241  (1875).  Amendment  under  re- 
served right  cannot  aflect  rights  of 
previous  creditors  against  the  corpo- 
ration. Bank  of  Old  Dominion  v. 
McVeigh,  20  Gratt.  457  (1871).  A  cor- 
porate charter  riglit  to  take  a  certain 
rate  of  interest  is  a  contract  and  is 
protected  against  subsequent  legisla- 
tion. Ilazen  v.  Union  Bank,  1  Sneed 
(Tenn.),  115  (1853).  See  also  dictum 
in  Pliiladelphia.  etc.  R'y's  Appeal,  102 
Pa.  St.  123  (1883),  that  an  amendment 
to  a  charter  which  enlarges  it  with- 
out imposing  any  now  or  additional 
burden  upon  it  is  a  mere  license  and 
may  bo  revoked,  citing  Jolinson  v. 
Crow,  87  Pa.  St.  184  (1878);  Clirist 
Church  V.  Philadelphia  County,  24 
How.  300  (1860).  The  legislature  may 
subsequently  authorize  the  sale  of  the 
corporate  franchises,  etc.,  to  pay  debts. 
Louisville,  etc.  Co.  v.  Ballard,  2  Mete. 
(Ky.)  165  (1859). 

The  case  of  Cross  v.  Peach  Bottom 
R'y.  90  Pa.  St.  392  (1879),  holds  that 
"the  legislative  reservation  is  in  the 
nature  of  a  police  power,  designed 
for  the  protection  of  the  public  wel- 
fare; and  where  such  protection  be- 
comes necessary,  the  law-making 
power  may  act  without  consulting 
either  the  interests  or  will  of  the 
company;  and  in  such  case  it  may 
well  be  that  not  only  the  company 
but  its  stockholders  must  submit. 
.  .  .  The  reservation  .  .  .  Avas  only 
intended  to  enable  the  legislature  to 
act  without  the  consent  and  against 
the  will  of  the  corporation."  Under 
its  reserved  power  to  amend,  the 
legislature  may  require  several  rail- 
roads to  acquiie,  build  to,  and  use  a 


894 


union  depot.  Worcester  v.  Norwich, 
etc.  R.  R,,  109  Mass.  lOJ  (1571). 

'Thus,  a  statute  authorizing  the 
taxation  of  st<x:k  which  by  the  cor- 
porate charter  is  exempt  is  uuoou- 
stitutional.  Gordon  v.  Appeal  Tax 
Court,  3  How.  133  (1845);  Farrington 
V.  Teune.sseo,  95  U.  S.  G79  (l."577).  An 
exemption  from  taxation  which  is  a 
gift  may  bo  rei>ealed.  rhi!adfli)liia 
V.  Pennsylvania  Hospital.  134  Px  St. 
171  (1890).    See  §  568,  in/rcu 

2  It  certainly  is  as  regards  corporate 
debts  already  incurred.  Common- 
wealth V.  Cochituato  Bank,  85  Mass. 
42  (1801);  Wheeler  v.  PVoutier  Bank, 
23  Mo.  308  (1843).  And  lias  l^en  helJ 
to  be  so  as  regards  future  cor^xjrate 
debts.  Ireland  c.  Palestine,  etc.  Co., 
19  Ohio  St.  369  (1«69).  Contra,  Stan- 
ley v.  Stanley,  26  Me.  191  (1840);  Coflin 
V.  Rich,  45  Me.  507  (1858);  Shufeldt  v. 
Carver,  8  111.  App.  545  (ISSI);  Fuggu. 
Sidwell,  8  111.  App.  551  (1S81);  Child 
V.  Coffin,  17  Mass.  64  (1820),  dictum; 
Gray  v.  Coffin,  63  Mass.  192, 200  (1.'352); 
Hathorn  v.  Calef,  53  Me.  471  (1«66). 
See  AVeidenger  v.  Spruance,  101  IIL 
278  (1881).  And  it  is  said  that  a  stock- 
holder may  restrain  by  a  proper 
proceeding  the  acceptance  by  the  cor- 
poration of  an  unconditional  amend- 
ment to  the  charter  by  which  the 
liability  of  the  shareholdei-s  is  in- 
creased. Owen  V.  Purdy,  12  Ohio  St. 
73  (1861);  Fry  v.  Lexington,  etc.  R.  R., 
2  Mete.  (Ky.)  314  (1859).  Cf.  Bailey 
V.  Hollister,  26  N.  Y.  112  (1862*; 
Thompson  v.  Guion,  5  Jones,  Eq. 
(N.  C.)  113  (1859);  Mowrey  n  Indian- 
apolis, etc.  R.  R.,  4  Biss.  78  (1866);  S.  C, 
17  Fed.  Cas.  930;  Lamnan  v.  Lebanon 
Valley  R.  R.,  30  Pa.  St.  42  (1858); 


CH.  XXVIII.] 


AMENDMENTS   TO   CnAETEES. 


[§  ^07. 


legal  and  binding,  although  there  are  limits  even  to  this  re- 
served power,  as  will  bo  shown  hereafter.* 

A  stiitute  imposing  additional  liability  upon  the  shareholders 
cannot  bo  repealed  so  as  to  afTcct  those  who  were  corporate  cred- 
itors prcviouiily  to  the  rep,'al.'  But,  whenever  the  statute  im- 
posing the  liability  is  penal  in  its  nature,  a  repeal  of  it,  even 
so  as  to  affect  existing  del>ts,  is  constitutional  at  any  time  be- 
fore the  corporate  creditor  obtains  judgment  on  his  claim.' 
An  important  exception  to  the  general  rules  stated  above  exists 
in  regard  to  amendments  under  the  police  power  of  the  state. 
The  state  may  amend  the  charter  of  a  railroad  corporation  by 
reducing  its  trallic  charges,  requiring  it  to  build  fences,  and  in 
various  other  ways  for  the  protection  of  the  public*    An  amend- 


Ilamilton,  etc.  Ins.  Ca  v.  llobart,  C8 
MosH.  •OlS  (lb.it):  Gardner  v.  llainil- 
ton  Mut,  Ins.  Co.,  83  N.  Y.  421  (ly^W). 
Where  tlie  inciileiit  of  individiuil  lia- 
bility was  n-jH-aied  by  an  ain'.-udmcnt 
to  the  stito  (Missouri)  constitution 
after  the  debt  accrued,  but  U.'Hjre  the 
increase  of  Bt(x;k  was  i.Hsued,  tiie  hold- 
ers of  the  new  stock  were  held  not 
liable  under  the  former  constitution. 
Ochiltree  r.  liailroad  Co.,  21  Wall  2 19 
(1874). 

•See  ^.",01,  I H/ro. 

'Ilawth.^rne  r.  Calef,  2  Wall  10 
(1801);  Conant  v.  Van  Sljaick,  21 
Barb.  87  (18.',7);  Norris  v.  \Vn,-ns.-hall, 
ai  Md.  492  (1871);  ProvidentSav.  Inst. 
V.  Jackson  Place,  etc  Co.,  02  Mo.  552 
(1873);  St  LouLs,  etc.  Ca  v.  Ilarbine, 
2  Ma  App.  134  (1870);  Central,  etc. 
Assoc,  t'.  Alalxiuio,  etc  Ins.  Co.,  70 
Alji.  120(18S1);  Woo<lrufTv.Trapnall, 
10  Uow,  190  (ia">0);  McDonnell  v.  Ala- 
bama, etc  Ins.  Co.,  85  Ala.  401  (1888). 
Sec  also  Story  r.  Furinan,  25  N.  Y.  214 
(1862);  Rochester  r.  liariics,  20  Barb. 
657  (1858);  Sinking  Fund  Cases,  99 
U.  a  700  (1878).  Cf.  Jennan  v.  Ben- 
ton, 79  ila  148  (1883);  Woodhouse  v. 
Conunon we.nl th  Ins.  Co.,  54  Pa.  St. 
307  (18<J7):  lie  Stiito  hm.  Co..  14  Fe<L 
Rep.  28  (1882);  Palfrey  r.  Pauhling, 
7  Iju  AniL  30;}  (1852);  lie  Toh-niph 
Cfenstr.  Ca,  L.  R.  10  &j.  381  (1870): 


Cooper  V.  Frederick,  9  Ala.  (N.  S.)  738 
(1840);  lie  Credit  Foncier,  L.  R.  11 
E«i.  3.56  (1871);  Coffin  v.  Rich,  45  Me. 
507  (1858).  Refjistered  tnmsferees  aro 
liable  the  same  as  tlieir  transferrers, 
even  thou;?h  before  the  transfer  the 
btatutory  liability  was  decrwused  by 
statute.  The  liability  to  old  credit- 
ors follows  the  stock.  National  Com. 
Bank  v.  McDonnell,  92  Ala.  387  (1890). 
A  statute  ffiving  the  cori^jration  a 
summary  remedy  against  a  stock- 
Iiulder  for  non-ixiyment  of  calls  may 
be  repeale<J-  Ux parte  Northeast,  etc 
R.  R.,  37  Ala.  079(1861). 

'  Breitung  r.  Lindauer,  37  ifich.  217 
(1877);  Union  Iron  Co.  v.  Pierce,  4 
Bias.  327  (1809);  S.  C,  24  Fed.  Cas.  583; 
Gregory  v.  German  Bank,  3  CJolo.  333 
(1877);  Cooley,  Const.  Lim.  (5th  ed.), 
pp.  444,  474.    See  §  223,  supra. 

<Seo  %  901,  infra.  Tlie  court  in 
Pearsall  v.  Great  Northern  R'y,  101 
U.  S.  040,  606  (1890j,  in  sjK'aking  of 
fhe  ixjlice  power,  said:  "So  imjKjrtaiit 
is  this  pfjwer,  and  so  nece.s.sary  to 
the  public  safety  and  lit^lth,  tliat  it 
cannot  be  bargained  away  by  the 
legislature;  and  hence  it  has  been 
held  that  charters  for  puqjoses  in- 
consistent with  a  due  regard  for  the 
public  health  or  public  morals  may 
Ikj  abr<»g;it<'<l  in  the  interests  of  a 
more  enlightened  public  opinion." 


895 


g§  498,  499.]  AMENDMENTS    TO    CHARTERS.  [cil.   XXVIII. 

ment  to  a  charter  forbidding  any  consolidation  with  a  compet- 
ing line  is  a  legitimate  exercise  of  the  police  power  of  the  state, 
and  it  is  immaterial  whether  the  power  to  amend  was  reserved 
or  not.^ 

§  498.  Charter  amendments  offered  to  the  stoclholders. —  The 
second  class  of  amendments  to  a  charter  —  the  amendments 
Avhich  occur  most  frequently  and  give  rise  to  many  diiliculties  — 
are  those  which  allow  the  corporate  directors  or  a  majority  of 
the  stockholders  in  corporate  meeting  assembled  to  engage  in 
a  new  or  different  or  more  extensive  or  more  contracted  busi- 
ness than  that  authorized  by  the  original  and  unamended  char- 
ter.   This  is  the  subject  of  the  remainder  of  this  chapter. 

§  499.  Anxiliayy  and  incidental  amendments  are  constitu- 
tional, though  some  of  the  stocJiholders  dissent. —  An  amendment 
made  to  a  corporate  charter  is  either  a  material  and  fundamental 
change  from  the  original  plan,  or  it  is  an  auxiliary  and  incidental 
change,  consistent  mth  the  carrying  out  of  tlie  original  plan.' 
The  latter  class  of  amendments  are  constitutional  and  valid. 
The  acceptance  of  an  auxiliary  amendment,  however,  should  bo 
by  the  stockholders  in  meeting  assembled  instead  of  by  the 
board  of  directors.^  But  acceptance  may  arise  from  user;  *  and 
hence  it  generally  happens  that  an  incidental  or  auxiliary  amend- 
ment to  a  charter  is  deemed  to  have  been  accepted  by  user  and  a 
vote  of  acceptance  by  the  directors  or  by  user  alone.*  An  amend- 

1  Louisville,  etc.  R.  R.  v.  Kentucky,  are  merely  auxiliary  and  not  funda- 
161  U.  S.  677  (1896).  To  same  effect,  mental,  they  may  be  accepted  by 
Pearsall  v.  Great  Northern  R'y,  161  a  majority  of  the  corporators;  and 
U.  S.  646  (1896).  when  so  assented  to  they  are  binding 

2  The  general  principle  of  law  gov-  on  the  whole;  but  it  is  otherwise  .  .  . 
erning  this  branch  of  the  subject  is  when  the  alterations  are  fimdamen- 
well  expressed  in  Woodfork  v.  Union  tal,  radical,  and  vital.  Tlie  accept- 
Bank,  3  Coldw.   (Tenn.)  488  (1866).  ance  must  then  be  imanimous." 

"  The  contract  or  charter,  after  ac-  3  Marlborough  Mfg.  Co,  v.  Smith,  2 

ceptance,  is  inviolable  between  the  Conn,  579  (1818);  Brown  v.  Fairmount, 

state  and  the  corporation,  as  it  is  also  etc,  Co.,  10  Phila.  32  (1873) ;  Hope  Ins. 

between  the  corporation  and  stock-  Co,  v.  Beckman,  47  Mo,  93  (1870), 

holders.    Neither  the  one    nor  the  ^See  %50B,  infra,  and  §  2a,  st/pra. 

other  can  disregard  its  obligations  or  5  Illinois,  etc.  R.  R,  v.  Zimmer,  20 

alter  its  essential  franchises  without  III  658  (1858),    See  also  Blatchford  v. 

the  unanimous  concurrence  of  the  Ross,  5  Abb.  Pr,  (N,  S.)  434  (1869);  Re 

stockholders,  ...  If  the  alterations  Excelsior  F,  Ins,  Co.,  16  Abb.  Pr.  8, 14 

proposed  in  the  charter  of  a  private  (1862),    In  Venner  v.  Atchison,  etc. 

corporation  by  legislative  enactment  R.  R.,  28  Fed.  Rep.  581  (1886),  it  was 

896 


cu.  xxviii.] 


AMEXDilENTS    TO    CHAETEKS. 


[§  499. 


ment  may  be  said  to  be  auxiliary  and  incidental  when  it  merely 
grants  new  powers  or  authorizes  new  methods  and  new  plans 
for  the  purpose  of  carrying  out  the  original  plan  and  effecting 
the  real  object  of  that  plan.  The  individual  motives  and  inter- 
ests of  a  stockholder  are  disregarded.  Whatever  is  for  the  ben- 
efit of  the  corporation  is  conclusively  presumed  to  be  for  the 
benefit  of  each  stockholder.  A  change  not  fundamental  to  the 
corporation  is  not  fundamental  to  each  and  every  stockholder.^ 
Whether  an  amendment  materially  changes  the  corporate 
plans  or  not  is  a  question  of  law  for  the  court.^  Accordingly 
each  case  is  to  be  decided  according  to  the  peculiar  circum- 
stances of  that  case,  and  no  general  rules  can  be  laid  down 
which  will  apply  to  all  cases.' 


held  that  the  directors  are  the  proper 
persons  to  accept  au  ainendinent  un- 
der the  circumstances  of  that  case. 

»  Delaware  R.  R.  r.  Tharp,  1  Hoast 
Del)  149(l!:<"i.jK  Irvin  r. Turnpike  Co., 
2  Pen.  &  \V.  (Pa.)  460  (ItWl);  Dlinois 
River  R.R  i'.Zimmer,20  Ill.Cr>4  (l«o8); 
Spnigue  I'.  Illinois,  etc.  R.  R.,  19  111. 
174  (1S.J7);  Banet  v.  Alton,  etc.  R.  R^ 
Vi  IlL  504  (IbJl).  Cf.  Hester  v.  Mem- 
pliLs.  etc.  R.  R.,  32  Miss.  378  (iSuG); 
Witter  V.  Mississippi, etc.  R.  R.,  20  Ark. 
4G:i  (18.?J);  Fulton  County  r.  Missis- 
sippi, etc.  R.  R,  21  IlL  3;J8  (1839).  The 
cases  of  Zabriskie  r.  Hackensack,  etc. 
R.  R,  IS  N.  J.  Eq.  178  (lSG7j;  Dayton, 
etc.  P^  R.  V.  Hatch,  1  Disney  (Ohio), 
84  (IS-Jo),  and  Central  R,  R.  r.  Collins, 
40  Ga.  C17  (1SG9),  repudiate  the  dis- 
tinction between  the  material  and 
iininateriiil  changes.  AU  changes 
are  held  to  be  equally  material 

-  Winter  r.  Muscogee  R.  R.,  11  Ga. 
438  (1852);  Witter  r.  Mississippi,  etc. 
R,  R,  20  Ark-  463  (1859);  Memphis 
Branch  R  R  v.  Sullivan,  57  Ga.  240 
(1876).  Cf.  Southern,  etc.  R  R  r. 
Stevens,  87  Pa.  St.  190  (1878). 

'  Certain  changes  in  the  route  of  a 
railroad  have  been  held  to  be  imma- 
terial, Wilson  V.  Wills  Valley  R  R, 
33  Ga.  466  (1863);  Johnson  r.  Pensa- 
cola,  eta  R  Pu,  9  Fla.  299  (1860);  Peo- 
ria, etc  R  R  r.  Elting,  17  IlL  429 
57  89 


(1850);  Banet  r.  Alton,  etc.  R  R,  13 
IlL  504  (1851);  Chattanooga,  etc.  R  R 
V.  Warthon,  98  Ga.  599  (1896);  build- 
ing branch  lines,  Peoria,  etc.  R  R  r. 
Preston,  35  Iowa,  115  (1872);  Green- 
ville, etc.  R  R  V.  Coleman,  5  Rich.  L. 
(S.  C.)  118  (1851);  is.suing  preferred 
stock,  Everhart  v.  West  Chester,  etc 
R  P...  28  Pa.  St,  339  (1857):  Rutland, 
etc  R  R  V.  ThraU,  35  Vt.  536  (1803); 
Curry  v.  Scott,  54  Pa.  St  270  (1807); 
or  more  common  stock,  Covington 
V.  Covington,  etc.  Bridge  Co.,  10  Bush 
(Ky.),  09  (1873);  Buffalo,  etc  R  R 
V.  Dudley,  14  N.  Y.  330  (1850).  Cf. 
Hughes  V.  Antietam  ilfg.  Co.,  34  Jild. 
310  (1870);  extending  the  time  for 
completing  the  road,  Agricultural 
Branch  R  R  v.  Winchester,  95  Mass. 
29  (1800);  Poughkeepsie,  etc.  Co.  v. 
Griffin,  24  N.  Y.  150  (1801);  Bailey  v. 
Hollister,  20  N.  Y.  112  (1802),  power 
to  amend  being  reserved ;  Taggart  i". 
Wei,tern  Md.  Pu  R,  24  Md.  503  (1866); 
Union  Hotel  Co.  v.  Hersee,  79  N.  Y. 
454  (1880) ;  Danbury,  etc  R  R  v.  Wil- 
son, 22  Conn.  435  (1853j;  consolida- 
tions that  take  the  place  of  part  of 
the  line  as  laid  out,  Sprague  v.  Illi- 
nois River  R  R,  19  IlL  174  (1857); 
Hanna  v.  Cincinnati,  etc.  R  R,  20 
lud.  30  (1863);  change  of  coqwrate 
name,  Bucksport,  etc.  R.  R.  v.  Buck, 
68  Me.  81  (1878);  Clark  v.  Monouga- 


§  500.] 


AMENDMENTS   TO   CHAKTEE3. 


[cn. 


xxviri. 


§  500.  Material  amendments  offered  to  the  stoclhohhrs  can 
he  accepted  onhj  hij  a  unanimous  vote. —  On  tlio  other  haml,  a 
material  and  fundamental  clian^,'e  in  the  cliartcr  l>y  an  aiinmd- 
ment  to  that  charter  is  an  unconstitutional  viohition  of  the  con- 
tract rights  of  any  stockholder  who  does  not  assent  to  such  an 
amendment.  Considerable  dilTiculty  is  experienced  in  deter- 
mining: what  is  a  material  and  fundamental  change.    Each  case 


hela  Nav.  Co.,  10  Watts  (Pa.),  304 
(1840);  changing  the  teiininus.  Par 
cific  R  R.  V.  Renshaw,  18  Mo.  210 
(1852);  Ross  v.  Chicago,  etc.  R.  R.,  77 
IlL  127,  134  (1875);  reduction  of  cap- 
ital stock  and  shortening  of  tlie  road, 
Troy,  etc.  R.  R.  v.  Kerr,  17  Barb.  581 
(1854);  Joslyn  v.  Pacific  Mail  S.  S.  Co., 
12  Abb.  Pr.  (N.  S.)  329  (1872).  Cf. 
Oldtown,  etc.  R.  R.  v.  Veazie,  39  Me. 
571  (1855);  or  enlarging  the  capital 
stock  and  extending  the  road,  such 
changes  not  appearing  on  the  record 
to  be  detrimental,  Peoria,  etc.  R.  R.  v. 
Elting,  17  111.  429  (1856);  Rice  v.  Rock 
Island,  etc.  R.  R.,  21  111.  93  (1859);  5),nd 
minor  changes  in  general.  Union 
Agric.  etc.  Assoc,  v.  Mill,  31  Iowa,  95 
(1870);  also  extensive  changes,  Illi- 
nois River  R.  R.  v.  Zimmer,  20  111.  654 
(1858);  such  as  extending  the  road. 
Cross  V.  Peach  Bottom  R'y,  90  Pa.  St. 
392  (1879);  purchasing  another  rail- 
road, Venner  v.  Atchison,  etc.  R.  R, 
28  Fed.  Rep.  581  (1886);  or  increasing 
the  number  of  directors.  Mower  v. 
Staples,  32  Minn.  284  (1884).  An 
amendment  increasing  the  capital 
stock  and  authorizing  a  branch  road 
does  not  release  subscribers.  Sche- 
nectady, etc.  Co.  V.  Thatcher,  11  N.  Y. 
102  (1854).  See  also  Gray  v.  Coffin,  63 
Mass.  192  (1852);  Child  v.  Coffin,  17 
Mass.  64  (1820);  Longley  v.  Little,  26 
Me.  162  (1846);  Payson  v.  Withers,  5 
Biss.  269  (1873);  S.  C,  19  Fed.  Cas. 
29;  Joy  v.  Jackson,  etc.  Co.,  11  Mich. 
155  (1863);  Lincoln,  etc.  Bank  v.  Rich- 
ardson, 1  Me.  79  (1820);  Greenville, 
etc.  R.  R.  V.  Johnson,  8  Baxt.  (Tenn.) 
332  (1874);  Fall  River  Iron  Works  v. 
Old  Colony  R.  R,  87  Mass.  221  (1862). 


An  increii.se  of  the  capital  stock  as 
allowed  by  the  charter  does  not  ro- 
loaso  subscribers.  Port  Edwards,  etc 
R'y  V.  Arpin,  80  Wis.  214  ( 1891).  An 
amendment  may  authorize  the  di- 
rectors to  change  the  location  of  toll 
j;ates.  Bardstown,  etc  C<x  v.  Rod- 
man, 13  a  W.  Rep  917  (Ky.,  1890). 
In  Atchison,  etc  R  R  v.  Fletcher, 
35  Kan.  230  (IbdO).  an  amendment 
authorizing  a  cori)oration  to  buy  tlio 
stock  of  anotlier  niilrojid  corporation 
and  to  guarantee  its  lx)uds  was  liold 
to  be  valid.  An  amendment  author- 
izing a  dam  company  to  raise  tho 
heiglit  of  its  dam  is  not  a  funda- 
mental charge.  Gray  v.  Mononga- 
hela  Nav.  Co.,  2  Watts  &  S.  156  (Pa., 
1841).  So  also  of  an  amendment  short- 
ening notices  of  calls  from  ninety 
to  twenty  days.  Illinois  River  R  R 
v.  Beers,  27  111.  185  (1862);  and  an 
amendment  making  subscriptions 
payable  five  per  cent  monthly  in- 
stead of  twenty-five  per  cent  annu- 
ally. Burlington,  etc.  R  R  v.  White, 
5  Iowa,  409  (1857).  The  legislature 
may  authorize  a  seminary  for  girls 
to  lease  a  part  of  the  premises  to 
school  commissioners.  Webster  v. 
Cambridge  Female  Seminary,  78  Md. 
193  (1893).  An  amendment  to  the 
charter  may  prescribe  that  unneces- 
sary corporate  real  estate  shall  be  di- 
vided among  or  partitioned  between 
the  stockholders.  Merchant  v.  West- 
ern Land  Assoc,  56  Minn,  327  (1894). 
The  legislature  may  authorize  a 
water-works  company  to  sell  its  prop- 
erty to  a  municii^ality.  Peabody  v. 
Westerly  Water-works,  37  AtL  Rep. 
807  (R.  L,  1897). 
898 


en,  XXVIII.] 


AilE^'DMENTS  TO   CHAETEKS. 


[§  500. 


is  decided  upon  its  own  facts,  and  consequently  the  best  light 
as  to  the  spirit  of  what  constitutes  a  material  change  is  obtained 
by  a  study  of  the  facts  of  cases  which  have  been  decided.^ 


1  Under  the  circumstances  of  the 
cases  it  has  been  held  a  material 
change  to  shorten  and  vary  the  route, 
Winter  v.  Muscogee  R,  IL,  11  Ga.  438 
(1852);  to  vary  t lie  route,  Mid<llusex 
Turup.  Cor  I),  v.  Locke,  8  Ma.s^  208 
(1811);  MiddlesL-x  Tump.  Corp.  v. 
Swan,  10  Mass.  381  (1813);  Hester  v. 
Menipliis,  etc.  R.  R,  32  Miss.  378 
(1850);  Wittorr.  ^lississippi,  etc.  R.  R, 
20  Ark.  403  (1859);  Champion  v.  Mem- 
phis, eta  R  R.  35  Miss.  002  (185.S); 
Simpson  v.  Denisoii,  10  liare.  54  (1852); 
clianging  a  terminus,  Manhuim,  etc 
Co.  V.  Arndt,  31  I'a.  St,  317  (185b); 
Marietta,  etc  R  IL  v.  EUiott,  10  Ohio 
St  57  (1850);  Middlesex  Tump.  Corp. 
V.  Locke,  8  Mass,  208  (1811);  Middle- 
sex Tump.  Corp.  v.  Swan,  10  Mass. 
384  (1813);  Thompson  v.  Guion,  5 
Jones,  Eq.  (N.  C.)  113  (1859);  permitr 
ting  a  niilroad  to  go  into  water  tran.s- 
portiitiuii  business.  Hart  ford,  etc  R  R 
V.  Croswell,  5  Hill,  3S3  (18-13),  a  lead- 
ing case;  Marietta,  etc.  R  R  r.  Elli- 
ott, 10  Ohio  St  57  (lS59r,  shortening 
the  lino.  First  Nat  Bank  v.  Char- 
lotte, 85  N.  C.  433  (1881);  allowing 
business- to  be  commenced  before  the 
full  capital  stock  is  subscribed,  Mem- 
phis Bi-anch  R  R  r.  Sullivan,  57  Ga. 
240  (1870) ;  dividing  the  line  and  form- 
ing two  or  more  corporations,  Indi- 
ana, etc.  Tump.  Ca  v.  Phillips,  2  Pen. 
&  W.  (Pa.)  184  (1830);  Fulton  County 
V.  ^Mississippi,  etc  R  R,  21  DL  338 
(1859);  Carlisle  v.  Terre  Haute,  etc 
R  R,  6  Ind.  310  (1855);  transferring 
a  railroad  subscription  from  one  rail- 
road to  another,  Pittsburg,  etc  R  R 
V.  Gazzam,  32  P;i.  St  340  (1858);  mak- 
ing the  charter  iHjri)etual  and  increas- 
ing power  to  hold  property,  Union 
Locks  &  Canals  v.  Towne,  1  N.  H,  44 
(1817);  allowing  a  life-insurance  com- 
pany to  insure  against  lire  and  marine 
loss,  Ashton  V.  Burbank,  2  DilL  435 


(1873);  &  C.,2  Fed.  Cas.  20;  extending 
the  line,  Stevens  v.  Rutland,  etc.  R  R, 
29  Vt  545  (1851).  See  also  Noesen  v. 
Port  Washington,  37  Wis.  108  (1875), 
where  there  was  an  amendment  au- 
thoriaing  tlie  purchase  of  a  railroad 
running  at  right  angles  to  the  old, 
but  a  release  was  upheld;  increasing 
the  par  value  of  the  stock,  Slahan  v. 
Wood,  44  CaL  402  (1872);  consolidat- 
ing the  corporation  with  another  cor- 
poration, Illinois,  etc  R  R  v.  Cook, 
29  IlL  237  (1802);  McCray  v.  Junction 
R  R„9  Ind-  358  (1857);  Shelbyville, 
etc.  Turnp.  Co.  v.  Barnes,  42  Ind.  493 
(1873i;  Booe  v.  Junction  R  R,  10  Ind. 
93  (1857);  New  Orleans,  etc.  R  R  u. 
Harris,  27  Miss.  517  (1854);  Clearwater 
V.  Meredith,  1  WalL  25  (1803);  Knox- 
ville  V.  Knox\'iUe,  etc  R  R,  22  Fed. 
Rep.  758  (1884);  Keau  v.  Johnson,  9 
N.  J.  Eq.  401  (1853);  Black  v.  Dela- 
ware, etc.  Canal  Ca,  24  N.  J.  Eq.  455 
(1873).  Cf.  Lauman  v.  Lebanon  Val- 
ley R  R.  30  Pa.  St  42  (1858),  criti- 
cised in  Mowrey  v.  Indianapolis,  etc. 
R  R,  4  Biss.  78  (1800);  S.  C,  17  Fed. 
Cas.  930;  Fry  v.  Lexington,  etc.  R  R, 
2  Mete  (Ky.)  314  (1859).  Until,  how- 
ever, the  corioration  accepts  buch 
amendment  the  stockholders  cannot 
complain.  To  same  ellect,  Delaware, 
etc  R  R  V.  Irick,  23  N.  J.  L.  321 
(1852).  Amendments  which  have  not 
been  acted  upon  do  not  release  tlie 
subscriber.  Taylor  v.  Supervisors,  80 
Va.  500  (1889).  See,  in  general,  Pearce 
V.  Madison,  etc  R  P^,  21  How.  441 
(1858);  Tuttle  v.  Michigan  Air  Line 
R  R,  35  Mich.  247  (1877);  New  Jersey 
Mid.  R'y  v.  Strait  35  N.  J.  L.  323 
(1872).  In  all  these  cases  neither  a 
mandatory  statute,  nor  a  vote  of  the 
directors,  nor  a  majority  of  the  stock- 
holders, can  compel  a  dissenting  stock- 
holder to  accept  the  change.  It  would 
be  unconstitutional  The  stockholder 


699 


§  501.] 


AMENDMENTS   TO    CHARTERS. 


[on.  xxviii. 


§  501.  Amendmcnis  under  the  reserved  power  of  the  state  to 
alter,  amend,  or  repeal  the  charter.— The  extent  of  the  power 
of  the  legislature  to  amend  a  charter,  where  it  has  reserved 
that  power,  is  not  yet  fully  settled,  and  is  full  of  dilliculties. 


may  say:  "I  have  agreed  to  become 
interested  in  a  railroad  company,  and 
have  contracted  in  view  of  the  profits 
to  be  expected,  and  the  perils  and 
losses  incident  to  that  description  of 
business;  but  I  have  not  agreed  that 
those  to  be  entrasted  with  the  capital 
I  contribute  shall  have  power  to  use 
it  in  a  business  of  a  diirerent  char- 
acter, and  attended  with  hazards  of 
a  different  description."  Marietta, etc. 
R  R.  V.  Elliott,  10  Ohio  St.  57  (1839). 
Even  though  the  legislature,  after  a 
turnpike  corporation  is  organized,  au- 
thorizes it  to  issue  stock  in  payment 
for  another  turnpike,  yet  a  dissenting 
stockholder  may  prevent  the  purchase 
by  showing  that  it  decreases  the  value 
of  his  stock.    Shaw  v.  Campbell,  etc. 
Co.,  15  S.  W.  Rep.  245  (Ky.,  1891). 
Where  the  statutes  under  which  the 
compaiiy  is  organized  allow  the  ob- 
jects of  the  company  to  be  changed 
on  a  vote  of  the  stockholders,  a  dis- 
senting stockholder  is  not  released 
from  his  subscription  by  such  change. 
Mercantile  Statement  Co.  v.  Kneal, 
51  Minn.  263  (1892).    Acts  relative  to 
a  corporation  may  be  so  radical  as  to 
constitute  a  new  charter  instead  of 
amendments  to  the  old  one.    Snook 
V.  Georgia  Imp.  Co.,  83  Ga.  61  (1889). 
Where  a  municipality  has  subscribed 
for  stock  an  d  issued  its  bonds  indorsed 
by  the    railroad  company  to  raise 
money  to  pay  the  subscription,  the 
legislature  cannot  authorize  the  com- 
pany to  apply  its  assets  to  the  pay- 
ment of  such  bonds.    A  stockliolder 
may  enjoin  it.    Hill  v.  Glasgow  R.  R., 
41  Fed.  Rep.  610  (1888).    The  legisla- 
ture cannot,  in  the  amendment  itself, 
authorize  the  majority  to  bind  the 
m.inority  herein.    New  Orleans,  etc. 
E.  R.  u  Harris,  27  Mis&  517  (1834). 


Where  a  charter  authorizes  a  lease, 
if  assented  to  by  tlio  stockliolders, 
an  amendmentauthoriziug  such  lease 
by  the  directors  would  bo  uni-onsti- 
tutional,  unless  accepted  by  the  stock- 
holders. Re  Opinion  of  the  Judges, 
28  S.  K  Rep.  18  (N.  C,  lb'J7).  Where 
a  state  is  a  stockholder,  and  by  stat- 
ute is  entitled  to  a  certain  vote  at 
elections,  a  subsequent  statute  can- 
not give  to  the  state  a  larger  vote. 
Tucker  v.  Russell,  83  Fed.  Kop.  203 
(1897).  An  amendment  cannot  de- 
prive the  members  of  the  corporation 
of  the  privilege  of  electing  its  direct- 
ors. The  legiskiture  cannot  arbitrarily 
name  and  appoint  trustees  of  an  edu- 
cational corporation,  the  charter  pro- 
viding that  vacancies  shall  be  filled 
by  the  remaining  trustees.  Sheriff  v. 
Lowndes,  10  Md.  337  (1800).  It  cannot 
givetothecityof  Louisville  the  iK>wer 
to  elect  the  trustees  of  the  University 
of  Louisville,  an  educational  corpora- 
tion. Louisville  u.  University  of  Louis- 
ville, 15  B.  Mon.  (Ky.)  642  (1855).  It 
cannot  vest  the  government  of  an  in- 
corporated academy  in  a  new  board 
of  trustees.  Norris  v.  Abingdon  Acad- 
emy, 7  Gill  &  J.  (Md.)  7  (1834).  Cf. 
%  603,  infra.  For  a  valuable  arg  ument 
against  the  jKjwer  of  a  majority  of 
the  stockholders  to  accept  an  amend- 
ment of  the  charter  so  as  to  give  the 
company  the  power  to  lease  its  rail- 
road, see  8  Harvard  L.  Rev.  390.  In 
Loewenthal  v.  Rubber,  etc.  Co.,  52  N.  J. 
Eq.  440  (1894),  the  court  held  that  the 
original  by-laws  constituted  a  con- 
tract between  the  stockholders,  and 
that  a  bj^-law  providing  for  cimiu- 
lative  voting  could  not  be  repealed. 
On  the  right  of  a  dissenting  stock- 
holder in  general,  see  also  Printing 
House  V.  Trustees,  101  U.  S.  711  (1881); 


900 


<;n.  XXTIII.]  AMENDME^-TS   TO    CHARTEKS.  [§  501. 

There  is  a  strong  tendency  in  the  decisions,  and  a  tendency 
^vhich  is  deserving  of  the  highest  commendation,  to  limit  tho 
power  of  the  legislature  to  amend  a  charter  under  this  re- 
served  power.     It  should  be  restricted  to  those  amendments 
only  in  which  the  state  has  a  public  interest.    Any  attempt  to 
use'this  power  of  amendment  for  the  purpose  of  authorizing  a 
maiority  of  the  stockholders  to  force  upon  the  minority  a  ma- 
terial change  in  the  enterprise  is  contrary  to  law  and  the  spirit 
of  justice     Under  such  reserved  power  the  legislature  has  only 
that  right  to  amend  the  charter  which  it  would  have  had  in 
case  tlfe  Dartmouth  College  case  had  decided  that  tlie  federal 
constitution  did  not  apply  to  corporate  charters.^     In  fact  the 
historical  origin  of  this  reservation  of  tho  right  to  amend  was 
due  to  the  effort  of  the  various  states  of  the  Union  to  escape 
from  the  decision  in  the  Dartmouth  College  case.'^    By  this  re- 
served ri-ht  the  restraint  of  the  federal  constitution  is  done 
away  with.    But  the  power  to  make  a  new  contract  for  the 
stockholders  is  not  thereby  given  to  the  legislature.     The  legis- 
lature may  repeal  the  charter,  but  cannot  force  any  stockholder 
into  a  contract  against  his  will. 

The  power  to  make  amendments,  and  to  repeal  and  alter 
chartei^has  been  reserved  in  most  of  the  states  of  the  Umon. 

Hoey  V  nendorson.  32  La.  Ann.  10G9  the  right  of  the  government  to  take 

S^^TstMa^.s  Church.  7  Serg.  from  either  indivadu^Us  or  corix^rn. 

i  T?  /pf  t  ^V-  (8--).  tions  any  property  wluch  they  may 

^JsnU^^Frd  cUoOU.am  ng^tfuUy  have  acquired.-    Snntl.. 

720  (18T8)T  Miller  v.  State,  15  Wall  Lake  Shore  etc  Co..  .-  N.  W.  Rop. 

A7ft  40-.  n-=!7-^)-  S:xn  MatooCuuntyu.  328  (Mich..  1897). 

^'uttri  i;;:ificR  R.  S  sawyer.  2.S.  ^^^f  P7/,It'3r3;^X"' 

279  (1882)-  Detroit  r.  Detroit,  etc.  Co..  Schottler.  110  U.  S.  347,  3o-  <1881 . 

2  M^ll  140  (1880).     The  reser^-ed  'gee  Part  Yll,  infra.    The  fo  low- 

ri^h    to  amend  or  repeal  a  charter  ing  special  references  are  made  to 

« itv^  tl^estate  whWe  any  sover-  some  of  the  constitut.ona  provjs.ons 

«Sty  would  be  if  unrostn^inedby  on  this  subject:  Const.  utK.no^  A^^^ 

IS^rL    constitutional    limitation^  '^r'':'^'J^  ^^J^^r^t, 

and  with  the  powers  which  it  would  ^'-J^^^^^^ ;^':'il^^^^^^        ,7^  lowa^ 

then  possess.    "  might  therefore  do  ^f  •  ^7'^^;^^^  ^^f,^^^^ 

what   it  would  be   admissible   for  ^  "J;  J'' ^'^"f^-^',''    '    ^_  o.  ^hs- 

any  constitutional  government  to  do  of  V^^^^'^f^^^^i;  "Jf S^R  S   d. 

whennotthusre.strained.butitcould  BacWtts.  ^t-  18.^0^^  I! '^f*  ,i  ,m. 

not  do  what  would  be  inconsistent  44,  §  23:  Gen.  St    ch.  »8,  M  -  M><^'" 

:^th  constitutional  principle.    And  f  °' ^^; J'^''  ^^i^^^^:,^/,",!  „^" 

it  cannot  l^nece-.'.iry  at  this  day  to  braska^  1875.  XI;   ^/Y-^^  V.^'^^^' 

inter  upon  a  discussion  in  denial  of  New  Jersey.  Amend.  IV.  7,  par.  11, 


§  501.] 


AMENDMENTS   TO    CnARTERS.  [cil.  XXVIII. 


It  is  clearly  established  that  the  legishitm-c  cannot,  iin.lcr  this 
reserved  power,  amend  the  charter  so  as  to  change  the  wliole 
character  of  the  enterprise  and  compel  the  corporation  to  pro- 
ceed under  the  amended  charter.'  The  restrictions  of  the  state 
constitution  still  exist,  and  individuals  c:innot  be  forced  by  the 


cl.  11;  New  York,  VIII,  1,  R  S.,  pt- 1. 
ch.  XVIII,  title  3,  §  8;  North  Caro- 
lina, VIII,  1;  Ohio,  XVIII,  2;  Ore-,'on, 
XI,  2;  Pennsylvania,  XVI,  10;  South 
Carolina,  XII,  1;  Tennessee,  XI,  8; 
Texas.  1875,  XII,  5,  7;  Wisconsin,  XI, 
%1;  Re  New  York  Elevated  R.  R.,  70 
N.  Y.  327  (1877);  Johnson  v.  Hmlson 
River  R.  R.,  49  N.  Y.  455  (1872);  Bank 
of  Chenango  v.  Brown,  20  N.  Y.  407 
(18G3);  Ashuelot  R.  R  v.  Elliot,  58 
N.  H.  451,  454  (1878). 

iln  Pennsylvania  it  is  held  that 
the  reserved  power,  when  used  so  as 
to  make  an  amendment  compulsory 
on  the  corporation,  "  is  in  the  nature 
of  a  police  power,  designed  for  the 
protection   of  the  public  welfare." 
Cross  V.  Peach  Bottom  R'y,  90  Pa.  St. 
892  (1879).    Under  its  reserved  power 
to  amend,  the  state  may  give  a  rem- 
edy against  a  mill-dam  corporation 
for  injm-ies  by  flood.    Monongahela 
Nav.  Co.  V.  Coon,  6  Pa.  St.  379  (1847), 
holding  also  that,  by  accepting  an 
amendment  which  is  granted  on  con- 
dition that  the  reserved  power  to 
amend  shall  apply  to  the  corporation, 
it  is  subject  to  such  power ;  Kenosha, 
etc.  R.  R.  V.  Marsh,  17  Wis.  13  (1863); 
Troy,  etc.  R.  R.  v.  Kerr,  17  Barb.  581 
(1854).    In  Knoxville  v.  KnoxviUe, 
etc.  R.  R.,  22  Fed.  Rep.  758  (1884),  the 
court  said:   "It  was  not  competent 
for  the  legislature  to  do  more  in  this 
respect  than   to  waive   the  public 
rights.    It  could  not  divest  or  impair 
the  rights  of  the  shareholders,  as  be- 
tween themselves,  as  guaranteed  by 
the  company's  charter,  without  their 
consent.   It  was  upon  the  faith  of  the 
stipulations  contained  in  said  charter 
that  the  shareholders  subscribed  to 


the  cai)ital  stcvk.  and  tliereby  mndo 
themselves  members  of  the  corpora- 
tion."   In  Orr  v.  Bnicken  County,  8i 
Ky.  593  (1884),  an  auicntlinent  under 
the  reserved    iK)wer,  changing  the 
metliod  of  voting,  was  decided  to  bo 
of  no  elfect  until  the  stockholders 
accepted  it.    The  court  said:  "Tho 
right  to  amend  the  ciiarter  may  bo 
expressly  reserved,  but  that   right 
does  not  confer  the  power  of  taking 
from  the  corporators  the  control  of 
the  corporate   property."    See    also 
§  009(7,   cli.    XXXVII,   ivfra,  as  to 
amendments  alTecting  tlie  right  to 
vota    Query,  whether  a  mandatory 
consolidation  would  be  legal.    Mow- 
rey  v.   Indianapolis,   etc.    R    R.,    4 
Biss.  78  (1800);  S.  C,  17  Fed.  Cas,  930. 
When    legal,   a  mandatory  change 
does  not  recjuire  acceptance  by  the 
stockholders.    Zabriskie  v.  Hacken- 
sack,  etc.  R  R,  18  N.  J.  Eq.  178  (1807). 
But  when    the   mandatory  amend- 
ment goes  beyond  the  legal  limits,  it 
must  be  accepted  by  the  corporation 
as  though  it  were  made  optional  with 
the  corporation.     Kenosha,  etc.  R  R 
V.  Marsh,  17  Wis.  13  (1803),  the  court 
saying  that  the  power  of  amendment 
was  never  reserved  with  reference  to 
any  question  between  the  corpora- 
tion and  its  stock  subscribers,  but 
solely  with  reference  to  questions  be- 
tween the  corporation  and  the  state, 
where  the  latter   desired  to  make 
compulsory  amendments  against  the 
will  of  the  former.    Tlie  corporation 
cannot  be  compelled  to  proceed.    All 
the  state  "  can  do  is  to  grant  it  the 
power,  and  then  it  is  for  the  corpora- 
tion to  accept  it  or  not,  as  it  pleasea" 
See  also  §  497,  supra. 


903 


XXV 1 1  I.J  AMENDMENTS    TO    CHAKTEKS. 


[§  501. 


cn, 

state  into  new  contracts.^  Moreover  the  amendment  must  not 
be  loreion  to  the  purposes  and  objects  of  the  original  charter. 
The  power  of  amendment  has  its  limits.  "It  can  repeal  or 
suspend  the  charter;  it  can  alter  or  modify  it;  it  can  take  away 
the  charter;  but  it  cannot  impose  a  new  one  and  obhge  the 

stockhoklers  to  accept  it The  power  to  alter  and  modify 

does  not  give' power  to  make  any  substantial  additions  to  the 
work  "»  The  best  view  taken  of  this  reserved  power  of  the 
sUto  is  that  under  it  a  fundamental  amendment  to  the  charter 
does  not  authorize  a  majority  of  the  stockholders  to  accept  the 
amendment  and  procee<l,  but  that  unanimous  consent  of  the 
stockholders  is  necessary.'  , 

Under  this  reserved  power,  however,  the  legislature,  it  is 
hekl  may  impose  a  statutory  liability  upon  stockholders  after 
they  have  been  incorporated  and  have  gone  into  business  under 
a  charter  which  docs  not  impose  such  Uability.    The  exercise 


» Cooley,  Const  Lim.  (5th  ed.),  p.  454. 
As  to  repeals  of  charters  un.ler  this 
reserved  power,  see  ch-  XXXVlll, 
infra. 

a  Ziil  -riskie  i'.  Hackensiick.  etc.  It  R., 
18  N.  J.  I'>1.  178  (1867).  "  The  power 
of  alteration  and  amendment  i.s  not 
without  limit  The  alterations  must 
be  reasonable;  they  must  bo  made  in 


>  Mills  V.  Central  R  R,  41  N.  J.  Eq. 
1, 4  (1880),  where  a  statute  subsequent 
to  the  charter  authorized  the  cous<jli- 
dation  of  railroad  companies.  The 
court  said:  "The  legislature  did  not 
intend  to  affect  the  riglits  of  stock- 
holders inter  sese,  and  the  act  does 
not  do  so,  either  expressly  or  by  im- 
plication.   .   .   .   After  shareholders 


good  faith,  and  l>e  consistent  with  the    had  entered  mto  a  contract  among 


scope  and  object  of  the  act  of  incor 
pomtion.  Sheer  oppression  and  wrong 
cannot  be  inflicted  under  the  guise 
of  amendment  or  alteration."  Shields 
V.  Ohio.  95  U.  S.  319   (1877);  Spring 
Valley  Water-works  v.  San  Francisco, 
61   CaL  3  (1881).    The    amendment 
must "  not  defeat  or  substantially  im- 
pair the  object  of  the  grant,  or  any 
rights  vested  under  it"  Close  v.  Glen- 
wood  Cemetery,  107  U.  S.  466  (1882). 
See  also  Miller  v.  State,  15  WalL  478 
(1872);   Worcester  v.  Norwich,  etc 
R  R,  109  Mass.  103  (1871).    The  mo- 
tives of  the  legislators  cannot  be  in- 
quired into.  Northern  R  R  r.  Miller, 
10  Barb.  260  (18.51);  Re  N.  Y.  Elevated 
R  R,  70  N.  Y.  327,  351  (1877).    See 
Astor  V.  Arcade  R'y,  113  N.  Y.  93,  111 
(1889). 


themselves,  under  legislative  sjino 
tion,  and  exiiended  their  money  in 
the  execution  of  the  plan  mutually 
agreed  upon,  the  plan  could  not,  even 
by  virtue  of  legislative  enactment,  be 
radically  changed  by  the  majority 
alone,  and  disw.-ntient  stockholders 
be  compelled  to  engage  in  a  new  and 
totally  different  undertaking,  because 
such  action  would  impair  the  obliga- 
tion of  the  dissenting  stockholders' 
contract  with  their  a-ssocisites  and 
the  state."   The  court  said  also,  that, 
under  its  reserved  power  to  amend 
a  charter,  the  state  cannot  give  "  a 
power  to  one  i^art  of  the  corj  (orators 
as  against  the  other  which  they  did 
not  have  before."    On  this  subject 
see  also  ^  497,  supra,  and  the  notes 
thereto. 


903 


§  501.] 


AMENDMENTS   TO   CnARTERS. 


[CII.  XX VI IT. 


of  this  power  by  the  legislature,  in  such  a  case,  is  held  to  bo 
only  a  repeal  of  part  of  the  corporate  franchises.'  So,  also,  it 
is  said  that  under  this  reserved  power  the  legislature  may  im- 
pose  a  statutory  liability  for  the  future  debts  and  obligations 

of  the  corporation.'^ 

The  constitutionality  of  various  amcndmonts  to  chaitors  in 
which  the  legislature  reserved  the  right  to  amend  or  repeal  is 
considered  in  the  notes  below.' 


1  MoGowan  v.  McDonald,  111  CaL 
57  (1896);  Bissell  v.  Heath,  98  Mich- 
472  (1894);  South  Bay,  etc.  Co.  v.  Gray, 
30  Me.  547  (1849);  Sleeper  v.  Goodwin, 
67  Wis.  577  (1887).  Cf.  Close  v.  Glen- 
wood  Cemetery,  107  U.  S.  460  (1882). 
See  §§  242,  280,  497,  siqora. 

2  Sherman  v.  Smith,  1  Black,  587 
(1861),  afl'g  Re  Oliver  Lee's  Bank,  21 
N.  Y.  9  (1860);  U.  S.  Trust  Co.  v.  U.  S. 
F.  Ins.  Co.,  18  N.  Y.  199  (1858).     Cf. 
Bailey  v.  Ilollister,  26  N.  Y.  112  (1862); 
Sinking  Fund  Cases,  99  U.  S.  700 
(1878) ;  Oldtown,  etc,  R.  R.  v.  Veazie, 
39  Me.  571  (1855);  Green  v.  Biddle,  8 
Wheat.  1,  84  (1823);  Gardner  v.  Hope 
Ins.  Co.,  9  R.  L  194  (1869).    Such  in- 
creased liability  may  be  imposed  by 
a  new  constitution  of  the  state.    lie 
Reciprocity  Bank,  22  N.  Y.  9  (1860); 
U.  S.  Trust  Co.  u  U.  S.  F.  Ins.  Co.,  18 
N.  Y.  199  (1858) ;  Re  Oliver  Lee's  Bank, 
21  N.  Y.  9  (1860);  aff' d  sub  nom.  Sher- 
man V.  Smith,  1  Black,  587  (1861).  In 
Consolidated  Assoc,  v.  Lord,  85  La- 
Ann.  425  (1883),  the  com-t  refvised  to 
uphold  an   amendment  which   im- 
posed further  liability  on  the  stock- 
holder.    The  statutory  liability  in 
California  does  not  apply  to  stock- 
holders in  corporations  existing  at 
the  time  the  statute  was  enacted. 
United  States  v.  Stanford,  69  Fed. 
Rep.  25  (1895);  aff'd,  161  U.  S.  412 
(1896).    A  legislature  may  by  statute 
create  a  statutory  liability  of  stock- 
holders for  existing  debts  of  the  corpo- 
ration, although  the  original  charter 
did  not  contain  such  liability.    Lin- 
coln V.  Carroll.  73  N.  W.  Rep.   173 
(Minn.,  1897).    See  also  §  497,  siq^ra. 


»The  case  of  Sinking-Fund  Com'rs 
V.  Green,  etc  Co.,  79  Ky.  73  (1880), 
holding  that  the  right  to  take  tolls 
cannot  be  abolished  where  the  com- 
pany has    maintained   and    kept  in 
repair  the  rivei-s,  relying  upon  tlie 
right  to  take  toll,  is  referred  to  in 
Louisville  Water  Co.  v.  Clark,  143 
U.  S.  1  (1892).     Concerning  this  sub- 
ject, see  §  900,  infra.    In  Oliio,  etc. 
R'y  V.  People,  123  111.  467  (1888),  the 
covirt  referred  to  but  did  not  decide 
the  question  wliethcr  a  state  could 
withdraw  its  consent  to  a  consolida- 
tion after  the  consolidation  had  been 
made.    The  legislature  cannot,  under 
its  reserved  power,  compel  a  dam 
company  to  erect  new  fish- ways  after 
it  has  compelled  them  to  jxiy  dam- 
ages to  fish  owners.     Commonwealth 
V.    Essex    Co.,  79    Mass.   239  (1859). 
Under  its  reserved  right  the  legisla- 
ture may  amend  the  charter  of  a  col- 
lege which  has  private  stockliolders, 
but  to  which  the  state  contributes 
fiinds,  so  that  instead  of  the  state 
having  four  directors  out  of  eleven 
the  state  shall  have   seven  out  of 
twelve.    Jackson  v.  Walsh,  75  Md. 
304  (1892);  but  see  Sage  v.  Dillard, 
15  B.  Mon.  (Ky.)  340,  357  (1854);  State 
V.  Adams,  44  Mo.  570  (1869);  Allen  v. 
McKean,  1  Sumn.  276  (1833);  S.  C,  1 
Fed.  Cas.   489.    Under  its  reserved 
right  to  amend  or  repeal  a  charter, 
the    legislature    may    authorize    a 
change  in  the  location  of  a  college, 
even  though  the  citizens  of  the  place 
where  it  was  first  located  donated 
largely  to  its  funds.     Brj'an  v.  Board 
of  Education,   151  U.  S.  639  (1894). 


904 


CH.  XXVIII.] 


AMENDMENTS   TO   CHAKTEKS. 


[§  501. 


The  supreme  court  of  the  TTnited  States  has  said  that  "a  power 
reserved  to  the  legislature  to  alter,  amend,  or  repeal  a  charter 
authorizes  it  to  make  any  alteration  or  amendment  of  a  char- 
ter granted  subject  to  it  which  will  not  defeat  or  substantially 
impair  the  object  of  the  grant,  or  any  rights  vested  under  it, 
and  which  the  legislature  may  deem  necessary  to  secure  either 
that  object  or  any  public  right."  ^  Under  the  reserved  power 
to  amend  a  charter  the  legislature  may  authorize  the  consoli- 
dation of  railroads.'    A  general  statute  reserving  the  power  to 


Where  a  gas  company  has  an  exclu- 
sive riglit  to  supply  gas  to  a  city, 
subject  to  the  right  of  the  legisla- 
ture to  alter  or  revoke  the  same,  the 
legislature  may  authorize  the  city  to 
construct  its  o\\-n  gas-works.  A  mu- 
nicipal ordinance  is  not  such  a  con- 
tract as  is  protected  by  the  constitu- 
tion of  the  United  States  in  regjird 
to  impairing  tlie  validity  of  contracts. 
It  is  a  contract  that  is  protected  in 
the  same  way  us  contracts  of  imlivid- 
uala.  Hamilton,  etc.  Co.  v.  Hamilton 
City,  140  U.  S.  2oS  (1892).  As  to  the 
Litter  i)oint,  see  contra.  City  R'y  v.  Citr 
izons' Street  R.  li..  160  U.&  5o7(1897)l 
Where  an  amendment  exempts  the 
company  from  taxation  and  provides 
that  it  shall  furnish  the  city  witli 
water  free  of  cost,  a  repeal  of  the 
exemption  repeals  the  obligation  as 
to  water.  Louisville  Water  Ca  v. 
Clark,  143  U.  S.  1  (1S92).  An  exemp- 
tion from  taxation  may  be  repealed 
under  the  reserved  riglit  to  amend, 
etc.  Pearsall  r.  Great  Northern  R'y, 
161  U.  S.  646,  663(1896);  Wagner  Free 
Institute  v.  Philadelphia,  1.32  Pa.  St 
612  (1890).  As  to  such  repeals  see 
§  5726,  infra.  Under  the  reserved 
power  to  amend  or  repeal  a  charter 
the  legislature  may  compel  the  cor- 
poration to  pay  wages  weekly  to  its 
employees.  State  v.  Brown,  etc.  Mfg. 
Ca,  18  R  L  16  (1892).  Under  the  re- 
served right  to  amend  the  charter 
the  legislature  may  amend  so  as  to 
confine  the  road  to  a  particular  route, 
and  outstanding    contracts   of   the 

90 


company  do  not  prevent  such  an 
amendment.  Macon,  etc.  R.  R.  r. 
Gibson,  85  Ga.  1  (1890).  In  regard  to 
the  question  of  the  constitutionality 
of  a  radical  amendment  to  a  charter 
under  the  reserved  right  to  amend, 
see  Shields  v.  Ohio,  9.1  U.  S.  319 
(1877);  Sinking  Fund  Cases,  99  U.  S. 
700  (1878);  Pennsylvania  Ojllege 
Cases,  13  Wall.  190  (1871);  Miller 
r.  State,  15  WalL  478(1872);  Spring 
Valley  Water-works  v.  Schottler,  110 
U.  S.  347  (1884);  Close  v.  Glen  wood 
Cemetery,  107  U.  S.  466  (1882).  Au- 
thorizing one  railroad  to  subscribe 
for  stock  in  another  railroad  has  Ijeen 
held  legal  White  v.  Syracuse,  etc. 
R  R.,  14  Barb.  559  (1853).  Also  bor- 
rowing money  and  building  branches. 
Northern  R.  R.  v.  Miller,  10  Barb.  2C0 
(1851).  Also  reducing  capital  stock. 
Joslj-n  V.  Pacific  Mail  S.  S.  Co.,  13 
Abb.  Pr.  (N.  S.)  329  (1872).  See  also 
White  Hall,  etc.  R.  R.  v.  flyers,  10 
Abb.  Pr.  (N.  S.)  34  (1872);  State  v. 
Accommodation  Bank,  26  La,  Ann. 
288  (1874).  The  extension  of  the  line 
from  six  to  seventeen  miles  was  held 
to  require  a  unanimous  accep.tance 
iji  2^briskie  v.  Ilackensack,  etc.  R.  R, 
18  N.  J.  Eq.  178  (1867). 

1  New  York  «fc  New  England  R  R 
r.  Bristol,  151  U.  S.  556  (1894). 

■-'  Market  Street  R'y  r.  Hellman,  109 
Cal.  571  (1895);  Hale  v.  Chesliire  R.  R, 
161  Mass.  443  (1894);  Bishop  r.  Brain- 
erd,  23  Conn.  289  (1859).  Contra, 
Kenosha,  etc.  R  R  r.  Marsh,  17  Wis. 
13  (1863),  a  dictum.  Mowrey  r.  Indian- 


§  502.] 


AMENDMENTS   TO   CHARTEES. 


[CH.  XIVIII. 


amend  or  repeal  charters  is  a  part  of  all  special  charters  passed 
subsequently.^ 

§  502.  Dissenting  stoclholilcrs  remedy  af/ainst  an  ilhgal 
amendment — Where  an  unauthorized  and  illegal  amendment 
has  been  accepted  by  a  corporation  and  -is  about  to  be  acted 
upon,  a  stockholder  has  two  remedies.  If  he  lias  not  paid  his 
subscription,  he  may  consider  himself  released  from  his  liabil- 
ity to  pay  the  subscription,  or  he  may  begin  suit  in  equity  to 
obtain  an  injunction  against  or  to  set  aside  any  action  by  the 
corporation  under  the  amendment.''     If  the  stockholder  has 


apolis,  etc.  R.  R.,  4  Diss.  78  (18G0) ;  S.  C, 
17  Fed.  Cas.  930.  See  also  §  89G,  infrcL. 
A  subscription  for  stock  is  not  re- 
leased by  a  subsequent  consolidation 
of  the  company  with  another,  unless 
such  consolidation  is  a  fundamental 
alteration  of  the  organization.  Mor- 
rill V.  Smith  County,  89  Tex.  529  (1896). 
It  has  been  held  that,  under  its  re- 
served power,  the  legislature  may 
authorize  a  road  to  lease  to  another. 
Durfee  v.  Old  Colony,  etc.  R.  R.,  87 
Mass.  230  (1862).  Under  the  reserved 
right  to  amend  the  charter,  an  amend- 
ment authorizing  a  lease  is  not  vaUd 
except  with  the  unanimous  consent 
of  the  stockholders.  Dow  v.  North- 
ern R.  R.,  36  Atl.  Rep.  510  (N.  H.,  1887), 
giving  an  exhaustive  discussion  of 
the  question. 

1  See  §  2,  supra.  A  general  antece- 
dent statute  reserving  the  right  to 
amend  does  not  apply  to  subsequent 
amendments  to  an  old  charter  where 
it  was  not  so  intended.  A  new  char- 
ter may  be  so  drawn  as  to  be  free 
from  such  a  general  antecedent  stat- 
ute. ,New  Jersey  v.  Yard,  95  U.  S. 
104  (1877),  rev'g  37  N.  J.  L.  228.  Where, 
subsequently  to  the  incorporation  of 
a  company,  a  general  act  reserves  to 
the  legislature  the  right  to  amend  or 
repeal  any  and  all  charters,  the  legis- 
lature may  repeal  any  amendments 
to  the  charter,  so  far  as  such  amend- 
ments are  passed  after  the  general 
act,  where  the  amendments  do  not 
expressly  waive  the  legislative  right 


of  amendment  or  repeal  But  any 
amendment  should  be  "saving,  when- 
ever that  f)ower  was  exerted,  all 
rights  previously  vested."  An  ex- 
emption from  taxation  may  l>e  re- 
pealed under  the  reserved  jiowcr. 
(Approving  Toiulinson  v.  Je&sup,  15 
Wall.  454  —  1872.  and  Railroad  Co.  v. 
Maine,  96  U.  S.  199  — 1877.)  Creditors 
stand  upon  the  same  footing  in  this 
respect  Louisville  Water  Ca  v. 
Clark,  143  U.  S.  1  (1892). 

2  This  rule  is  recognized  and  aj> 
plied  in  most  of  the  cases  of  this 
chapter.  See  also  Cleiirwater  v. 
Meredith,  1  Wall.  25  (1863).  holding 
that  the  stockliolder  was  released, 
and  saying:  "  Clearwater  could  have 
prevented  this  consolidation  had  he 
chosen  to  do  so;"  Nugent  v.  Super- 
visors, 19  Wall.  241  (1873).  An  amend- 
ment to  the  charter  materially  chang- 
ing the  terminus  releases  a  dissenting 
subscriber  for  stock  from  his  subscrip- 
tion. Kenosha,  etc.  R.  R  v.  Marsh, 
17  Wis.  13  (1863).  A  change  of  the 
termini  under  an  amendment  to  the 
charter  releases  previous  subscribers, 
there  being  no  reserved  right  to  make 
such  amendment.  Snook  v.  Georgia 
Imp.  Co.,  83  Ga.  61  (1889).  A  fimda- 
mental  change  in  the  corporation  re- 
leases subscribers.  Greenbrier  Ind. 
Exposition  v.  Rodes,  37  W.  Va,  738 
(1893);  Buffalo,  etc.  R.  R.  r.  Pottle,  23 , 
Barb.  21  (1856).  A  change  in  the  plan 
of  organization  so  as  to  have  a  larger 
capital  stock  than  was  originally  in- 


906 


CH.  XXVIII.] 


AMEXDMEXTS    TO    CHAKTEES. 


[§  502. 


already  paid  his  subscription,  then  his  only  remedy  is  an  in- 
junction or  a  suit  to  set  aside.*  In  Pennsylvania  it  has  been 
held  that  the  stockholder  may  have  an  injunction  herein,  but 
only  until  the  corporation  shall  have  purchased  his  interest  in. 


tended  releases  a  subscriber.  Nor- 
wich, etc.  Ca  V.  HockaJay,  89  Va.  557 
(WJ'-ir  A  cbangy  of  route  releasee  the 
subscriber.  Champion  v.  Memphis, 
etc.  R.  R.,  35  Miss.  092  (185S).  A  cliar- 
ter  amendment  enhirging  the  corpo- 
rate objects  from  tire  and  accident  to 
fire,  marine,  and  inland  insurance  re- 
leases dissenting  stockholders.  Ash- 
ton  V.  Burbank,  2  DilL  435  (1S73|; 
a  C.  2  Fed.  Cas.  20.  A  legi.slative 
amendment  nut  accepted  by  tlie  com 
pany  i.s  no  defense  to  a  subscription. 
Chattanooga,  etc.  R  R  v.  Wartlien, 
98  Ga.  5'jy  (1890).  In  England  cases 
arise  releasing  the  subst-nljor  when 
the  memoranda  of  associiition  vary 
from  the  prospectus.  Sttjwart's  Case, 
L.  R  1  Ch,  App.  574  (1806);  Web- 
ster's Case,  L.  R  2  Eq.  741  (1800); 
Sliip's  Case,  2  De  G.,  J.  &  &  544  1 180.5;; 
Downes  r.  Ship,  L.  R  3  H.  L.  343 
(1808).  Cf.  Nixon  v.  Brownlow,  3  IL 
&  N.  686  (185.8);  Norman  v.  MiU-hell, 
5  De  G.,  M.  &  G.  W8  (1854).  See  also 
Dorris  V.  Sweeney,  60  N.  Y.  403  (1875). 
Where,  prior  to  incorporation,  a  per- 
son agrees  to  take  stock  in  a  coqK> 
ration  to  furnish  incandescent  elec- 
tric lighting,  a  corix)ration  to  furnish 
electricity  and  jtower  cannot  enforce 
his  subscription.  Marysville,  etc 
Ca  V.  Johnson,  109  Cal.  192  (1895). 
Where  the  cl»art«r  varies  from  the 
subscription  paper  in  that  the  cap- 
ital stock  is  doubled  and  the  objects 
changed,  a  sul>^criber  is  not  bound, 
even  tliKU;,'!)  he  delays  sevenil  montlis 
in  repudiating  the  contract  Baker 
r.  Fort  Worth  Board  of  Trade,  8  Tex. 
Civ.  App.  560  (1894).  A  sul^.ription 
to  a  joint-stock  association  or  part- 
nership cannot  be  enforced  by  a 
corporation  subs»'<|ucntly  organized. 
Knottsville,  etc  Co.  t?.  Mattingly,  3.5 


S.  W.  Rep.  1114  (Ky.,  1S9C).  If  the 
statute  requires  the  prulile  and  esti- 
mates to  be  made  before  municipal 
aid  is  given,  a  subsequent  variation 
releases  the  subscription.  State  v. 
Morristown,  93  Tenn.  239  (1893). 
After  a  winding-up  has  commenced 
there  can  be  no  release  herein.  Oakea 
V.  Tunpinnd,  L.  R  2  IL  L.  325  (18C7). 
In  oi)i)osition  to  the  above  rule  of 
law,  there  are  some  decisions  holding 
that  the  subscribers'  only  remedy  is 
an  injunction.  Were  it  not  tliat  the 
great  weight  of  authority  holds  other- 
wise, this  view  would  be  commended 
as  the  only  logical  result  of  the  law. 
There  is  no  reason  why  a  stockholder 
who  lias  not  f)aid  his  subscrii)tion 
should  be  better  oil  than  ho  who  has 
met  tliat  obligation.  See  §  187,  supra; 
also  Hays  r.  Ottiiwa,  etc  R  R,  01  111. 
422  (1871);  Pacific  R.  R  v.  Uughcs,  23 
Ma  291  (1855);  Martin  v.  Pensacola 
R  R,  8  Fla.  370.  389  (1^59);  Ware  r. 
Grand  Junction  Water  Works,  2  Russ. 
&  M.  470  (1831);  First  Nat  Bank  v. 
Cliarlotte,  85  N.  C.  433  (1881).  The 
plea  of  relea.se  must  allege  accept- 
ance by  the  corjtoration,  and  injury 
to  the  defendant  sued  on  his  sub- 
scription. Uawkins  v.  Mississippi, 
etc  R  R,  35  Miss.  088  (ia58). 

•  This  reme  ly  also  is  supported  by 
a  large  numlx;r  of  the  cases  in  this 
chapter.  See  Stevens  v.  Rutland,  etc, 
K  R.  29  Vt  545  11851);  Black  n  Del- 
aware, etc  Canal  Co.,  24  N.  J.  E<i.  455 
(1873);  Mowrey  v.  Indianai>olis,  etc 
R  R,  4  Bisa  78  (1800k  S.  C,  17  Fed. 
Cas.  930;  Ware  v.  Grand  Junction 
Water  Work.s,  2  Russ.  &  M.  470  (1831). 
The  stockholder  cannot  enjoin  par- 
ties from  applying  to  the  legislature 
for  the  amendment  St(»ry  v.  Jersey 
City,  etc  Ca,  16  N.  J.  Eq.  13  (1863), 


907 


§  503.] 


AMENDMENTS   TO   CHAETERS. 


[cn.  xxvin. 


the  corporation.^  This  decision,  however,  has  been  douljted, 
and  hardly  seems  consistent  with  well-estal>li.slied  principles 
protecting  persons  in  their  right  to  retain  their  property  except 
as  taken  from  them  under  the  power  of  eminent  domain.' 

§  503.  Assent  and  acquiescence  as  a  har  to  the  stochhohlcrs 
remedy. —  A  stockholder  may  be  estopped  from  objecting  to  an 
amendment  by  his  express  or  implied  acquiescence  tliercin. 
Any  acts  indicating  an  acceptance  by  him  of  the  amendment 
bind  him  and  bar  his  siiit.^  Acquiescence  may  sometimes  grow 
out  of  his  silence  or  delay,  under  circumstances  that  called  on 
him  to  dissent  if  he  so  intended.*    His  assent,  however,  is  not 


reviewing  the  cases;  Stevens  v.  Rut- 
land, etc.  R  R.,  29  Vt.  545  (1851). 

1  Lauman  v.  Lebanon  Valley  R.  R., 
30  Pa.  St.  42  (1858),  approved  in  State 
V.  Bailey,  16  Ind.  46  (1801).  Cf.  Sliip 
V.  Crosskill,  L.  R  10  Eq.  73  (1870); 
Stewart  v.  Austin,  L.  R.  3  Eq.  299 
(1866),  holding  that  the  recovery  back 
cannot  be  in  a  court  of  equity. 

2  Mowrey  v.  Indianapolis,  etc.  R.  R, 
4  Biss.  78  (1806);  S.  C,  17  Fed.  Cas. 
930. 

3  Bedford  R  R  v.  Bowser,  48  Pa. 
St.  29  (1864).  Long  delay  may  con- 
stitute a  ratification  herein.  Gilford 
V.  New  Jersey  R.  R,  10  N.  J.  Eq.  171 
(1854).  No  formal  acceptance  of  an 
amendment  is  necessary.  Bangor, 
etc.  R  R  V.  Smith,  47  Me.  34  (1859); 
State  V.  Sibley,  25  Minn.  887  (1879); 
Hope  Mut.  F.  Ins.  Co.  v.  Beckman,  47 
Mo.  93  (1870);  Covington  v.  Coving- 
ton, etc.  Co.,  10  Bush  (Ky.),  09  (1874); 
Kenton  County  Court  v.  Bank  Lick 
Tump.  Co.,  10  Bush  (Ky.),  529  (1875); 
Sumrall  v.  Sun  Mut.  Ins.  Co.,  40  Mo. 
27  (1867) ;  Smead  v.  Indianapolis,  etc. 
R  R,  11  Ind.  104  (1858).  Cf.  Pingiy 
V.  Washburn,  1  Aiken  (Vt.),  204  (1826). 
See,  in  general,  Memphis  Branch  R 
R.  V.  Sullivan,  57  Ga.  240  (1876);  Hous- 
ton V.  Jefferson  College,  63  Pa.  St.  428 
(1809);  Danbury,  etc.  R  R  v.  Wilson, 
22  Conn.  435  (1853);  Vermont,  etc.  R 
R  V.  Vermont  Central  R  R.,  34  Vt. 
2  (1861);  Hayworth  v.  Jtmction  RR, 


13  Ind.  348  (1859);  Mills  v.  Central  R. 
R,  41  N.  J.  Eq.  1  (1880);  Zabriskie  r. 
Hackensack,  etc.  R  R,  18  N.  J.  Eq. 

178  (1807);  Ex  parte  Booker,  18  Ark 
338  (1857);  Upton  t'.  Jackson,  1  Flip. 
C.  C.  413  (1874);  S.  C,  28  Fed.  Caa. 
844;  Goodiu  v.  Evans,  18  Ohio  St. 
150  (1808);  also  §  040  and  ch.  XLIV, 
infra.  If  the  stockholder  subscribed 
after  the  amendment  was  made  be 
cannot  complain.  Eppes  v.  Missis- 
sippi, etc.  R  R,  35  Ala.  33,  54  (1859); 
IMcClure  v.  People's  Freight  R'y,  90 
Pa.  St.  209  (1879).  If  a  stockholder 
does  not  object  to  an  amendment,  it 
is  not  for  a  person  whose  land  is 
being  taken  under  eminent-domain 
proceedings  to  object.  Ames  v.  Lake 
Superior,  etc.  R.  R,  21  Minn.  241,  291 
(1875).  Changes  and  amendments  as 
to  the  route  do  not  release  the  sub- 
scriber where  he  took  part  therein. 
Owenton,  etc.  Co.  v.  Smith,  13  S.  W. 
Rep.  420  (Ky.,  1890).  Bonds  issued 
under  an  amendment  to  a  charter 
with  the  consent  of  all  the  stock- 
holders will  be  enforced,  even  though 
the  amendment  was  invalid.  John- 
son V.  Mercantile,  etc.  Co.,  94  Ga.  324 
(1894). 

*  Commonwealth  v.  Cullen,  13  Pa, 
St.  133  (1850);  Martm  v.  Pensacola, 
etc.  R  R,  8  Fla.  370  (1859);  Owen  v. 
Pm-dy,  12  Ohio  St.  73  (1801).  Contra, 
Hamilton  ]Mut.  Ins.  Co.  v.  Hobart,  08 
Mass.  543  (1854).    Parties  taking  part 


908 


OH.  xivni.] 


AMENDMENTS   TO    CHAETERS. 


[§  603. 


to  be  presumed,  but  must  be  proven.*  A  court  of  equity  will 
go  far  to  aid  a  dissenting  stockliolder,  where  he  applies  promptly 
and  before  large  investments  and  many  changes  are  made  on 
the  faith  of  the  acts  complained  of.  But  laches  will  not  be 
tolerated  by  the  courts,  especially  where  important  interests 
are  involved.' 


in  an  extension  of  the  road  cannot 
object  tliat  the  charter  anienilment 
authorizin};  it  was  unconstitutioiiiiL 
Jones  V.  Concord,  etc,  R.  IL,  30  AtL 
Rep.  614  (N.  H,  1802).  Altliough  a 
radical  cliange  in  the  location  of  a 
railrojid  after  a  subscription  luus  been 
made  reh-ust^'s  tiie  suliscription,  yet 
the  6ul)8<:ril)er  may  by  his  acts  be 
bound  by  such  cliange.  Lowell  V. 
Wa-sliingtou  Ca  IL  It,  37  Atl.  Kei>. 
809  (Ma.  1897).  Although  a  stock- 
holder may  enjoin  a  consolidation  of 
his  company  with  another  under  a 
statute  pa.ssed  after  the  incorj)orar 
tion,  the  object  of  the  consolidiition 
being  dilTerent  from  that  of  the  orig- 
inal cori •oration,  yet  where  the  stock- 
holder delays  applying  to  the  court 
for  nearly  a  year,  and  in  the  mean- 
time the  consolidated  compjiny  has 
borrowed  money  and  given  mort- 
gages, and  such  mortgages  are  about 
to  be  foreclosed,  the  complaining 
Btockholder  is  guilty  of  laches  and 


his  remedy  is  barred.  Rabe  v.  Dun- 
Lip,  51  N.  J.  Eq.  40  (1893).  A  consoli- 
dation of  railroads  under  an  aiiKiid- 
ment  to  the  cluirter  may  be  jtrevented 
by  a  single  stockholder.  13ut  several 
years'  delay  in  complaining  is  fatiil. 
The  stockholder  then  can  only  re- 
cover the  value  of  his  stock  and  past 
dividends.  Dei)Osit  Bank  v.  Barrett, 
13  S.  W.  Rep.  337  (Ky.,  1890).  Where 
st^xjkholders  in  a  college  exchange 
their  stock  for  scholars! lips,  a  re- 
moval of  the  college  to  anotlier  loca- 
tion under  an  amendment  to  tlie 
charter,  such  amendment  having 
boon  made  twenty-Qve  years  prior  to 
such  removal,  will  not  be  enjoinetL 
Bn-an  v.  Board  of  Education,  90  Ky. 
822  (1890). 

J  March  v.  Eastern  R.  R.,  43  N.  IL 
515  (18G2);  Union  Locks  &  Canals  v. 
Towno.  1  N.  H.  44  (1817);  Ireland  v. 
Palestine,  etc  Tump.  Co.,  19  Ohio  St. 
309  (1809). 

2  See  ch,  XLIV,  infra. 


909 


CHAPTER  XXIX. 


"TRUSTS "AND  UNINCORPORATED  JOINT-STOCK  ASSOCIATIONa 


A.  "TRUSTS. 

503a.  Definition  and  lejjalitjr  of  a 
"trust"  —  Decisions  in  tlie 
various  states  on  tliis  sub- 
ject. 

5035.  Further  inquiry  as  to  the  le- 
gality of  a  "trust." 

503c.  Liability  of  trustee  and  cer- 
tificate-holders. 

503cZ.  Qualifications,  powers,  etc., 
of  the  trustees  and  of  cer- 
tificate-holders. 


B.   UXINCORI'ORATED  JOINT-STOCK  AS- 
SOCIATIONS. 

§  G04  Definitions  —  Joint-stock  com- 
jianics.  clubs,  exclian^^es, 
etc, —  Ownorsliip  of  land. 

005.  Statutory  joint-stock  couijia- 
nii's. 

606.  Joint-stock  companies  may 
arise  by  imnlication  of  law. 

507.  How  a  pf-rson  iM-comes  a  mem- 

ber —  Tninsfers. 

508.  Liability  of  members  to  cred- 

itors and  to  the  company. 

509.  Actions  by  members  agamst 

c>fiicei-s  and  the  compjiny. 

510.  Dissolution. 


§  503«.  Dvjinition  and  legality  of  a  ^^  trust'''  —  Decisions  in 
the  various  states  on  this  subject — The  word  "  trust "  was  first 
used  to  mean  an  agreement,  between  many  stockholders  ir. 
many  corporations,  to  phace  all  their  stock  in  the  hands  of 
trustees  and  to  receive  therefor  trust  certificates  from  the 
trustees.  The  stockholders  thereby  consolidate  their  interests 
and  become  trust-certificate  holders.  The  trustees  own  the 
stock,  vote  it,  elect  the  ofiicers  of  the  various  corporations,  control 
the  business,  receive  all  the  dividends  on  the  stock,  and  use  all 
these  dividends  to  pay  dividends  on  the  trust  certificates.  The 
trustees  are  periodically  elected  by  the  trust-certificate  holders. 
The  purpose  of  the  "  trust "  is  to  control  prices,  prevent  compe- 
tition, and  cheapen  the  cost  of  production.  The  Standard  OH 
Trust,  the  American  Cotton-Seed  OU  Trust,  and  the  Sugar 
Trust  were  examples  of  this  method  of  combination.^ 


^The  committee  of  the  House  of 
Representatives  at  Washington,  in 
their  report,  explain  the  natm-e  of  the 
Standard  Oil  Trust  and  Sugar  Tnist 
very  clearly.  The  committee  reports 
"that  there  exist  a  certain  number 
of  corporations  organized  under  the 
laws  of  the  different  states  and  sub- 


910 


ject  to  their  control;  that  these  cor- 
porations have  issued  their  stock  to 
various  individuals,  and  that  these 
individual  stockholders  have  surren- 
dered their  stock  to  the  trustees 
named  in  the  agreements  creating 
these  trusts,  and  accepted  in  lieu 
thereof    certificates    issued    by  th© 


on.  XXIX.]  TKUSTS,  ETC.  [§  503(2. 

But  the  word  "  trust "  has  a  wider  and  more  pojiular  mean- 
ing. It  is  used  to  designate  any  combination  of  producers  for 
the  purpose  of  controlling  prices  and  suppressing  competi- 
tion. In  this  sense  of  the  word,  all  contracts,  agreements,  and 
schemes,  whereby  those  who  were  competitors  combine  to  regu- 
late prices,  are  "  trusts." 

During  the  past  ten  years  trusts  have  come  into  great  prom- 
inence. They  have  multiplied  rapidly  and  have  extended  into 
many  branches  of  business.  They  became  the  object  of  great 
])opular  opposition,  and  their  legality  has  been  fiercely  assailed, 
both  in  the  courts  and  V)y  means  of  prohibitory  statutes. 

The  courts  have  held  with  great  uniformity  that  these  com- 
binations are  illegal  if  their  {)urjK)se  is  to  restrict  production, 
raise  prices,  or  restrain  trade.  The  law  is  clear  that  any  com- 
bination of  competing  concerns  for  the  purpose  of  controlling 
prices,  or  limiting  production,  or  suppressing  competition,  is  con- 
trary to  public  policy  and  is  void.  This  principle  of  law  has 
been  applied  with  great  rigor  to  trusts,  the  recent  combina- 
tions in  trade.  The  two  leading  cases  on  the  subject  are  the 
Sugar  Trust  decision  in  New  York'  and  the  Standard  Oil  Trust 
decision  in  Ohio.''  Many  cases  showing  the  dilferent  circum- 
stances under  which  this  rule  has  been  applied  are  given  in 

trastees  named  therein-    The  a^ee-  *  The  state  Mrill,  at  the  instance  of 

ments  provide  that  the  various  cor-  the  attorney-general,  forfeit  tliecliar- 

porations  whose  stock  is  surrendered  ter  of  a  corporation  whose  stockliold- 

to  the  trustees  shall  preservo  their  ers  have  entered  into  a  "  trast "  with 

identity  and  carry  on  their  business."  the  stockholders  of  comi)eting  corjx)- 

See  4  R'y  &  Corp.  L.  J.  98.     Mr.  S.  C.  rations  for  the  purpose  of  forming  a 

T.  E)o<Jd,  the  general  solicitor  and  monopoly  in  and  raising  the  price  of 

originator  of  the  Standard  Oil  Trust,  sugar.    People  r.  North   River,  etc 

defines  a  trast  as  "an  arrangement  Ca,  121  N.  Y.  582  (18'JO).    This  case 

by  which  the  stockholders  of  various  broke  up    the  "Sugar  Trust"  and 

corponitions  place  their  stocks  in  the  drove  it  into  transferring  all  its  iin»i>- 

hiiuds  of  certain  trastees,  and  take  in  erty  to  a  New  Jersey  corporation  or- 

lieu  thereof  certificates  showing  each  ganized  for  that  purposa 

shareholder's  equitable  interest  in  all  ^The  next  imf>ortant  case  was  State 

the  stock  so  heKL    The  r&sult  is  two-  v.  Standard  Oil  Co.,  49  Ohio  St  137 

fold:    1.    The  stockhoMers   thereby  (1892).    ThLs  case  declared  illegal  the 

become  interested  in  all  the  corpora-  Standard  Oil   Trust.    That  trust  is 

tions  whoise  stocks    are  thus  hel<L  now  in  process  of  lifjuidation.    These 

2.  The  trustees  elect  the  directors  of  two  rases  are  now  the  leading  au- 

the  sevenil  coriwrations."  See?  R'y  «&  thorities  on  this  subject. 
Corpi  L.J.2ii<i. 

on 


§  503a.] 


TRUSTS,  ETC. 


[CH.  XXIX. 


the  notes  below,  arranged  in  the  alpbabetical  order  of  the  vari- 
ous states.* 
These  cases  indicate  the  complicated  questions  and  impor- 


1  California:  Master  stevedores  may 
form  an  association  for  the  puri)Oses 
of  fixing  charges  and  agreeing  that 
all  business  done  by  them  sliall  be 
for  the  benefit  of  the   association. 
Herriman    v.    Menzies,   11  o    CaL   IG 
(1896).    "Monopoly  signifies  the  sole 
power  of  dealmg  in  a  particular  thing, 
or  doing  a  particular  thing,  either 
generally  or  in  a  particular  place." 
San  Diego  "Water  Co.  v.  San  Diego 
Flume  Co.,  108  Cal.  549  (1895).     A  con- 
tract whose  effect  is  to  give  a  monop- 
oly in  the  sale  of  bags,  by  the  vendor 
agreeing  to  sell  to  one  party  exclu- 
sively, is  illegal,  and  no  damages  can 
be  collected.    Pacific  Factor  Co.  v. 
Adler,  90  Cal.  110  (1891).    Although 
the  state  is  prosecuting  a  suit  to  for- 
feit the  charter  for  entering  into  a 
combination,  yet  a  sale  of  part  of  the 
corporate  property  to  a  stockholder 
pending  the  suit  is  legal,  and  the  re- 
ceiver cannot  follow  the  property.    A 
•wi-it  of  prohibition  will  issue  against 
Mm.    Havemeyer  v.  Superior  Coiu't, 
84  CaL   327  (1890).    Where  aU  the 
manufacturers  of  lumber  at  a  certain 
point  contracted  to  sell  to  a  corpora- 
tion all  the  product  of  the  mills  so 
far  as  such  product 'was  sold  in  four 
counties,  and  the  mills  agreed  not 
to 'sell  to  any  other  pai-ties  in  those 
counties  except  upon  a  forfeit  to  the 
corporation,  the  court  held  that  any 
one  of  the  mills  could  repudiate  the 
contract.    In  a  suit  brought  by  the 
corporation  against  one  of  the  mills 
for  refusing  to  live  up  to  the  con- 
tract, the  court  held  that  the  corpora- 
tion coiild  not  recover.    Santa  Clara, 
etc.  Co.  V.  Hayes,  76  CaL  387  (1888). 

Illinois:  Where  a  person  conveys 
property  to  a  corporation,  the  object 
being  to  place  the  stock  of  that  cor- 
poration in  the  hands  of  trustees  to 
create  a  trust,  such  person,  having 


recovered  possession  of  his  property, 
may  defend  against  his  coutniet  to 
convey.    Bisliop  v.  A  niericnn,  etc.  Co., 
157  I IL  284  (1895).     Quo  ivun-auto  lies 
against  a  corporation  formed  to  pur- 
chase substantially  all  the  dLstiller- 
ios  in  the  country.     Dist  illing,  etc.  ( 'o. 
V.  People,  156  111"  448  (1895).    The  Illi- 
nois stivtute  of  1891  against  trusts  is 
constitutionaL     Ford  v.  Chicago,  etc. 
Assoc,  155  IlL  166  (1895).    The  stato 
may  forfeit  the  charter  of  a  live- 
stock corixjnition  wliere  it  limits  the 
number  of  agents  which  each  of  its 
stockholders  may  employ.     People  v. 
Chicago  L.  S.  Exchange.  48  N.  K  Rep. 
1062  (IIL,  1897).    A  stockholder  in  a 
coi-poration  cannot  sustain  a  bill  to 
have  the  charter  forfeited  and  the 
corporation  wound  up  on  the  ground 
that  it  was  formed  to  purchase  and 
combine  various  competing  linseed- 
oil  mills  for  the  purpose  of  forming  a 
monopoly.    The  state  alone  can  ask 
for  such  a  forfeiture.    Moreover,  the 
stockholder,  by  being  a  stockholder, 
is  estopped  from  complaining,  and  is 
presumed  to  have  had  knowledge  of 
the  facts  from  the  time  that  he  be- 
came a  stockholder.    Coquard  v.  Na- 
tional L.  S.  Co.,  49  N.  E.  Rep.  563  (111., 
1898!.    Although    the  general  stat- 
ute authorizes  incorporation  for  any 
"  lawful  purpose,"  yet  an  incorpK^ra- 
tion  to  buy  a  majority  of  the  stock 
of  each  of  four  competing  gas  cor- 
porations in  a  city  is  illegal  where 
the  piu-pose  is  to  create  a  monopoly. 
The  state  may  by  suit  have  the  char- 
ter forfeited.    People  v.  Chicago  Gas 
T.   Co.,  130  IIL  268   (1889).    All  gas 
companies  owe  a  duty  to  the  public. 
An  agreement  of  two  companies  in 
one  city  to  keep  out  of  each  other's 
territory  is  void.     Chicago  GasL.  Co. 
V.  People's  Gas  L.  Co.,  121  IIL  530 
(1887).    In  Illinois  all  the  grain  deal- 


912 


en.  XXIX,] 


TRUSTS,  ETC. 


[§  503a. 


tant  litigation  that  have  arisen  by  reason  of  the  trusts.  It  is 
believed,  however,  that  the  volume  of  such  litigation  will  de- 
crease rather  than  increase  in  the  future.    Most  of  the  great 

ers  in  a  to\^Ti  secretly  combiBed  and  one  by  a  business  firm,  and  then  an- 

made  contracts  by  which  they  con-  other  iuenil>er  claims  the  contract, 

trolled  the  price  of  grain  and  the  which  the  firm  lets  to  him,  and  tlien 

local    store-house    accommodations,  the  firm  gives  the  business  to  the 

The  parties  succeeded,  but  disagreed  first  member,  the  ^cond  cannot  col- 

in  their  division  of  tlie  profits.     An  lect  damages.     Fabacher  v.  Bryant, 

action  foran  accounting  was  brouglit  4G  La.  Ann.  8"^0  (1894).    A  stockholder 

by  one  against  another.    The  court  cannot  hold  a  director  liable  for  the 

refused  to  aid  either  party.    The  law  stock  becoming  worthless  by  reason 

will  leave  the  guilty  conspirators  as  of  the  fact  that  the  director  and 

it  finds  them.     Craft  v.  McConoughy,  others  sold  their  stock,  amounting 

79  111.  340  (1875).  to  tliree-fourtlis  of  the  stock,  to  tlie 

luwa:    Tiio  Iowa   statute  against  American  Cotton  Oil  Ti-ust,  and  tliat 

trusts  applies  to  an  agreement  of  in-  the  trust  then  dissolved  the  corjiora- 


surance  comiuinies  to  charge  uni- 
form rates.  Beechley  f.  Mulville,  70 
N.  W.  Kei».  107  (Iowa,  1897). 

Kansas:  Where  an  association  of 
live-stock  commL«ion  merchants  is 


tif>n  by  a  three-fourths  vote,  as  al- 
lowed by  statute,  altliough  the  direct- 
ors as  such  voted  for  the  dissolution. 
Trisconi  v.  Winship,  43  La.  Ann.  45 
(1891).    A  pooling  contract  between 


formed  for  the  purjiose  of  regulating  two  railrojids  competing  for  business 

commLssions,  with  a  jjonalty  for  vio-  between  the  same  points  is  void  as 

lation  of  the  same,  a  member  cannot  against  public  rnjlicy.    The  court  will 

enjoin    the  association    from  exi>el-  leave  the  i»artie3w]iere  they  are.   Tho 


ling  him  for  non-jKiyment  of  the  i)en- 
alty.  Greer  r.  Payne,  4  Kan.  App. 
153  (1896).  Insurance  business  is  not 
interstate  commerce.  Foreign  in- 
surance companies  tliat  combine  to 
control  and  increase  the  rates  of  in- 
surance on  pro|»frty  inside  tho  state 
violate  the  statute  against  trusts,  and 
their  loc^l  agents  are  subject  to  pros- 
ecution therefor.  State  u  Phi[»ps,  50 
Kan,  009  (1893). 


arrangement  in  this  case  was  for  a 
division  of  earnings  Texas,  etc.  li'y 
V.  Southern  Pac.  R'y,  41  La.  Ann.  970 
(1889).  In  Louisiana,  where  several 
fLrms  owned  a  large  quantity  of  India 
bagging,  and  combined  and  agreed 
not  to  sell  except  uf)on  the  consent 
of  a  majority  of  those  who  were  jar- 
ties  to  the  agreement,  the  court  re- 
fused both  to  uphold  the  agreement 
and  to  enforce  the  penalty  for  a  vio- 


Kentucky:  The  agreement  of  two  lation  of  the  compact  India  Bag- 
rival  boats  to  divide  their  cardings  ging  Assoc  r.  Kock,  14  La.  Ann.  lOS 
in  a  certain  proixirtion,  and  if  either  (1^j9). 

owner  sells  he  shall  not  go  into  the        Massachusetts:  The  combination  of 

business  agiiin   for  a  year,  is  void,  two  parties  who  each  claim  a  jKitf-nt 

The  party  who  has  sold  and  then  re-  on  an  article  not  a  prime  necessity 

turned  at  once  to  the  business  is  not  nor  a  staple  commodity  in  the  market 

liable  in  damages.    Anderson  r.  Jett,  is  legal  and  may  be  specifically  en- 

89  Ky.  375  (1889).  forced.    Gloucester,  etc.  Ca  i'.  Ilussia 

Louisiana:    Where   a    draymen's  Cement  Co.,  154  Mas.s,  92  (1891).     In 

union  has  obtiined  a  monopoly,  and  Central  Shade-Roller  Ca  v.  Cashman, 


dictates  wlio  shall  receive  a  i»articu- 
lar  coDtract,  and  a  contract  is  let  to 


143  Mass.   353  (1887;,  where  ceilain 
shade-roller  manufacturers  formed  a 


06 


913 


§  oOda.] 


TRUSTS,  ETC. 


[cn.  XXIX. 


trusts  have  been  driven  from  their  original  mode  of  organiza- 
tion and  have  reorganized  by  conveying  all  their  proi)erty  to 
a  corporation  organized  for  the  purpose  of  taking  over  the  pro^)- 


corporation  to  sell  their  product,  the 
court  enjoined  one  of  the  parties 
from  repudiating  the  agreement,  but 
said:  "The  agreejfient  does  not  refer 
to  an  article  of  prime  necessity,  nor 
to  a  staple  of  commerce,  nor  to  mer- 
chandise to  be  bought  and  sold  in  the 
market.  ...  It  does  not  look  to  af- 
fecting competition  from  outside  — 
the  parties  have  a  monoix)ly  by  their 
patents  —  but  only  to  restrict  com- 
petition in  price  between  themselves. 
.  .  .  When  it  appears  that  the  com- 
bination is  used  to  the  public  detri- 
ment, a  different  question  will  be 
presented  from  that  now  before  us." 

Michigan:  In  ascertaining  the  mar- 
ket price  of  articles  sold,  the  price  as 
fixed  by  a  combination  in  the  trade 
will  not  be  considered.  Lovejoy  v. 
Michels,  88  Mich.  15  (1891).  A  con- 
tract of  a  concern  not  to  manufac- 
ture a  certain  line  of  articles  in  some 
states  for  five  years  is  void.  West- 
ern, etc.  Assoc.  V.  Starkey,  84  Midi. 
76  (1890).  Where  three  persons  in- 
terested in  a  match  factory  agreed 
to  vmite  their  property  with  that  of 
their  competitors  in  one  large  cor- 
poration, a  monopoly  —  the  Diamond 
Match  Company  —  the  courts  will 
not  enforce  the  contract  between 
these  three  persons  which  specifies 
the  proportion  in  which  each  of  the 
three  was  to  participate  in  the  profits 
coming  to  them  jointly  from  the  mo- 
nopoly. The  history,  character  and 
pui-pose  of  the  match  monopoly  are 
fully  stated  in  this  decision.  Rich- 
ardson V.  Buhl,  77  Mich.  632  (1889). 

Minnesota:  It  is  legal  for  a  large 
number  of  retail  lumber  dealers  to 
form  a  voluntary  association,  and 
agree  that  they  will  not  deal  with 
any  manufacturing  or  wholesale 
dealer  who  sells  directly  to  custom- 
ers, and  thereby  deprives  the  retail 


dealer  of  business,  and  the  by-laws  of 
their  association  may  i)rovido  tliat 
the  secretary  shall  notify  all  mem- 
bers of  the  names  of  wholesjilers  wlio 
sell  in  this  manner  to  consumers.  An 
injimction  against  the  secretary  giv- 
ing sucli  notices  will  not  bo  granted. 
Bohn  Mfg.  Co.  v.  HoUis,  54  Minn.  223 
(1893).  By-laws  of  an  exchange  re- 
stricting the  freedom  of  members  to 
reduce  prices  and  establisli  ollices  for 
selling  are  void.  KoltF  v.  St  Paul 
Fuel  Exchange,  48  Minn.  215  (1892). 

Mississijipi:  Althougli  two  cotton 
compress  companies  have  agreed  to 
consolidate,  and  have  put  tlieir  prop- 
erty in  the  hands  of  a  governing  com- 
mittee to  manage  until  a  new  char- 
ter is  obtained,  ye^either  corix)ration 
may  withdraw  from  tlie  arrange- 
ment, it  being  7iltra  vires.  Greenville, 
etc.  Co.  V.  Planters',  etc.  Co.,  70  ^liss. 
669  (1893).  As  to  the  Mississippi  stat- 
ute, see  also  American  F.  Ins.  Co.  v. 
State,  22  S.  Rep.  99  (Miss.,  1897). 

Missouri:  See  Ski-ainka  v.  Schar- 
ringhavisen,  8  Mo.  App.  522  (1880),  up- 
holding a  pooling  contract  of  certain 
owners  of  stone  quarries  located  in 
St.  Louis,  on  the  ground  that  the  re- 
straint was  local  in  its  effect. 

Nebraska:  Where  the  stockliolders 
of  a  distilling  corporation  transfer 
their  stock  to  trustees,  for  the  purpose 
of  entering  into  a  trust,  such  trustees 
being  the  holders  of  the  stock  of  va- 
rious other  corporations  engaged  in 
the  same  business,  and  trust  certifi- 
cates are  issued  by  them  in  place  of 
the  stock,  the  state,  at  the  instance 
of  the  attorney-general,  will  cause 
the  charter  to  be  annulled  on  the 
ground  of  misuser,  the  corporation 
being  no  longer  engaged  in  a  lawful 
business.  Although  the  coi-porate 
property  was  transferred  just  before 
judgment,  the  court  will  not  allow 


914 


en.  XXIX.] 


TRUSTS,  ETC. 


[§  60Za. 


erty.  Such  has  been  the  case  with  the  Sugar  Trust  and  the 
Cotton-seed  Oil  Trust.  The  decisions  of  the  Xew  York  coui-t 
of  appeals  against  the  Sugar  Trust  and  of  the  supreme  court  of 


its  decree  to  be  evaded.  State  v.  Ne- 
braska Distilling  Co.,  29  Neb.  700 
(1890). 

New  Jersey:  A  corporation  formed 
to  create  a  monopoly  in  the  pottery 
basiness  cannot  enforce  an  agree- 
ment of  one  of  the  ixirties  not  to  en- 
gage in  the  bu-siness.  Trenton,  etc. 
Co.  t'.  Oliphant,  39  AtL  Rep.  923  (N.  J., 
1898).    An  injunction  does  not  lie  at 


form  an  illegal  combination  of  com- 
petitors in  trade.  U.  S.  Vinegar  Co. 
V.  Foehrenbach,  148  N.  Y.  58  (1895). 
A  person  who  buys  a  trust  certifi- 
cate, the  certificate  containing  a  stip- 
ulation binding  the  holder  to  all  the 
terms  of  the  tnist  agreement,  thereby 
becomes  a  party.to  the  illegal  trans- 
action, and  such  person  has  no  stand- 
ing in  court  to  obtain  an  accomiting 


the  instance  of  the  state  to  restrain    and  distribution  of  the  property  or 


a  corix)ratiun  from  transacting  basi- 
ness, even  thougli  it  was  formed  to 
bring  about,  by  conditions  imix)sed 
upon  selling  agents,  a  monoiK>ly  in 
the  cigarette  basiness,  and  had 
largely  succeeded  in  doing  sa  The 
remedy,  if  any,  is  by  quo  warranto. 
The  court  reviewed  the  ca.ses  wherein 
injunction  would  lie.  Stockton  v. 
American,  etc  Co.,  36  AtL  Kep.  971 
(N.  J.,  1897).  "Where  a  contract  be- 
tween a  domestic  railroad  company 
and  a  foreign  railroad  comi>any  is 
declared  illegal  and  void  by  the  court 


l)rofits.  The  whole  agi-eement  and 
transaction  being  illegal,  the  court 
will  leave  the  parties  where  it  finds 
them.  The  court  i)ointed  out  that 
there  was  no  proof  in  this  case  that 
the  defendant  trustees  were  seeking 
to  derive  any  i)ersonal  advantage 
from  the  agreement,  but,  on  the  con- 
trary, were  endeavoring  to  carry  out 
the  wishes  of  nearly  all  of  the  cer- 
tificate-holders. Unckles  v.  Colgate, 
148  N.  Y.  529  (1890).  A  corporation 
formed  by  milk  dealers  to  fix  the 
price  to  bo  i^aid  to  farmers,  etc.,  for 


on  the  ground  that  it  seeks  to  create    milk  is  iUegaL    People  v.  Slilk  Lx 


a  monoiKjly  in  the  coal  business,  and 
the  court  orders  the  domestic  rail- 
road comiMiny  to  cease  complying 
with  such  contract,  the  court  will 
appoint  a  receiver  of  such  comi^any 
if  it  attempts  to  evade  the  decree; 
but  on  proof  that  no  evasion  has  been 


cliange,  145  N.  Y.  2G7  (1893).  Where 
an  Illinois  corixsration  sues  in  New 
York  on  a  subscription  to  its  .stock, 
it  is  no  defense  to  allege  that  the 
company  was  to  create  a  monoi)oly, 
where  the  only  proof  was  certain 
prospectuses,  etc.,  issued  before  the 


attempted  the  court  will  refuse  to  comiKiny  was  .organized.  The  de- 
appoint  a  receiver.  Stockton  r.  Cen-  fense  is  not  good  unless  the  company 
tml  R  Rof  N.  J.,  50  N.  J.  Eq.  489  "was  formed  for  purposes  illegal 
(1892).  It  is  not  iUegal  for  one  stock-  here,  or  was  doing  acts  prohibited  by 
yard  company  to  buy  out  another  the  laws  of  tliis  state  to  its  own  citi- 
stoc-kvard  comp;inv.    WiUoughby  u.  zens  and  corporations."    U.  S.  \in- 


Chicago,  etc.  Co.,  50  N.  J.  Eq.  650 
(1892;;  Ellerman  v.  Chicago,  etc  Ckx, 
40  N.J.  E<i.  217  (1891). 

New  York:  See  People  v.  North 
River,  etc  Co.,  121  N.  Y.  582  (1890). 
It  is  no  defense  to  an  action  to  en- 
force a  subscription  that  after  incor- 
poration the  company  proceeded  to 


91; 


egar  Ck).  v.  Schlegel,  143  N.  Y.  5:j7 
(1894).  It  is  legal  for  a  party  who 
contemplates  constructing  water- 
works to  abandon  the  project  and 
enter  the  employ  of  a  competitor; 
and  he  may  collect  comiHjnsation 
therefor,  although  a  part  of  the  com- 
pensation was    due    to    hia  having 


§  503^.] 


TKUSTS,  ETC. 


[cn.  XXIT. 


Ohio  against  the  Standard  Oil  Trust  liave  convinced  the  trusts 
that  their  original  mode  of  organization  was  illegal  ami  must 
be  abandoned.    The  result  has  been  that  the  trusts  for  the 


abandoned  his  own  enterprise.  Oakes 
V.  Catteraugus  Water  Co.,  143  N.  Y. 
430  (1894).  A  carrier  may  by  special 
agreement  give  reduced  i-ates  to  cus- 
tomers who  stipulate  to  give  it  all 
their  business,  and  refuse  those  rates 
to  others  who  are  not  able  or  will- 
iiig  to  so  stipulate,  provided  that  the 
charge  exacted  from  those  othei's  is 
not  excessive  or  unreasonable.  Lough 
V.  Outerbridge,  143  N.  Y.  271  (1804). 
Where  manufacturers  form  an  ille- 
gal association  to  which  they  pay  a 
certain  sum,  which  they  are  to  for- 
feit if  they  disobey  its  regulations 
and  are  expelled,  one  of  them  can- 
ziot  enjoin  the  association  from  ex- 
pelling him.  This  action  was  to 
enforce  the  agreement,  and  not  to 
recover  back  his  money.  Plioenix 
Bridge  Co.  v.  Keystone  Bridge  Co., 
142  N.  Y.  425  (1894).  In  People  v. 
Sheldon,  139  N.  Y.  251  (1893),  the  de- 
fendant was  convicted  of  the  crime 
of  conspiracy  iinder  the  Penal  Code 
of  New  York,  where  he  and  others 
combined  to  raise  the  price  of  coal 
at  retail  and  destroy  free  competi- 
tion, even  though  no  excessive  price 
was  charged. 

A  combination  between  dealers  in 
sheep,  to  sell  only  to  certain  butchers, 
the  butchers  agreeing  to  buy  only 
from  them,  excepting  that  such  com- 
missions as  were  received  from  busi- 
ness transacted  with  others  should 
be  paid  into  a  common  pool,  is  illegaL 
A  penalty  for  violating  the  agree- 
ment cannot  be  collected.  Judd  v. 
Harrington,  139  N.  Y.  105  (1893).  The 
purchaser  of  a  trust  certificate  issued 
by  the  trustees,  the  certificate  being 
in  a  form  similar  to  that  of  certifi- 
cates of  stock,  may  compel  the  trust- 
ees to  transfer  the  same  to  him  on 
their  books,  although  he  is  a  com- 
petitor of  the  trust  and  has  opposed 


it  in  all  ways  possibla  Rice  i'.  Rocke- 
feller, 134  N.  Y.  174  (1892X  In  this 
case  the  court,  speaking  of  the  nat- 
ure of  a  triLSt,  sjii  1:  "  The  agreement 
constituted  not  a  partnership,  hut  ;i 
trust  in  belialf  of  the  beneliL-iaries. 
And  wliile  it  is  not  a  corjioration,  it. 
by  the  agreement,  took  some  of  the 
attributes  of  a  cor|X)ration,  in  so  far 
that,  through  its  trustees,  certificates 
of  shares  in  the  equity  to  the  prop- 
erty hold  by  them  were  issued,  and 
were  transfenil)le  in  like  manner  ap- 
parently as  are  those  of  corporations." 
Where  several  carlx)n  manufactur- 
ers have  formed  a  combination  by 
leasing  their  several  .concerns  to  a 
trustee,  and  also  assigning  to  him 
their  orders  for  carbons,  and  subse- 
quently one  of  them  withdraws,  the 
withdrawing  concern  cannot  sue  for 
and  claim  the  amount  due  upon  one 
of  the  orders  assigned  to  and  filled 
by  such  trustee.  The  defendant  hav- 
ing interpleaded,  the  trustee  takes 
the  money.  Pittsburg  Carbon  Co.  v. 
McMillin,  119  N.  Y.  40  (1890).  Where 
a  manufacturer  of  a  peculiar  kind 
of  machinery  under  a  patent  agrees 
with  a  trustee  for  several  corpora- 
tions that  he,  the  manufacturer,  will 
sell  his  machinery  to  them  alone,  and 
they  agree  to  give  him  a  percentage 
of  their  profits,  the  agi-eement  is  legal 
and  may  be  enforced  by  him.  Good  v. 
Daland,  121  N.  Y.  1  (1890).  A  person 
agreeing  not  to  engage  in  a  certain 
business  within  a  certain  territory 
cannot  evade  the  contract  by  setting 
up  that  the  other  party  is  an  illegal 
combination.  National  Wall  Paper 
Co.  V.  Hobbs,  90  Hun,  288  (1895).  The 
members  of  a  retail  coal  dealers'  as- 
sociation formed  to  prevent  and 
actually  preventing  competition  are 
liable  criminally  under  the  New 
York  statutes.    Drake  v.  Siebold,  81 


916 


CH.  XXIX,] 


TKUSTS,  ETC. 


[§  503a?. 


most  part  have  reorganized  and  reappeared  in  the  form  of  gi- 
gantic corporations.  How  far  the  law  will  interfere  witli  this 
class  of  corporations  remains  to  be  seen. 


In  the  Chicago  Gas 


Ilun,  178  (1894).  The  holder  of  trust- 
ees' certificates,  wliere  tlie  trust  is 
orj,'anized  on  the  plan  of  trustees 
holding  the  shares  of  stock  of  the 
various  corjxtrations,  is  denied  all 
relief  by  the  courts  as  against  the 
trustees.  lie  cannot  couijkjI  them 
to  pay  dividends  or  liave  the  pio> 
erty  in  their  hands  divided  upon 
the  dissolution  of  the  trust.  Tlie 
combination  being  illegal,  the  courts 
will  not  aid  any  of  the  jKirtie-s.  So 
far  as  the  law  is  concerned,  the  trust- 
ees can  appropriate  the  proj)erty  to 
tiieir  own  iLse,  and  the  holders  of 
the  trustees'  certilicatt'S  will  not  be 
grouted  any  relief.  Kice  v.  liocko- 
feller,  Supr.  Ct,  Sjx  T.,  N.  Y.  U  J., 
April  U'O,  1894.  An  agreement  of  deal- 
ers in  stone  that  all  Kiles  shall  bo 
made  by  a  certain  corporation  and    in   canal  transportation    agreed   to 


tain  sum  for  withdrawing  its  line  of 
boats  was  upheld  as  against  tlio  dis- 
sent of  a  stockholder  in  the  fonner 
company.  Leslie  v.  Lorillard,  110 
N.  Y.  519  (1888).  A  large  number  of 
the  proprietors  of  boats  on  the  canals 
made  a  combination.  The  income 
from  every  boat,  over  and  above  a 
certain  amount  allowed  to  the  boat 
for  ex  {Menses  for  wear  and  tear,  was 
turned  into  the  "pooL"  At  certain 
times  the  fund  in  the  "  pool "  was  to 
bo  divided  among  the  parties  accord- 
ing to  the  number  of  their  boats.  In 
an  action  to  enforce  layment  under 
tlio  agreement  the  court  held  that 
the  wliole  arrangement  was  illegal, 
void,  and  not  enforceable  Stanton 
V.  Allen,  5  Denio,  434  (1848).  The  pro- 
prietors of  five  lines  of  boats  engaged 


shall  then  be  apportioned  among  the 
dealers  in  a  certain  way  is  illegaL 
Cummings  i\  Union,  etc.  Co.,  15  N.  Y. 
A  pp.  Div.  GO-2  (1897).  Where  many 
manufacturers  under  various  pjitents 


combine  and  do  business  at  certain 
rates  for  freight  and  passiige.  The  net 
earnings  were  to  be  divided  among 
themselves  in  a  fixed  jtropurtion. 
One  of  the  parties  sued  another  to 


form  a  cor|)onition  and  convey  to  it  compel  him  to  make  payment.    The 

their  patents  and  t:ike  back  licenses  court  held  that  the  combination  waa 

under  which  the  corporation  regu-  void  under  the  statutes  of  New  York, 

lates  the  price,  and  tliey  agree  not  and  said:  "It  is  a  familiar  maxim 


to  use  any  new  patents  and  not  to 
manufacture  any  new  kind  of  har- 
row, the  combination  is  illegaL  Any 
one  of  the  parties  may  by  suit  in 

•  ••piity  be  relieved  from  its  terms. 
Strait  r.  National  Harrow  Co.,  18 
N.  Y.  Sui>p.  224  (1891).  The  harrow 
trust  was  again  declared  illegal  in 
National  Harrow  Co.  v.  Bement,  21 
N.  Y.  App.  Div.  290  (1897).  It  is  estab- 
lished "  that  no  contracts  are  void  as 
l>eing  in  genersil  restraint  of  trade 
whtTo  tliey  operate  simply  to  pre- 
vent a  party  from  engaging  or  com- 
l'^tin^c  in  the  same  business."  Hence, 

•  in  agreement  of  one  stwimsliip  com- 
jany  to  i«ay  another  company  a  cer- 

91 


that  competition  is  the  life  of  trade. 
It  follows  that  whatever  destroys  or 
even  relaxes  comiKjtition  in  trade  ia 
injurious  if  not  fat^il  to  it"  Hooker 
V.  Vandewater,  4  Denio,  319  (1847). 

A  coal  company  bought  coal  from 
several  corporations  upon  their  con- 
tract not  to  sell  to  any  other  parties 
in  tliat  locality.  The  purix)se  was  to 
enable  the  purchaser  of  the  coal  to 
have  a  monoix>ly  of  the  market.  The 
party  which  purchased  the  coal  did 
not  pay  for  it  The  coal  comiany 
which  had  sold  brought  suit  for  the 
]>rice,  but  the  court  held  that  the  suit 
must  fail.  The  comi)any  had  taken 
part  in  an  illegal  contract  and  com- 


§  503^.] 


TKUSTS,  ETC. 


[cn.  XXII. 


Company  case  the  supreme  court  of  Illinois  forfeitetl  the  char- 
ter  of  the  company  on  the  ground  that  it  was  formed  to  briii;,' 
about  an  iUef?al  combination.     New  Jersey,  on  the  other  hand, 


bination-    In  such  cases  the  parties 
are  outside  of  the  pale  and  protection 
of  the  law.    The  courts  will  not  aid 
either  party.    Arnot  v.  Pittston,  etc. 
Co.,  68  N.  Y.  558  (1877).    Many  salt 
manufacturers  in  New  York  state 
combined  to  limit  the  jiroduction  and 
control   the    price    of    salt.      They 
formed  a  corporation,  and  each  of 
the  parties  leased  to  the  corporation 
his  manufactory  of  salt.   Each  of  the 
parties  was,  however,  to  continue  the 
manufacture  of  salt  in  his  manufac- 
tory, but  only  to  a  limited  extent,  and 
was  to  sell  the  product  to  a  corpora- 
tion at  a  fixed  price.    The  agreement 
was  carried  out.    One  of  the  parties 
could  not  collect  from  the  corporation 
the  price  for  the  salt  delivered  to  it, 
and  accordingly  he  brought  suit.  But 
the  court  decided  that  he  could  not 
collect.    He  lost  his  salt,  and  also  the 
price  of  it.    The  law  declares  such 
combinations  illegal,  and  will  not  aid 
any  of  the  parties.    Clancey  v.  Onon- 
daga, etc.  Co.,  62  Barb.  395  (1863).  Tlie 
agreement  of  the  various  members  of 
the  "  Wire  Trust "  not  to  sell  at  less 
than  a  certain  price  is  void.    A  for- 
feit cannot  be  recovered  back  by  one 
of  the  parties.    De  Witt,  etc.  Co.  v. 
New  Jersey,  etc.  Co.,  9  R'y  &  Corp. 
L.  J.  314  (N.  Y.  C.  P.,  1891)'.    The  re- 
ceiver of  one   of  the    corporations 
forming   a   "trust"  may  enjoin  it 
from  reorganizing  in  the  shape  of  one 
large  corporation.  Gray  v.  De  Castro, 
etc.  Co.,  10  N.  Y.  Supp.  632  (1890).  Al- 
though the  charter  of  one  of  the  cor- 
porations whose  stock  is  held  by  a 
"  trust "  is  forfeited,  yet'  the  receiver 
cannot  liave  a  receiver  appointed  of 
the  "trust"  property.    This  would 
amount  to  a  receivership  of  all  the 
property  of  a  person  who  happened 
to  be  a  stockholder  in  an  insolvent 
corporation.     Gray  v.   Oxnard,  etc. 


Co.,  N.  Y.  L.  J.,  Juno  C,  1890.  Tlie  re- 
ceiver of  the  comi)any  wlioso  charter 
is  forfeited  lias  no  right  to  an  ac- 
counting from  tlie  otlier  coriximtions 
as  partners,  lie  is  conliued  to  the 
property  of  his  own  comiKiny.  Gray 
V.  Oxnard,  etc.  Co.,  11  N.  Y.  Supi).  1  IS 
(1890);  anU-nied  in  59  Hun,  387  (ISlU). 
on  the  ground  that  an  illegal  contract 
canuut  be  enforced.  A  receiver  of 
an  insolvent  corporation  may  recover 
money  due  it  from  an  illegal "  tru.st," 
though  the  corporation  was  a  party 
to  the  "  trust."  Pittsburg  Carbon  Co. 
V.  McMilliu,  53  Hun,  67  ( 1«89).  A  con- 
tract whereby  the  stockholders  of  one 
cori)oration  were  to  buy  only  from 
the  stockholders  of  another,  and  the 
stockholders  of  the  latter  were  to  sell 
only  to  the  stockholders  of  the  former, 
was  upheld  in  Live-Stock  Assoc,  etc. 
V.  Levy,  3  N.  Y.  St.  Rep.  514  (1880).  A 
trust  being  iUegal.  a  certificate-holder 
may  have  a  receiver  appointed  of  all 
the  stock  and  assets  held  by  the 
trustees,  and  may  have  an  accoimt- 
ing  by  the  trustees.  Cameron  v. 
Havemeyer,  12  N.  Y.  Supp.  126  (1890^ 
Where  a  "trust"  pa.sses  into  a  re- 
ceiver's hands  by  reason  of  insolv- 
ency, the  receiver  may  recover  debts 
due  the  "  trust "  from  the  con.stituent 
corporations.  Pittsburg  Carbon  Co. 
V.  McMilUn,  53  Hun,  67  (1889).  The 
case  of  Diamond  Match  Co.  v.  Roeber, 
106  N.  Y.  473  (1887),  was  not  a  "  trust " 
case. 

Ohio:  See  State  v.  Standard  Oil  Co., 
49  Ohio  St.  137  (1892).  The  Candle 
Manufacturers'  unincorporated  asso- 
ciation, formed  to  control  prices,  etc., 
is  illegal.  A  member  cannot  recover 
his  share  of  the  profits.  Emery  v. 
Ohio  Candle  Co.,  47  Ohio  St.  320  (1890). 
Many  salt  manufacturers  formed  a 
"  trust,"  by  agreeing  to  sell  all  their 
product  to  an  unincorporated  joiut- 


918 


en. 


XXIX.] 


TKUSTS,  ETC. 


[§  50305. 


grants  broad  charters  to  the  combinations  and  receives  a  heavy 
toll  for  the  privileges  and  immunities  granted.  The  past  five 
years  have  changed  but  little  the  status  of  the  whole  question. 


stock  association.     The  latter  was 
<:omrx)seJ  of,  and  its  directors  were 
elected  by,  the  manufacturers.    The 
purpose  of  the  combination  was  to 
Lave  the    association  buy  the  salt 
from  the  manufacturers  and  sell  it 
to  the  public    Comixjtition  would 
thereby  be  prevented.     The    court 
held  that  the  combination  was  void, 
and  enjoined  the  a.ssociation   from 
seizin;;  the   product  of  one  of  the 
manufacturers.     Central  Ohio  Salt 
Co.  r.  (Juthrie.  35  Ohio  St  0G(5  (18>s0). 
rtiimylvania:   A  combination  of 
brewers  to  control  tiie  price  of  boor 
within  a  city  is  illegal,  and  the  court 
will    not    enforce    the    agreement 
Nester  f.  Continental  Browing  Ca, 
ICl  Pa.  St  473  (1894).     Five  Pennsyl- 
vania coal  cori)orations,   which  to- 
gether controlled  a  certain  kind  of 
coal,  combined  and  agreed  that  sales 
should  be  made  through  a  committee 
and  a  general  agent, and  that  thereby 
prices  should  be  fixed,  freights  made, 
and  sales  and  deliveries  adjusted.   If 
any  com{>any  sold  more  tlian  a  fixed 
propc.rtion  it  was  to  pay  a  certain 
amount  to  the  others.    The  combina- 
tion was  made  and  carried  out  in 
New  York.     In  the  course  of  time 
one  of  the  companies  sued  another  to 
recover  its  proportion  of  tiie  amount 
which  the  latter  was  to  pay  for  the 
excess  of  coiU  sold  by  it    The  Penn- 
Bvlvauia  court  held  that  it  could  not 
recover;  that  the  combination  was 
illegal  and  void;  and  that  it  was  a 
consi»iracy  under  the  New  York  stat- 


as  become  members  thereof,  and  to 
protect  them,"  etc.,  the  intent  being 
to  combine  the  reUiil  coal  dealers. 
JRe  Richmond  Retail  Coal  Co.,  9  R'y 
&  Corp.  K  J.  31  (Phila.,  18'JO). 

Rhode  Island:  Three  out  of  four 
oleomargarine  comiwmies  in  New 
England  may  legally  agree  to  consoli- 
date into  one  comixiny  in  order  to 
stop  sharp  competition.  They  may 
also  agree  not  to  do  business  sepa- 
rately for  five  years  anywhere.  Oak- 
dale  Mfg.  Co.  V.  Garst,  18  li.  L  484 
(1894). 

Tennessee:  It  is  illegal  for  an  Ohio 
corporation  to  purchase  a  majority 
of  tiio  stock  of  a  Tennessee  corpora- 
tion lor  the  p-rpose  of  controlling 
the  latter,  even  though  they  are  en- 
gaged in  a  similar  business,  the  ob- 
ject being  to  form  a  monopoly, 
llence  the  purchasing  company  can- 
not enforce  the  contract  as  to  certain 
things  which  were  to  be  done  by  the 
vendor  of  the  stock.  Slarble  Co.  v. 
Harvey,  92  Tenn.  115  ( l.'?92).  A  com- 
bination of  four  cotton-seed  oil  cor- 
porations, by  an  agreement  that  the 
possession  and  use  of  all  their  prop- 
erty should'be  turned  over  to  certain 
jKjrsons  to  run,  is  a  partnership,  and 
contrary  to  the  rule  of  law  tliat  a  cor- 
poration cannot  become  a  f»artner. 
One  of  the  four  corporations  sued  and 
recovered  possession  of  its  proi»erty. 
Mallory  r.  Uanaur  OU  Works,  80  Tenn. 
598  (1888). 

■Texas:   In  Waters,  etc.  Oil  Co.  v. 
State, 44  S.W.  Rep.  930  (Tex.,  1808),  the 


ute  airainst  the  commission,  by  two    state  forfeited  the  right  of  a  foreign 


or  more  iiersons,  of  "any  act  iujuri 
ous  .  .  .  to  trade  or  commerce."  Mor- 
ris Run  Ck)al  Ck>.  v.  Barclay  Ck)al  Co., 
eS  Pa.  St  173  (1871).  The  courts  will 
refu>e  a  charter  to  a  conif^ny  whose 
business  is  to  be  "to  promote  the 
business  of  suchVetail  coal  dealers 


corporation  organized  under  the  laws 
of  Mis.souri  to  do  biLsiness  in  Texas, 
the  corjwration  having  agreed  with 
various  merchants  and  other  dealers 
in  oils  in  Texas  so  that  such  lartiea 
should  not  sell  any  oils  except  those 
of  that  corporation-    The  Texas  stat- 


919 


§  503^.] 


TKUSTS,  ETC. 


[cii.  XXIX. 


The  supreme  court  of  the  United  States  have  dcchired  illegal 
railroad  pooling  contracts  as  being  contrary  to  the  anti-trust 
act  of  congress  of  1890.  But  aside  from  this,  the  law  has  inter- 
fered  but  little  with  these  great  combinations. 

iites  against  combinations  was  de-    the  prrouncl   tliat  tlie  vendor  Ls  an 

illegal    trust    or    combination.     Na^ 


Glared  unconstitutional  in  Re  Unce, 
79  Fed.  Rep.  627  (1897),  as  violating 
the  right  of  contract  guaranteed  by 
the  federal  constitution.    A  contract 
between  a  brewer  and  a  dealer  by 
which  certain  territory  is  given  ex- 
clusively to  the  dealer,  and  the  dealer 
agrees  not  to  buy  of  others,  is  con- 
trary to  the  Texas  statuta    Toxas 
Brewing  Co.  v.  Temploman,  90  Tex. 
277  (1896).    A  manufacturer  of  wind- 
mills may  grant  an  exclusive  terri- 
tory for  their  sale  to  a  firm,  even 
though  such  firm  agrees  not  to  handle 
any  other  bind  of  windmill    "Welch 
V.  Phelps,  etc.  Co.,  89  Tex.  653  (1896). 
An   agreement  or    combination    of 
brewers  as  to  sales  of  beer  to  dealers 
is  legal  at  common  law,  but  void 
under  the  Texas  statute.    Anheuser, 
etc.  Assoc.  V.  Houck,  88   Tex.  184 
(1894).    The  attorney-general  cannot 
maintain  an    injunction   against  a 
combination  of  insurance  companies 
to  fix  rates  and  commissions,  inas- 
mucli  as  insurance  business  is  not  a 
public  or  quasi-public  business,  nor 
does  it  concern  a  staple  of  life.  Queen 
Ins.  Co.  V.  State,  86  Tex.  250  (1893), 
holding  also  that  a  statute  against 
trusts  and  combinations    does   not 
apply  to  a  combination  of  fire  insur- 
ance companies  to  fix  uniform  rates 
and  commissions. 

Wisconsin:  A  combination  of 
mason  builders  by  which  they  pay 
to  their  association  six  per  cent  on 
all  contracts,  and  all  bids  are  sub- 
mitted to  the  association  before  they 
are  made,  and  six  per  cent  added  to 
the  lowest  bid,  is  illegal  Milwaukee, 
etc.  Assoc.  V.  Niezerowski,  95  Wis, 
129  (1897).  A  purchaser  of  goods  can- 
not defeat  an  action  for  the  price  on 


tioual   Distilling  Co.  t'.  Cream  City 
Imp.  Co.,  80  Wis.  352  (1893).   .See  Kel- 
logg V.  Larkin,  3  Pin.  (Wis.)  123  (1851). 
The  United  States  CoitrtH:  Wliere 
a  car-manufacturing  corporation 
leases  all  its  property  to  anotlier  cor- 
poration  for  a  term  of  years   ami 
agrees  not  to  engage  in  business  dur- 
ing that  time,  '*  tlio  contr.iit  between 
the  parties  is  void,  becaiLso  in  unrea- 
sonable restraint  of  trade,  and  thert> 
fore  contrary  to  public  policy."  Cen- 
tral Trausp.  Ca  v.  Pullman's  Palace 
Car  Co.,  139  U.  S.  24,  53  (1891),  quot- 
ing from  and  approving  of  Alger  i*. 
Tliacher,  30  JIass,  51  (1837).     A  jjer- 
son  may  purcliase  at  foreclosure  everv 
tliough  he  represents  the  stockhold- 
ei-s,  and  even  though  the  intention 
may  be  to  organize  a  new  ci)nipany 
to  continue  an  illegal  combination 
in  trade.    Olmstead  v.  Distilling,  et<\ 
Co.,  73  Fed.  Rep.  44  (1895).    In  ^If- 
Cutcheon  v.  Merz  Capsule  Co.,  71 
Fed.  Rep.  780  (1890),  several  corpora- 
tions agreed  to  turn  over  their  prop- 
erty to  one  corporation  and  to  take 
stock  and  bonds  in    payment,  the 
price  to  be  thereafter  fixed  by  ap- 
praisers.   After  the  stock  was  is.sued 
one  of  the  companies  withdrew,  and 
the  court  held  that  the    company 
withdrawing  could  file  a  bill  to  can- 
cel the   agreement  on  the  ground 
that  the  company  had  no  power  to 
hold  stock  in  other  corporations.  An 
illegal  combination  cannot  maintain 
a  bill  to  enjoin  infringement  upon 
its  patents.    National  Harrow  Co.  tv 
Quick,  07  Fed.  Rep.  130  (1S95).    Rent 
may  be  collected  on  a  lease  of  a 
manufacturing  plant  to  a  competing 
concern,  even  thougli  the  intent  was 


920 


CH.  XXIX.] 


TEUSTS,  ETC. 


[§  503a, 


The  fact  is  that  the  industrial  movement  of  the  age  is  irre- 
sistibly towards  consolidation  and  combination,  in  connection 
with  the  expansion  and  extension  of  trade  at  home  and  abroad. 


to  decrease  competition.  An  ajjreo- 
ment  of  the  lessor  not  to  engage  in 
the  business  during  the  term  of  the 
lease  is  valid  U.  S.  Chemical  Co.  v. 
Provident  Chemical  Co.,  C4  Fed.  Rep. 
946(1894).  A  contract  by  a  manu- 
facturing company  not  to  manufact- 
ure for  a  certain  period  if  it  is  ixiid 
a  certJiin  percentage  on  Bales  made 
by  others  is  illegal  and  voi'L  Oliver 
V.  Gihnore,  52  Fed.  IJeji.  502  Jl8iB>. 
It  is  no  defense  to  an  infriiiKeihenfc 
suit  tlrnt  the  complainant  lias  formed 
a  monojtoly  of  all  j»atents  bearing 
upon  the  matter.  Strait  r.  National 
Harrow  Co..  51  Fed.  Ilep.  bl9  (IH0\1). 
An  a-ssignment  of  jKitents  by  one 
of  several  |»arties  to  a  corj>)nition 
formetl  to  unite  various  jsitents  in  a 
certain  business  is  alwolute  and  can- 
not be  rovoketl,  even  though  the 
party  was  by  agn,>ement  to  have  a 
salary  of  $C.O<X)  i)er  year  and  this  sal- 
ary lijis  not  l)een  jKiid.  13racher  v. 
Hat  Swwit  .Mfg.  Co.,  49  Fe.l.  Ui'iu  921 
(1892).  A  i»erson  who  has  sold  his 
l»kery  to  a  cor|»onition  which  is  a 
•*tr\i.>it,"  taking  sto4k  in  the  corix)ra- 
tion  in  i<iyment,  may  tender  back 
the  stock  and  retiike  possession  of 
his  l>akery.  The  act  of  congress 
against  combinations  applies.  Amer- 
ican, etc  Co.  V.  Klotz,  44  Fed.  Rep. 
721  (1891).  Where  the  stockholders 
of  a  corporation  enter  into  a  contract 
for  and  in  behalf  of  the  cori>onition 
and  for  its  l)enefit,  and  the  corpora- 
tion accepts  that  benefit,  the  latter 
is  l)ound  and  affected  by  the  contract 
and  subject  to  the  liabilities  of  the 
contract  the  same  as  though  it  had 
ilirectly  entered  into  it  Hence  it  is 
that  a  corjKtnition  is  guilty  of  enter- 
ing into  a  "  triLst "  in  a  case  whore  its 
Pt<^)ckh«ilders  enter  into  tho"tni.st" 
Amerii-an  Preserver*'  TriLst  r.  Tay- 
lor M f g.  Co.,  46  Fed.  lie^  1 32  ( 1  ^'J 1 ).  In 


this  case  the  court  held  that  the 
trustees  wore  agents,  and  that  tlio 
coriHjrations  were  among  the  princi- 
jKils,  ;jnd  that  it  wa.s  ultra  I'ircs  of 
the  corporations  to  purchase  stocks, 
bonds,  and  various  properties  through 
these  agents,  the  trustees.  Henco 
one  of  the  corporations  cannot  be  en- 
joined from  breaking  the  contract. 
Where,  in  order  to  enter  into  a  com- 
bination, one  of  the  corporations  as- 
signs all  its  projK'rty  to  its  stock- 
holders, and  they  a.ssign  it  to  the 
new  consolidated  and  absorbing  cor- 
poration, and  also  agree  with  that 
corjKjration  not  to  compete  with  it 
in  bu-siness,  the  first-named  corp<> 
nition  n»ay  l»e  stiirte<l  in  the  bu.si- 
ness  anew  and  will  not  be  enjoined. 
American  Preservers'  Ckx  v.  NorrLs, 
43  Fe.l.  Rep.  711  (1890). 

In  controversies  between  a  certifi- 
cate-holder and  the  tru-stees  the  court 
will  not  consider  the  legality  of  the 
"trust"  Gould  r.  Head,  41  Fed.  Rep. 
210  (1890).  A  certificate-holder  can- 
not enjoin  an  ultra  vires  or  illegal 
act  of  the  trustees  where  ho  obtains 
ser%'ice  on  only  four  out  of  the  nine 
trustees.  Each  trastee  is  liable  j>er- 
sonally  for  |>ast  breaches  of  tru.st,  but 
an  injunction  against  future  acts  can 
only  bo  where  all  the  trustees  are 
made  partiea  Wall  v.  Thoma.s,  41 
Fed-  Rep.  020  (1890).  A  bill  in  e<iuity 
to  restrain  a  live-stock  exciiango 
from  carrj-ing  out  certain  by-laws 
which  tended  to  monopolize  the  busi- 
ness was  sustained  in  United  States 
V.  Hopkins,  82  Fed.  Re^  529  {1897). 
The  amingement  of  the  harrow  trust, 
whereby  seventy  per  cent  of  the  man- 
ufacturers assigned  their  i<atcnts  and 
good  will  to  a  cori)onition,  and  then 
acted  as  agents  or  licensees  of  sucli 
corporation  to  manufacture  and  sell 
on  the  terms  prescribed  by  it,  is  illegaL 
>1 


§  603^.] 


TEUSTS,  ETC. 


[CU.  XXIX. 


The  law  is  designed  to  check  any  abuses  in  this  tendency,  and 
has  been  successful  in  so  doing.  The  law,  however,  is  not  in- 
tended to  interfere  with  the  legitimate  demands  of  trade,  and 


National  Harrow  Co.  v.  Hench,  83  Fed. 
Rep.  3G  (1897).  A  corporation  created 
to  form  a  monopoly  in  the  manufact- 
ure of  harrows  cannot  maintain  a  suit 
for  infringement.  National  Harrow 
Co.  V.  Hench,  84  Fed.  Rep.  226  (1'898). 
Various  decisions  liave  been  made 
under  the  act  of  congress  against 
monopolies.  The  act  of  congress  of 
July,  1890,  against  unlawful  monopo- 
lies applies  to  a  contract  between  rail- 
roads regulating  traffic  rates.  U.  S. 
V.  Trans-Missouri  Freight  Assoc,  166 
U.  S.  290  (1897).  The  federal  statute 
against  trusts  and  monopolies  applies 
only  so  far  as  interstate  and  interna- 
tional trade  is  concerned.  It  does  not 
apply  to  the  sugar-refining  business. 
U.  sl  V.  E.  C.  Kiight  Co.,  156  U.  S.  1 
(1895),  wliich  also  (p.  9)  gives  a  defini- 
tion of  the  word  "  monopoly."  Where 
six  iron-pipe  manufacturing  compa- 
nies combined  in  such  a  way  that 
whenever  a  large  contract  for  pipe 
was  to  be  given  out  anywhere  in  cer- 
tain territory  a  committee  fixed  on 
the  price  to  be  demanded,  and  then 
auctioned  off  among  the  six  compa- 
nies the  privilege  of  competing,  the 
sum  named  by  the  highest  bidder 
being  called  the  "bonus,"  and  this 
highest  bidder  at  the  secret  auction 
then  bid  the  committee's  price  at  the 
public  competition,  while  the  other 
companies,  to  conceal  their  combina- 
tion from  the  public,  put  in  slightly 
higher  "  protecting  bids,"  and  if  suc- 
cessful the  bonus  was  then  paid  into 
tlie  general  treasuiy,  the  combination 
is  in  violation  of  the  anti-trust  act  of 
congress  of  1890.  The  court  held  that 
inasmuch  as  the  six  companies  were 
in  four  different  states  there  was  a 
restriction  on  a  corporation  in  each 
of  these  states  in  regard  to  manufact- 
uring and  selling  pipe  to  be  delivered 


in  another  state.  U.  S.  v.  Addyston 
Pipe  &  Steel  Co.,  85  Fed.  Rep.  271 
(1898).  The  United  States  govern- 
ment may  file  a  bill  in  equity  to  en- 
join importers  and  dealers  in  coal  in 
a  certain  city  from  combining  so  as 
to  regulate  the  retail  i)rices  arbi- 
trarily. U.  S.  V.  Coal,  etc.  Assoc,  85 
Fed.  Rep.  253  (1898).  A  comlnnation 
of  coal  dealers  to  regulate  prices  and 
provide  for  the  division  of  prices  with 
the  miners  of  tiie  coal  is  contrary  to 
the  act  of  congress,  where  the  coal- 
mining companies  operate  chiefly  in 
one  state,  and  the  contract  is  made 
and  carried  out  in  a  city  in  another 
state.  U.  S.  V.  Jellico,  etc.  Co.,  46  Fed. 
Rep.  432  (1891).  A  suit  for  damages, 
based  on  the  federal  anti-trust  law, 
failed  in  Bishop  v.  American  Preserv- 
ers' Co.,  51  Fed.  Rep.  272  (1892).  The 
statute  applies  to  illegal  trusts  of 
stock  to  unite  competing  railroads. 
Clarke  v.  Central  R.  R.,  50  Fed.  Rep. 
338  (1892).  In  this  case,  however,  on 
the  final  hearing,  the  bill  was  dis- 
missed. See  Clarke  v.  Richmond,  etc. 
Co.,  62  Fed.  Rep.  328  (1894).  In  U.  S. 
V.  Patterson,  55  Fed.  Rep.  605  (1893), 
the  federal  statute  was  held  to  apply 
in  certain  particulars,  and  not  to  apply 
in  others.  The  act  of  congress  rela- 
tive to  monopolies  does  not  authorize 
an  injunction  except  on  the  part  of 
the  government.  Blindell  v.  Hagan, 
54  Fed.  Rep.  40  (1893).  An  indictment 
of  a  number  of  lumbermen  for  rais- 
ing the  price  of  lumber  fifty  cents  a 
thousand  feet  will  not  lie  under  the 
federal  statute.  U.  S.  v.  Nelson,  52 
Fed.  Rep.  646  (1892).'  Indictments 
under  the  federal  law  against  monop- 
olies were  quashed  in  Re  Corning,  51 
Fed.  Rep.  205  (1892);  Ee  Terrell,  51 
Fed.  Rep.  213  (1892);  Re  Greene,  52 
Fed.  Rep.  104  (1892);  U.  S.  v.  Patter- 


922 


CH.  XXIX.] 


TRUSTS,  ETC. 


[§  503a. 


if  sucli  interference  is  attempted  it  will  be  demonstrated,  just 
as  it  was  demonstrated  in  England  in  regard  to  statutory  pro- 
hibitions against  the  consolidation  of  railroads,  that  the  laws 
of  trade  are  stronger  than  the  laws  of  men.^ 


son.  55  Fed.  Rep.  605,  and  59  Fed.  Rep. 
2sU  (1893). 

England:  The  House  of  Lords,  the 
highest  court  in  England,  in  1891,  af- 
linned  the  decisions  of  the  courts 
beltiw  in  Mogul  Steamship  Co.  v.  Mc- 
Gregor, L.  R  17  A  pp.  Cas.  25,  aQlrm- 
iiig  L.  R  23  Q.  B.  D.  598,  and  L.  R.  21 
<i.  H.  D.  544,  and  held  that  an  action 
of  coiispinicy  would  not  lie  against 
a  company  tliat  gave  lower  rates  of 
freight  to  iKirties  who  shipped  exclu- 
sively by  them,  there  being  in  the 
transiiction  no  desire  to  injure  others 
and  no  ill-wilL    The  defendant  shiiv 
jjing  comjianies  and  owners  had  com- 
bined togetlier  and  formed  a  "con- 
ference "  or  "  ring,"  and  their  agents 
in  China  had  issued  circulars  to  siiij>- 
l»ers  there  to  the  effect  that  exportei-s 
in   China  who  confined  their  ship- 
ments of  goods  to  vessels  owned  by 
members  of  the  "  conference  "  sliould 
Ije  allowed  a  certain  rebate,  payable 
lialf-yearly,  on  the  freight  charged. 
The  court  held  that  the  "conference," 
being  formed  by  the  defendants  with 
the  view  of  keeping  the  trade  in  their 
own  hands,  and  not  with  the  view  of 
ruining  the  trade  of  the  plaintiffs,  or 
throughany  personal  malice  or  ill-will 
towards  them,  was  not  unlawful,  and 
that  no  action   for  conspiracy  was 
maintainable.  Lord  Coke,  in  the  great 
and  leading  '*  Case  of  the  Monopolies," 
11  Coke.  846  (1G02),  declared  that  a 
monoi»oly  was  illegal  and  void.   Lord 
Coke  said  that  a  monopoly  led  to  three 
results:   an  increase  in  price,  a  de- 
crease in  quality,  and  the  impoverish- 
ment of  artisans  and  others.     An 
agreement  of  manufacturers  that  one 
bhall  not  employ  the  discharged  hands 
of  any  other  except  ui>on  the  written 
consent  of  the  latter  is  void.    Mineral 


Water,  etc.  Soc.  v.  Booth,  L.  P.  36 
Ch.  D.  4C5  (1887).  A  company  which 
is  organized  in  violation  of  a  statute 
cannot  collect  debts  which  are  due 
to  it  Jennings  v.  Hammond,  L.  R, 
9  Q.  B.  D.  225  (1882),  the  company  in 
this  case  being  organized  in  violation 
of  a  statute  which  prohibited  more 
than  twenty  persons  uniting  in  an  as- 
sociation or  partnership  except  under 
certain  conditions.  In  another  case 
many  manufacturers,  in  consequence 
of  troubles  between  themselves  and 
their  emploj-ees,  entered  intoan  agree- 
ment and  gave  a  bond  that  they  all 
would  abide  by  the  rates  of  labor, 
hours  of  work,  and  other  regulations 
which  a  majority  of  those  who  en- 
tered into  the  combination  should  de- 
cide upon.  The  court  held  that  the 
compact  was  in  restraint  of  trade; 
tliat  it  was  illegal  and  void,  and  that 
the  bond  could  not  be  enforced.  Hil- 
ton V.  Eckersley,  6  EL  &  Bl.  47  (1850). 
Cf.  OntarioSalt  Co.  v.  Merchants'  Salt 
Co.,  18  Grant  (U.  C.)  Ch.  540  (1871), 
where  a  Canadian  "pool "  on  salt  was 
sustained ;  Wickens  v.  Evans,  3  Y.  & 
J.  318  (1829).  The  word  "  monopoly  " 
originally  meant  an  exclasive  privi- 
lege granted  by  the  crown.  The  courts 
held  that  the  crown  could  not  grant 
it  See  Case  of  the  Monopolies,  11 
Coke,  84  (1602);  Mitchel  v.  Reynolds, 
1  R  Wms.  181,  187(1711). 

"'  In  England,  for  more  than  thirty 
years,  parliament  legislated  against 
the  consolidation  of  railroad^.  This 
legislation  proved  to  be  utterly  in- 
effective, and  in  1872  a  parliamentary 
committee  made  an  elaborate  and 
exhaustive  report  on  the  subjecj,  and 
said,  among  other  tilings,  that  con- 
solidation "had  not  brought  with  it 
the  evils  that  were  anticipated,  but 


023 


§  503^/.]  TKUSTS,  ETC.  [cH.  XXIX. 

In  England  the  genuine  "  trust  "  has  been  used  for  legitimate 
investment  purposes.  Tlie  trustees  are  authorized  to  invest  the 
funds  of  the  "  trust  "  in  the  stocks  and  bonds  of  miscellaneous 
corporations.  Generally,  however,  they  are  limited  in  the 
amount  which  they  may  invest  in  any  one  direction.  That 
which  is  lost  in  one  investment  is  expected  to  be  made  up  by 
large  profits  in  another.  It  is  a  mode  of  investment  on  a  largo 
scale,  and  is  made  on  the  principle  of  an  average  gain  and  loss.^ 
In  England  it  has  been  held  that  a  worknum  who  has  been  dis- 
charged by  his  employer  at  the  instance  of  a  delegate  of  a  work- 
men's organization,  because  he,  the  workman,  had  at  a  previous 
time  done  work  other  than  that  which  was  his  regular  trade, 
cannot  hold  the  delegate  liable  in  damages,  even  though  the  dis- 
charge was  caused  by  threats  of  the  delegate  to  the  employer 
that  unless  the  discharge  was  made  all  the  men  wouUl  quit 
work.^ 

The  American  "  Car  Trust "  is  practically  an  agreement  of 
several  owners  of  cars  to  place  them  in  the  liands  of  an  agent 
to  sell  on  the  instalment  plan,  the  agent  having  the  poAver  to 
issue  certificates  representing  an  interest  in  the  instalments.' 

§  5035.  Further  inquiry  as  to  the  lefjaliti/  of  a  "  trust."— 
There  are  other  things  to  be  considered  in  determining  whether 
or  not  a  "  trust "  is  legal.  Does  it  vest  personal  property  or  real 
estate  in  a  trustee  for  a  longer  period  than  is  allowed  by  law  ? 
Is  the  formation  of  a  trust  for  the  purpose  of  carrying  on  business 
authorized  by  law  ?  Is  the  shifting  of  the  parties  interested  — 
that  is,  the  certificate-holders  —  allowed  in  cases  of  trusts? 
These  questions  will  be  considered  in  the  order  named. 

It  is  the  policy  of  the  law  to  limit  the  time  during  which  a 

that,  in  any  event,  long  and  varied  Sykes  v.  Beadon,  L.  R  11  Ch.  D.  170 
experience  had  fully  demonstrated  (1879);  Smith  v.  Anderson,  L.  R.  15 
the  fact  that,  while  parliament  might  Ch.  D.  247  (1880);  Wigfield  v.  Potter, 
hinder  and  thwart  it,  it  could  not  45  L.  T.  Rep.  612  (1882);  Credit  Mo- 
prevent  it."  bilier  v.  Commonwealth,  67  Pa.  St.  233 
1  See  Healey,  Company  Law  and  (1870),  the  last  case  being  a  "  trust  " 
Practice  (2d  ed.),  p.  191.  For  the  form  created  to  construct  a  railroad,  the 
of  articles  of  agreement  of  this  kind  cestui  queiriist  being  the  stockholders 
of  a  "  trust,"  and  for  a  detailed  state-  of  a  designated  corporation, 
ment  of  the  various  provisions  that  2  Allen  v.  Flood,  77  L.  T.  Rep.  717 
are  made,  varying  according  to  the  (1897).  Cf.  Curran  v.  Galen,  152  N.  Y. 
character  of  the  enterprise  and  the  33  (1897). 
purposes   of   the    participants,    see  3  gee  ch.  L,  infra. 

92-4 


CH.  XXIX.] 


TRUSTS,  ETC. 


[§  503&. 


person  may  tie  up  his  personal  property  or  real  estate  Gener- 
ally this  time  is  fixed  as  the  life-time  of  the  survivor  of  any  tv.  o 
pe;sons  then  living  and  designated  by  the  person  crea  mg  the 
trust.  Each  state,  by  its  statutes,  generally  limits  the  time 
during  which  property  may  be  tied  up  by  a  trust,  and  if  a  trust 
is  formed  for  a  period  longer  than  that  allowed  by  statute  the 
trust  itself  is  void.^  There  is  little  doubt  that  merchandise,  land, 
and  shares  of  stock  may  be  placed  in  trust.  The  law  is  clear 
that  "every  kind  of  valuable  property,  both  real  and  personal, 
that  can  be  assigned  at  law  may  be  the  subject-matter  of  a 

^'TdilTercnt  question  arises,  however,  in  determining  whether 
u  Irust  may  be  created  to  carry  on  business  and  trade,  or  to 
control  a  concern  which  carries  on  business.' 

At  common  law  the  placing  of  personal  property  in  trust  for 
the  purpose  of  carrying  on  business  in  the  name  and  under  the 
manao-ement  of  the  trustees  is  legal  and  allowable.*    The  stat- 


1  Gerard,  Titles  to  Real  Estate  (3d 
ed.),  p.  223.  Moreover,  if  the  time  is 
to  lie  measured  by  the  life  of  a  i)crson 
then  living,  a  trust  which  is  to  exi.st 
for  a  fi$ed  jH^riod,  however  short, 
without  reference  to  the  life  of  a  per- 
son then  living,  is  void.  Gerard, 
Titles  to  Real  Estate  (3d  ed.),  pp.  224, 
225.  In  New  York  the  saspcnsion  can 
b^  for  only  two  lives  in  l)eing,  and,  in 


benefit  of  creditors;  or  to  sell,  nioi-t- 
gage,  or  lease  it  for  the  benefit  of  an- 
nuitants or  for  satisfying  a  lien  on  the 
land;  or  to  receive  the  rent  and  use 
it  for  the  support  of  a  certain  person; 
or  to  accumulate  the  rent  for  a  cer- 
tain iKjrson.  L.189C,ch.517,J-7G.  Ac- 
cordingly a  modern  "trust,"  whose 
property  consists  of  real  estate  in 
New  York,  would  be  void.    But  as 


-z^::::^^^:^  ^— -i^r^^^ 


after.  1  R.  S.  773,  S  1 ;  L-  189G,  clu  547, 
^  32.  These  statutes  apply  to  reiil 
and  personal  property.  Gerard.  Titles 
to  Real  Estate  (3d  ed.).  p.  235;  Hone  v. 
Van  Schaick,  7  Paige,  221  (1838) ;  Bean 
V  Bowen,  47  How.  Pr.  306  (1874); 
Holmes  r.  Mead,  52  N.  Y.  332,  344 
1873).  The  statutory  prohibition 
against  the  accumulation  of  the  in- 
come of  trust  property,  except  in  the 
case  of  infants,  applies  lx)th  to  real 


erally  different    As  to  New  York, 
see  Gerard,  Titles  (3d  ed.),  p.  235. 

*  For  decisions  at  common  law  to 
the  effect  that  property  may  be  vested 
in  trustees  for  the  purpose  of  caiTy- 
ing  on  business,  see  Ex  yartc  Gar- 
land, 10  Ves.  Jr.  110  (1804);  Scott  v. 
I^n,  34  Beav.  434  (1805).  In  Holmes 
V.  Mead,  52  N.  Y.  332,  344  (1873),  the 
court  said:  "  A  trust  in  Y>ersonal  pr<,i>- 
erty,  which  is  not  in  conflict  with  the 


estate  ana  personam  J  ^f  j„f^,.psh  and  protecting  the  suspen- 


to  Real  Estate  (3d  ed.),  pp.  233,  235 

2 1  Perrv,  Trusts,  §  67. 

J  Under  the  statutes  of  New  York  a 
trust  of  proi)orty  consisting  of  real 
estate  is  voi.l,  unless  the  puri^se  of 
the  trust  is  to  sell  the  land  for  the 


of  interest  and  protecting  the  suspen- 
sion of  absolute  ownership  in  prop- 
erty of  that  character,  is  valid  when 
the  trustee  is  competent  to  take,  and 
a  trust  Is  for  a  lawful  purpose  wi-U 
defined,  so  as  to  be  capable  of  being 


925 


§  bOdh.] 


TRUSTS,  ETC. 


[cn.  XXIX. 


utes  of  the  various  states,  however,  must  be  consulted  in  refer- 
ence to  this  point.^ 

There  is  little  difficulty  in  determining  the  question  whether 
it  is  allowable  in  law  to  create  a  trust  where  the  cestuis  que 
trust — that  is,  the  certificate-holders  —  change  and  fluctuate  in 
their  identity.  The  law  does  not  require  the  cedul  que  tru«t 
to  remain  continuously  one  and  the  same  person.  He  is  not 
indefinite,  even  though  by  transfer  of  interest  his  identity  may 
change.^ 

A  more  formidable  objection  to  the  legality  of  a  "  trust "  is 
that  it  is  similar  to  an  unincorporated  joint-stock  association, 
and  that  the  latter  is  illegal,  inasmuch  as  it  assumes  the  powers, 
privileges,  and  name  of  a  corporation.  It  was  on  this  ground 
that  the  decision  in  Louisiana  declared  that  the  American 
Cotton  Oil  Trust  was  illegal,  and  was  disqualified  to  do  busi- 
ness within  that  state.  The  court  held  that,  under  the  stat- 
utes of  Louisiana,  an  unincorporated  joint-stock  association 
is  illegal;  that  a  "trust"  was  one  kind  of  an  unincorporated 
joint-stock  association,  and  consequently  that  it  was  illegal  and 
void.^ 


specifically  executed  by  the  court. 
.  .  .  Trusts  of  personal  property  are 
not  affected  by  the  statute  of  uses  and 
trusts,  which  applies  only  to  trusts 
in  real  property."  In  Gott  v.  Cook,  7 
Paige,  521,  534  (1839),  the  chancellor 
said:  "  Tlie  Revised  Statutes  have  not 
attempted  to  define  the  objects  for 
which  express  trusts  of  personal  es- 
tate may  be  created,  as  they  have 
done  in  relation  to  trusts  of  real  es- 
tate. Such  trusts,  therefore,  may  be 
created  for  any  purposes  which  are 
not  illegal."  See  also  Graff  v.  Bon- 
nett,  31  N.  Y.  9  (1865),  In  Power  v. 
Cassidy,  79  N.  Y.  603,  613  (1880),  the 
court  said :  "  The  law  does  not  limit 
or  confine  trusts  as  to  personal  prop- 
erty except  in  reference  to  the  sus- 
pension of  ownership,  and  they  may 
be  created  for  any  purpose  not  for- 
bidden by  law."  To  same  effect, 
Bucklin  v.  Bucklin,  1  Keyes  (N.  Y.), 
141  (1864);  Goebel  v.  Wolf,  113  N.  Y. 
405  (1889). 


J  Many  of  them,  including  Michi- 
gan, Wisconsin,  Minnesota,  Califor- 
nia, Dakota,  Xortli  Carolina,  Georgia, 
Pennsylvania,  Connecticut,  Ken- 
tucky, and  Vermont,  have  statutes 
expressly  specifying  the  objects  for 
which  a  trust  may  be  created.  See 
Stimson,  American  Statute  Law, 
§  1703. 

2  See  Harrison  v.  Ha;rrison,  36  N.  Y. 
543  (1867),  affirming  43  Barb.  163; 
Holmes  v.  ]\Iead,  53  N.  Y.  333,  343 
(1873);  Conkling  v.  Washington  Uni- 
versity, 2  Md.  Ch.  497  (1849);  1  Perry, 
Trusts,  §  66.  In  regard  to  tliis  mat- 
ter, a  "  trust "  is  legal  on  the  same 
principle  that  it  is  legal  for  a  bond- 
holder secured  by  a  railway  trust 
deed  or  mortgage  to  sell  and  transfer 
his  interest  to  another. 

"State  of  Louisiana  v.  American 
Cotton  Oil  Trust,  1  R'y  &  Corp.  L.  J. 
509  (1887),  the  court  saying:  "A  join^ 
stock  company  is  not  known  to  the 
laws  of  Louisiana," 


926 


OH.  XXIX.] 


TRUSTS,  ETC. 


[§  503c. 


But  this  view  of  the  law  would  not  be  sustained  elsewhere 
in  this  country;  nor  would  it  be  sustained  under  the  old  com- 
mon law  of  Enghmd.  Unincorporated  joint-stock  companies 
have  existed  for  years  and  are  common  throughout  all  the  other 
states  of  the  Union.  They  are  legal  methods  of  carrying  on 
business.' 

§  503c.  LiahiUty  of  trustee  and  certificate  holders.— The  law 
is  clear  that  a  trustee  who  carries  on  any  kind  of  business  is 
liiible  personally,  and  to  the  entire  extent  of  his  private  fortune, 
fur  all  tlie  del)ts  incurred  in  the  management  and  execution  of 
the  trust.'  It  is  possible,  however,  that  the  use  of  the  words 
"as  trustee,"  in  the  contract  entered  into,  will  protect  him 
again.st  this  liability.'  And  there  is  little  doubt  that  the  cred- 
itors of  the  trust  may  collect  their  debts  from  its  property.  This 
has  been  a  doubtful  point,  but  is  now  reasonably  well  settled. 
It  nuittei-s  not  whether  the  trustees  have  expressly  bound  the 
trust  prop«Tty  to  pay  the  debts.  AVhere  the  trustee  is  insolv- 
ent, a  creditor  of  the  trust  may  proceed  against  its  property  to 


«  See  S  504.  infra.  In  England  there 
formerly  was  doubt  ujon  this  sub- 
ject, but  this  doubt  was  due  to  the 
-Bubble  Act"  This  sUitute  was 
passed  in  ITJO  for  the  i)uri>o«e  of  sup- 
pressing unincoriHjrated  coiui>anies. 
At  that  time  they  were  regarded  as 
"dangerou-s  niiischievous,  and,  in 
short,  public  nuisances."  But  the  stat- 
ute was  repe;iled  in  182G,and  Lindley, 
the  great  English  judge  and  jurist, 
says  of  it:  "  Juster  views  of  political 
economy  and  of  the  limits  within 
which  legislative  enactments  should 
be  confined  have  led  to  the  repeal  of 
the  statute  in  question,  which,  tliough 
deemed  higlily  benelicial  half  a  cen- 
tury ago,  probably  gave  rise  to  much 
more  mischief  than  it  prevented." 
Lindley,  Company  Law  (5th  ed.), 
pt  132.  Moreover,  a  careful  examina- 
tion of  tlie  English  authorities  up  to 
the  present  day  shows  conclusively 
that  at  common  law  an  unincorpo- 
rated joint-stock  ass(K-iation  is  legal 
and  valid.     Lindley,  Comi»auy  Law 


(5th  ed.),  p.  133.  Cf.  Greene  v.  People, 
21  N.  E.  Rep.  GO.J  (111.,  1889). 

2  Thompson  v.  Brown,  4  Johns.  CK 
C19  (1820);  Wild  v.  Daveni'ort,  48  N. 
J.  L  129  (1886);  Stephens  v.  James, 
77  Ga.  139  (1886);  Itogers  v.  Wheeler, 
43  N.  Y.  598  (1871);  Jones  v.  Selig- 
man,  81  N.  Y.  190  (1880;. 

'Contracts  entered  into  by  tlie 
trustees  of  a  trust  deed  for  many 
shareholders  bind  the  Uitter  but  not 
the  former  personally,  where  the 
trustees  were  authorized  to  make  the 
contracts  and  did  so  as  trustees.  It 
is  immaterial  that  tiie  contracts  are 
under  seal  Cook  r.  Gray,  133  Mass. 
106  (1882).  But  see  Stevenson  v.  Polk, 
71  Iowa,  278  (1887);  1  Pars.  Cont. 
(6th  ed.),  *122.  As  to  the  mode  of 
compelling  payment  of  a  debt  in- 
cvirred  by  a  trustee  who  has  Issued 
scrip  to  represent  the  property,  see 
Mayo  V.  Moritz,  151  Mass.  481  (lS90j, 
holding  tiiat  the  remedy  is  not  for  a 
receiver  to  wind  up  the  trust. 


927 


')Odc.] 


TRUSTS,  ETC, 


[ciI.   XXIX. 


procure  payment  ox  a  debt  incurred  in  the  execution  of  the 
trust.^ 

But  a  different  rule  prevails  as  regards  the  cestui  que  trusty 
the  beneficiary.  The  cestui  qxie  trust  cannot  bo  held  liable  for 
the  debts  created  by  the  trustees  or  for  debts  incurred  in  the 
execution  of  the  trust.  This  question  has  arisen  chiefly  in  cases 
where  trustees  have  carried  on  the  business  of  an  insolvent  per- 
son for  the  benefit  of  the  creditors  of  the  latter.^  And  the  same 
conclusion  is  reached  in  cases  where  an  executor,  administrator, 
or  trustee  carries  on  a  business  for  the  benefit  of  a  beneficiary.' 

It  has  been  held  also  that  the  trustee  cannot  render  the  cedui 
que  trust  liable,  even  though  the  trustee  contracts  with  the 
creditor  to  that  efl;ect.* 

There  is  little  doubt  that  these  old  principles  of  law  are  ajv 
plicable  to  "  trusts."  The  courts  of  England  have  decided  that 
^  modern  "trust"  is  not  a  partnership  or  mere  association,  but 


1  Cater  v.  Eveleigh,  4  Desaus.  (S.  C.) 
19  (1809) ;  James  v.  Mayrant,  4  Desaus. 
(S.  C.)  591  (1815);  Montgomery  v.  Eve- 
leigh, 1  McCord  Ch.  (S.  C.)  2G7  (1826); 
Magwood  V.  Johnston,  1  Hill  (S.  C.) 
Ch.  228  (1833);  Gaudy  v.  Babbitt,  5G 
Ga.  640  (1876);  Tennant  v.  Stoney,  1 
Rich.  Eq.  (S.  C.)  222, 243  (1845);  Wylly 
V.  Collins,  9  Ga.  223  (1851);  Frost  v. 
Shackleford,  57  Ga.  261  (1870);  Ferrin 
V.  Myrick,  41  N.  Y.  315  (1869).  Contra, 
Worrall  v.  Harford,  8  Ves.  Jr.  4  (1802); 
Mulhall  V.  Williams,  32  Ala.  489 
(1858);  Jones  v.  Dawson,  19  Ala.  672 
(1851).  SeealsoNewuNicoll,73N.Y. 
127  (1878);  Noyes  v.  Blakeman,  6  N.  Y. 
567  (1852). 

2  Storrs  V.  Flint,  46  N.  Y.  Super.  Ct. 
498  (1880);  Cox  v.  Hickman,  8  H.  L, 
Cas.  268  (1860);  He,  Stanton  Iron  Co., 
21  Beav.  164  (1855);  Sehvyn  v.  Harri- 
son, 2  Johns.  &  H.  334  (1862).  See 
Bingaman  v.  Hickman,  115  Pa.  St. 
420  (1887). 

3  In  Ex  parte  Garland,  10  Ves.  Jr. 
110  (1804),  where  a  testator  directed 
that  a  certain  sum  be  used  to  carry 
on  a  business,  and  the  executor  so 
used  it,  and  the  business  became  in- 
solvent, held,  per  Lord  Eldon,  that  no 


other  part  of  the  testator's  property 
was  liable  for  tlie  debts  thereliy  in- 
curred; overruling  Ilankey  v.  ILini- 
mond,  1  Cooke's  Bankr.  Law,  67 
(1785).  Lord  Eldon  further siiid:  "On 
the  other  hand,  the  case  of  the  exec- 
utor is  very  hard.  He  becomes  liable, 
as  personally  responsible,  to  the  ex- 
tent of  all  his  own  property,  .  .  . 
though  he  is  but  a  trustee.  But  he 
places  himself  in  that  situation  by 
his  own  choice."  In  Re  Johnson,  L.  R. 
15  Cli.  D.  548  (1880),  the  cases  are  re- 
viewed. Lord  Eldon 's  decision  that 
it  is  not  the  general  estate  of  the 
testator  which  is  liable,  but  only  so 
much  as  he  has  authorized  to  be  em- 
ployed in  the  business,  is  stated  to  be 
stiU  the  law.  See  also  Strickland  v. 
Symons,  L.  R.  26  Ch.  D.  245  (1884). 
An  estate  is  not  liable  for  debts  cre- 
ated by  a  partnership  continued  by 
order  of  the  wflL  Stewart  v.  Robin- 
son, 115  N.  Y.  328  (1889). 

4  Stanton  v.  King,  8  Hun,  4  (1876); 
aflE'd,  69  N.  Y.  609.  See  15  Am.  L. 
Rev.  456;  Burch  v.  Breckinridge,  16 
B.  Mon.  (Ky.)  488  (1855) ;  New  v.  Nicoll, 
12  Hun,  431  (1877);  aff'd,  78  N.  Y.  127. 


928 


CH.  XXIX.] 


TEUSTS,  ETC. 


[§  503^. 


is  similar  to  an  old  common-law  trust  estate.  This  conclusion 
was  reached  in  construing  an  English  statute  which  prohibits 
certain  partnerships  or  associations  from  doing  business.' 

Such  beinir  the  case,  it  seems  to  be  clear  that  the  trustees 
and  the  property  of  a  modern  "trust"  are  liable  for  all  debts 
incurred  by  it,  but  that  the  holders  of  tlie  trust  certificates  are 
not  in  any  way  liable  therefor,  unless  they  have  expressly 
agreed  to  assume  that  liability. 

§  50.V.  QualiJiailioHs,  powers,  rights,  auil  duties  of  the  vian- 
agcrs  and  ccrtiJitatchuliUrs  of  a  "«;•»«<."— Any  person  may 


1  In  Englind  a  statute  exists  which 
forbids  any  company,  association,  or 
partnersliij)  consisting  of  more  than 
twenty  persons  from  carrying  on  any 
business  for  the  acquisition  of  gJtin, 
unless  it  is  registered  as  a  comiwmy 
under  the  Joint-stock  Conipanies  Act, 
and  complies  therewith  as  regards 
reports,  etc  It  lias  been  held  that  a 
"trust"  is  not  a  "company,  associ- 
ation, or  partnership,"  and  conse- 
quently is  not  affected  by  this  statute. 
Wigfield  V.  Potter,  45  L.  T.  Kop.  C13 
a882);  Crowther  r.  Thorloy,  32  W.  R. 
330  (1884);  lie  Siddall,  L.  R.  29  Cli.  D. 
1  (188o);  Smith  r.  Anderson,  L.  R.  15 
Ch.  D.  247  (1S.S0).  The  last  case  cited 
was  an  action  to  have  the  "trast" 
dissolved  on  the  ground  that  it  w;\s 
a  partnership,  and  was  doing  busi- 
ness in  violation  of  the  statute.  The 
court  refu-sed  to  grant  the  relief  de- 
sired, and  said  that  the  certificate- 
holders  were  not  partners  and  did 
not  form  an  association.  "There has 
never  been  anything  creating  any 
mutual  rights  or  obligations  between 
those  person-s.  They  are  from  the 
(irsit  entire  strangers,  who  have  en- 
tered into  no  contract  whatever  with 
each  other,  nor  has  eiWier  of  them 
entered  into  any  contract  with  the 
trustees  or  any  trustee  on  behalf  of 
the  other,  there  being  nothing  in  the 
deed  pointing  to  any  mandate  or 
delegation  of  authority  to  anybody 


to  act  for  the  certificate-holders  as 
l)etween  themselves,  and  nothing,  as 
it  ajJixMirs  to  me,  by  which  any  lia- 
bility could  ever  be  cast  ui)on  the 
certificate-holders  either  as  between 
thems<ilvc3oras  between  themselves 
anil  anyl)C)dy  else.  ...  If  there  is 
any  business  at  all,  it  is  to  be  carried 
on  by  the  trustees.  Whatever  is  to 
be  done  is  to  be  done  by  the  trustees" 
And  Cotton,  L.  J.,  said:  "The  tru-stoes 
here  are  the  only  persons  who  are 
dealing  with  the  investments,  and 
they  are  dealing,  not  as  agents  for 
some  principal,  but  as  tnustees  in 
whom  the  property  and  the  manage- 
ment of  it  are  vested,  and  who  have 
the  power  of  changing  the  invest- 
ments and  securities.  That  is  just 
like  the  case  which  often  occiu^ 
where  the  executors  or  trustees  of  a 
will  are  directed  to  carry  on  a  busi- 
ness. The  fact  that  they  are  to  ac- 
count to  others  for  the  profits  made 
is  a  matter  utterly  immaterial  as  be- 
tween them  and  those  with  whom 
they  deal.  They  deal  with  those  per- 
sons as  the  only  persons  contracting, 
and  hold  themselves  out  as  personally 
liable.  Those  persons  have  no  right 
whatever  as  against  the  persons  bene- 
ficially entitled."  This  case  was  one 
involving  a"tru.st."  See  also  dicta 
to  the  same  efTert  in  Credit  Mnbilier 
V.  Commonwealth,  C7  Pa.  St  233 
(1870). 


50 


929 


§  503d] 


TRUSTS,  ETC. 


[CU.  XXII, 


serve  as  a  trustee,  provided  that  person  is  competent  to  tako 
the  legal  title  to  the  i)ropcrty.i 

The  trustees  of  a  "  trust "  correspond  somewhat  to  the  direct- 
ors of  a  corporation.  They  generally  are  elected  annually  by 
the  certificate-holders  in  a  regularly  called  meeting  of  them- 
selves. The  instruments  creating  the  "  trust "  usually  provide 
for  the  election  of  trustees,  and  for  their  succession  and  tenn 
of  office.  There  is  nothing  in  the  old  law  of  trust  estates  which 
forbids  this  change  of  trustees.'^ 

Where,  by  the  trust  deed,  a  majority  of  the  cestuis  que  tr\is.t 
have  power  to  fill  a  vacancy  caused  by  the  incapacity  or  inabil- 
ity of  the  trustee,  they  may  substitute  a  new  trustee  when 
the  old  trustee  removes  to  and  becomes  a  resident  of  a  foreign 
country.' 


1 1  Perry,  Trusts,  §  89. 

2  "  The  person  who  creates  the  trust 
may  ino;ild  it  into  whatever  form 
he  pleases;  he  may  therefore  deter- 
mine in  what  manner,  in  what  event, 
and  upon  what  condition  the  orig- 
inal trustees  may  retire  and  new 
trustees  may  be  substituted.  All  this 
is  fully  within  his  power,  and  he  can 
make  any  legal  provisions  which  he 
may  think  proper  for  the  continua- 
tion and  succession  of  trustees  dur- 
ing the  continuation  of  the  trust." 
Perry,  Trusts,  §  287.  In  England, 
under  the  vesting  acts,  the  coiu-t  held 
that  it  had  power  to  vest  the  estate 
of  a  modern  "  trust "  in  new  trustees 
where  one  of  the  old  trustees  was 
dead,  another  was  insane,  and  under 
the  trust  agreement  the  certificate- 
holders  had  elected  new  trustees. 
Re  Siddall,  L.  R.  29  Ch.  D.  1  (1885). 
A  similar  power  was  given  to  the 
court  in  regard  to  trasts  of  personal 
property  in  New  York  by  L.  1882,  ch. 
185.  As  regards  the  common-law 
rules  and  powers  of  the  courts  herein, 
see  Perry,  Trusts,  §  276  et  seq.  At 
common  law,  upon  the  death  of  the 
surviving  trustee,  his  executor  or 
administrator  became  the  trustee. 
Boone  v.  Citizens'  Sav.  Bank,  84  N.  Y. 


83,  87  (1881);  Do  Peyster  v.  Beekman, 
55  How.  Pr.  90  (1877).  In  tlie  cost- 
book  company  case  of  Johnson  v. 
Goslett,  18  C.  B.  728  (1800),  the  fol- 
ing provision  appears:  "The  trustees 
of  the  said  lease  shall,  wlien  and  if 
required  by  the  directors,  execute  a 
deed  declaring  that  they  hold  the 
said  mine  under  and  by  virtue  of 
such  lease  as  trustees  for  the  benefit 
of  the  shareholders  in  the  said  com- 
pany, according  to  their  respective 
shares  and  interests  tlierein;  and  if 
any  or  eitlier  of  the  said  trustees,  or 
any  future  trustees,  shall  resign,  or 
die,  or  become  incapable  or  imwill- 
ing  to  act,  then  new  trustees  or  a 
new  trustee  may  be  appointed  by 
any  of  the  general  meetings  of  share- 
holders hereinafter  provided  for,  in 
the  place  of  the  trustees  or  trustee 
so  resigning,  or  dying,  or  becoming 
incapable  or  unwilling  to  act,  as 
aforesaid ;  and  the  said  premises  shall 
be  forthwith  assigned  to  and  vested 
in  the  said  new  trustee  or  trustees 
jointly  with  the  continuing  trustee 
or  trustees,  or  in  such  new  trustees 
only,  as  the  case  may  require,  at  the 
expense  of  the  said  company." 

3  Farmers'  L.  &  T.  Co.  v.  Hughes, 
11  Him,  130  (1877).     In  this  case  the 


930 


en.  x_xix.] 


TEUSTS,  ETC. 


[§  503(7. 


The  extent  of  tbc  powers  of  the  trustees  of  a  "  trust "  is  jw 
matter  of  great  interest  to  the  public  and  the  certiiicate-hold- 
ers.  Especially  is  this  the  case  since  in  many  cases  the  extent 
of  the  trustees'  powers  is  kept  a  secret  from  all  except  the 
favored  few.  Often  the  certificate-holders  are  not  allowed  to 
examine  and  know  the  contents  of  the  trust  instrument  which 
defines  the  powers  of  trustees.  The  law,  however,  guards 
jealously  against  any  assumption  of  powers  by  the  trustee  be- 
yond those  which  are  expressly  conferred  by  the  trust  instru- 
ment.' 

The  trustees  who  hold  the  stock  in  the  various  corporations 
which  make  up  the  "  trust "  are  trustees  and  not  vendees  of  the 
stock.'    The  trustee  ordinarily  has  no  power  to  sell  the  stock.' 

There  are  other  incidents  which  explain  the  position  of  the 
trustee.  lie  may  sue  and  be  sued  in  his  own  name  on  all  mat- 
ters and  contracts  pertaining  to  the  trust.* 

lie  is  not  liable  to  the  cestui  que  trust  for  losses  incurred  by 
his  management  of  the  property  of  the  trust.  He  is  bound 
merely  to  exercise  ordinary  discretion  and  to  obey  the  direc- 


deed  of  tnist  provided  tliat  the  trust- 
ees or  their  survivor  might  be  re- 
moved by  the  vote  of  a  majority  in 
interest  of  the  holders  of  the  bonds 
referred  to  in  the  trust  deed,  at  any 
meeting  called  for  that  purpo^^};  and 
further,  by  a  sepjirate  and  distinct 
provision,  that  in  case  of  the  death, 
removal,  resignation,  incapacity,  or 
inability  of  both  or  either  of  said 
trustees  to  act  in  the  execution  of 
the  trust,  then  a  majority  of  the 
holders  of  such  bonds  might  desig- 
nate and  select,  in  writing,  one  or 
more  competent  persons  to  liU  the 
vacancy  so  occurring.  The  property 
may  be  made  to  vest  in  new  trustees 
witliout  transfer,  if  the  trust  instru- 
ment is  so  drawn.    1  Perry,  Tnista, 

» 1  Perry,  Tracts,  §.5  454,  400. 

»  People  r.  North  River,  etc  Co.,  121 
N.  Y.  582  (1890). 

> See  ch.  XIX,  /nipra,  Tlie  trustees 
of  the  American  Cuttle  Trubt  cannot 


sell  shares  of  stock  wliicli  thoy  hold- 
Gould  V.  Head,  38  Fed.  Rep.  880  (1880); 
S.  C,  41  Fed.  Rep.  240  (1890). 

*  In  this  respect  the  trustee  is  not 
the  same  as  the  director  of  a  corpora- 
tion. "A  trustee  is  a  man  who  is  the 
owner  of  the  property,  and  deals  with 
it  as  principal,  as  owner,  and  as  mas- 
ter, subject  only  to  an  e^^iuitablo  ob- 
ligation to  account  to  some  f>ersona 
to  whom  he  stands  in  the  relation  of 
trustee,  and  who  are  his  cestuis  que 
trust.  .  .  .  The  office  of  director  is 
that  of  a  paid  servant  of  the  com- 
pany. A  director  never  enters  into 
a  contract  for  himself,  but  he  enters 
into  contracts  for  his  principal;  that 
is,  for  the  company  of  whom  he  is  a 
director  and  for  whom  he  is  acting. 
He  cannot  sue  on  such  contracts,  nor 
be  sued  on  them  unless  he  exceeds 
his  authority.  That  so^-ms  to  me  to 
be  the  broad  distinction  l)etween 
tnistei'S  and  directors."  Smith  v. 
Anderson,  I*  R.  15  Ch.  D.  247  (1880). 


931 


§  50Zd.]  TEUSTS,  ETC.  [cil. 


XXIX. 


tions  of  the  instrument  creating  the  trust.  It  is  only  for  a 
breach  of  trust  that  he  may  bo  made  to  account  to  the  ccatul 
que  trust} 

In  the  case  of  the  modern  "trust"  it  has  been  doubted 
whether  the  consent  of  all  the  trustees  is  essential  to  its  con- 
tracts and  acts,  as  is  the  case  with  the  old  common-law  trust.' 
But  in  general  these  matters  are  regulated  and  provided  for 
by  the  instrument  which  creates  the  "trust." 

The  compensation  of  the  trustee  is  usually  fixed  by  the  trust 
deed.  If  not,  it  falls  within  the  provisions  of  the  statutes,  or 
a  reasonable  compensation  is  allowed  by  the  common  law.' 

The  property  of  the  "  trust "  cannot  be  seized  for  the  indi- 
vidual debts  of  the  trustee,*  but  the  interest  of  the  certificate- 
holder  may  be  reached  so  as  to  subject  it  to  the  payment  of 
his  debts.'  In  this  respect  the  certificates  resemble  shares  of 
stock. 

The  trust  property,  where  it  consists  of  personal  property  in 
the  nature  of  bonds,  stocks,  notes,  or  evidences  of  indebtedness, 
or  corresponds  to  the  capital  stock  of  the  corporation,  may  be 
taxed  at  the  place  where  the  main  office  or  place  of  Ijusiness 
of  the  "  trust "  exists.  The  extent  of  the  taxation  depends,  of 
com'se,  upon  the  statutes  of  tUe  state  wherein  the  tax  is  laid.' 

There  is  more  difficulty  in  determining  whether  a  certiiicate- 

1  Simonton  v.  Sibley,  123  U.  S.  220  see  2  Alb.  L.  J.  2G1,  2SS.    In  New 

(1887).  Where  a  railroad  construction  York,  by  statute,  all  transfers  of  per- 

contract  is  assigned  to  trustees  to  be  sonal  property  made  in  trust,  for  use 

can-ied  out  and  the  profits  to  be  paid  of  the  person  making  the  same,  are 

to  the  stockholders  of  a  designated  void  as  against  his  creditors,  existing 

corporation,  the    stockholders  may  or  subseqitent    2  R.  S.  135,  §  1  (7th 

compel  the  trustees  to  pay  over  such  ed.,  p.  2327,  and  cases  there  cited), 

profits.    The  trustees  cannot  set  up  See  also  GrafiE  v.  Bonnett,  31  N.  Y.  9, 

that  they  were  also  directors  of  the  14,  18  (1865). 

railroad.    Hazard  v.  Dillon,  34  Fed.  SRicker  v.  American  Loan,  etc.  Co., 

Rep.  485  (1888).  140  Mass.  346  (1885).    See  also  People 

mills  V.  Hurd,  29  Fed-  Rep.  410  v.  Albany  Assessors,  40  N.  Y.  154 

(1887).  (1869);   Re  Jefferson,  35  Minn.   215 

3  2  Perry,  Trusts,  §  917.  (1886),  citing  many  cases  on  this  sub- 

*  Gibson  v.  Stevens,  7  N.  H.  353  ject.    It  is  well  settled  in  New  York 

(1834),  where  a  trustee  was  author-  state  that  imder  its  statutes  no  shares 

ized  to  continue  the  testator's  busi-  of  stock  in  either  domestic  or  foreign 

ness.     The  property  was  held  not  corporations  are  subject  to  taxation 

subject  to  the  trustee's  personal  debts,  except  shares  of  stock  in  banks.   See 

5  As  to  the  nile  at  common  law,  §  565,  infrcu 

933 


CH.  XXIX.]  TRUSTS,  ETC.  [§  504. 

holder  may  tenninute  Lis  interest  in  the  "trust"  and  demand 
his  })roj)ortion  of  tlie  property.  In  certain  "trusts,"  whose 
property  consists  of  shares  of  stock,  he  undoubtedly  may.*  But 
in  "general  a  single  certificate-holder  cannot  have  the  whole 
"  trust "  dissolved  and  wound  up  before  the  time  fixed  by  the 
trust  agreement  for  its  dissolution  has  arrived.' 

If  the  "  trust "  itself  is  forbidden  by  the  statutes  of  the  state 
wherein  it  exists,  it  never  will  be  wound  up  by  the  courts. 
Tlic  law  will  not  comi)el  a  trustee  to  account  for  property  or 
transactions  which  grow  out  of  a  contract  which  is  prohibited 
by  statute.  The  courts  leave  the  parties  where  they  are  found. 
They  are  outside  of  the  protection  of  the  law.' 

If,  however,  the  "trust"  is  legal,  it  may  be  terminated  at 
any  time  by  a  decree  of  a  court,  upon  the  consent  of  all  the 
jiarLies  who  are  interested  in  it.*  IJut  a  "trust"  will  not  be 
ilissolved  and  wouml  up  merely  because  the  trustees  have  been 
guilty  of  a  breach  of  trust.  The  remedy  in  such  a  case  is  to 
enjoin  or  remove  the  trustees.*  Where,  however,  the  trust  is 
insolvent  and  incapable  of  proceeding,  a  dissolution  and  wind- 
ing up  of  its  business  will  bo  decreed  by  a  court.' 

B.    UXrNCOnrORATED   JOINT-STOCK   ASSOCIATIONS. 

§  504.  Drfniitions  —  Joint-stock  companies,  chths,  exchanges^ 
etc. —  Ownership  of  land. —  A  joint-stock  company  may  be  de- 
fined to  be  an  association  of  persons  for  the  purpose  of  business, 

>See  §  5036,  siipra.  78  (ISoC).  where  insolvent  copartner* 

'Smith  tJ.  Anderson,  L.R.  15  Ch.  D.  ships  were  wound  up,  though  the 

247  (18.S0).    The  same  rule  prevails  in  time  for  which  they  were  to  exist 

xmincorporated  joint-stock    asMxin-  had  not  yet  expired.    See  also  Siog- 

tions.    See  Smith  v.  Virgin,  33  Me,  hortner  v.  Weissenbom,  20  N.  J.  Eq. 

118  (ISOIV    See    also  Waterburr  v.  172  (1800);  Howell  v.  Harrey,  r>  Ark. 

Merchants*  Union  Exp.  Ca,  50  Barb,  270  (18^13);  Van  Ness  v.  Fisher,  5  I^ins. 

157  (1867),  holding  that  such  com-  230(1871);  Brienu.  Harriman.  1  Tonn. 

pany  will  not  be  wound  up  merely  Ch.  467  (1873);  Halladay  v.  Elliott,  8 

bocaase    the    directors   have    been  Oreg.  84  (1879);  Bjigley  u.  Smith,  10 

guilty  of  a  bmach  of  trust  N.  Y.  489  (18-33).     In  Sibley  v.  Minton, 

«  ll;  Padstow,  etc  Assoc,  L.  R.  20  27  L.  J.  (Ch.)  53  (1858),  the  court  held 

Ch.  D.  l.'J7  (1^-^?).  that,  in  an  action  by  an  advojiturer 

<  Perry,  Trusts,  §  000.  in  a  cost-book  mining  compnny  to 

•  2  Perry,  Trusts,  |:;g  816-853.  wind  up  the  company  and  adju.>t  the 

•See  Ikiring  v.  Dix,  1  Cox,  Ch.  213  losses,  all  the  co-adventurLra  were 

(1786);  Ikiiley  v.   Ford,  13  Sim.  495  necessary  parties. 

(1S43) ;  Jennings  i'.  Baddeley,  3  K.  &  J. 

933 


§  504.] 


TBUSTS,  ETC. 


[OU.  XXIX. 


having  a  capital  stock  divided  into  shares,  and  governed  hy 
articles  of  association  which  prescribe  its  objects,  organization, 
and  procedure,  and  the  rights  and  liabilities  of  the  members, 
except  that  the  articles  cannot  release  the  members  from  their 
liability  as  partners  to  the  creditors  of  the  company.^ 

A  joint-stock  company  lies  midway  between  a  corporation 
and  a  copartnership.    It  is,  however,  to  be  distinguished  from 


iln  Hedge's  Appeal,  63  Pa.  St.  273 
(18G9,  following  the  statute  8  «&  9 
Vict.,  c.  110),  it  is  defined  to  be  "  a 
partnership  whereof  the  capital  is  di- 
vided, or  agreed  to  be  divided,  into 
shares,  and  so  as  to  be  transferable 
without  the  express  consent  of  all 
the  copartners."  In  the  statutes  of 
Massachusetts  the  words  "  joint-stock 
company  "  are  used  to  mean  a  cor- 
poration organized  under  the  general 
incorporation  act  of  the  state.  Atr 
torney-Geueral  v.  Mercantile  Ins.  Co., 
121  Mass.  524  (1877).  But  this  is  not 
an  accurate  use  of  the  term.  "  The 
articles  of  association  of  an  unincor- 
porated joint-stock  company  bear  the 
same  relation  to  it  that  the  charter 
bears  to  an  incorporated  company; 
they  regulate  the  duties  of  the  offi- 
cers and  the  duties  and  obligations 
of  the  members  of  such  a  company 
among  themselves;  they  specify  the 
capital,  limit  the  duration,  and  define 
the  business  of  the  company."  Bray 
V.  FarweU,  81  N.  Y.  600  (1880),  per 
Earl,  J.  See  also  White  v.  Bro\\Tiell, 
4  Abb.  Pr.  (N.  S.)  162, 193  (1868).  In 
Eobbins  v.  Butler,  24  111.  387, 426  (1860), 
it  is  said  that  joint-stock  companies 
"  have  none  of  the  rights  and  immuni- 
ties of .  .  .a  regularly  incorporated 
company.  These  stock  compan  ies  are 
nothing  more  than  partnerships;  and 
every  n  ember  of  the  company  is  lia- 
ble for^  the  debts  of  the  concern,  no 
matter  what  the  private  arrange- 
ments among  themselves  may  be." 
To  the  same  effect,  see  Moore  v.  Brink, 
4  Hun,  402  (1875);  Skinner  v.  Dayton, 


19  Johna  513  (1822);  Wells  v.  Gates, 
18  Barb.  554  (1851);  Koaslcy  v.  Codd, 
2  Car.  &  P.  403  (1826).  "The  term 
•  joint-stock  company  *  appears  to 
have  originated  in  England  in  com- 
paratively recent  times.  Joint-stock 
companies  may  bo  said  to  bo  partner- 
ships, or  individuals  associiited  for 
some  specified  purpose,  under  a  desig- 
nated name  or  description,  to  which, 
by  some  general  or  special  statute, 
when  they  have  been  formed  or  com- 
posed in  a  specified  manner,  some  of 
the  powers  or  proper  attributes  of  a 
corporation  have  been  given."  Day- 
ton, etc.  R  R  r.  Hatch,  1  Disney 
(Ohio),  84,  90  (1855).  Factors',  etc. 
Ins.  Co.  V.  New  Harbor,  etc.  Co.,  37 
La.  Ann.  233,  239  (1885),  speaks  of  a 
joint-stock  company  as  "a  nonde- 
script organization,  composed  of  the 
owners  of  certificates  showing  the 
proportion  of  their  respective  inter- 
est in  its  assets  and  liability  for  its 
obligations,  and  who  are  co-owners 
or  proprietors  in  common.  As  no  one 
is  bound  to  own  property  in  indi- 
vision,  it  follows  that  such  owners 
who  wish  a  division  have  a  right  to 
have  that  property  sold,  and  after  a 
liquidation  of  the  affairs  of  the  con- 
cern to  have  the  residue  distributed 
ratably  among  themselves."  At  com- 
mon law  a  partnership  or  joint-stock 
association  may  do  business  under 
any  name  that  it  chooses.  See  g  233, 
note,  supra;  Preachers'  Aid  Soc  v. 
Rich,  45  Me.  552  a858) ;  2  Perry,  Trusts, 
§  730;  Swasey  v.  American  Bible  Soc., 
57  Me.  523  (1869). 


934 


<JH.  XXIX.] 


TRUSTS,  ETC. 


[§  504. 


tbera,^  cand  also  from  clubs,^  from  social,  benevolent,'  and  mutual- 
aid*  oi-unizations,  and  from  associations  formed  for  business 
purposes,  but  witbout  a  capital  stock,*  especially  in  respect  to 

(18C7);  Gardner  v.  Fremantle,  19  W. 
R.  250  (ISTO);  Delauney  v.  Strickland^ 
2  Stark.  41G  (1818);  Caldicott  v.  Grif- 


lit  differs  from  a  corporation  in 
tiiat  a  joint-stock  company  has  no 
limited  liability  as  regards  its  stock- 
holders; and  it  cannot  sue  or  be  sued 
in  the  name  of  the  association.    It 


fiths,  8   Excli.  898   (1853 1;    Ebbing- 
housen  v.  Worth  Club,  4  Abb.  N.  Gas. 


differs  from  a  copartnership  in  that    300  (187a 


it  is  not  dis3«jlved  by  a  transfer  of 
stock;  and  each  member  has  not  the 
same  powers  of  transacting  business 
and  disposing  of  the  assets  as  in  a 
partnership.  See  Cox  v.  Bodfish,  35 
Me.  302  (1853).  A  company  organized 
under  the  statutes  of  Pennsylvania 
and  having  mixed  cliaracteristics  of  a 


jPenfield  v.  Skinner,  11  Vt  29G 
(1839);  Beaumont  v.  Meredith,  3  Ves. 
&  B.  180  (1814).  See  also  Thomas  v. 
EUmaker,  1  Pars.  Sel.  Eq.  Cas.  98 
(18-11).  Or  Masonic  lodges.  See  Ash 
r.  Guie,  97  Pa.  St.  493  (1881).  See  also 
Cohn  V.  Bon^t.  30  Ilun,  502  (18S5); 
Goodman  v.  Jedidjah  Lodge,  07  Md. 


jK^rtnership  and  corin^ration  is  a  cor-    117  (1887);  Schmidt  v.  Ahr^\^ra  Lin- 


poratiou  so  far  as  removal  to  the  fed 
oral  court  is  concerned.  Bushnell  i'. 
Park.  40  Fed.  Kcp.  209  (1891).  The 
ordinary  attachment  statute  author- 
izing the  attachment  of  shares  of 
stock  does  not  apply  to  a  club  organ- 


coin  Lodge,  84  Ky.  490  (1880).  A 
by-law  of  a  benevolent  society  that, 
for  non-payment  of  dues,  the  names 
of  members  shall  be  dropixj.l.  is  legal 
and  self-executing.  Pux)d  r.  Iliiilway, 
etc  AS.SOC.,  31  Fed.  Rep.  02  (1887).  See 


ized  for  lawfuUiK)rting  purposes  and    McCalhon  v.  U.bernia,  etc  Soc.,  .0 


being  more  of  the  nature  of  a  statu- 
tory joint-stock  a.ssociation  than  a 
corporation.  Lyon  v.  Denison,  80 
Mich.  371  (1890).  Ln  Illinois  it  is  a 
criminal  offense  for  individuiils  or  an 
unincorporated  association  to  use  a 
name  that  implies  incorporation. 
llazeltou  Boiler  Co.  v.  Ilazelton,  etc. 
Co..  142  UL  491  (1892). 

«Park  V.  Spaulding,  10  Hun,  128 
(1877);  Ridgely  v.  Dobson,  3  Watts  & 
S.  (Pa.)  118  (1842);  Loubat  v.  Le  Roy, 
40  Hun,  546  (ISSO);  Flemyng  v.  Uec- 
tor. 2  M.  &  W.  172  (1830);  ReSt  James 
Club.  2  De  G.,  M.  &.  G.  383  (1852); 
Ewing  r.  Midlock,  14  Alx  (O.  S.)  82 
(1837);  Todd  v.  Emly.  8  JL  &  W.  505 
(1841);  Reynell  v.  Lewis,  15  M.  &  W. 
517  (1840);  Wood  r.  Finch,  2  F.  &  F. 
447  (1801) ;  Cross  r.  Williams,  10  W.  R 
302  (1S02);  Cockerell  v.  Aucompte,  5 
W.  R-  033  (ia57) ;  Koohler  r.  Brown,  31 
How.  Pr.  235  (1860) ;  Wall.r  r.Thomas, 
42  How.  Pr.  337  (1871);  Uopkinsou  v. 
Marquis   of   Exeter,   16    W.  R.  266 


CaL  163  (1886),  involving  a  secession 
from  a  benevolent  association.  Be- 
nevolent associations  are  not  neces- 
sarily copartnerships.  Brown  r.Stoer- 
kel,  74  Midi.  269  (1889). 

<Lafond  v.  Deems,  81  N.  Y.  507 
(1880);  Fritz  v.  Muck,  62  Uow.  Pr. 
09  (1881);  Pipe  i'.  Bateman,  1  Iowa, 
369  (1855).  Cf.  Thomas  v.  Ellmaker, 
1  Pars.  SeL  Eq.  Cas.  98  (1844);  Olery 
V.  Brown,  51  How.  Pr.  92  (1875).  See 
also  Boone,  Corp.,  §  338. 

»Such  as  stock  exchanges.  See 
White  V.  Brownell,  2  Daly,  329  (1808); 
Clute  V.  Loveland,  GS  CaL  254  (1885); 
Leenh  v.  Harris,  2  Brew.st  (Pa.)  571 
(1809);  Statev.  Chamber  of  Commerce, 
20  Wis.  63  (1865);  Waston  v.  Ives,  97 
N.  Y.  223  (1884),  relative  to  sale  of  a 
seat  by  tlie  exchange  to  pay  the  mem- 
ber's debts.  See  al.'^  Piatt  v.  Jones, 
96N.Y.24(18.84).  As  to  a  levy  of  exe- 
cution on  a  seat  in  an  exchange,  see 
Bowen  V.  Bull.  12  N.  Y.  Sup^  325 
(1890);  Powell  t».  Waldron,  89  N.  Y. 


935 


§  504.] 


TKUSTS,  ETC. 


[cii.  XXIX. 


the  riglit  of  expulsion.^  In  the  matter  of  the  ex]Hilsion  of  a 
member  from  an  incorporated  exchange,  the  court  may  pass 
upon  the  question  of  the  jurisdiction  of  the  board  of  directors 
to  expel  a  member,  and  also  as  to  whether  there  was  any  evi- 


328  (1882);  Ritterband  v.  Baggett,  4 
Abb.  N,  Cas.  G7  (1877);  Londheim  v. 
White,  67  How.  Pr.  467  (1884).  A  scat 
in  the  excliange  is  property  whicli 
may  be  reached  by  creditors.  But  if 
an  assignee  in  bankruptcy  refuses  to 
take  it  and  pay  the  dues,  the  bank- 
rupt who  pays  them  may  retain  the 
seat.  Sparliawk  v.  Yerkes,  142  U.  S. 
1  (1891).  It  is  legal  for  an  excliange 
to  have  and  enforce  a  by-law  pro- 
viding that  the  seat  of  a  member 
shall  be  sold  in  case  of  his  failure  to 
fulfill  his  contracts.  Rorke  v.  San 
Francisco  Stock,  etc.  Board,  99  CaL 
196  (1893).  A  seat  in  a  stock  ex- 
change cannot  be  sold  under  levy  of 
execution.  The  pm-chaser  takes  noth- 
ing.   Lowenberg  v.  Greenebaum,  99 


CaL  162  (1893).  The  seat  of  a  mem- 
ber of  an  exchange  may  be  reached 
by  judgment  creditors  of  the  oNvnor, 
although  the  by-laws  provide  othor- 
wisa  Habenicht  v.  Lissak,  78  Cal.  'S'ti 
(1889).  "Where,  under  a  by-law  of  a 
board  of  trade,  diflerences  between 
members  are  arbitrated,  a  court  of 
equity  may  review  the  decision  in 
regard  to  the  measure  of  damages. 
Ryan  v.  Cudahy,  157  IlL  108  (1805). 
Associations  may  be  for  improving 
a  water-power.  Troy  Iron,  eta  Fac- 
tory V.  Corning,  45  Barb.  231  (1884). 
For  building  a  school-house.  Mar- 
ston  V.  Durgin,  54  N.  H.  347  (1874). 
For  protecting  business  interests. 
Caldicott  V.  Griffiths,  8  Exch.  898 
(1853).    See  also  Tenney  f.  New  Eng- 


1 A  member  of  a  union  cannot  bring 
a  suit  in  equity  to  declare  void  and 
illegal  a  by-law  that  members  shall 
be  fined  for  accepting  employment  in 
connection  with  non-union  persons, 
and  to  enjoin  the  infliction  of  a  fine 
upon  himself.  His  remedy  is  at  law 
or  by  application  to  the  attorney- 
general.  Thomas  v.  Musical,  etc. 
Union,  121  N.  Y.  45  (1890).  A  by-law 
that  the  members  of  a  news  associ- 
ation shall  not  publish  news  fur- 
nished by  other  associations  in  the 
same  territory  is  valid.  The  penalty 
for  violation  may  be  suspension.  Mat- 
thews V.  Associated  Press,  61  Him, 
199  (1891).  See  also  notes  siijyra. 
Where  a  member  of  a  lodge  was  ex- 
pelled for  entering  into  a  conspiracy 
to  blackball  applicants  for  admis- 
sion, the  court  refused  to  restore  him 
by  mandamus,  and  said  that  such  a 
case  was  different  from  one  where 
property  rights  or  money  demands 
are  involved.  State  v.  Grand  Lodge, 
53  N.  J.  L.  536  (1891).    Where  the 


expelled  member  has  the  right  by 
by-law  to  appeal  from  the  decision  to 
a  corporate  meeting,  the  coiu-ts  will 
not  interfere  until  such  appeal  is 
taken.  Screwmen's  Benev.  Assoc,  v. 
Benson,  76  Tex.  552  (1890).  As  to  ex- 
pulsion of  a  member  from  a  club 
under  a  by-law,  see  Commonwealth  f. 
Union  League,  135  Pa.  St.  301  (1890). 
An  action  is  not  maintainable  to 
compel  an  unincorporated  volun- 
tary political  association  to  admit  a 
person  to  membership.  SIcKane  v. 
Adams,  123  N.  Y.  609  (1890).  Such 
organizations  as  chambers  of  com- 
merce sometimes  provide  for  forfeit- 
ure of  membership  for  non-pajinent 
of  dues,  and  such  provision  is  legaL 
The  corporation  may,  however,  sue 
for  its  dues  instead  of  forfeiting  the 
membership.  Denver,  etc.  Commerce 
V.  Green,  8  Colo.  App.  420  (1896).  As 
to  expulsion  of  members  from  unin- 
corporated associations,  see  Otto  v. 
Journeymen  Tailors'  Union,  75  CaL 
308  (1888).    See  also  §  7006,  infra. 


936 


en. 


XXIX.] 


TEUSTS,  tTO. 


[§  504. 


(Icnce  at  all  justifying  the  expulsion.^  A  mutual  insurance  com- 
pany  may  pay  dividends.^  A  joint-stock  company,  although  it 
exercises  the  power  to  issue  stock,  the  same  as  a  corporation, 
yet,  when  organized  for  the  purpose  of  transacting  any  lawful 
business,  is  itself  a  lawful  means  of  carrying  on  business.' 


kind   Protection    Union,  37   Vt   64 
(18C4);  Abels  v.  McKeen,  18  N.  J.  Eq. 
462  (1807);  Henry  r.  Jack.son,  37  Vt 
431  (186."»;  Frost  v.  Walker.  CO  Me.  463 
(1872).     Building  associations.    Stro 
hen  V.  Franklin,  etc  Assoc.,  115  Pa. 
St.  273  (l'^S7);  Quein  f.  Smith,  108  Pa. 
St  32."^  0885);  Jack.son  v.  Ca.'^idy,  68 
Tex.  282  (1887);  Auld  v.  Glasgow,  etc. 
Soa.  L.  R.  12  App.  Cas.  197  (18b7).    A 
building    association  has  power  to 
lorrow  money  and  give  security  for 
it    North  Hudson,  etc,  Assoc  v.  Hud- 
son Nat  liiink,  79  Wis.  31  (1891).    A 
building  and   loan    a.ssociation   can 
foreclose  a  mortgage  irresi«ctive  of 
I«yinent3  by  the  mortgagor  on  his 
stock   in  the  association.     Peijple's, 
etc  Assoc  V.  Furey.  47  N.  J.  Fxi-  410 
(1890).     For  a  full  explanation  of  the 
cliaracter  and  mode  of  business  of  a 
mutual  benefit  building  association 
or  corporation,  where  regular  dues 
are  paid  and  the  money  loaned  to  the 
members  on  mortgages  without  in- 
terest see  People  r.  Lowe,  117  N.  Y. 
175  (1889).     As  to  the  stockholder's 
right  in  a  building   association  to 
withdraw  and  sue  for  his  payments 


the  law  against  usury  does  not  apply 
to  building  cooperative  associations. 
Albright  v.  Lafayette,  etc.  Assoc.  103 
Pa.  St.  411  (1883).  See  also  Winget  v. 
Quincy,  etc  Assoc,  128  HL  67  (1889). 
In  a  Micliigan  co-operative  savings 
and  loan  corporation,  if  a  member 
sells  his  stock  to  the  company,  he 
cannot  afterwards  redeem  or  sell 
it  It  is  not  a  loan,  a-s  other  author- 
ities have  held.  Michigan  Bldg.  etc 
Assoc  r.  IklcDevitt  77  Mich.  1  (1889). 
See  Atwood  v.  Dumas,  149  Mass.  167 
(1889). 

>  People  V.  New  York  Produce 
Exck,  149  N.  Y.  401  (1896).  See  also 
Re  Haebler.  149  N.  Y.  414  ( 1800).  hold- 
ing that  a  by-law  giving  the  board  of 
managers  power  to  discipline  mem- 
bers is  legal  A  stock  exchange  may 
expel  a  member  who  does  not  ful- 
fill his  contracts  made  within  the 
exchange,  due  notice,  etc,  being 
given  to  him  in  the  matter.  Lewis 
V.  Wilson,  121  N.  Y.  284  (1890).  Stock 
exchanges  cannot  expel  members  for 
carrying  cases  into  courts  instead  of 
arbitrating.  People  v.  New  York 
Cotton  Exch.,  8  Hun,  216  (1870).    As 


under  a  bv-law  providing   therefor    to  the  power  of  a  board  of  trade    o 
totheexte^tofone-thirdofthefunds    expel  a  -    b^^  see  P.chor  . 


cago  Board  of  Trade,  121  IlL  412(1887). 
2  In  McKean  v.  Biddle,  37  Atl.  Ptep. 
528  (Pa.,  1897),  where  a  mutual  in- 
surance company  for  one  hundred 
and  thirty-two  years  had  not  paid 
dividends^  but  had  accimiulated  a 
surplas  of  over  ?l,OOO.fXK).  the  court 
held  tliat  the  comr-any  might  resume 
the  payment  of  dividends.  Tlio  court 
also  held  that  every  corporation  has 
the  inherent  right  to  declare  di>-i- 
dends. 
^oc     4o    ^     i:-  "'i- ■'  -   V"-'        '"^*  '^  **^  ^^*®  ***  contend  that 
In  Pennlylvauia  by  statute    partncrsliips  with  transferable  share* 

087 


in  the  treai^urv,  see  Texas,  etc.  As.soc 
V.  Kerr,  13  &  W.  Rep.  1020  (Tex., 
18901  Concerning  a  building-as.so- 
ciation  stock  c<,)mplication  and  the 
rights  of  creditors  of  a  stockholder, 
Bee  Wilson  v.  Schoenlaub,  99  Mo.  96 
(1889).  Tlie  nature  of  full-paid  stock 
in  building  associations  is  considered 
in  Towle  r.  American  Bldg.  etc 
Assoc,  75  Fed.  Rep.  938  (1896).  As  to 
rights  upon  the  insolvency  of  a  build- 
ing association,  see  Gibson  t".  Safety, 
etc  As-^..  48  N.  R  Rep.  •'580  (IlL, 
1897). 


§  504] 


TRUSTS,  ETC. 


[oh. 


XXIX. 


The  earlier  cases  declaring  that  joint-stock  companies  were 
illegal  were  so  decided  largely  because  of  the  Bubble  Act,  which 
was  in  force  from  1720  to  1820.^ 

Yery  high  English  authority,  after  a  thorough  review  of  tho 
English  cases,  gives  the  opinion  that  at  common  law  joint-stock 
associations  are  legal,'^ 


are  illegal  in  tliis  commonwealth. 
.  .  .  The  grounds  upon  which  they 
were  formerly  said  to  be  illegal  in 
England,  apart  from  statute,  have 
been  abandoned  in  modern  times." 
Phillips  V.  Blatchford,  137  Mass.  510 
{18S 1).  "  These  companies,  being  con- 
sonant with  the  wants  of  a  growing 
and  wealthy  community,  have  forced 
their  was  into  existence,  whether 
fostered  by  the  law  or  opjJOsed  to  it." 
Greenwood's  Case,  3  De  G.,  M.  &  G. 
459,  477  (1854);  Townsend  v.  Goewey, 
19  Wend.  424  (1838).  A  laboring  men's 
association  for  the  purpose  of  oppos- 
ing capitalists  has  been  upheld.  Snow 
V.  Wheeler,  113  Mass.  179  (1873). 

1  Enacted  6  Geo.  I,  c.  18,  §  18;  re- 
pealed, 6  Geo.  IV,  c.  91.  Lindley  says 
of  this  act:  "Juster  views  of  polit- 
ical economy  and  of  the  limits  within 
which  legislative  enactments  should 
be  confined  have  led  to  the  repeal  of 
the  statute  in  question,  which,  though 
deemed  highly  beneficial  half  a  cen- 
tury ago,  probably  gave  rise  to  much 
more  mischief  than  it  prevented." 

2  Lindley,  Company  Law  (5th  ed.), 
p.  130.  In  a  thorough  and  exhaust- 
ive note  on  this  subject  the  learned 
author  refers  to  Rex  v.  Dodd,  9  East, 
510  (1808),  holding  that  a  company 
with  a  prospectus  limiting  the  liabil- 
ity of  subscribers  is  illegal,  as  a  trap 
to  ensnare  the  unwary;  Josephs  v. 
Pebrer,  3  B.  &  C.  639  (1825),  holding 
that  unincorporated  companies  with 
transferable  shares  are  illegal;  and 
Buck  V.  Buck,  1  Campb.  547  (1808), 
and  Rex  v.  Stratton,  1  Campb.  549,  n. 
(1809),  to  same  effect.  He  states  that 
Kinder  v.  Taylor,  Coll.  Partn.  917  (2d 
ed.,  1825);  S.  C,  8  L.  J.  Ch.  69;  Du- 


vergier  r.  Fellows,  5  Bing.  248  (1828); 
afl'd,  10  B.  &  C.  820,  and  BlundeU  v. 
Winsor,  8  Sim.  001  (1837),  contained 
dicta  only,  so  far  as  they  passed  on 
the  legality  of  these  companies.  The 
following  cases  clearly  establish  tho 
legality  of  joint-stock  associations: 
Harri:;on  v.  Ileathorn,  G  Man.  &  G.  81 
(1813);  Garrard  v.  Hardey,  5  Man.  & 
G.  471  (1843);  Barclay's  Case,  20  Beav. 
177  (1858);  Re  Aston,  27  Beav.  474 
(1859);  Grisewood's  Case,  4  De  G.  &  J. 
544  (1859);  Sheppard  v.  Oxenford,  1 
K  &  J.  491  (1855);  Rex  v.  W^ebb,  14 
East,  406  (1811);  Walburn  v.  Ingilby, 
1  M.  &  K.  Gl  (1832);  and  see  Pratt  v. 
Hutchinson,  15  East,  511  (1812);  Elli- 
son V.  Bignold,  2  Jac.  &  W.  510  (1821); 
Nockels  V.  Crosby,  3  B.  &  C.  814  (1825); 
Kempson  v.  Saunders,  4  Bing.  5(1826); 
Brown  v.  Holt,  4  Taunt.  587  (1812). 
And  the  learned  jurist  comes  to  this 
conclusion:  "The  case  of  BlundeU 
V.  Winsor,  always  relied  upon  as  an 
authority  by  those  who  contend  that 
such  a  company  is  illegal,  has  never 
met  with  approbation  from  the  bench, 
nor  has  it  ever  been  followed.  Upon 
the  whole,  therefore,  it  appears  that 
there  is  no  case  deciding  that  a 
joint-stock  company  with  transfer- 
able shares,  and  not  incorporated  by 
charter  or  act  of  ixarliament,  is  illegal 
at  common  law;  that  opinions  have 
nevertheless  differed  upon  this  ques- 
tion; that  the  tendency  of  the  courts 
was  formerly  to  declare  such  compa- 
nies illegal;  that  this  tendency  exists 
no  longer;  and  that  an  unincorpo- 
rated company  with  transferable 
shares  will  not  be  held  illegal  at 
common  law  unless  it  can  be  shown 
to  be  of  a  dangerous  and  mischiev- 


938 


en. 


XXIX.] 


TRUSTS,  ETC. 


[§  504. 


In  Louisiana  and  Illinois  a  contrary  conclusion  has  been  ar- 

rivcil  at.^  . 

The  real  estate  of  an  unincorporated  joint-stock  association 
is  rrcneraUy  held  in  the  names  of  trustees  for  its  benefit.^  A 
deed  of  land  to  certain  grantees  as  trustees  for  an  unincorpo- 
rated association  is  not  void,  but  is  upheld  by  the  court.  The 
trust  is  an  active  one,  and  is  not  executed  at  once  by  force  of 
the  statute.'  A  deed  to  persons  as  trustees,  the  beneficiaries 
beinc^  the  members  of  an  association,  take  title,  and  the  Ne^v 
York  statute  does  not  vest  the  title  in  the  beneficiaries,  the 


OU8  character,  tending  to  the  griov- 
Huce  of  her  uuijesty's  subjects  The 
locality  at  common  law  of  sucli  com- 
janies  may  therefore  be  considered 
u3  finally  esUiblishod." 

»  See  §  aOob,  supra;  Greene  v.  Peo- 
ple, 21  N.  E.  Rep.  COj  (Ul,  1S80).  A 
lutual  insurance  company  may  bo 
ifficieutly  a  corporation,  or  assum- 
iig  to  be  such,  to  sustain  quo  war- 
anto  against  it  Greeae  v.  People, 
;  -.0  III.  olS  (\SU);  State  r.  Ackermuu, 
,1  Ohio  St.  103(1894). 
2  Where  an  association  holds  land 


(1891).  A  deed  to  a  corporation  not 
in  existence  is  void.  Provost  v.  Mor- 
gan's, etc  R.  R,  42  La.  Ann-  809 
(1«'J0).  If  a  trustee  who  holds  Umd 
for  the  benefit  of  a  corporation  com- 
mits a  breach  of  trust,  any  stock- 
holder may  cause  him  to  be  removed, 
risk  V.  Patton,  7  Utah,  399  (1891).  A 
new  unincorf)orated  association  can- 
not claim  the  land  of  the  one  which 
it  succeeds,  where  the  members  are 
not  the  same.  Allen  v.  Long,  80  Tex. 
20 1  ( 1 891 ).  Although  the  association 
lias  been  dormant  for  many  years, 


:u  the  name  of  trustees  for  the  ben^  yet  a  new  association   ormed  of  part 

lit  of  certificate-holders,  the  certifi-  of  the  members  o    the  old  cannot 

■atl  constitute  an  equitable  lien  on  convey  the  land  of  the  old  one.   Allen 

[TvTJ^elL  from  'he  sale  of  the  r.  Long,  80  Tex.  201  (1891).    A  deed  to 

Tnd!  and  even  a  consolidation  with  an  unincorporated  association  vests 

another  association  does  not  disturb  title  in  it  as  soon  as  it  .s  mcorporated. 


this  lien.  Crawford  v.  Gross,  140  Pa. 
St.  297  (1891).  A  conveyance  of  land 
»to  certain  individuals  as  trustees  for 
the  members  of  an  unincorporated 
association  is  not  void  by  the  statute 
of  uses  and  trusts  Turner  v.  Onto- 
nagon, etc.  Co.,  77  Mich.  003  (1889). 
In  matters  of  deeds,  usage  and  long 


Clifton,  eta  Co.  v.  Puindell,  82  Iowa, 
89(1891).  Cf.ch.XU.,  infra.  An  ab- 
solute deed  to  an  individual  may 
nevertheless  be  construed  as  in  trust, 
where  there  is  a  declaration  in  writ- 
ing by  him  that  he  holds  it  in  trust 
for  a  churclL  Pcorganizcd  ChiucK 
etc  V.  Church  of  Christ,  00  Fed.  Rep. 


I?i^  of  time   may  validate  deeds  937  (1894).     If  the  trustees  have  no 

m^Te  out  by  an  unincorporated  a^  power  to  seU  the  land  except  on  the 

^"iation  as  a  corfK,ration.     Baeder  vot«  of  the  stockholders,  a  convey- 

r  Jennings,  40  Fed.  Rep.  199  (18S9).  ance  without  that  consent  is  voi^ 

\vhere"n"iiincorporatJdassociation  WiUis  v.  Greiner.  20  S.  W.  Rep.  8o8 

ov^Lnd  which  il  held  in  trust  for  it  (Tex.,  1894).   An  un.ncorix>rated  ass^ 

b^dividuals  it  may.  upon  becom-  elation  may  be  made  the  recipient  of 

ing  incorporated,  compel  the  trustees  a  be^quest.     lladdenr.  Daudj,.l  N.  J. 

to  deed  to  it  the  land.     Organized  Eq.  lot  (189.!).                         -nq  nfi93\. 

Labor  Hall  v.  Gebert,  48  N.  J.  Eq.  393  »  Hart  v.  Seymom-.  14.  111.  o98  (1893V 

939 


505.] 


TKUSTSj  ETO. 


[cn.  XXIX, 


trustees  being  beneficiaries  also.»     The  English  cost-book  min- 
ing companies  were  organized  on  tliis  principle.'^  ^ 

§  505.  Statutory  joint-stock  company.— There  is  an  essential 
difference  between  a  joint^stock  company  as  it  exists  at  common 


iKing  V.  Townshend,  141  N.  Y.  358 
(1894). 

2  These  mining  companies  existed 
in  the  counties  of  Cornwall  and  Dev- 
onshire.   They  were  first  heard  of  in 
the  courts  about  the  year  ISoO.  Their 
plan  of  organization  and  operation 
arose  from  cvLstom,    Their  organiza- 
tion and  mode  of  business  were  as 
follows:  Many  persons,  desirous  of 
working  a  mine,  would  cause  the  title 
or  lease  thereto  to  be  taken  in  the 
names  of  one  or  more  persons  called 
trustees.  The  business  was  then  car- 
ried on  by  an  agent  called  a  "  purser," 
or  by  a  board  of  managers  elected  by 
the  participants,  who  were  called  the 
"  adventurers."   The  latter,  of  course, 
were  the  beneficiaries  of  the  "trust." 
Any  adventurer  had  a  right  to  trans- 
fer his  interest  to  a  transferee.  There 
was  no  fixed  capital  stock.    Calls  for 
money  were  made  on  the  adventur- 
ers, according  to  their  sliares,  as  often 
as  it  was  needed.    For  a  full  state- 
ment of  the  character  of  these  min- 
ing companies,  see  Kittow  v.  Liskeard 
Union,  L.  R.  10  Q.  B.  7  (1874).    See 
also  Be  Bodmin,  etc.  Co.,  23  Beav.  370 
(1857),  holding  that  the  court  would 
not  take  judicial  notice  of  the  nature 
of  a  cost-book  mining  company.   Hy- 
bart  V.  Parker,  4  C.  B.  (N.  S.)  209  (1858), 
holding  that  the  purser  could  not  sue 
at  law  on  an  unpaid  call;  Re  Wrys- 
gan,  etc.  Co.,  28  L.  J.  (Ch.)  894  (1859), 
as  to  right  to  relinquish  shares,  also 
describing  the  functions  of  the  pm-ser 
and  managing  directors;  Jolinson  v. 
Goslett,  18  C.  B.  728  (1856),  affirmed  in 
3  C.  B.  (N.  S.)  569  (1857),  giving  the  full 
terms  of  the  articles  of  agreement; 
Thomas  v.  Clark,  18  C.  B.  6G2  (1856), 
where  the  court  said:  "Every  part- 
nership has  a  right  to  make  its  own 


reg\ilations  as  to  the  mode  of  trans- 
ferring shares  or  interests  tlierein;  " 
Re  Prosper,  etc.  Co.,  L.  R.  7  Ch.  280 
(1872),  relative  to  rights  upon  a  resig- 
nation; Mayhew's  Case,  5  De  G.,  M. 
&  G.  837  (1854),  holding  that  by  a 
transfer  of  his  share  "  the  liability  of 
the  transferrer  is  entirely  divested 
from  him  and  passes  to  the  tran.s- 
feree;  "  Re  Wrysgan  Co.,  5  Jur.  (N.  S.) 
215  (1859),  where  the  court  said:  "The 
various  phases  of  absurdity  which 
these  joint-stock  companies  display 
are  such  that  tke  marvel  in  my  mind 
is  daily  increasing  how  any  man  can 
become  a  member  of  a  joint-stock 
company;"  Northey  v.  Johnson,  19 
L.  T.  Rep.  (0.  S.)  104  (1852),  holding 
that  after  transfer  the  transferrer  is 
not  liable  for  the  debts  incurred. 

It  is  clearly  established  that  the 
adventurers  in  a  cost-book  mining 
company  are  personally  and  individ- 
ually liable  as  partners  for  the  debts 
incurred  in  the  enterprise.  Peel  v. 
Thomas,  15  C.  B.  714  (1855);  Newton 
V.  Daly,  1  F.  &  F.  26  (1858);  Harvey  v. 
Clough,  8  L.  T.  Rep.  (N.  S.)  324  (1863); 
Tredwen  v.  Bourne,  6  M.  &  W.  461 
(1840);  Ellis  v.  Schmoeck,  5  Bing.  521 
(1829);  Lanyon  v.  Smith,  3  B.  &  S. 
938  (1863),  holding  a  transfen-er  lia- 
ble for  debts  incurrrd  previous  to  the 
transfer.  To  same  effect,  Geake  v, 
Jackson,  15  W.  R.  338  (1807).  They 
are  liable,  also,  to  indemnify  the  di- 
rectors or  ti-ustees.  Ex  parte  Chip- 
pendale, 4  De  G.,  M.  &  G.  19,  52  (1854). 
See  also  Birch's  Case,  2  De  G.  &  J.  10 
(1857),  and  Fenn's  Case,  4  De  G.,  M,  & 
G.  285  (1854),  where  the  members 
who  had  exercised  their  right  to 
withdraw  were  held  not  liable.  In 
Hart  V.  Clarke,  6  De  G,  IM.  &  G.  233 
(1854),  an  adventurer  compelled  the 


940 


en.  XXIX.] 


TRUSTS,  ETC. 


[§  505. 


law  and  a  joint-stock  company  Iiaving  extensive  statutory  ])o\v- 
ers  conferred  upon  it  by  the  state  within  which  it  is  organized. 
The  latter  kind  of  joint-stock  companies  are  found  in  England 
and  in  the  state  of  New  York.  To  such  an  extent  have  these 
statutory  powers  been  conferred  on  joint-stock  companies  that 
the  only  substantial  difference  between  them  and  corporations 
is  that  the  members  are  not  exempt  from  liability  as  partners 
for  the  debts  of  the  company.  Accordingly,  joint-stock  com- 
panies, both  those  of  Enghind  and  New  York,  have  been  held 
to  be  corporations  in  many  respects,  although  expressly  declared 
by  statute  not  to  have  that  character.'    A  limited  partnership 


company  to  account  to  him  for  liis 
share  of  the  profits.  Tlie  adveuturers 
have  no  interest  in  the  land,  and  con- 
sequently a  transfer  of  their  shares 
is  not  a  transfer  of  an  interest  in 
land.  Sp;irling  v.  Parker,  9  Beav. 
450  (184Gj;  Powell  v.  Jessopp,  18  C.  a 
'.30  (1S.30);  nayter  v.  Tucker,  4  K.  & 
J.  243  (1858).  The  cost-bKX)k  mining 
company  was  frequently  spoken  of 
as  a  species  of  joint-stock  company. 
Re  Wrysgan  Co.,  5  Jur.  (N.  S.)  215 
(1859):  Geake  v.  Jackson.  15  W.  R. 
338  (1SG7);  Watson  v.  Spratley,  10 
Exch.  222  (ia")4).  where  the  court 
said:  "The  interest  of  the  share- 
holder in  the  great  incorporated 
joint-stock  companies,  and  in  the 
smallest  mine  conducted  upon  the 
cost-book  principle,  is,  in  its  essen- 
tial nature  and  quality,  identical. 
For  an  American  mining  case  ap- 
;  living  similar  principles,  see  Treat 
V.  Hiles,  G8  Wis.  344  (1887).  It  is  well 
settled  that  the  shareholders  in  an 
unincorporated  association  cannot 
convey  or  dedicate  to  the  public  any 
land  that  may  be  held  by  trustees 
for  its  benefit  Ward  v.  Davis,  3 
Sandf.  502  (1850).  The  interest  of  one 
'if  the  cestuis  que  trust  of  such  a 
triLst,  consisting  of  real  estate,  is  per- 
sonalty, and  descends  as  such  upon 
his  death.  Mallory  i'.  Russell,  71  Iowa, 
r.3  (1887).  As  to  the  effect  of  a  deed, 
t^nt,  or  bequest  of  real  estate  to  an 


unincorporated  association,  see  Webb 
V.  Weatherhead,  17  Uow.  570  (1854); 
Gerard,  Titles  to  Real  Estate  (3d  ed.), 
p.  420;  Owens  v.  Missionary  Soc,  14 
N.  Y.  380  (1850);  3  Washb.  Real  Prop. 
2<>1  (4th  ed.);  Holmes  v.  Meiid.  52  N.  Y. 
332  (1873);  Goesele  v.  Bimeler,  5  Mo- 
Lean,  223  (1851);  S.  C,  10  Fed.  Gas. 
528:  German  Land  Assoc,  v.  SchoUor, 
10  Minn.  031  (1805);  Peabody  v.  East- 
ern Methodist  Soa,  87  Mass.  540  (18G3); 
Towar  v.  Hale,  46  Barb.  361  (INGG);  1 
Dart,  Vend.  &  P.  (5th  ed.)  21;  Cliapiu 
V.  Chicopee  Universalist  Soc,  74  ilass. 
580  (1857);  African  M.  E.  Church  v. 
Conover,  27  N.J.  Eq.  157(1876*;  Leon- 
ard V.  Davenport,  58  How.  Pr.  384 
(1877);  Sherwood  v.  American  Bible 
Soc.,  4  Abb.  App.  Dec  227  (1864);  Mc- 
Keon  V.  Kearney,  57  How.  Pr.  349 
(1878);  Gibson  v.  McCall,  1  Rich.  L. 
(S.  C.)  174  (1844)  ;Byamt'.Bickford,  140 
Mass.  31  (1885),  holding  that,  although 
a  deed  to  the  association  is  ineffoct- 
iial,  yet  that  it  passes  title  to  the  mem- 
bers of  the  association-  Tliey  cannot 
take  by  devise  in  New  York.  White 
r.  Howard,  46  N.  Y.  144  (1871);  Phila- 
delphia Bapt  Assoc  V.  Hart,  4  Wheat 
1  (1819). 

•  See  Thomas  v.  Dakin.  22  Wend.  9 
(1839);  Warner  r.  Beers,  23  Wend.  103 
(1840);  Parmly  r.  Tenth  Ward  Bank, 
3  Edw.  395  (1840):  People  v.  Water- 
town,  1  Hill,  616  (1841);  Bank  of 
Watertown  v.  Watcrtown,  25  Wend. 


941 


§  505.] 


TEUSTS,  ETC. 


[cn.  XXIX. 


under  tlie  Pennsylvania  statutes  is  practically  a  corporation,  and 
as  such  may  sue  in  a  federal  court.'  Partnership  associations 
organized  under  the  laws  of  Michigan  are  controlled  by  the 


686  (1841);  Willoughby  v.  Comstock, 
3  Hill,  389  (1843);  Lcavitt  v.  Yates,  4 
Edw.  134  (1843);  Leavitt  v.  Tylee,  1 
Sandf.  Cb.  207  (1843);  People  v.  Niag- 
ara County,  4  Hill,  20  (1842);  Bois- 
gerard  v.  New  York  Banking  Co.,  2 
Sandf.  Ch.  23  (1844);  Re  Bank  of 
Dansville,  6  Hill,  370  (1844);  GilTord 
V.  Livingston,  2  Denio,  380  (1845); 
Case  V.  Mechanics'  Banking  Assoc,  1 
Sandf.  693  (1848);  Leavitt  v.  Biatch- 
f ord,  17  N.  Y.  521  (1858) ;  S.  C,  5  Barb.  9 ; 
Cuyler  v.  Sanford,  8  Barb.  225  (1850); 
Gillet  V.  Moody,  3  N.  Y.  479  (1850); 
Talmage  v.  PeU,  7  N.  Y.  328  (1852); 
Tracy  v.  Talmage,  18  Barb.  456 
:i854);  Gillet  v.  Phillips,  13  N.  Y.  114 
(1855);  Falconer  v.  Campbell,  2  Mo- 
Lean,  195  (1840);  S.  C,  8  Fed.  Ca& 


963;  Duncan  v.  Jones,  32  Hun,  13 
(1884).  A  joint-stock  association  ex- 
isting in  New  York  and  suable  by  tlie 
laws  of  New  York  by  service  on  its 
president  may  be  sued  as  a  corjx)ra- 
tion  in  Oliio,  although  not  actually 
incorporated  in  New  York.  Adams 
Express  Co.  r.  State,  55  Ohio  St.  6I> 
(18%).  Tlie  United  States  Express 
Company,  an  unincorporated  associa- 
tion under  the  laws  of  the  state  of 
New  York,  is  treated  as  a  coriJoration 
in  other  states.  Edgeworth  v.  Wood, 
58  N.  J.  L.  463  (1896).  The  taxation 
statutes  of  Pennsylvania  imixjsing 
taxes  upon  corporations  organized  in 
another  state  do  not  apply  to  an  un- 
incorporated association,  an  express 
company  organized  in   New  York. 


1  Andrews  Bros.  Co.  v.  Youngstown 
Coke  Co.,  86  Fed.  Rep.  585  (1898).  A 
partnership  association  under  the 
statutes  of  Pennsylvania  is  not  a  cor- 
poration to  the  extent  that  the  estate 
of  a  stockholder  is  liable  on  a  claim 
arising  after  the  death  of  such  stock- 
holder. Bodey  v.  Cooper,  82  Md.  625 
(1896).  Nor  is  it  a  corporation  within 
the  meaning  of  the  tax  statutes. 
Gregg  V.  Sanford,  65  Fed.  Rep.  151 
(1895).  An  association  formed  under 
the  Pennsylvania  statutes  is  a  part- 
nership and  not  a  corporation.  Hence 
it  cannot  be  sued  in  Massachusetts 
in  the  name  under  which  it  does  busi- 
ness. Edwards  v.  Warren,  etc.  Works, 
168  Mass.  564  (1897).  In  Carter  v. 
Producers'  Oil  Co.,  38  Atl.  Rep.  571 
(Pa.,  1897),  the  com-t  said  in  regard 
to  Pennsylvania  joint-stock  associa- 
tions organized  under  the  statutes: 
"Whether  the  partnership  associa- 
tion ought  to  be  classified  by  the  pro- 
fessor of  legal  science  as  a  species  of 
the  genus  corporation,  or  the  genus 
partnership,  or  whether  it  should  be 


set  apart  as  a  new  genus,  seems  to 
me  unimportant.  If  a  corporation, 
it  is  so  peculiar  in  its  featm-es  that 
the  general  law  of  corporations  can- 
not be  applied  to  it  without  impor- 
tant modifications;  if  a  partnersliip, 
it  so  differs  from  the  common  type 
that  the  general  law  of  partnerships 
is  but  slightly  applicable.  Both  the 
law  of  corporations  and  the  law  of 
partnerships  are  to  be  resorted  to  in 
the  absence  of  statutory  regulations, 
the  choice  being  determined  by  the 
natiire  of  the  feature  under  consider- 
ation. .  .  .  A  partnership  association 
differs  from  the  common  type  of 
partnerships  in  that  the  members 
vote,  and  do  not  act  wuth  the  powers 
of  partners,  and  in  that  they  are  sub- 
ject to  no  joint  liability.  It  differs 
from  the  common  type  of  corpora- 
tions in  that  the  members  have  a 
right  to  admit  or  refiise  membership 
in  the  company  to  the  transferee  of 
the  interest,  as  well  as  in  some  other 
particulars." 


942 


on.  XXIX.] 


TKUSTS,  ETC. 


[§  506. 


laws  relative  to  corporations.^  Under  the  partnership  associa- 
tion statute  of  Ponnsylvania,  a  by-hiw  may  be  enacted  taldng 
away  the  voting  power  from  any  stock  which  is  sold,  even  though 
it  is  purchased  by  an  existing  member.' 

§  50G.  Joinlstoclc  comjjanus  may  arise  hy  implication  of  law. 
Joint-stock  companies  are  generally  formed  by  the  mutual 
agreement  and  direct  intent  of  the  parties.  They  may,  how- 
ever, arise  by  implication  of  law.  Thus,  an  inefTectual  attempt 
at  an  incor[)oration  may  make  the  parties  members,  not  of  a 
corporation,  but  of  a  joint-stock  company.'  In  like  manner, 
after  the  charter  of  a  corporation  expires  and  the  parties  con- 
tinue to  do  business,  they  do  so  as  a  joint-stock  company.* 


Sanford  v.  Grogg,  58  Fed.  Rep.  C20 
(1893).    The  Englisli  joiut-stock  com- 
pany i.s  much  the  same.     "The  com- 
jiany  has  a  name  as  an  a.ssociation, 
maintaining  tlio  i<lentity  of  the  bo<Jy 
through  all  changes  of  its  members; 
its  pr<>ix;rty  is  divided  into  transfer- 
able sliares;  and  it  has  conferred  ujjon 
it  the  legal  capacity  to  sue  and  be 
sued  in  tlie  name  of  one  of  its  ofliccrs, 
and  such  a  suit  .  .  .  may  be  brought 
by  or  against  a  member  as  well  as 
u  third  person."    It  is  a  coqwration, 
though  the  English  statute  declares 
it  Ls  not   Oliver  f.  Liverpool,  etc.  Ins. 
Co.,  100  Mass.  531   (18G8);   afTd   sub 
nonu  LiverptHjl  Ins.  Ck).  v.  Massachu- 
setts 10  Wall.  560  (1870).    So,  also, 
with  the  New  York  joint-stock  com- 
jianies.    Fargo  v.  I>ouisville,  etc  R'yi 
6  Fed.   Rep.   787   (1881);  Sanford  v. 
Supervisors  of  New  York,  15  How.  Pr. 
173  (18.58);  AVaterbury  r.  Merchants' 
Union  Exp.  Co.,  50  Barb.  157  (1SG7). 
As  regards  the  liability  of  the  mem- 
bers for  the  debts  of  tl>o  company,  it 
is  held  to  be  a  copartnership.  Boston, 
etc.  R.  li.  V.  Pearson,  128  Mass.  445 
(1880);  Oliver  v.  Liverpool,  etc,  Ins. 
Ca,  100  .Mas.s.  531  (1868);  aff'd  sub 
nam.  Liver[>ool  Ins.  Co.  i'.  Massachu- 
setts. 10  Wall.  5GG  (18701   The  refasal 
of  the  legi.slature  to  call  them  corpo- 
ration.s  is  importint  as  cutting  off  the 
exemption  of  tlif  incinljers  from  lia- 


bility to   creditors;    an   exemption 
which,  at  common  law,  belongs  to  all 
corporations.  Joint-stock  companies 
in  England  have  always  been  largely 
statutory.   See  Van  Sandau  v.  Moore, 
1  Russ.  4 11  (1820).     In  New  York  the 
English  decisions  on  these  companies 
are  doubtless  good  authority,  since 
tiiey  exist  under  statutes  wliich  are 
much  alike.   A  New  York  jointrstock 
association  cannot  sue  as  such  in  the 
federal  courts.    Chapman  r.  Barney, 
129  U.  S.  077  (1889).   In  New  York  the 
statutes  relative  to  taxation  of  corpo- 
rations do  not  apply  to  joint-stock 
companies.    They  are  not  corpora- 
tions.   People  V.  Coleman,  133  N.  Y. 
279  (1892);  Hoey  v.  Coleman,  40  Fed- 
Rep.  221  (1891).    An  unincorporated 
joint-stock  association  is  legal  in  New 
York.    Under  the  statuses  of  that 
state  such  a.ssociations  are  corpora- 
tions for  many  i)urposes.     People  v. 
Wemple.  117  N.  Y.  130  (1889). 

1  Rouse,  etc.  Co.  t'.  Detroit,  etc.  Co., 
09  N.  W.  Rep.  511  (Mich.,  189G). 

2  Carter  r.  Producers'  Oil  Co.,  38 
AtL  Rep.  571  (Pa.,  1897;. 

» lie  Meudenhall,  9  Nat  Bankr.  Reg. 
497  (1874);  S.  C,  17  Fed.  Ca.s.  10;  Whip- 
ple V.  Parker.  29  ilicli.  369,  380  (1874); 
and  see  cli-  XIII,  sitpra.  Cf.  Foster 
V.  Moulton,  35  Minn.  458  (188G). 

*  Watertown  Nat  Bank  v.  Landon, 
45  N.  Y.  410  (1871). 


943 


§§  507,  508.] 


TRUSTS,  ETC. 


[cn,  XXIX. 


§507.  Bow  a  iicrson  Iccomcs  a  mcmhcr— Transfers.— A 
person  becomes  a  member  of  a  joint-stock  comiKiny  by  any  act 
which  indicates  an  intent  to  become  a  member  on  his  part,  and 
a  consent  or  acquiescence  therein  by  the  company  itself.'  Uo 
may  also  become  a  member  by  a  transfer  made  to  him  of  an- 
other member's  interest,  unless  the  articles  of  association  restrict 
the  right  of  transfer .^ 

§  508.  Lialilitij  ofmcmlcrs  to  creditors  and  to  the  company. 
A  joint-stock  company  is,  in  regard  to  the  liability  of  its  mem- 
bers to  creditors  of  the  company,  a  partnership;  its  members 
are  liable  as  partners;'  and  the  ordinary  rules  of  partnership 


1  The  formalities  need  be  no  ^eater 
than  in  forming  an  ordinary  partner- 
ship. Schuylerville  Nat.  Bank  v.  Van 
Derwerker,74  N.  Y.23-1  (1878);  Pettis 
V.  Atkins,  GO  III  454  (1871);  Machin- 
ists' Nat.  Bank  v.  Dean,  124  ^Mass.  81 
(1878).     Cf.  Volger  v.  Hnj,  131  Mass. 
439  (1881).    It  is  not  necessary  that 
certificates  of  the  stock  be  issued  in 
order  to  constitute  membership.  Den- 
nis V.  Kennedy,  19  Barb.  517  (1854); 
Boston,  etc.  R  R.  v.  Pearson,  128  ^lass. 
445  (1880).    Evidence  of  subscription 
and  payment  of  an  assessment  is  suf- 
ficient.   Frost  V.  Walker,  60  Me.  408 
(1872).    But  not  of  subsci-iption  with- 
out any  participation.     Hedge's  Ap- 
peal, 63  Pa.  St.  273  (1869). 

2  A  transfer  of  the  certificate  of 
stock  has  such  effect  although  not 
registered  in  the  stock-book.  Butter- 
field  V.  Beardsley,  28  Mich.  412  (1874). 
Transfer  may  be  before  the  certifi- 
cates are  issued.  Butterfield  v.  Spen- 
cer, 1  Bosw.  1  (1856).  But  if  the  arti- 
cles of  association  prohibit  transfer, 
the  transferee  takes  only  the  right  to 
profits,  not  as  a  partner,  but  as  an  as- 
signee. Harper  v.  Raymond,  3  Bosw. 
29  (1858).  So,  also,  where  transfer  is 
allowed  only  on  consent  of  certain 
oflicers  who  refuse.  Kingman  v. 
Spurr,  24  Mass.  235  (1828).  A  trans- 
fer does  not  carry  dividends  already 
declared.  Harper  v.  Raymond,  3  Bosw. 
29  (1858).    If  a  transfer  is  improperly 


allowed,  the  company  is  liable  to  the 
party  injured.  Cohen  v.  Gwynn,  4 
Md.  CIl  357  (1848).  Although  an  un- 
incorporated association's  articles 
provide  that  transfers  of  stock  shall 
be  made  only  with  consent  of  the  di- 
rectors, yet,  where  such  provision  is 
for  many  years  disregarded,  a  stock- 
holder who  so  transferred  his  stock 
at  a  time  when  the  assets  equaled 
the  liabilities  cannot  be  held  liable 
as  a  stockholder.  Wadsworth  v.  Dun- 
can, 164  III  360  (1896);  Wadsworth  v. 
Latirie,  164  III  42  (1896).  See  also 
§  621a,  infra.  As  to  the  liability  of 
the  transferee,  see  next  section. 

3  Wadsworth  I'.  Duncan,  164  111.  360 
(1896);  MCFadden  v.  Leeka,  48  Ohio 
St.  513  (1891);  Jenne  v.  Matlack,  41 
S.  W.  Rep.  11  (Ky.,  1897);  Westcott  v. 
Fargo,  61  N.  Y.  542  (1875);  Wither- 
head  V.  AUen,  3  Keyes,  562  (1867); 
Cross  V.  Jackson,  5  Hfil,  478  (1843); 
Skinner  v.  Dayton,  19  Johns.  513 
(1822);  Wells  v.  Gates,  18  Barb.  554 
(1854);  Boston,  etc.  R.  R.  v.  Pearson, 
128  Mass.  445  (1880);  Taft  v.  Ward, 
106  Mass.  518  (1871);  S.  C,  111  Mass. 
518  (1873);  Bodwell  v.  Eastman,  106 
Mass.  525  (1871);  Tappan  v.  Bailey,  45 
Mass.  529  (1842);  Cutler  v.  Thomas,  25 
Vt.  73  (1852);  Kramer  u  Arthurs,  7  Pa. 
St.  165  (1847);  Gott  v.  Dinsmore,  111 
Mass.  45  (1872);  Newell  v.  Borden,  128 
Mass.  31  (1879).  See  also  §  504,  supra. 
Contra.  Irvine  v.  Forbes,  11  Barb.  587 


944 


en.  XXIX.] 


TRUSTS,  ETC. 


[§  508. 


exist  ])etwcen  the  members  themselves,^  including  the  right  to 
contribution  as  between  themselves,-  and  also  render  a  member 
liable  to  third  persons.'    The  question  whether  a  stockholder 


(18.'32);  Livingston  v.  Lynch,  4  Johns. 
Ch.  573  (18i0),  overruled  as  dicta  by 
TowTisend  i*.  Goewey,  19  Wend  42-4 
(1838);  Allen  v.  Long,  80  Tex.  2G1 
(1891);  Ridenour  v.  Mayo,  40  Ohio  St 
9  (1883).  In  Frost  r.  Walker,  CO  Mo. 
4G.S  (1872),  the  court  s;iid:  "An  unin- 
corjMjrated  joint-stock  company  is  a 
niero  partnership,  and  each  moinber 
is  personally  liable  for  all  its  debt.s. 
It  is  iniiKjrtant  for  the  public  to  know 
that  if  [>crson8  connect  themselves 
with  a  company  of  this  dt^ription 
they  are  every  one  of  them  liable  to 
pay  the  demands  upon  it."  The  ofTi- 
cers  who  enter  into  a  contract  for  the 
com[>any  are  liable  thereon  fKjrson- 
ally.  "  It  is  immaterial  wljethor  they 
bo  so  held  because  they  held  them- 


selves out  as  agents  for  a  principal 
that  had  no  existence,  or  on  tJie 
ground  that  they  must,  under  the 
contract,  be  regarded  as  principals 
for  the  simple  reason  that  there  is  no 
other  principal  in  existence."  Lewis 
V.  Tilton,  G4  Iowa,  220  (1884);  Freden- 
dall  V.  Taylor,  20  Wi&  280  (1870).  The 
individual  memliersof  a  club  are  not 
liable  for  the  salary  of  the  manager, 
even  though  tlie  club  is  unincorpo- 
rated- Georgeson  v.  Caffrey,  71  Hun, 
472  (1893).  Those  who  actively  take 
I>artin  a  purchase  are  liable  wliether 
the  otliers  are  or  not  Winona  Lum- 
ber Co.  V.  Church,  G  S.  D.  498  (189.")). 
TliLs  liability  as  partners  applies  only 
to  associations  having  a  definite 
membership,  and  does  not  apply  to 


»  BuUard  r.  Kinney.  10  CaL  60  (18.>S). 
The  remedy  of  one  member  against 
another  is  in  equity.  Iluth  v.  ilum- 
boMtStamm,Gl  Conn.  227(1892).  One 
memlKjr  cannot  sue  anotlier  at  law  for 
his  jMirt  of  the  profits  of  the  business, 
which  is  under  control  of  the  latter. 
My  rick  v.  Dame,  G3  3Iass.  248  (18.12); 
Dull  V.  Maguire,  99  Mas.s.  300  (1868); 
Whitehouse  t?.  Sprague,  7  AtL  Rep. 
17  (M&,  1886).  A  person  inducod  to 
put  money  into  an  enterprise  on  false 
representiitions  that  it  is  a  joint- 
st'K-k  comjiany  may  recover  back  his 
m.  .11.  y.  Lebby  r.  Ahrens,  2G  S.  C.  275 
(1><>7).  A  director  of  an  unincorpo- 
rated association  who  contracts  for 
it  is  not  liable  personally.  Abbott  v. 
Ck)bb.  17  Vt  593  (iai5);  Alexander  v, 
Womian,  6  EL  «&  N.  100  (ISGO. 

iiMorrissey  v.  Weed,  12  Ilun,  491 
(1878);  Skinner  v.  Dayton,  19  Johna 
513  (1822);  Ray  v.  Powers,  134  Mass. 
22  (IsSii;  Whitman  v.  Porter,  107 
Mas-H.  .')22  (1S71);  Tyrrell  v.  Washburn, 
W  JIasi.  4GG  (l8G^Jj.  But  not  if  the 
CO  94 


expense  was  incurred  contrary  to  the 
articles  of  association.  Dunforth  v. 
Allen,  49  Mass.  334  (1844);  Clark  v. 
Reed.  28  Mass.  446  (1831).  One  stock- 
holder cannot  sue  another  at  law  for 
his  f)art  of  the  assets.  Whitehou.se 
V.  Sprague,  7  AtL  Rep.  17  (Me.,  188G). 
Where  the  constitution  of  an  imincor- 
porated  association  Limits  the  debts, 
and  tlie  directors  incur  a  larger 
amount  of  debts,  tlie  directors  can- 
not obtain  contribution  from  the 
stockholders.  McFadden  v.  Lccka, 
48  Ohio  St  513  (1801). 

'A  member's  interest  cannot  be 
reached  by  execution-  Kramer  v. 
Artlmrs,  7  Pa.  St  105  (1847 ).  But  see 
Lindley,  Partn.  (2d  Am.  ed.),  p.  837. 
Acquiescence  in  the  dealings  of  other 
members  with  third  persons  binds  a 
member.  Pennsylvania  In.s.  Co.  v. 
MvuT)hy,  5  Minn.  30  (18G0);  Wells  r. 
Gates,  18  Barb.  554  (1854).  For  the 
liability  as  affected  by  the  transfer 
of  stock,  see  Smith  v.  Virgin,  33  Ma 
148  (1851). 


§  508.] 


TKUSTS,  ETC. 


[CII.  XXIX. 


may  limit  his  common-law  or  statutory  lialjility  by  an  express 
contract  with  the  company's  creditors  to  that  ellect  is  discussed 


a  public  meeting  held  to  promote  the 
construction  of  a  shoe  shop,  the  sub- 
scriptions made  at  such  meeting  hav- 
ing been  dulj'  paid,  even  though  it 
was  further  voted  "  to  stand  back  of 
the  committee."  In  any  case  the  suit 
would  be  at  law  and  not  in  equity. 
Cheney  v.  Goodwin,  88  Mo.  5G3  (1890). 
A  lease  to  an  unincorporated  associar 
tion  binds  personally  all  members 
assenting  to  it.  Reding  v.  Anderson, 
73  Iowa,  498  (1887).  Members  of  co- 
operative trading  associations  are  liar 
ble  as  partners  for  the  debts  of  the 
concern.  Davison  v.  Ilolden,  55  Conn. 
103  (1887).  And  sometimes  are  liable 
also  for  debts  contracted  after  they 
have  sold  their  stock.  See  Sham- 
burg  V.  Abbott,  112  Pa.  St.  6  (1886). 
The  members  of  an  imincorporated 
association  to  enforce  the  liquor  laws 
are  not  liable  to  an  attorney  for  serv- 
ices in  prosecuting  cases.  McCabe  v. 
Goodfellow,  133  N.  Y.  89  (1893).  The 
vdce-president  and  the  treasurer  of 
an  unincorporated  fair  association 
are  liable  for  premiums  offered.  !Mur- 
ray  v.  Walker,  83  Iowa,  203  (1891). 
Members  of  a  joint-stock  company 
are  personally  liable  for  tlie  debts  of 
the  company.  Durham  Fertilizer 
Co.  V.  Clute,  112  N.  C.  440  (1893).  The 
members  of  a  joint-stock  company 
are  liable  for  its  debts.  People  v. 
Coleman,  133  N.  Y.  279  (1892).  In 
the  case  of  Seacord  v.  Pendleton,  55 
Hun,  579  (1890),  the  court  reviewed 
the  authorities  and  decided  that  the 
stockholders  in  a  bank  which  was 
not  incorporated  were  not  liable  to 
depositors,  there  being  no  allegation 
that  the  stockholders  had  any  arti- 
cles of  association  or  partnership,  or 
bad  performed  any  act,  or  had  knowl- 
edge of  the  business  or  consented 
thereto.  A  subscription  agreement 
prior  to  incorporation,  in  which  the 


parties  state  tlie  number  of  shares 
tiiken,  and  in  which  they  agree  to  pay 
the  contractors,  who  are  parties  to 
the  contract,  a  specified  sum,  is  a 
joint  undertaking  on  the  subscrib- 
er's part.  Tlie  contractors  may  hold 
them  liable  as  parlors,  the  agree- 
ment not  limiting  their  liability  to 
the  number  of  shares  taken  by  each. 
An  immaterial  alteration  after  a  part 
have  signed  does  not  release  any  one. 
The  agreement  of  the  contractors  to 
hold  each  subscriber  liable  only  on 
his  subscription  if  he  would  pay  that 
is  without  consideration  and  void. 
Any  subscriber  could  expressly  limit 
his  liability  to  his  subscription-  Davis 
V.  Shafer,  50  Fed.  Rep.  764  (1893).  If 
proof  is  given  by  plaintiff  that  a  co- 
partnership existed,  and  the  defense 
is  that  it  was  a  corporation,  the  de- 
fendant must  prove  that  fact.  Al- 
though the  company  had  a  president 
and  secretary,  this  in  itself  does  not 
raise  a  presumption  of  a  corporation. 
Clark  V.  Jones,  87  Ala.  474  (1889;.  A 
notice  to  stocklaolders  that  they  will 
be  held  liable  under  a  statute  is  not 
served  on  the  members  of  an  imin- 
corporated  association  by  serving 
such  notice  on  the  cliief  ofiicer  of 
such  association.  Wells  v.  Robb,  43 
Kan.  201  (1890).  Where  a  creditor  of 
a  bank  sues  the  stockholders  as  part- 
ners, the  burden  of  proof  is  on  him  to 
prove  that  no  corporation  existed,  it 
being  shown  that  the  bank  always 
acted  as  a  corporation  and  held  itself 
out  as  such  and  was  supposed  so  to 
be  by  the  stockholders.  Hallstead  v. 
Coleman,  143  Pa.  St.  352  (1891).  The 
supposition  or  belief  of  the  members 
that  they  are  not  liable  beyond  the 
par  value  of  their  stock  does  not  pro- 
tect them  from  liability.  Famum  v. 
Patch,  60  N.  H.  294  (ISSO);  and  see 
§  233,  note,  supra. 


946 


OH.  XXIX.] 


TEU8T8,  ETC. 


[§  508. 


elsewhere.^    The  member's  subscription  may  be  enforced  by  a 
suit  at  law.' 

In  enforcing  the  liability  of  members  of  a  joint-stock  com- 
pany by  a  suit  in  equity,  if  the  parties  are  very  numerous  or 
unknown,  they  need  not  all  be  joined  as  defendants.'  Suits  by 
or  an-ainst  unincorporated  associations  must  be  brought  in  the 
name  of  or  against  all  the  members.*  A  member  who  transfers 
his  interest  is  nevertheless  liable  for  precedent  debts  of  the  asso- 
ciation.* Members  who  sell  their  stock  and  withdraw  are  liable 
for  subsequent  debts  whore  proper  notice  of  their  withdrawal 


•See  ^216,  mpra. 

'If  tho  subscription  runs  to  the 
trustees  personally  they  may  sue 
thoroon.  Otherwise  all  must  join  as 
plaintiffs.  Cross  v.  Jackson,  5  Hill, 
478  (18-13);  TownsonJ  v.  Goewey,  19 
Wend- 424  (181W).  It  seems  that  a  sub- 
scription to  a  volunUir)'  a.s.sociation 
is  enforceable  by  a  coqxjration  which 
took  tho  place  of  tho  proposed  volun- 
tarj'  a.ssociation,  where  the  subscriber 
knew  of  the  change  of  plan  and  did 
not  object  Osbom  v.  Crosby,  03  N.  IL 
683  (1885).  Subscriptions  to  its  stock 
are  collectible  the  same  as  subscrip- 
tions to  stock  of  corporations.  Bul- 
lock V.  Falmouth,  etc  Co.,  83  Ky.  18^1 
(1887). 

'Mandeville  v.  Riggs,  2  Pet  482 
(1829),  reversing  Riggs  v.  Swann,  3 
Cranch,  C.  C.  1S3  (1827);  a  C,  20  Fed. 
Cas.  78a  See  also  Phipps  r.  Jones,  20 
Pa.  St  260  (1853);  Dennis  v.  Kennedy, 
19  Rirb.  517  (1854);  Wood  v.  Draper, 
24  Biirb.  187  (1857):  Smith  v.  Lock- 
wood,  1  Code  Rep.  (N.  S.)  319  (1851); 
Birminghnra  v.  Gallagher,  112  Mass. 
190  (1873);  Snow  v.  Wheeler,  113  Mass. 
179(1873);  Pipe  v.  Bateman,  1  Iowa, 
869  (ia55);  Marshall  v.  Lovelass,  Cam. 
&  N.  (N.  C.)  217  (ISOl);  Lloyd  v.  Loar- 
ing.  6Ves.  Jr.  773  (1802);  Deems  v. 
AllKiny,  etc  Line,  14  Blatchf.  474 
(1878);  S.  C,  7  Fed.  Cas.  348.  As  re- 
gards the  practice  in  bringing  actions 
against  mem>>ers  of  an  unincorpo- 
rated association,  see  Kneeland,  At- 
tachments, ch.  XVL 


*  Williams  v.  Bank  of  Michigan,  7 
Wend.  539,  512  (1831);  Detroit  Schuet- 
zen  Bund  v.  Detroit  Agitations  Ver- 
ein,  44  Miclu   313  (1880);    Mears  v. 
Moulton,  30  Md- 142(1868);  McGreary 
V.  Chandler,  58  Me.  537  (1870).    One 
or  more  members  of  an  unincorpo- 
rated aasociation  may  sue  for  the 
benelit  of  alL     Liggett  v.  Ladd,  17 
Oreg.  89  (1888).    In  Perine  v.  Grand 
Lodge  A  O.  U.  W.,  48  Minn.  82  (1892), 
where  an  insurance  jxilicy  was  sued 
upon,  the  court  held  that  it  was  im- 
material that  tho  defendant  was  not 
incorfjoratod,  inasmuch  as  it  had  held 
itself  out  as  a  corporation.    The  court 
may  direct  a  writ  of  mandamus  to 
be  served    upon   the   resident  gen- 
eral agent  of  the  company.    State  v. 
Adams,  etc  Cc,  08  N.  W.  Rep.  1085 
(Minn.,  1896).     By  statute,  in  Ohio, 
one  or  more  of  the  stockholders  may 
sue  for  the  benefit  of  the  association. 
Phitt  V.  Colvin,  50  Ohio  St  703  (1893). 
In  a  suit  against  an  unincorporated 
association,  the  members  of  which 
are  so  scattered  as  to  render  service 
upon  all  impossible,  service  uiK>n  its 
officers  is  sufficient  to  give  the  court 
jurisdiction  over  the  members.     An 
unincorporated  association  acting  as 
a  corporation  may  be  sued  as  a  cor- 
poration in  its  corporate  name  by 
one  of  its  members.     Fitzpatrick  v. 
Rutter,  IGO  IlL  282  (1895). 

6  Morgan's  Ca.se.  1  De  G.  &  Sm.  750 
(1849);  Tyrrell  v.  Washburn,  88  Mass. 
466  (1863). 


917 


509.] 


TRUSTS,  ETC. 


[cn.  XXIX. 


has  not  been  given,  the  same  as  in  a  partnership.^  The  members 
are  liable  for  past  contracts,  even  though  they  dissolve  the  associ- 
ation.2  A  purchaser  of  stock  in  an  unincorporated  association 
is  not  liable  to  creditors  for  debts  contracted  before  he  became 
a  member.'  The  rights  and  liabilities  of  a  member  depend 
upon  the  law  of  the  place  of  the  domicile  of  the  company  itself.* 
The  rules  applicable  to  stockholders  in  corporations  are,  by 
analogy,  applied  to  members  in  these  companies,  especially  as 
regards  their  defenses  to  subscriptions '  and  meetings  of  the 
company.®  These  associations  cannot  be  taxed  on  a  franchise, 
as  corporations  may  be.^ 

§  509.  Actions  ly  members  against  officers  and  the  company.— 
The  members  may  bring  an  action  to  remedy  the  fraud,^  ultra 

Crowell, 


1  New  York,  etc.  Bank  v. 
177  Pa.  St.  313  (189G). 

2  Camden,  etc.  R.  R.  v.  Guarantors 
of  Pennsylvania,  35  AtL  Rep.  790 
(N.  J.,  189G). 

3  Christy  u  Sill,  131  Pa.  St  492 
(1890).  Tlie  transferee  of  a  share  in 
an  unincorporated  company  is  liable 
for  all  debts  existing  at  the  time  of 
or  after  the  transfer.  Taylor  v.  Illll, 
1  N.  R.  566  (1863).  Although  a  stock- 
holder purchased  his  stock  from  the 
association  which  was  insolvent  at 
the  time,  yet  he  cannot  offset  this  as 
capital  contributed  by  him.  Barn- 
dollar  V.  Du  Bois,  142  Pa.  St.  565 
(1891).  A  member  is  not  liable  for 
debts  contracted  before  he  became  a 
member.  Hornberger  v.  Orchard,  39 
Neb.  639  (1894). 

*  Cutler  V.  Thomas,  25  Vt.  73  (1852). 

5  That  the  full  capital  stock  must 
be  subscribed  before  any  subscrip- 
tion is  collectible,  see  Bray  v.  Far- 
well,  81  N.  Y.  600  (1880).  Contra, 
Tappan  v.  Bailey,  45  Mass.  529  (1842); 
Boston,  etc.  R.  R.  v.  Pearson,  128  Mass. 
445  (1880);  Pitchford  v.  Davis,  5  M.  & 
W.  2  (1839).  Forfeiture  of  stock  re- 
leases the  member  only  as  to  subse- 
quent debts.  Skinner  v.  Dayton,  19 
Johns.  513  (1822). 

6  Notice  of  the  time  and  place  must 
be  given.    Irvine  v.  Forbes,  11  Barb. 


587  (1853).  The  members  cannot  act 
except  in  meeting  assembled.  The 
majority  do  not  rule.  Livingston  v. 
Lynch,  4  Johns.  Ch.  573  (1820);  Irvine 
V.  Forbes,  11  Barb.  587  (1852).  But 
the  articles  may  provide  otherwise. 
Waterbury  v.  Mercliants'  Union  Exp. 
Co.,  50  Barb.  157  (18G7). 

'Hoadley  v.  Essex  Coimty,  105 
Mass.  519  (1870);  Gleason  v.  McKay, 
134  Mass.  419  (1883),  holding  the  stat- 
ute to  be  unconstitutional-  Cf.  §  505, 
supra. 

8  The  other  members  are  not  proper 
parties.  Boody  v.  Drew,  46  How.  Pr. 
459  (1874).  An  officer  may  be  en- 
joined, but  not  removed.  The  suit 
must  not  be  in  the  interest  of  a  rival 
company.  "VVaterbuiy  v.  Merchants' 
Union  Exp.  Co..  50  Barb.  157  (1867). 
Trustees  receiving  gifts  are  liable 
therefor  to  the  company.  Re  Fry,  4 
Phila.  Rep.  129  (1860).  Trustees  can- 
not sell  to  the  company.  Robbins  v. 
Butler,  24  IlL  387  (1860).  The  treas- 
m-er  may  be  compelled  to  pay  over 
fvmds  belonging  to  the  company. 
Sharp  V.  Warren,  6  Price,  131  (1818). 
The  trustees  are  liable  in  tort  for 
their  frauds  on  the  company.  Dennis 
V.  Kennedy,  19  Barb.  517  (1854).  A 
committee  to  build  may  be  made  to 
account  where  they  secretly  contract 
with  themselves,  though  the  contract 


948 


en.  XXIX.] 


TKUSTS,  ETC. 


[§  510. 


vires  acts,^  and  negligence  -  of  the  trustees.  In  ISTew  Tork  a 
member  may,  by  statute,  sue  the  company,  in  the  same  manner 
that  a  stockholder  in  a  corporation  may  sue  the  corporation.' 
A  bill  in  equity  by  a  member  of  an  unincorporated  association 
to  enjoin  the  directors  from  enforcing  an  alleged  illegal  by-law 
must  join  all  the  directors  as  defendants.* 

§  510.  Dissolution.— Where  the  term  of  existence  of  a  joint- 
stock  company  is  fixed  by  its  articles  of  association,  it  cannot 
be  dissolved  at  the  instance  of  a  member  before  the  expiration  of 
tliat  time.*  It  may,  however,  be  dissolved  where  the  enterprise 
becomes  wholly  impracticable  or  its  attainment  impossible,  but 
not  always  because  of  the  misconduct  of  its  oilicers.*   The  death 


is   nominally    with    other   persons. 
Whitman  v.  Bowdon,27  S.  C.  53  (1887). 

'  A  member  cannot  be  compelled 
to  accept  the  stock  of  another  com- 
pany for  his  interest,  a  consolidation 
of  the  two  having  been  mada  Froth- 
ingham  v.  iJarnoy,  6  Ilun,  3G0  (1870). 
But  he  may  not  be  able  to  prevent 
the  consolidation.  !McVicker  v.  Ross, 
55  Barb.  247  (lsC9).  An  ultra  vires 
act  may  be  enjoined.  Abels  v.  Mc- 
Keen.  18  N.  J.  Eq.  402  (1807).  The 
members  need  not  make  good  the 
oflBcers'  debts  paid  by  the  latter,  grow- 
ing out  of  ultra  vires  acts.  Crum's 
Appeal,  00  Pa.  St.  474  (1870).  But  the 
ofTicer-i  themselves  are  liable  to  third 
persons.  Sullivan  v.  Campbell,  2 
Hall  (N.  Y.),  271  (1829).  And  possi- 
bly the  members.  Sullivan  v.  Camp- 
bell, 2  Hall  (N.  Y.),  271  (1829).  If  a 
member  has  not  participated  or  ac- 
q\iiesced  in  the  ultra  vires  act  he  is 
not  Liable  thereon.  Roberts's  Appeal, 
«2  Pa.  St  407  (1880).  Cf.  Van  Aernam 
V.  Bleistein,  103  N.  Y.  3.J5  (188G),  hold- 
ing the  members  liable  for  a  libel; 
aff'g  Van  Aernam  v.  McCune,  32  Uun, 
816. 

»  Re  Fry,  4  Phila.  129  (18G0). 

»  Code  Civ.  Proc.,  §  1919;  Wcstcott 
V.  Fargo,  61  N.  Y  542  (1875);  Saltsman 
V.  Shults,  14  Hun,  250  (1878).  At 
common  law  the  name  is  not  recog- 
nized arnl  the  suit  would  fail,  nabiclit 
V.  Pemberton,  4  Saudf.   057   (1851): 


Pipe  V.  Batoman,  1  Iowa,  309  (1855); 
Ewing  r.  :Medlock,  14  AI;v.  (O.  S.)  83 
(1837);  Schmidt  v.  Gunther,  5  Daly, 
452  (1874). 

*  Greer,  etc  Co.  v.  Stoller,  77  Fed. 
Rep.  1  (1.^90). 

6  Von  Schmidt  v.  Huntington,  1  CaL 
55(1850).  See  also  Smith  v.  Virgin, 
33  Ma  1 18  (1851).  Cf.  Lindley,  Partn. 
234;  La  fond  v.  Deems,  81  N.  Y.  507 
(18801  The  minority  cannot  forro  a 
dissolution  as  in  the  case  of  partner- 
ship. Equity  will  not  aid,  unless 
there  be  good  reason  for  dissolution. 
Hinkley  r.  Blethen,  78  Me.  221  (1880). 
Minority  of  an  Odd  Fellows'  lodge 
cannot  compel  sale  of  proi>erty  and 
distribution.  Robbinsr. Waldo  Lodge, 
78  Mo.  505  (1887);  and  see  Baglcy  v. 
Smith.  10  N.  Y.  489  (1853).  A  court 
will  wind  up  a  partnership,  even  be- 
fore its  fixed  time  of  existence  has 
expired,  if  it  is  insolvent  or  unprofit- 
able or  incapable  of  proceeding.  Jen- 
nings V.  Baddeley,  3  K.  &  J.  78  (1850); 
Baring  v.  Dix,  1  Cox,  Ch.  213  (ITSO;; 
Bailey  v.  Ford,  13  Sim.  495  (1843); 
Holladay  v.  Elliott.  8  Orcg.  84  (1879); 
Seighortner  v.  Weissenbom,  20  N.  J. 
Eq.  172  (1809);  Brien  v.  Harriman,  1 
Tenn.  Ch.  407  (1873);  Howell  v.  Hai^ 
vey,  5  Ark.  270  (1843);  Van  Ness  v. 
Fi.sher,  5  I^na  230  (1871). 

8\Vatorbun,'  v.  Mercliants*  Union 
Exp.  Co..  50  Barb.  157  (1807).  Contra, 
Mills  r.  Uurd,  32  Fed.  Rep.  127  (1887). 


049 


§  510.] 


TEUSTS,  ETC 


[CU.  XXIX. 


of  a  member  does  not  dissolve  it;  ^  nor  does  a  transfer  of  one's 
interest.^  The  dissolution  of  one  of  the  subordinate  unincor- 
porated organizations  by  the  general  organization  docs  not  vest 
in  the  latter  the  property  of  the  fonner.'  The  incorporation 
of  the  association  by  a  part  of  the  members  docs  not  dissolve 
the  association.*  The  incorporation  of  an  association  is  a  ma- 
terial change  in  the  association,  which  is  not  legal  unless  au- 
thorized by  an  amendment  to  its  articles  of  association.*  Upon 
dissolution  the  trustees  of  the  company  are  bound  to  convert 
the  property  into  cash  and  distribute  it.'  In  proceedings  for  a 
dissolution  all  the  members  need  not  be  made  parties."' 


1  McNeish  u  U.  S.  Hulless  Oat  Co., 
57  Vt.  316  (1884).  C/.  Walker  v.  Wait, 
50  Vt.  GG8  (1878).  The  death  of  a 
stockholder  does  not  dissolve  the  as- 
sociation, nor  release  liis  estate  from 
subsequently  incurred  debts.  Phil- 
lips V.  Bhitchford,  137  Mass.  510  (1884). 
The  death  of  a  member  does  not  dis- 
solve the  company,  but  if  it  has  not 
paid  dividends  for  twenty-three  years 
and  is  not  likely  to  pay  any,  a  court 
may  decree  dissolution.  Willis  v. 
Chapman,  G8  Vt.  459  (1896). 

2  A  transfer  of  his  stock  by  a  mem- 
ber does  not  dissolve  a  joint-stock  as- 
sociation under  the  Pennsylvania 
law.  Be  Globe  Refining  Co.,  151  Pa, 
St.  558  (1892). 

sWicksv.  Monihan,  130  N.  Y.  232 
(1891).  The  withdrawal  of  a  charter 
by  a  higher  body  from  one  of  its 
branches  does  not  affect  the  right  of 
the  latter  to  its  property.  Wells  v. 
Monihan,  129  N.  Y.  161  (1891). 

*  A  part  of  the  members  of  an  un- 
incorporated association  cannot  pro- 
ceed to  incorporate  it  against  the 
objections  of  the  others.  Rudolph  v. 
Southern  Ben.  League,  23  Abb.  N.  C. 
199  (1889).  Where  an  unincorporated 
association  appoints  a  committee  to 
incorporate,  and  they  do  so,  and  then 
proceed  to  run  an  opposition  business, 
the  association  cannot  enjoin  them 
from  so  doing.  Paulino  v.  Portuguese 
Ben.  Assoc,  18  R.  I.  165  (1893).  A 
committee  appointed  by  a  voluntary 
association  to  obtain  a  charter  may 


incorporate  in  the  name  of  the  vol- 
tmtary  association,  and  the  associa- 
tion cannot  enjoin  tlie  use  of  such 
nama  Paulino  t'.  Portuguese  Ben- 
Assoc,  18  R.  I.  165  (1893). 

5  National  Grand  Lodge  v.  Watkins, 
175  Pa.  St.  241  (1896). 

^Frothingham  v.  Barney,  6  Him, 
366  (1876);  Butterfield  v.  Beardsley, 
28  Midi.  412  (1874).  Upon  the  ex- 
piration of  the  time  for  which  the 
company  was  organized  it  becomes 
dissolved,  and  the  assets  must  be  dis- 
tributed if  any  one  of  the  members 
insists  thereon.  Mann  v.  Butler,  2 
Barb.  Ch.  362  (1847).  As  to  the  dis- 
tribution of  funds  of  an  incoi-porated 
benevolent  association,  see  Ashton  r. 
Dashaway  Assoc,  84  CaL  61  (1890). 
As  to  the  land,  see  §  504,  supra.  As 
to  the  rules  governing  the  distribu- 
tion of  the  assets  of  a  mutual  benefit 
building  corporation,  see  People  v. 
Lowe,  117  N.  Y.  175  (1889).  Where  a 
majority  of  a  volxmtary  association 
secede  from  the  higher  organization 
to  whicli  the  lower  one  belongs,  they 
cannot  take  the  property  with  them, 
Gorman  v.  O'Connor,  155  Pa.  St.  239 
(1893).  In  general,  see  78  L.  T.  Rep. 
639. 

■^  Such  as  non-residents  who  cannot 
be  reached.  AngeU  v.  Lawton.  76 
N.  Y.  540  (1879).  The  complainant 
may  bring  the  proceeding  in  behalf 
of  himself  and  others  having  a  com- 
mon interest  with  him.  INIann  v.  But- 
ler, 2  Barb.  Ch.  362  (1847). 


9-)0 


CHAPTER  XXX. 


STOCKHOLDERS'  RIGHT  TO  INSPECT  THE  BOOKS  OF  THE  CORPa 

RATION. 


§  516.  Allegations  and  form  of  writ 
517.  Right  to  inspect  minutes  of 

meetings  of  directors. 
5ia  Statutes    giving  right  of  in- 

snection. 
519.  Orders  to  corporation  to  allow 

iuspection  —  Subpoena  duces 

tecum— B'iil  of  discovery. 


§  51 1.  Common-law  rights. 

612.  Common-law  action  for  dam- 

ages for  refusaL 

613.  Mandamus  is  the  preferable 

remedy. 
511  Not  granted  as  a  matter  of 

course  unless  the  right  is 

statutory. 
515.  When  it  will  and  will  not  be 

granted. 

§  511.  Cummon-Jaw  ri^/tfs.— The  stockholders  of  a  corporar 
tion  had,  at  conimon  law,  a  right  to  examine  at  any  reasonable 
time,  and  for  any  reasonable  purpose,  any  one  or  all  of  the 
books  and  records  of  the  corporation.^ 


This  rule  grew  out  of 


• "  At  common  law  the  stockhold- 
ers of  a  corponition  had  the  right  to 
examine,  at  reasonable    times,  the 
records  and  books  of  the  corporation." 
Stone  V.  Kellogg,  40  N.  E.  Rep.  223 
(111.,  1896).    Stockholders  "  have  the 
right,  at  common  law,  to  examine 
and  inspect  all  the  books  and  records 
of  the  corporation  at  all  seasonable 
times,  and  to  be  thereby  informed 
of  the  condition  of  the  corporation 
and  its  property."    Per  Redfield,  J., 
in  Lewis  v.  Brainerd,  53  Vt  519  (1881). 
In  Commonwealth  v.  Phcenix  Iron 
Co.,  105  Pa.  St  111  (1884),  the  court 
said:  "  In  the  absence  of  agreement, 
every  shareholder  has  the  right  to 
inspect  the  accounts  —  a  right  sub- 
ject to  tlie  necessities  of  tlie  com- 
pany, yet  existing.   .   .   .   The   doc- 
trine of  the  law  is  that  the  books  and 
papers  of  the  corr>oration,  tliough  of 
necessity  kept  in  some  one  hand,  are 
the  common  property  of  all  the  stock- 
holders."   The  right  exists  although 

"  its  exercise  be  inconvenient  to  the 

0 


book-keepers  and  managers  of  the 
partnership  business."    In  Huylar  v. 
Cragin  Cattle  Co.,  40  N.  J.  Eq.  393 
(1885),  the  court  said:  "Stockholders 
are  entitled  to  inspect  the  books  of 
the  company  for  proper  purposes  at 
proper  times  .  .  .  and  they  are  en- 
titled to  such  inspection  though  their 
only  object  is  to  ascertain  whether 
their  affairs  have  been  properly  con- 
ducted by  the  directors  or  managers. 
Such  a  right  is  necessary  to  their  pro- 
tection." Deaderickr.  Wilson. 8  Baxt. 
(Tenn.)   108  (1874).     "The    minority 
stockholder  should  have  the  right  to 
require  a  statement  from  the  com- 
pany."   Sage  V.  Culver,  71  Hun,  42 
(1893).    A  stockholder  is  not  entitled 
as  a  matter  of  right  to  inspect  the 
stock-book  or  other  books  of  the  bank. 
The  court  will  not,  although  it  has 
the  power,  grant  a  mandamus  for 
the  inspection  of  the  stock-book  or 
other  books  of  a  bank,  imless  some 
special  grounds  bo  disclosed  to  war- 
rant it.    Be  Bank  of  Upi>er  Canada 


§  511.] 


INSPECTION   OF   OOKPOEATB   BOOKS. 


[CH.  XXX. 


an  analogous  rule  applicable  to  public  corporations  and  to  or- 
dinary copartnerships,  the  books  of  which,  by  well-established 
law,  are  always  open  to  the  inspection  of  members.*  Never- 
theless it  seems  that  a  stockholder  has  no  right,  aside  from 
statute,  to  examine  the  original  papers  and  vouchers  of  the 
corporation,  unless  some  property  right  is  involved,  or  some 
controversy  exists,  or  some  specific  and  valuable  interest  is  in 
question,  to  settle  which  an  inspection  of  these  documents  is 
necessary.^ 

A  director  has  an  absolute  right  to  examine  all  the  books  of 
the  company,'  even  though  ho  is  hostile  to  the  corporation.* 
But  in  Connecticut  a  contrary  rule  is  laid  down  where  he  is 
seeking  information  in  order  to  organize  a  rival  company.* 

V.  Baldwin,  1  Draper  (K  B.  Can.),  55 
(1829).  A  stockholder  in  a  New  York 
corporation  has  a  common-law  right 
to  examine  the  books  and  papers  of 
the  corporation  where  a  proposition 
has  been  made  for  the  purchase  of 
all  the  stock  of  the  company  and  the 
dividends  have  been  greatly  reduced. 
Be  Application  of  Steinway,  31  N.  Y. 
App.  Div.  70  (1898).  Mr.  Simon  Stem, 
in  the  Cyclopedia  of  Political  Science, 
Political  Economy,  and  United  States 


History,  vol  III,  p.  52G,  says:  "An- 
other problem  presented  by  the  exist- 
ing condition  of  the  railways  in  the 
United  States  is  that  which  arises 
from  secrecy  of  management.  This 
evil  must  be  dealt  with  radically. 
One  of  the  prime  motives  for  secrecy 
of  management  is  the  enonnous  ad- 
vantage which  at  the  present  day  it 
gives  to  the  managers  in  the  main- 
tenance of  their  power.  They  alone 
•.know  where  the  stockholders  are  to 
be  found,  and  can  therefore  control 
votes  by  the  knowledge  of  how  to 
reach  or  buy  them,  thus  perpetuat- 
ing their  control  Another  motive 
is  the  advantage  thus  afforded  for 
stock  speculations.  The  board  of 
managers,  by  keeping  unto  them- 
selves the  knowledge  that  their  prop- 
erty is  losing  heavily  in  comparative 
traflSc,  can  sell  their  own  holdings 


and  go  short  of  the  market  under 
circimistancos  wliich  will  yield  them 
an  absolute  certainty  of  protit  on  the 
transaction-  This  gives  them  an  enor- 
mous advantage  over  the  commu- 
nity by  depleting  the  pockets  of  the 
unwary,  who  liud  themselves  sad- 
dled with  stocks  at  high  prices, 
bought  months  in  advance  of  the 
public  announcement  that  tlie  road 
is  in  difTiculties.  The  knowledge  of 
rapid  gains  in  the  development  of 
business  likewise  gives,  so  long  as  it 
can  be  kept  secret,  a  like  ail  vantage 
in  purchase  of  stock.  This  advan- 
tage has  been  exploited  to  such  a  de- 
gree in  the  United  States  that  the 
investing  public  has  become  inspired 
with  a  general  distrust  for  railroad 
stock  investment." 

1  Commonwealth  v.  Phoenix  Iron 
Co.,  105  Pa.  St.  Ill  (1884). 

2  Ellsworth  V.  Dorwart,  95  Iowa,  108 
(1895). 

3  People  V.  Throop,  12  Wend.  181 
(1834);  CharUck  v.  Flushing  R  R.,  10 
Abb.  Pr.  130  (1860);  Be  Ciancimino, 
N.  Y.  L.  J.,  Dec.  23, 1890.  Cf.  State 
V.  Einstein,  46  N.  J.  L.  479  (1884). 

4  People  V.  Throop,  12  Wend.  181 
(1834). 

5  A  director  who  is  actively  organ- 
izing a  rival  company  has  no  right 
to  examine  the  letter  files  of  the  f  or- 


953 


CH.  XXX.] 


INSPECTION    OF    COEPORATE    BOOKS.        [§§  512,  513. 


A  creditor  of  the  corporation  or  any  person  who  is  a  stranger 
to  it  can  obtain  access  to  its  records  by  a  bill  in  equity  for  dis- 
covery.^ Corporate  books  in  the  hands  of  a  receiver  should  be 
open  to  all  parties.' 

§  512.  Common-law  action  for  damages  for  refusal. —  The 
legal  right  of  a  stockholder  of  a  corporation  to  examine  the  cor- 
porate books  is  a  right  which  gives  him  a  cause  of  action  at  law 
for  damages  against  the  corporate  officers  if  they  refuse  to  allow 
the  inspection.'  The  plaintiff  is  entitled  to  nominal  damages, 
and  to  such  further  damages  as  he  may  prove.  It  has  been  held 
that  he  need  not  allege  or  prove  any  special  reason  or  purpose 
of  his  desire  and  request  to  examine  the  books;*  but  the  vast 
size  of  modern  corporations,  with  tens  of  thousands  of  stock- 
holdei-s  and  hundreds  of  clerks,  renders  it  impossible  to  open 
all  the  books  to  all  the  stockholders,  and  renders  necessary  the 
rule  that  some  good  reason  be  given  by  the  stockholder  apply- 
ing to  examine  the  books. 

§  513.  Mandamus  is  the  yrcfcrahJc  remedy. —  An  action  for 
damages  is  generally  totally  inadequate  as  a  remedy.*    The 


mer  in  order  to  aid  tlie  lattor.  The 
secretiiry  may  forcibly  take  them 
from  liim.  Ilominway  v.  Ueminway, 
M  Conn.  443  (1«90). 

1  A  bill  of  discovery  lies  at  instanro 
of  cor|>')nite  creditors  iu  the  courts  of 
one  stato  to  compel  coriwratc  ollicers 
to  give  the  names  of  stockholders  of 
the  corporation  in  another  state  with 
a  view  to  enforcing  tlie  statutory 
liability  in  the  latter  state.  Post  r. 
Toledo,  etc  R.  K,  144  Ma.ss.  341  (1887). 
As  to  the  remedy  by  subpojua,  etc., 
see  ^  519,  infra.  As  to  the  general 
right  of  a  stockholder  to  examine  the 
books  of  a  corporation  and  the  recog- 
nition of  such  right  in  et[uity  by  dis- 
covery, see  Gresley,  Eq.  Ev.  116,  117; 
Kj-naston  v.  East  India  Co.,  3  Swanst. 
249  (1S19);  Bolton  v.  Liverpool,  3  Sim. 
407  (1*}1):  S.  C.,1  MyL«&;K.8S;  Brace 
V.  Ormond,  1  Meriv.  409  (18 IG). 

'See  S  872.  infra;  78  L.  T.  Rep.  443. 

»  Lewis  V.  Brainerd,  53  Vt  510  (laSl). 
As  to  tlie  right  to  insf>ection  and  to 
take  copies  of  records  in  a  county 


clerk's  or  register's  ofBce,  see  Ran- 
dolph V.  State,  82  Ala.  527  (1880);  Han- 
son r.  Eich^taedt,  09  Wis.  538  (1887); 
Brewer  r.  Watson,  71  Ala.  299  (1882); 
Plielan  v.  SUite,  76  Ala,  49  (1884); 
Webber  v.  Townley,  43  Midi.  534 
(1880);  Diamond  Match  Ca  v.  Pow- 
ers, 51  Mich.  145  (1883);  People  v.  Cor- 
nell, 47  Barb.  329  (1860);  People  v. 
Peilly,  38  Ilun,  429  (1886);  People  v. 
Richards,  99  N.  Y.  020  ( 1885).  A  stock- 
holder has  the  legal  right  to  insjiect 
the  books  of  the  corporation  of  which 
he  is  a  member,  but  tlie  company  is 
not  liable  for  a  refiusal  of  the  secre- 
tary to  allow  a  stockholder  to  .e.x- 
amine  the  books.  Legendre  v.  New 
Orleans  Brewing  Assoc.,  45  La.  Ann. 
669  (1893). 

*  Lewis  V.  Brainerd,  53  Vt  510  (1881). 

*  In  Cockburn  v.  Union  Bank,  13  La. 
Ann.  369  (1858),  the  court  said  a  suit 
for  damages  "might  last  for  a  long 
time  and  petitioner  suffer  great  loss 
by  Ijeing  debarred  from  an  examina- 
tion" of  the  books.   "  Ue  does  not  ask 


953 


I  514.]         INSPECTION  OF  COErOKATE  BOOKS.       [CH.  XXX. 

stockholder  wishes  to  inspect  the  corporate  books  and  does  not 
wish  damages  or  a  lawsuit.  Accordingly,  in  certain  cases,  upon 
the  application  of  a  stockholder  who  has  been  denied  the  privi- 
leo"e  of  examining  the  corporate  records,  it  has  been  the  practice 
of  the  courts  to  issue  a  mandamus  to  the  corporate  olllcers  com- 
manding them  to  allow  a  specified  stockholder  to  examine  the 
books  of  the  corporation.'  Thus,  at  common  law,  a  stockholder 
has  a  right  to  a  mandamus  to  compel  the  corporate  ollicers  to 
allow  him  to  examine  certain  books  and  papers  of  the  corpora^ 
tion,  where  a  proposition  has  been  made  for  the  purchase  of  all 
the  stock  of  the  corporation,  and  a  large  reduction  has  been 
made  in  the  dividends,  and  the  stockholder  is  unable  to  ascer- 
tain the  real  value  of  his  stock.' 

§  514.  Not  granted  as  a  matter  of  course  nnless  the  right  is 
statutory. —  The  Avrit  of  mandamus,  however,  does  not  issue 
herein  as  a  matter  of  course.  It  is  an  extraordinary  remedy,  to 
be  invoked  only  upon  special  occasions.  The  courts  do  not  grant 
the  mandamus  until  it  has  taken  into  careful  consideration  all 
the  facts  and  circumstances  of  the  case.  The  condition  and 
character  of  the  books,  the  reasons  for  refusal  by  the  corpora- 
tion, the  specific  purpose  of  the  stockholder  in  demanding  in- 
spection, the  general  reasonableness  of  the  request,  and  the 
effect  on  the  orderly  transaction  of  the  corporate  business  in 
case  it  is  granted,  are  all  considered  in  granting  or  refusing  the 
writ.    It  is  granted  only  in  furtherance  of  essential  justice.' 

for  damages,  but  for  the  exercise  of  (1884);  S.  C.  sub  nonu  Phoenix  Iron 
a  right.  If  he  has  the  right  he  ought  Co.  v.  Commonwealth,  113  Pa.  St.  563 
to  have  the  exercise  of  it  as  soon  as  (188G),  explaining  the  method  of  pro- 
possible;  for  the  deprivation  of  his  cedure,  and  holding  that  the  appli- 
right  cannot,  perhaps,  be  accurately  cant  need  not  apply  to  a  court  of 
estimated  in  damages.  It  may  be  equity.  The  old  rule  that  mandamus 
many  years  before  the  amovmt  of  the  will  issue  only  for  a  public  purpose 
damage  can  be  known."  is  no  longer  a  rule  of  law  so  as  to  pre- 
1 "  It  would  seem,  from  the  weight  vent  its  use  herein.  Commonwealth, 
of  authority  and  in  reason,  that  a  etc.,  sfiipra,  questioning  Rex  v.  Bank 
shareholder  is  entitled  to  mandamus  of  England,  2  B.  &  Aid.  620  (1819); 
to  compel  the  custos  of  corporate  and  Rex  v.  London  Assur.  Co.,  5  B.  & 
documents  to  aUow  him  an  inspec-  Aid.  899  (1822).  See  also  Rex  v.  Clear, 
tion,  and  copies  of  them,  at  reason-  4  Bam.  &  C.  899  (1825);  Foster  v. 
able  times,  for  a  specific  and  proper  White,  86  Ala.  467  (1889). 
pm-pose,  upon  showing  a  refusal  on  2  jig  Application  of  Steinway,  31 
the  part  of  the  custos  to  allow  it,  and  N.  Y.  App.  Div.  70  (1898). 
not  otherwise."  Commonwealth  v.  3"Xhe  application  is  addressed  to 
Phoenix  Iron    Co.,  105  Pa.  St.   Ill  the  sound  discretion  of  the  court." 

954 


en.  XXX.] 


INSrECTION    OF    COKPOKATE    BOOKS. 


[§  --^l^. 


Wliere  a  statute  gives  to  stockholders  the  right  to  examine 
corporate  books,  mandamus  seems  to  be  granted  as  a  matter  of 
riirht.' 


The  reasons  for  granting  the  writ 
"  should  bo  clear  and  cogent.  ...  To 
hold  that  every  person  who  shows 
himself  to  be  a  holder  of  stock  is  at 
liberty  to  demand  an  examination  of 
the  transfer-books  when  and  as  often 
as  he  pleases,  and,  if  refused,  to  apply 
for  a  writ  of  mandamus  to  enforce 
an  abs<jlute  right,  would  be  to  estab- 
lish a  rule  highly  prejudicial  to  the 
interests  of  all  corporations  and  their 
stockholders.  .  .  .  Tlio  power  of  the 
court  should  be  exercised  in  such 
Cixs<s  with  great  discrimination  and 
care."  People  v.  Lake  Shore,  etc 
It.  R,  11  Ilun,  1  (ISTT):  affirmed,  sub 
nom.  Re  Sage,  70  N.  Y.  220  (1877).  See 
also  People  v.  Northern  Pac  R.  R.,  50 
N.  Y.  Super.  Ct.  43C  (1884).  "  Discre- 
tion in  these  matters  should  be  ex- 
ercised in  a  reasonable  manner  and 
subject  to  precedent"  Rcgina  v. 
Wilts,  etc.  Canal  Nav.,  29  L.  T.  Rep. 
9J2  (1874).  A  reference  may  be  or- 
dered by  the  court  to  determine  the 
truth  of  the  allegations  in  the  affi- 
davits used  to  obtain  a  mandamus. 
People  V.  St,  Louis,  etc  R'y,  44  Hun, 
552  (1887).  Mandamus  is  the  prefer- 
able remedy.  Legendre  r.  New  Or- 
leans Browing  Assoc,  45  La.  Ann.  CG9 
(1S03). 

1  Where  a  statute  gives  the  right  to 
i^ispect,  this  right  may  be  enforced 
by  mandamus.  Coquard  v.  National, 
etc  Co.,  49  N.  E.  Rep.  563  (IlL,  1898). 
A  statute  giving  the  right  to  exam- 
ine the  books  and  records  gives  the 
right  to  examine  contracts,  and  this 
right  may  be  enforced  by  mandamus. 
Stone  v.  Kellogg.  40  N.  E.  Rep.  222 
(IlL,  1896*.  Mandamus  lies  at  the  in- 
stance of  a  stockholder  to  compel 
his  corporation  to  allow  him  to  in- 
spect the  books  of  the  company  rela- 
tive to  the  stock  in  accordance  with 
the  constitution  of  Louisiana,  the  ob- 


ject of  the  stockholder  being  to  ascer- 
tain the  value  of  his  stock  and  to 
guide  his  future   action  in  regard 
thereto.    Stato  v.  New  Orleans,  etc. 
Co.,  22  S.  Rep.  815  (La.,  1897).     Under 
the  Wisconsin  statute  authorizing  a 
stockholder  to  examine  the  stock- 
books   and  accounts,  a  mandamus 
may  be  issued  to  the  officer  having 
the  books  in  charge.    State  v.  lier- 
genthal,  72  Wis.  314  (1888).    Under 
a  constitutional  right  to  see  the  list 
of  stockholders,  a  stockholder  has 
no  absolute  right  to  take  a  list  of 
them.     Commonwealth    v.    Empire 
Pass.  R-y,  134  Pa.  St.  237  (1890).   Man- 
damus lies  to  enforce  the  statutory 
right  of  inspection.     People  v.  Pacific 
Mail  S.  S.  Co.,  50  Barb.   280  (1867). 
Mandamus  lies  to  compel  the  resi- 
dent agent  of  a  foreign  corporation 
to  open  its  transfer  books  to  a  stock- 
bolder  as  required  by  statute.    Peo- 
ple V.  Paton,  20  Abb.  N.  Cas.  195  (1887). 
Mandamus  will  lie  in  behalf  of  the 
wife  of  a  deceased  stockholder,  who 
holds  the  certiiicates  mado  out  in 
his  name,  to  compel  the  corporation 
to  allow  her  to  examine  the  transfer 
books  in  orde»  that  she  may  vote  in- 
telligently at  a  coming  election.  Peo- 
ple V.  Eadie,  03  Uun,  320  (1892).  Man- 
damus lies  to  open  for  the  inspection 
of  a  stockholder  and  for  taking  mem- 
oranda   therefrom    such    corporate 
books  as  the  statute  prescribes  shall 
be  open  to  him.    Ee  Martin,  62  Ilim, 
557  (1891).    Mandamus  lies  to  allow 
inspection  as  required  by  the  statute, 
and  the  fact  that  the  applicant  holds 
a  certificate  of  stock  is  sufficient. 
Martin  v.  Johnston  Co.,  25  Abb.  N. 
Cas.  350  (1890).  Where  there  is  a  state 
statute  allowing  stockholders  to  ex- 
amine the    corporate    books,  a  nar 
tional  bank  in  the  state  is  subject 
thereto  and   mandamus  will  isauOi 


055 


§515.] 


INSrECTION    OF    COEPOKATE   BOOKS. 


[cn.  XXX. 


§  515.  WJicn  it  will  and  will  not  he  granted. —  It  will  not  bo 
granted  to  satisly  curiosity,  nor  to  aid  the  stock-market  specu- 
lations of  the  stockholders.'  Either  some  property  rights  of 
the  stockholder  must  be  involved,  or  some  controversy  exist,  or 
some  specific  and  valuable  interest  be  in  question,  to  settle 
yrhich  an  inspection  of  the  corporate  records  becomes  necessary.'* 


Winter  v.  Baldwin,  89  Ala.  483  (1889). 
Under  a  statute  to  the  effect  tliat 
"  the  stockholders  of  all  private  cor- 
porations have  the  right  of  access  to, 
inspection,  and  examination  of  the 
books,  records,  and  papers  of  the  cor- 
poration, at  reasonable  and  proper 
times,"  a  stockholder  has  the  "  right 
to  examine  the  books  at  any  and  all 
reasonable  times,"  and  "when  this 
right  is  claimed  and  refused,  he  is 
entitled  to  a  mandamus  on  the  aver- 
ment that  he  is  a  stockholder  of  the 
corporation;  that  he  has  demanded 
the  right  of  inspection;  that  the  time 
was  reasonable  and  proper;  and  that 
the  right  was  denied  him."  He  may 
make  the  examination  through  an 
agent.  Foster  v.  Wliite,  86  Ala.  467 
(1889).  Concerning  the  New  York 
act  requiring  resident  transfer 
agents  of  foreign  corporations  to  ex- 
hibit to  stockliolders  the  transfer 
book  and  a  list  of  stockholders,  and 
concerning  an  alternative  writ  of 
mandamus  therein,  see  People  v. 
Crawford,  68  Hun,  547  (1893).  Man- 
damus lies  to  compel  corporate  oflS- 
cers  to  exhibit  to  a  stockholder  the 
books  specified  in  the  statute  giving 
this  right.  Ellsworth  v.  Dorwart,  95 
Iowa,  108  (1895).  See  also,  concern- 
ing such  statutes,  §  518,  infra. 

1  The  writ  will  not  be  "  granted  to 
enable  a  corporator  to  gratify  idle 
curiosity."  Foster  v.  White,  86  Ala. 
467  (1889);  People  v.  Walker,  9  Mich. 
328  (1861).  "The  interests  of  aU  the 
corporators  require  that  the  writ 
shall  not  go  at  the  caprice  of  the 
curious  or  suspicious."  Common- 
wealth V.  Phoenix  Iron  Co.,  105  Pa.  St. 
Ill    (1884>     "Courts   should    guard 


against  all  attempts  by  combinations 
hostile  to  the  corporation  or  its  ex- 
isting officers  to  use  its  writ  of  man- 
damus to  accomplish  their  personal 
or  speculative  ends."  People  v.  Lake 
Shore,  etc.  R  R,  11  Uun,  1  (1877). 
Nor  will  the  court  grant  "a  mere 
wrecking  petition  to  ruin  a  going 
concern."  Re  West  Devon,  etc.  Mine, 
L.  R  27  Ch.  D.  106  (1884).  Mere  sus- 
picion is  not  enough  to  justify  an 
order  of  inspection,  even  though  the 
applicant  stockholder  intends  to 
bring  suit  against  the  directors.  Cen- 
tral, etc.  R  R  r.  Twenty-third  Street 
R'y,  53  IIow.  Pr.  45  (1S77). 

2  Thus,  where  there  had  been  no 
dividends  for  nine  years,  and  the  offi- 
cers were  partners  in  a  competing 
concern,  and  refvised  to  allow  inspec- 
tion, it  was  granted  in  order  to  ena- 
ble the  applicant  to  ascertain  whether 
the  real  facts  justified  an  action  for 
fraud  on  the  part  of  the  officers. 
Commonwealth  v.  Phoenix  Iron  Co., 
105  Pa.  St.  Ill  (1884).  Granted  also  to 
allow  applicant  to  ascertain  whether 
a  by-law  existed  entitling  him  to  an 
office  by  promotion.  Reg.  v.  Sad- 
dlers' Co.,  10  W.  R  87  (1861).  Mi% 
management  and  intent  to  bring 
suit  need  not  be  alleged.  "Often- 
times frauds  are  discoverable  only 
by  examination  of  the  books  by  an 
expert  accoimtant."  Huylar  v.  Cra- 
gin  Cattle  Co.,  40  N.  J.  Eq.  392  (1885). 
It  is  granted  also  to  a  stockholder 
who  has  a  suit  or  controversy  with  a 
party  other  than  the  corporation  it- 
self. Rex  V.  Hostmen,  2  Stra.  1223 
(1745);  Mayor  of  Southampton  v. 
Graves,  8  T.  R  590  (1800).  It  has  been 
granted  to  enable  a  stockholder  to  see 


956 


CH.  XXX.]  INSPECTION    OF    COKPORATE    BOOKS.  [§  515. 

Mandamus  will  be  granted  in  order  to  enable  the  applicant  to 
ascertain  who  are  stockholders,  with  a  view  to  canvassing  their 


the  discount  book,  although  there  is 
no  suit  between  him  and  the  corpo- 
ration, and  no  intent  to  bring  one. 
Cockburn  v.  Union  Bank,  13  La.  Ann. 
289  (1858).    At  an  early  day,  however, 
it  was  held  that  "  the  members  have 
no  right,  on  speculative  grounds,  to 
call  for  an  examination  of  the  books 
and  muniments  in  order  to  see  if,  by 
possibility,the  company's  atrairs  may 
be  better    administered  tlian   they 
think  they  are  at  present    If  they 
have  any  complaint  to  make,  some 
suit  should  be  instituted,  some  defi- 
nite matter   charged,  ...  or  there 
sliould  bo  some  particular  matter  in 
dispute    between    members,  or    be- 
tween the  corporation  and  individ- 
uals in  it;  there  must  be  some  con- 
troversy, some  specific  purpose,  in 
respect  of  which  the  examination 
becomes  necessary."    King  v.  Mer- 
chant Tailors'  Co.,  2  B.  &  Ad.  115 
(1831).   The  apitlicant  must  allege  the 
extent  of  his  interest,  also  wherein 
his  object  of  inspection  is  just  and 
useful     Hatch  v.  City  Bank,  1  Rob. 
(La.)  470  {181'2).    The  case  of  State  v. 
Bienville  Oil  Works,  28  La.  Ann.  201 
(1876),  states  that  the  two  preceding 
cases  "  failed  through  want  of  pre- 
cision and  definiteness    in    stating 
some  weU-defined  purpose,  some  rea- 
sonable cause,  and  showing  that  they 
had  some  interest  in  the  matter."  A 
charter  provision  that  the  corporate 
powers  "  shaU  be  exercised  by  a  board 
of  directors"  is  immaterial  herein. 
State  V.  Bienville  OU  Works,  28  La. 
Ann.  204  (1870).    Where  a  reduction 
of  capital  stock  is  contemplated,  a 
large  stockholder  has  a  right  to  in- 
spection to   ascertain  whether   the 
business    Js  being  "prudently    and 
profitably  "  carried  on-    State  v.  Bien- 
ville Oil    Works,   28  Liu    Ann.    204 
(1876).    The  writ  will  not  be  granted 
to  allow  applicant,  a  director,  to  in 


spect  and  make  entries.   Rosenfeld  v. 
Einstein,  40  N.  J.  L.  479  (1884V    Tlie 
general  purpose  of  ascertaining  "the 
condition  of  the  company  "  was  held 
insufficient  in  People   v.  Walker,  9 
Mich.  328  (1861).  The  stockholder  may 
take  memoranda  or  a  list  of  the  stock- 
holders   Commonwealth  v.  Phoenix 
Iron  Co..  105  Pa.  St.  Ill  (1884);  Cotheal 
V.  Brouwer,  5  N.  Y.  502  (1851),  affirm- 
ing Brouwer  v.  Cotheal,  10  Barb.  216 
(1850);  Hide  v.  Hohnes,  2  MoUoy,  373 
(1825).    In  Stettauer  v.  New  York, 
eta  Co.,  43  N.  J.  Eq.  40  (1S80),  where 
a  stockholder  filed  a  bill  in  equity  to 
compel  corporate  ofiicers  to  allow 
himself  and  his  accountant  to  exam- 
ine the  corporate  books,  its  basiness 
having  been  closed  and  distribution 
of  assets  made,  but  a  statement  of 
its  affairs  refused,  the  court  held  that 
the  bill  would  not  lie,  since  no  fraud 
or  insufficient  distribution  of  assets 
was  alleged.  Mandamus  is  the  proper 
remedy.     Swift  v.  State,  7   Houst. 
(Del)  338  (1886),  holds  that  mandamus 
will  issue  to  the  officers  of  a  foreign 
corporation  to  exhibit  its  books  then 
in  the  state,  and  allow  copies  of  rec- 
ords to  be  taken  by  a  stockholder  who 
intends  to  commence  suit  against  a 
pledgee  of  his  stock;  the  controversy 
turning  on  the  question  of  the  earn- 
ings and  expenses  of  the  corporation. 
Mandamus  to  open  the  stockrledger 
was  denied  in  a  case  where  the  owner 
of  four  shares  of  stock  alleged  that 
littfe  or  no  dividends  were  paid,  and 
the  stock  was  depreciating,  no  mis- 
management being  cliarged.     A  by- 
law authorizing  inspection  of  books 
of  account  does    not  authorize  in- 
spection of  stock-ledger.     Lyon    v. 
American  Screw  Co.,  16  R.  L  472  (1889). 
Where  a  Michigan  stockholder  in  a 
Connecticut  corporation  is  suing  in 
Michigan  other  stockholders,  on  con- 
tracts relative  to  stock,  he  may  ob- 


057 


§  51G.] 


IXSPECTION    OF   COKPOKATE    BOOKS. 


[on.  XXX. 


votes  for  an  election.'  Mandamus  will  not  be  granted  to  allow 
a  stockholder  to  make  a  list  of  the  stockholders  where  the  ob- 
ject is  to  combine  them  in  attacking  a  lease  made  by  the  cor- 
poration.2 

§  516.  Allegation  and  form  ofivrit — The  writ  should  run 
to  the  person  or  officer  who  has  control  of  the  records.'  The 
stockholder  may  make  the  inspection  through  an  agent,  and 
may  have  the  aid  of  an  interpreter,  attorney,  or  expert.*  The 
request  to  inspect  the  books,  for  refusal  of  which  the  manda- 
mus is  asked,  must  be  alleged  to  have  been  made  at  a  proper 
time  and  place,  and  of  the  proper  person,  and  to  have  been  re- 
tain in  Delaware  a  mandamus  com- 
pelling the  president,  who  resides 
there  and  has  corporate  books  and 
papers  there,  to  allow  him  to  exam- 
ine the  same  and  take  copies.  Rich- 
ardson V.  Swift,  7  Houst.  (Del.)  137 
(1885),  a  carefully  considered  case. 
Mandamus  may  lie  to  compel  the 
resident  officers  of  a  foreign  corpora- 
tion to  permit  inspection.  State  v. 
Farmer,  7  Ohio  C.  C.  429  (1892).  A  stock- 
holder sued  by  a  corporation  on  an 
ordinary  debt,  and  who  sets  up  in 
defense  that  he  was  induced  to  buy 
stock  from  outside  parties  by  fraudu- 
lent statements  made  by  the  com- 
pany, cannot  have  a  mandamus  to 
compel  the  company  to  allow  him  to 
examine  its  books.  His  application 
in  such  a  case  is  as  a  creditor  and  not 
as  a  stockholder.  Investment  Co.  v. 
Eldridge,  2  Pa.  Dist  394  (1893). 

1  Mandamus  was  granted  in  People 
V.  Eadie,  N.  Y.  L.  J.,  Dec.  30,  1891,  to 
open  the  stock-books  to  a  stockholder 
who  wished  to  ascertain  who  were 
stockholders  in  order  to  confer  with 
them  for  the  piirpose  of  changing 
the  board  at  an  approaching  election. 
Mandamus  was  granted  to  a  stock- 


(1877);  aff'd  mh  norru  Re  Sage,  70 
N.  Y.  220  (1877).  A  stockholder  in 
Pennsylvania  may  have  a  mandamus 
to  compel  the  company  to  allow  him 
to  inspect  and  take  a  copy  of  the  list 
of  stockholders,  his  purpose  being  to 
consult  them  and  obtain  proxies  from 
other  stockholders.  It  is  immaterial 
that  a  receiver  is  in  charge  of  the 
property  under  a  foreclosura  Such 
a  receiver  has  nothing  to  do  with  the 
stock-book.  Commonwealth  v.  Phila- 
delphia, etc.  R.  R,  3  Pa.  Dist.  115 
(1893). 

2  Commonwealth  v.  Empire  Pass. 
R'y,  134  Pa.  St.  237  (1890),  and  nota 
See  criticism  on  this  case  in  N.  Y.  L. 
J.,  Oct  13,  1890. 

3  "  The  writ  shall  be  directed  to 
him  who  is  to  do  the  thing  required 
to  be  dona  "Ad  irector  may  demand 
inspection  though  hostile  to  the  cor- 
poration. People  V,  Throop,  12  Wend. 
183  (1834). 

<  In  examining  the  books  a  stock- 
holder may  have  with  him  his  attor- 
ney and  stenographer.  Ellsworth  v. 
Dorwart,  95  Iowa,  108  (1895).  A  stock- 
holder who  is  entitled  to  examine 
corporate  books  may  have  with  him 


holder  who  wished  to  persuade  other    an  attorney  or  other  person  familiar 


stockholders  not  to  appeal  a  suit  in 
which  he  was  interested  adversely  to 
the  corporation,  the  defeated  party. 
Reg.  V.  Wilts,  etc.  Canal  Nav.,  29  L. 
T.  Rep.  922  (1874).  See  also  People  v. 
Lake  Shore,  etc.  R.  R.,  n   Hun,   1 


958 


with  that  line  of  business.  People  v. 
Nassau  Ferry  Co.,  86  Hun,  128  (1895). 
May  inspect  through  his  duly  author- 
ized agent.  State  v.  Bienville  Oil 
Works  Co.,  28  La,  Ann.  204  (1876). 
See  also  §  519,  infra. 


OH.  XXX.] 


INSPECTION    OF    COKrOKATE   BOOKS. 


[§  ^IT. 


fused.^  The  application  should  also  state  what  information  the 
applicant  needs,  and  what  books  of  the  corporation  he  wishes 
to  inspect.^  "  The  order  should  be  so  drawn  as  not  to  incon- 
venience the  transaction  of  business." '  Technical  objections  to 
the  writ  are  not  favored  by  the  courts.  Nevertheless  the  sub- 
stantial allegations  must  be  made. 

§  517.  Biyht  to  inspect  mimites  of  meetings  of  directors.— Jt 
would  take  a  strong  case  to  induce  a  court  to  issue  a  mandamus 
commanding  the  corporate  oiliccrs  to  allow  a  stockholder  to 
inspect  the  minutes  of  the  meetings  of  the  directors.*  The  suc- 
cess of  the  corporate  enterprise  depends  frequently  upon  the 
secrecy  of  the  plans  of  the  directors.  In  connection  with  liti- 
gations the  rule,  of  course,  is  different;  but,  aside  from  this,  it 


1  The  stockholder  must  first  apply 
to  the  proper  corporate  officer  liav- 
ing  authority  to  grant  inspection. 
Rex  V.  Wilts,  etc.  Canal  Nav.,  3  AA 
&  EL  477  (1835).  And  must  state  to 
him  the  reason  why  he  desires  in- 
spection. Eex  V.  Wilts,  etc.  Canal 
Nav.,  3  ^¥0.  &  EL  477  (1835);  also  Rex 
V.  Clear,  4  Barn.  &  C.  899  (1825);  Peo- 
ple V.  Walker,  9  Mich.  328  (1861). 

»  Morgan's  Case,  L.  R.  28  Cli.  D.  G20 
(1884).  This  case  also  states  that  in 
England  it  is  customar>'  for  many 
banking  companies  to  insert  in  tlieir 
constitutions  a  provision  forbidding 
the  insi>ection  of  customers'  accounts 
by  sliareholders  or  creditors.  Irrele- 
vant parts  of  the  books  may  be  sealed 
up.  Jones  V.  Andrews,  58  L.  T.  Rep. 
601  (1888);  Earp  v.  Lloyd,  3  KL  &  J. 
549  (1857) ;  Napier  v.  Staples,  2  MoUoy, 
270(1828);  Hill  r.  Great  Western  R'y, 
10  C.  R  (N.  S.)  148  (1861);  Clifford 
V.  Tavlor,  1  Taunt  167(1808);  Gerard 
V.  Pe'nswick,   1   Swanst   533  (1818); 


L.  J.,  Oct  3,  1892,  p.  18,  approving  of 
text 

<  "  It  is  highly  proper  that  an  in- 
spection of  the  books  containing  the 
proceedings  of  the  directors  should 
be  obtained  on  special  occasions  and 
for  special  purposes;  .  .  .  but  the 
proposed  daily  and  hourly  inspection 
and  publication  of  all  their  proceed- 
ings would  be  tantamoimt  to  admit- 
ting the  presence  of  strangers  at  all 
their  meetings,  and  would  probably 
ere  long  be  foxmd  very  prejudicial  to 
the  shareholders."  Regina  v.  iMari- 
quita,  etc.  Min.  Co.,  1  EL  &  EL  289 
(1858).  "  A  private  storkholder  of  an 
incori)orated  company  has  no  right 
to  have  access  to  the  minutes  of  the 
proceedings  of  the  directors  vmless 
that  right  is  expressly  given  by  the 
charter;  and  consequently,  and  of 
necessity,  he  must  remain  ignorant 
of  their  action  until  they  choose  to 
make  tliat  action  known  "  (dictum). 
Alabama,  etc.  R  R.  v.  Rowley,  9  Fla. 


Dias  V.  :Merle,  2  Paige,  494  (1831) ;  Titus-  508, 514  (1861).  See  also  Lindley,  Com 


V.  Cortelyou,  1  Barb.  444  (1847);  Peo- 
ple V.  Pacific  Mail  S.  S.  Co.,  50  Barb. 
280  (18G7);  Pynchon  v.  Day,  118  IlL  9 
(1886).  But  if  such  irrelevant  matter 
cannot  be  separated,  the  larty  must 
produce  the  wliole.  Carew  v.  White, 
6  Beav.  172  (1842). 
»  Duffy  r.  Mutual  Brewing  Co.,  N.  Y. 


panics,  tmder  "Inspection  "  in  Index. 
In  Streit  v.  Citizens'  F.  Ins.  Co.,  29 
N.  J.  Eq.  21,  31  (1878),  the  court  said: 
"The  officers  ought  not  to  have 
denied  to  any  stockholder  an  opjKjr- 
tunity.  i)roi»erly  applied  for,  to  exam- 
ine tiie  minutes  of  the  meetings  of 
the  directors." 


939 


§  518.] 


INSrECTION  OF  COKrORATE  EOOKS. 


[cn. 


XXX. 


seems  that  a  stockliolder  is  not  entitled  as  a  matter  of  right  to 
a  mandamus  to  allow  him  to  inspect  the  minutes  of  the  di- 
rectors' meetings.  The  same  rule  "would  seem  to  apply  to 
miscellaneous  questions  asked  of  the  directors  at  stockholders' 
meeting's. 

§  518.  Statutes  givinf/  right  of  inspection. —  The  right  to  in- 
spect corporate  records  is  frequently  given  to  stocldiolders  by 
statutory  provisions.  Sometimes  this  statutory  riglit  extends 
only  to  the  corporate  transfer  book.*  Sometimes  it  includes  all 
corporate  records.'^  Mandamus  lies  to  enforce  this  right.'    Fre- 


1  See  Part  VII,  infrcu  The  New 
York  statute  was  construed  in  Co- 
theal  V.  Brouwcr,  5  N.  Y.  5G2  (1851); 
People  V.  Pacific  Mail  S.  S.  Co.,  50 
Barb.  280  (1867);  Kennedy  v.  Chicago, 
etc.  R.  R.,  14  Abb.  N.  Cas.  326  (1884); 
People  V.  Mott,  1  How.  Pr.  247  (1845); 
Kelsey  v.  Pfaudler,  etc.  Co.,  3  N.  Y. 
Supp.  723  (1889);  People  v.  Throop,  12 
Wend.  183  (1834).  The  New  York 
statute  in  relation  to  transfer  agents 
in  this  state  of  foreign  corporations 
was  construed  in  People  v.  Lake 
Shore,  etc.  R.  R,  11  Hun,  1  (1877); 
aff'd  sub  nom.  Re  Sage,  70  N.  Y.  220; 
People  V.  Northern  Pacific  R.  R,  50 
N.  Y.  Super.  Ct.  456  (1884);  Kennedy 
V.  Chicago,  etc.  R  R,  14  Abb.  N.  Cas. 
326  (1884);  People  v.  U.  S.  etc.  Co.,  20 
Abb.  N.  Cas.  192  (1888);  People  v. 
Paton,  20  Abb.  N.  Cas.  195  (1887);  Ee 
Commerford  v.  "William  J.  Johnston 
Co.,  N.  Y.  L.  J.,  Oct.  7, 1800;  Ei-vin  v. 
Oregon  R'y,  etc.  Co.,  22  Hun,  566 
(1880).  For  New  Jersey,  see  Revision 
of  1877,  p.  183,  §  36;  Huylar  v.  Cragin 
Cattle  Co.,  40  N.  J.  Eq.  392  (1885) ;  S.  C, 
7  Atl.  Rep.  521  (1887).  Under  the  stat- 
utes of  New  Jersey  the  court  will 
order  the  books  of  the  company  to  be 
brought  within  the  state  on  the  peti- 
tion of  the  president  and  a  director. 
A  person  having  a  right  to  exairune 
the  books  of  the  company  may  do  so 
through  an  attorney.  It  is  immate- 
rial what  the  motive  of  the  applicant 


may  be.  Mitchell  v.  Rubber  Reclaim- 
ing Co.,  24  AtL  Rep.  407  (N.  J.,  1892). 
As  to  the  hvw  in  Connecticut,  see 
Pratt  V.  Meriden  Cutlery  Co.,  35  Conn. 
86  (1868).  See,  in  general,  Cain  r.  Pul- 
len,  34  La.  Ann.  511  (1882).  A  delay 
of  one  day  in  allowing  the  inspection, 
owing  to  the  absence  of  the  person 
having  charge  of  the  books,  does  not 
cavise  the  penalty  to  attach.  Kelsey 
V.  Pfaudler,  etc.  Co.,  41  IIun,£0  (1886). 
The  statutory  right  of  stockholders 
in  a  New  York  corporation  to  exam- 
ine certain  books  does  not  take  away 
the  common-law  right  of  the  stock- 
holders to  examine  the  books  and 
papers  for  a  proper  purpose  and  to 
have  a  mandamus  to  that  efifect.  Re 
Application  of  Stein  way,  31  N.  Y. 
App.  Div.  70  (1898). 

2  Ohio  Rev.  Stat.  (1886),  §  3312;  CaL 
Civ.  Code,  §g  377,  378;  Penal  Code, 
565;  R  L  Pub.  St.,  ch.  153,  §  21,  and 
ch.  158,  §  24  (1882J;  Midi.  Gen.  Stat. 
§  3173,  for  banks.  See  also  Colo.  Gen. 
Stat.  (1882),  §  249;  Mo.  Rev.  Stat. 
(1879),  §§  720,  721;  Vermont  R.  Laws 
(1880),  §§  3294, 3295;  Mass.  1860,  ch.  68, 
§  10;  111.  Rev.  Stat.  (1874),  ch.  32,  §  13. 
The  pleading  in  a  cause  of  action 
arising  under  a  statute  herein  must 
clearly  bring  the  case  within  the 
statute.  Lewis  v.  Brainerd,  53  Vt. 
510  (1881).  The  purpose  of  tlie  in- 
spection need  not  be  stated  to  the 
officer.    That  the  officer  had  notice 


3  See  §  514,  supra. 
960 


CH.  XXX.] 


INSPECTION    OF    COKPOKATE    BOOKS. 


[§  519. 


quently  the  charter  itself  states  that  the  stockhokler  shall  have 
certain  rights  of  inspection.  In  England  the  Companies  Act 
regulates  specifically  the  stockholders'  right  of  inspection,  and 
provides  for  a  committee  of  investigation  in  behalf  of  the  stock- 
holders whenever  an  investigation  is  desired  by  tliein.^ 

§  519.  Orders  to  corporaiion  to  allow  inspection  —  Sulpa^na 
duces  tecum  — Bill  o/^/i.scoi-crj/.- An  inspection  of  corporate 
records  is  often  desired  in  connection  with  an  action  which  is 
pending  in  the  courts,  iuid  it  has  been  the  practice  of  the  courts 
to  grant  applications  for  this  purpose.^    The  order  to  allow  an 


of  plaintiflf's  stockholdership  mast  be 
allegeiL  'Williams  v.  College  Cornor, 
etc.  Co.,  45  Ind.  170  (1873).  Cf.  Queen 
V.  Grand  Canal,  1  Ir.  L.  R-  337  (lb30). 
The  common-law  right  of  inspection 
remains,  although  a  si^ecial  statutory 
right  is  also  given.  Peojjlo  r.  I^ike 
Shore,  etc.  R.  K..  11  Hun,  1  (IS77). 

1  25  &  20  Vict,  c.  89,  Table  A.    In 
England,  \mder  a  statute  allowing  a 
Btockholder  to  iiii-iKJCt  the  register  of 
stockholders,  etc.,  an  injunction  lies 
to  restrain  coriK)rate  oflicers  from  re- 
fusing this  right     UoUand  v.  Dick- 
son, L.  R.  37  Ch.  D.  009   (1888).     A 
company  which  by  statute  is  bound 
to  allow  an  inspection  of  the  regi.sr 
ter  must  allow  a  iiarty  tQ  take  copies 
of  the  same,  and  an  injunction  lies  in 
case  of  refusal    Nelson    v.   Anglo- 
American,  etc.  Co.,  [18971  1  Ch-  130. 
A  stockholder  has  the  right  to  make 
a  copy  of  cori>orate  records  which  he 
is  examining.    Boord  v.  African,  etc. 
Co.,  77  L.  T.  Rep.  553  (1897).    Under 
the  English  statute  a    stockliolder 
may  inspect  the  transfer  book  and 
take  copies,  even  though  he  is  acting 
in  the  interest  of  a  rival  company. 
Mutter  t'.  Ea.stem,  etc.  Ry.  L.  R.  38 
CIl  D.  92  (1888).  A  stockholder  suing 
to  set  aside  a  fraudulent  contract 
may  have  inspection  even  of  privi- 
leged matters  between  the  company 
and  its  attorney.   Gouraud  v.  Edison, 
eta  Co.,  59  L.  T.  Rep.  813  (1888). 

»  The  evidence  sought  must  be  di- 
rectly material  to  the  causa    Rex  r. 


Ilostmen,  2  Stni.  1223  (1745);  Rex  v. 
Babb,  3  T.  R.  579  (1790j;  Mayor  of 
Soutliampton  v.  Graves,  8  T.  R.  590 
(1800),  holding  that  a  stranger  has  no 
more  right  to  have  an  inspection 
here  than  in  a  case  where  he  sues 
a  copartnership.  See  Central  Nat 
Bank  r.  Wiutc,  37  N.  Y.  Super.  Ct 
297  (1874),  holding  that  in  New  York 
the  insixictiou  is  proi)er  if  tiie  evi- 
dence is  material  and  cannot  other- 
wise be  obtained;  Clinch  v.  Financial 
Corp.,  L.  R.  2  Eq.  271  (1800),  where  a 
director  was  compelled  to  produca 
In  the  federal  courts  an  in.spection 
will  not  be  granted  in  order  to  frame 
a  complaint  Paine  v.  Warren,  33 
Fed.  Rep.  357  (1888). 

In  a  bill  alleging  fraud  on  the  part 
of  the  directors,  whereby  complain- 
ant a  stockholder,  has  been  injured, 
tlie  latter  may  obtain  such  insixjc- 
tion.  Walburn  v.  Ingilby,  1  MyL  & 
K  01  (1833).  See  Bassford  v.  Blakes- 
ley,  0  Beav.  131  (1842).  On  a  verilied 
petition  by  a  single  shareholder  stat- 
ing that  a  mine  owned  by  the  com- 
pany is  being  worked  at  a  loss,  an 
inspection  of  the  company's  books 
will  be  granted.  Re  Wast  Devon, 
eta  Mine,  L.  R.  27  CIl  D.  100  (1884). 
In  a  suit  to  hold  the  directors  of  a 
life  insurance  company  jKirsonally 
rasponsible  for  large  losses  alleged 
to  have  been  caused  by  moneys  im- 
properly paid  on  policies,  an  inspec- 
tion has  been  allowed,  although 
l.laintifT  was  said  to  liave  but  a  trir 


61 


001 


§  510.] 


INSPECTION  OF  COKPOKATE  BOOKS. 


[cii. 


XXX. 


inspection  may  be  made  at  any  stage  of  the  action.  A  stock- 
holder has  this  right  to  aid  him  in  suits  with  strangers,  and  of 
course  his  right  herein  is  more  extensive  than  the  rights  of  the 
other  party  to  the  action.    In  fact,  a  person  who  is  not  a  stock- 


fling  interest  in  the  company  and 
was  desirous  of  injuring  it,  and  liad 
published  prejudicial  statements  in 
regard  to  the  matter.  Williams  v. 
Prince  of  Wales  Ins.  Co.,  23  Beav.  338 
(1857).  Where  a  company  was  being 
wound  up,  an  application  on  behalf 
of  twenty-four  out  of  eight  hundred 
and  fifty-six  shareholders,  who  had 
associated  themselves  together  for 
an  investigation  into  the  company's 
affairs,  was  allowed,  with  permission 
to  employ  an  accountant  to  carry  on 
the  examination  of  the  books.  Joint- 
stock  Discoimt  Co.'s  Case,  36  L.  J. 
Eq.  150  (18G7).  See  Emma  Silver 
Min.  Co.'s  Case,  L.  R  10  Ch.  App. 
194  (1875) ;  People  v.  Lake  Shore,  etc 
R.  R,  11  Hun,  1  (1877);  70  N.  Y.  220; 
Ex  parte  Buclian,  3G  L.  J.  (Ch.)  150 
(18G6).  An  inspection  will  not  be 
granted  for  the  purpose  of  fishing 
out  a  defense  to  a  suit.  Birmingham, 
etc.  R'y  V.  White,  1  Q.  B.  282  (1841); 
Imperial  Gas  Co.  v.  Clarke,  7  Bing.  95 
(1830).  See  Hoyt  v.  American  Exch. 
Bank,  1  Duer,  652  (1853);  Shoe  & 
Leather  Assoc,  v.  Bailey,  49  N.  Y. 
Super.  Ct.  385  (1883).  Nor  to  furnish 
materials  to  the  other  side  for  a  new 
trial.  Pratt  v.  Goswell,  9  C.  B.  (N.  S.) 
706  (1861).  Nor  to  ascertain  whether 
petitioner  might  better  accept,  with 
the  other  shareholders,  what  was 
offered  her  for  her  holding  in  an  old 
company,  which  was  being  wound 
up,  instead  of  proceeding  with  an  ar- 
bitration. Re  Glamorganshire  Bank- 
ing Co.,  L.  R  28  Ch.  D.  620  (1884). 
Nor  to  establish  a  justification  in 
an  action  against  the  petitioner  for 
libel,  imputing  insolvency  to  the 
company.  Metropolitan,  etc.  Co.  v. 
Hawkins,  4  H.  &  N.  146  (1859).  See 
Finlay  v.  Lindsay,  7  Ir.  L.  R  (N.  S.)  1 


(1857);  Collins  r.  Yates,  27  L.  J.  (Exch.) 
150  (1858);  Opdyke  v.  IMarble,  44  Barb. 
64  (1864).  Nor  to  examine  all  the 
books  of  the  company  for  fifty  years 
back,  because  petitioner  alleges  tliat 
he  is  dissatisfied  with  the  manage- 
ment of  the  company  and  with  the 
accounts,  besides  other  grounds.  Re- 
gina  V.  Grand  Canal,  1  Ir.  L.  R  337 
(1839),  Nor  where  the  petition  does 
not  specify  tlie  particular  books 
asked  for,  nor  the  object  of  the  peti- 
tioner in  making  the  application  to 
the  oflicers  and  to  the  court,  Regina 
V.  London,  etc.  Docks  Co.,  44  L.  J. 
(Q.  B.)  4  (1874).  See  Hunt  v.  Hewitt, 
7  Exch.  236  (1852);  Pepper  v.  Cham- 
bers, 7  Exch.  226  (1852) ;  New  England 
Iron  Co.  V.  New  York  Loan,  etc.  Co., 
55  How.  Pr.  351  (1878);  Central,  etc. 
R  R  u  Twenty-third  St.  R'y,  53  How. 
Pr.  45  (1877);  Forsyth  Comm'rs  v. 
Lemly,  85  N.  C.  341  (1881);  Walker  v. 
Granite  Bank,  44  Barb.  39  (1865).  The 
court  may  direct  the  manner  of  the 
examination.  Williams  v.  Prince  of 
Wales,  etc.  Co.,  23  Beav.  338  (1857). 

An  appeal  may  be  taken  from  an 
order  granting  a  pai-ty  leave  to  in- 
sjiect  and  examine  the  books  of  a  cor- 
poration, the  ajipellant.  Thompson 
V.  Erie  R'y,  9  Abb.  Pr.  (N.  S.)  212 
(1870);  Lancashire,  etc.  Co.  v.  Great- 
orex,  14  L.  T.  Rep.  290  (1866);  People 
V.  Kent  County  Judge,  38  Mich.  351 
(1878);  Forsyth  Comm'rs  v.  Lemly, 
85  N.  C.  341  (1881).  See  Saxby  v. 
Easterbrook,  L.  R  7  Exch.  207  (1872); 
Bustros  V.  White,  L.  R  1  Q.  B.  D.  423 
(1876);  Clyde  v.  Rogers,  24  Hun,  145 
(1881);  McCargo  v.  Crutcher,  27  Ala. 
171  (1855);  Sage's  Case,  70  N.  Y.  221 
(1877).  As  to  the  costs  of  an  inspec- 
tion, see  Hill  v.  Philp,  7  Exch,  233 
(1852);  Davey  v.  Pemberton,  11  C,  B. 


962 


CH.  XXX.] 


INSrECTION   OF    COKPOEATE    EOOKS. 


[§  519. 


holder  has  no  more  right  to  an  inspection  of  the  corporate  books 
than  he  has  to  inspect  the  books  of  a  copartnership.  Tiiis  is 
the  rule  even  though  he  is  suing  or  being  sued  by  a  stockholder.* 
But  in  a  suit  against  stockholders  for  malicious  prosecution,  they 
may  be  required  by  mandamus  to  produce  certain  books  of  the 
corporation  for  the  inspection  of  the  plaintiff.^  If  a  stock- 
holder, and  sometimes  a  third  person,  is  suing  or  being  sued  by 
a  corporation,  he  is  entitled  to  the  usual  right  of  a  notice  to 
produce  docmnents,'  or  to  a  discovery  by  an  order,^  especially 


(N.  S.)  628  (1862);  Gardner  v.  Danffcr- 
lield,  5  Beav.  385  (1842).  Stockholders 
obtaining  inspection  may  be  ordered 
not  to  disclose  the  information  re- 
ceived. Ex  parte  Buchan,  36  L.  J. 
(Ch.)  150  (1860);  Williams  r.  Prince  of 
Wales,  etc.  Co.,  23  Beav.  338  (1857). 
May  examine  through  an  attorney. 
Williams  v.  Prince  of  Wales,  etc.  Co., 
23  Beav.  338  (1857).  A  professional 
accountant  may  be  employed.  Bon- 
nardet  v.  Taylor,  IJ.  &  IL  383  (18G1); 
1  Greenl.  Ev.,  i^  474.  An  inspection 
of  the  stock-ledger  was  allowed  in 
People  V.  Pacific  Mail  a  S.  Co.,  50 
Barb.  280  (1867).  So  also  of  the 
discount- book.  Cockbum  v.  Union 
Bank,  13  La.  Ann.  289  (1858);  People 
r.  Throop,  12  Wend.  183  (1834).  So 
also  of  the  by-laws.  Harrison  v.  Wil- 
liams, 3  B.  &  C.  1G2  (1824);  Reg.  v.  Sad- 
dlers' Co.,  10  W.  R  87  (1861).  See 
also  Walbum  v.  Ingilby.  1  Myl.  &  Iv. 
61  (1833),  where  the  order  was  to  a 
third  person  liaving  charge  of  the 
books.  "  The  courts  of  common  law 
may  also  make  an  order  for  the  in- 
spection of  writings  in  the  posses- 
sion of  one  party  to  a  suit  in  favor  of 
tiie  other."  1  GreenL  Ev.,  §  559.  An 
article  of  the  company  taking  away 
the  right  of  inspection  does  not  pre- 
vent a  nile  issuing  requiring  its  al- 
lowance in  pending  litigation.  Hall 
V.  Connell,  3  Y.  &  C.  (Exch.)  707  (1840). 
The  rule  stated  in  the  text  above 
applies  to  joint-stock  companies. 
Woods  V.  De  Figaniere,  1  Rob.  (N.  Y.) 
631  (1863).     In  the  federal  courts  the 


right  is  statutory.  U.  S.  Rev.  Stat, 
§  724.  The  opinions  of  counsel  in  the 
case  of  a  fraudulent  transaction  are 
not  priviiegecL  Williams  v.  Quebrada 
R'y,  etc.  Co.,  [1895]  2  Ch.  751. 

'  Strangers  have  no  more  right  to 
demand  inspection  of  the  books  of 
a  corjKiration  during  litigation  in 
which  the  corporation  is  not  inter- 
e.sted  than  they  have  to  demand  a 
similar  right  of  any  other  person. 
Mayor  of  Southampton  v.  Graves, 
8  T.  R.  590  (1800),  overruling  earlier 
cases.  See  also  Opdyke  v.  Jklarble, 
44  Barb.  04  (1864);  Morgan  v.  Morgan, 
16  Abb.  Pr.  (N.  S.)  291  (1874).  A  cor- 
poration will  not  be  compelled  to 
ojien  its  records  for  the  purposes  of  a 
litigation  in  which  it  is  not  a  party. 
Henry  v.  Travelers'  Ins.  Co.,  35  Fed. 
Rep.  15  (1888). 

-  Eddy  V.  Bay  Circuit  Judge,  72  N. 
W.  Rep.  890  (Mich.,  1897). 

'  See  Wait,  Insolv.  Corp.,  g  519.  See 
also  §  714,  infra. 

*  Rex  V.  Travannion,  2  Chitty,  366 
(1818);  Swansea  Vale  R'y  v.  Budd, 
L.  R.  2  Eq.  274  (1806);  Macintosh  v. 
Flint,  etc.  R  R.,  1  Ry  &  Corp.  L.  J. 
384  (Mich.,  1887),  a  stockholders  ca.se. 
An  order  to  allow  examination  of 
the  corporate  records  was  .gi*anted 
in  Kirkpatrick  v.  Pope  Mfg.  Co.,  61 
Fed.  Rep.  46  (1894),  where  the  defend- 
ant  companj'  said  that  it  had  not  vio- 
lated a  contract,  but  that  its  succes- 
sor was  liable.  Where  a  stockholder 
files  a  bill  to  obtain  an  accounting, 
and  cliarges  misappropriation,  and 


903 


§  519.] 


INSPECTION  OF  COKPOKATE  BOOKS. 


[cn. 


XXX. 


in  England  and  New  York  state,  or  by  compelling  the  corpo- 
rate officers  to  swear  to  the  pleading  of  the  corporation,  where 

makes  a  motion  that  he  be  allowed  to  in  the  company's  books  having  ref- 
exaniine  the  books,  the  court  will  wait 
until  the  corporation  jjleads  or  an- 
swers before  granting  the  motion, 
lianger  v.  Ciiamiiion,  etc.  Co.,  51  Fed. 
Kep.  01  (1892;.  A  corporation  may  ap- 
peal from  an  order  for  the  examina- 
tion of  one  of  its  officers.  Sherman  u 
Beacon,  etc.  Co.,  58  Hun,  143  (1890). 
Under  the  statutory  practice  in 
Ivhode  Island  the  court  may  order 
tlie  production  of  the  record  book  of 
the  corporation  in  court  or  for  an 
inspection.  Arnold  v.  Pawtuxet,  etc. 
Co.,  18  R.  I.  189  (lb9;j).  By  examina- 
tion before  trial  plaintiff  may  ascer- 
tain whether  defendants  are  proper 
defendants  or  whether  they  are  a  cor- 
j)oration.  Sweeney  v.  Sturgis,  24  Hun, 
1G2  (1881).  Where  persons  sued  as 
partners  deny  the  partnership,  the 
X)laiiitifr  may  have  an  examination 
before  trial  in  order  to  ascertain 
what  the  company  is  and  of  whom  it 
consists.  Clark  v.  Wilcklow,  75  Hun, 
290  (1894).  The  affidavit  to  obtain 
the  order  must  show  that  the  infor- 
mation sought  is  essential.  Imperial 
Cas  Co.  V.  Clarke,  7  Bing.  95  (18o0); 

AVilliams  v.  Savage  Mfg.  Co.,  3  Md. 

Ch.  418,  428  (1851).    The  officers  may 

be  oi'ally  examined  by  the  court  with 

reference  to  wliere  the  books  are. 

Lacharme  v.  Quartz  Rock,  etc.  Min. 

Co.,  1  H.  &  C.  134  (18G2).   They  may  be 

required  to  make  affidavits.    Ranger 

V.  Great  Western  R'y,  4  De  G.  &  J. 

74  (1859);  lie  Burton,  31  L.  J.  (Q.  B.) 

03  (1801).    Such  inspections  may  be 

through  agents.     Bonnardet  v.  Tay- 
lor, 1  J.  &  H.  383  (1801);  Drapers. 

Manchester,  etc.  R'y,  7  Jur.  (N.  S.) 

pt.   1,  80  (1801).    But  see  Re  West 

Devon,  etc.  Mine,  L.  R.  27  Cli.  D.  106 

(1884);  Bank  of  Utica  v.  Hillard,  0 

Cow.  02  (1830).     In  an  action  against 

a  corporation  the  plaintiff  is  entitled 

to  inspect  all  the  minutes  and  entries 


crence  to  the  subject  in  litigation. 
Hill  V.  Great  Western  R'y,  10  C.  B. 
(N.  S.)  148  (1801);  Harrison  v.  Wil- 
liams, 3  B.  &  C.  103  (183 1);  Re  Burton, 
31  L.  J.  (Q.  B.)  03  (1801);  Sinclair  v. 
Gray,  9  Fla.  71  (1800).  See  Hill  v. 
Manchester,  etc.  Co.,  5  B.  &  Ad.  800 
(1833);  Rex  v.  Buckingham,  8  B.  &  C. 
375  (1838);  Imperial  Gas  Co.  v.  Clarke, 
7  Bing.  95  (1830).  It  includes  the 
agent,  solicitor,  counsel,  or  expert  of 
the  party  asking  the  inspection. 
Hide  V.  Holmes,  3  MoIIoy,  373  (1835); 
Blair  v.  Massey,  I.  R.  5  Eq.  033  (1871); 
Joint-stock  Discount  Co.'s  Case,  36  L. 
J.  (Eq.)  150  (1807);  Bonnardet  v.  Tay- 
lor, 1  Johns.  &  H.  383  (1801);  Attorney- 
General  V.  Whitwood  Local  Board,  40 
L.  J.  (Cli.)  593  (1871);  Lindsay  v.  Glad- 
stone, L.  R.  9  Eq.  133  (1809);  Williams 
V.  I'rince  of  Wales  Ins.  Co.,  23  Beav. 
338  (1857);  State  v.  Bienville,  etc.  Co., 
28  La.  Ann.  204  (1870);  Ballin  v.  Ferst, 
55  Ga.  540  (1875).  But  see  Bartley  v. 
Bartley,  1  Drew.  233  (1853);  Summer- 
field  V.  Pritchard,  17  Beav.  9  (1853); 
Draper  v.  Manchester,  etc.  R.  R,  3 
De  G.,  F.  &  J.  23  (1801);  Re  West 
Devon,  etc.  Mine,  L.  R.  27  Ch.  D.  100 
(1884).  And  a  shareholder  who  is 
also  the  solicitor  of  opposing  litigants 
is  nevertheless  so  entitled.  Reg.  v. 
Wilts,  etc.  Canal  Nav.  Co.,  29  L.  T. 
Rep.  923  (1874);  Kingsford  v.  Great 
Western  R'y,  16  C.  B.  (N.  S.)  701 
(1804).  But  see  Hutt's  Case.  7  Dowl. 
Pr.  090  (1839);  Herschfeld  u  Clarke, 
11  Excli.  713  (1856).  See  also  notes 
supra.  The  manner  of  inspection 
must  be  gentlemanly.  Williams  v. 
Prince  of  Wales,  etc.  Co.,  23  Beav. 
338  (1857).  The  plaintiff  may  have 
inspection  of  corporate  minutes  in  a 
suit  by  a  superintendent  against  the 
corporation.  Hill  v.  Great  Western 
R'y,  10  C.  B.  (N.  S.)  148  (1801).  Or  in 
;i  suit  by  a  claimant  of  office.    Re 


964 


[§^ 


10. 


ClI.  XXX.]  I>'SrECTION    OF    COKPOKATE    BOOKS. 

the  facts  souglit  for  are  brought  out  by  that  pleading  ^  or  by  a 
bill  of  discovery .- 


Burton.  31  L.  J.  (Q.  B.)  G3  (ISGl.    See 
also  §  714,  infra.    An  order  will  not 
he  granted  for  the  purpose  of  fish- 
inc;  out  a  defense.    Birmingliani,  etc. 
R-y  t'.  White,  1  Q.  B.  ^82  (1S4U    See 
also  Credit  Ca  v.  Webster,  53  L.  T. 
Rep.  419  (1883^     In  New  York  the 
right  of  inspection  by  order  is  regu- 
lated by  statute.    Code  Civ.  Proc., 
|;^  803-809.   See  Boorman  v.  Atlantic, 
etc.  R.  R.,  78  N.  Y.  509  (1879);  Ervin 
r.  Oregon  R'y,  etc  Co.,  22  Hun,  566 
(1880),  holding  that  where  the  books 
are  in  use  only  sworn  copies  can  be 
required;    Johnson  v.   Consolidated, 
etc  Min.  Cc,  3  Abb.  Pr.  (N.  S.)  413 
(1867);  Walker  r.  Granite  Bank,  19 
Abb.   Pr.   Ill   (1865);    Thompson    r. 
Erie  R'y,  9  Abb.  Pr.  (N.  &)  230  (1870); 
Fenlon  v.  Deuipsey,  10  N.  Y.  St.  Rep. 
733  (1887);  People  v.  U.  S.  Mercantile 
Rep.  Co.,  20  Abb.  N.  Cas  192  (1888); 
Shipherd  r.  Cohen,  N.  Y.  D.  Reg.,  Jan. 
26.  1888.    So  also  is  the  right  to  sub- 
ptfna  a  corix)ration.    Code  Civ.  Pnx?., 
$;;5  8(^.  869,  872,  873.    See  New  York, 
ttc  R.  R.  V.  Carhart.  36  Uim,  288 
a885);  Reichman  r.  Manhattan  Co., 
26  Ilun,  433  (1882);  ch.  536,  L.  1880; 
Fenlon  t*.  Dempsey.50  Hun.  131  (18S8); 
Russell  V.  Manhattan  Ry,  N.  Y.  D. 
Reg.,  Dec  8,  1887;  People  r.  Mutual, 
etc!  Ca,  74  N.  Y.  434  (1878);  Wain- 
wright  V.  Tiffiny,  13  N.  Y'.  Civ.  Pra 
222  U887).    The  transfer-book  may  be 
thus  examined-    See  Fenlon  r.  Demp- 
sey.  50  nun,  131  (1888). 

» Formerly  in  equity  s\xits  it  was 
the  practice  to  make  as  co-defend- 
ants with  the  corporation  such  offi- 
cers as  could  answer  under  oath  such 
matters  as  the  complainant  dtsired 
to  know.  See  g  738.  infra;  Glasscott 
r.  Copper-Miners,  11  Sim-  305  (1840); 
Re  Barneds  Bkg.  Co.,  L.  R.  2  Cli- 
Appi  3,50  (1867);  French  v.  First  Nat. 
Bank,  7  Ben.  488  (1874);  S.  C,  9  Fed. 
Caa.  786.    This  rule  prevails  because 


the  corporation  itself  cannot  be  con- 
victed of  perjury.    McKim  v.  Odom, 
3  Bland  Ch-   (Md.)  407,  420  (1828); 
W^ych  V.  Meal,  3  P.  Wms.  311  (1734); 
Bevans  v.  Dingman's  Choice  Tm-up., 
10  Pa.  St  174  (1849).    The  corpora- 
tion itself  may  be  compelled  to  an- 
swer fully.    See  Gamewell,  etc.  Co. 
V.  New  York,  31  Feii  Rep.  312  (1887), 
citing  cases.    A  corix)rate  officer  may 
be  joined  with  the  corixjration  as  a 
defendant  to  obtain  from  him  a  dis- 
covery.    Lord  Eldon  said  as  to  this 
rule:  "It  originated  with  Lord  Tal- 
bot, who  reasoned  thus  upon  it :  that 
you  cannot  have  a  satisfactory  an- 
swer from  a  corporation,  therefore 
you  make  the  secretary  a  party,  and 
get  from  him  the  discovery  you  can- 
not be  sure  of  having  from  them; 
and  it  is  added  that  the  answer  of 
the    secretary  may  enable   you  to 
get  better  information."  Continental 
Nat  Bank  v.  Ileilman,  66  Fed-  Reix 
184  (1895). 

»  A  bill  lies  in  equity  to  compel  a 
corporation  to  discover,  in  aid  of  a 
suit  at  law,  for  damages  for  infringe- 
ment of  patent  Colgate  v.  Com- 
pagnie  Fran^aise,  23  Fed.  Rep.  S3 
(1885).  See  also  as  to  a  bill  of  dis- 
covery, McComb  r.  Chicago,  etc.  R. 
R,  19'Blatchf.  69  (1881);  Costa  Rica 
r.  Erlanger,  L.  R.  1  Ch.  D.  171  (1875); 
Glasscott  V.  Copper-Miners,  11  Sim- 
305  (1840);  Moodalay  v.  Morton,  1 
Bra  C.  C.  469  (1785);  Colgate  r.  Coni- 
pagnie  Fran(;aise,  23  Fed.  Rep.  S3 
(1885);  Stettauer  r.  Now  York,  etc 
Ca,  42  N.  J.  Eq.  46  (1886);  French  r. 
First  Nat  Bank,  7  Ben-  4SS  (1874); 
&  C,  9  Fed-  Cas.  786.  But  a  bill  of 
discovery  wiE  not  lie  against  one 
who  is  merely  a  witness.  Fenton  r. 
Hughes,  7  Yes.  Jr.  287  (1802);  Dum- 
mer  v.  Chippenham,  14  Ves.  Jr.  245 
(1807).  As  to  the  dilTerence  between 
a  bill  of  discovery  and  other  bills,  see 


905 


§  519.] 


INSPECTION  OF  COKPORATE  BOOKS. 


[cn.  XXX. 


A  bill  of  discovery  may  be  brought  to  discover  tlic  names  of 
stockholders  in  order  to  enforce  their  statutory  liability.'  Some- 
times a  subpoena  duces  tecum  may  be  issued  in  behalf  of  a  stock- 
holder or  of  a  third  person.' 

Most  of  the  states  have  statutes  regulating  tliis  subject,  and 
these  statutes  frequently  displace  the  common-law  procedure. 


Mclntyxe  v.  Union  College,  6  Paige, 
239  (1837);  Many  v.  Beekman  Iron 
Co.,  9  Paige,  188  (1841).  Wliere  dis- 
covery is  sought  from  an  officer  he 
should  be  made  a  party  defendant. 
Virginia,  etc.  Co.  v.  Hale,  93  Ala. 
542  (1890).  A  discoveiy  will  not  be 
granted  wliere  there  is  no  allegation 
that  information  is  refused,  or  that 
the  party  cannot  examine  the  books, 
or  that  a  mandamus  was  inadequata 
Wolfe  V.  Underwood,  9G  Ala.  329 
(1892). 

1  Post  V.  Toledo,  etc.  R  R.,  144  Mass. 
841  (1887). 

2  New  York  Code  of  C.  P.,  §  868. 
The  right  of  a  stockholder  to  com- 
pel a  corporation  to  produce  in  court 
the  corporate  records  has  been  the 
subject  of  some  controversy.  In  New 
York,  under  the  old  Code,  it  was 
held  that  a  subpoena  duces  tecum  will 
not  always  lie  herein,  but  that  an 
order  to  the  corporation  to  allow  an 


inspection  is  the  proper  remedy.  La 
Farge  v.  La  Farge  F.  Ins.  Co.,  14  IIow. 
Pr.  20  (1857);  Central  Nat.  Bank  r. 
Wiiite,  37  N.  Y.  Super.  Ct.  297  (1874). 
In  Iowa  a  corporate  sen-ant  wiio  is 
required  by  a  subpcena  to  produce 
the  coi-porate  book.s,  which  show  that 
the  corporation  has  violated  tlio 
liquor  laws,  need  not  do  so  if  the 
books  are  not  in  his  possession.  But 
otherwise  he  is  guilty  of  contempt 
U.  S.  Express  Co.  v.  Henderson,  G9 
Iowa,  40  (188G).  See  also  preceding 
notes.  The  president  may  be  com- 
pelled by  subj)oena  duces  tecum  to 
produce  drawings  owned  by  the  com- 
pany in  a  suit  in  which  it  is  a  pivrty. 
Johnson,  eta  Co.  v.  North  Branch 
Steel  Co.,  48  Fed.  Rep.  195  (1891). 
Stock-exchange  books,  as  evidence, 
must  be  proved  by  the  secretary. 
Terry  v.  Birmingham  Nat.  Bank,  9.'^ 
Ala.  599  (1891). 


966 


CHAPTER  XXXI. 


UENS  OF  THE  CORPORATION  ON  STOCK  FOR  THE  STOCKHOLD- 
ERS DEBTS  TO  THE  CORPORATION. 


§  520,  521.  No  lien  at  common  law. 
523-524.  A  lien  may  be  created  by 
statute,  by  charter,  or  jxjssi- 
bly  by  by-law  or  contract  — 
Notice  of  the  lien. 
525.  What  plira.sos  in  cliarters  or 
Btatutea  will  or  will  not  au- 
thorize the  corporation  to 
create  or  enforce  a  lien  on 
stock. 
626.  The   lien,   wlien    e.stabli.she<l, 
covers  all  th<;  stock holders's 
shares  and  dividends. 


g  527.  The  lien  protects  the  corpora- 
tion as  to  all  the  debts  due 
to  it  from  the  sharcliolders. 
52a  RiRht  of  lien  as  against  miscel- 
laneous parties. 

The  lien  can  be  enforced  for 
the  benefit  of  the  corpora- 
tion only. 

Methods  o"f  enforcing  the  lien. 

The  cori>oration  may  waive  its 
lien. 

The  lien  as  affected  by  trans- 
fers and  notica 
533.  The    lien    on    national-bank 
stock- 


529. 


530. 
531. 

532. 


^§  520,  521.  No  Urn  at  common  /«?/•.— Corporations,  both  ia 
this  country  and  in  England,  frequently  possess  and  exercise  a 
lien  on  a  shareholder's  stock  for  debts  due  from  that  share- 
holder to  the  corporation.  In  this  chapter  it  is  ])roposed  to 
consider  the  origin  of  the  lien;  the  extent  to  which  it  may  be 
exercised  and  enforced;  the  waiver  of  it  by  the  corporation; 
and  its  effect  generally  upon  the  transfer  of  shares. 

It  is  clear  that  at  common  law  a  corporation  has  no  lien  upon 
the  shares  of  its  stockholders  for  debts  due  from  them  to  the 
company.^    The  policy  of  the  common  law  has  always  been  to 


iGemmell  v.  Davis,  75  Md.  546 
(1892);  Massachusetts  Iron  Co.  v. 
Hooper,  61  ilass.  183  (1851);  Bates  v. 
New  York  Ins.  Co.,  3  Johns.  Cas.  238 
(1802);  Steamship  Dock  C^.  r.  Heron, 
52  Pa.  St  2^0  (ISCG);  Merchants'  Bank 
V.  Shouse,  102  Pa.  St.  488  (18S3);  Fitz- 
hugh  r.  Bank  of  Shepherdsville,  3 
T.  B.  Mon.  (Ky.)  126  (1825);  Williams 
r.  Lowe,  4  Neb.  382,  398  (1876);  Dana 
V.  Brown,  1  J.  J.  Marsh.  (Ky.)  304 
(1829);  Hart  r.  State  Bank,  2  Dev.  Eq. 
(N.  C.)  Ill  (1831);  Farmers',  etc.  Bank 
V.  Wasson,  48  Iowa,  336  (1878);  People 


V.  Crockett,  9  CaL  112  (1858);  Sar- 
gent V.  Franklin  Ins.  Ck).,  25  Slass. 
90  (1829);  Neale  v.  Janney,  2  Cranch 
C.  C.  188  (1819);  S.  C,  17  Fed.  Cas. 
1306;  McMurrich  v.  Bond  Head  Har- 
bor Co.,  9  U.  C.  Q.  B.  333  (1852);  Cli.so 
Inv.  Co.  r.  W\isliington  Sav.  Bank,  50 
Pac.  Rep.  575  (Wash..  1897).  Cf.  Wes- 
ton's Case,  K  R.  4  Cli.  20  (18G8).  See 
also  Gibson  v.  Hudson's  Bay  Co.,  MS. 
Rep.  Mick  T.  12  Geo.  I.  (1720);  7  Vin. 
Abr.  (2d  Lond;  ed.)  125;  Pinkett  r. 
Wright,  2  Hare.  120  (1812);  Byrne  r. 
Union  Bank,  9  Rob.  (La.)  433  (1845); 


967 


i22.] 


LIEN    OF   THE    CORPORATION    ON    STOCK. 


[CH. 


XXXI, 


discountenance  secret  liens,  inasmuch  as  they  hinder  trade  and 
restrict  the  safe  and  speedy  transfer  of  property.^  It  is  upon 
this  ground  that  the  courts  refuse  to  enforce  a  lien  upon  stock 
when  such  lien  is  not  created  by  charter  or  by  by-huv.  A 
stocldiolder  has  a  right  to  sell  his  stock  and  have  it  transferred 
on  the  corporate  books,  although  there  are  unpaid  calls  due  on 
the  stock  at  the  time  of  transfer,  and  for  refusal  to  transfer  ho 
may  sue  for  conversion.^  A  trustee  issuing  certificates  to  rep 
resent  an  interest  in  a  reorganized  property  has  no  lien  on  a 
certificate  for  costs  in  a  litigation  over  it.» 

§  522.  A  lien  may  he  crcalcd  hy  statute^  hy  charter,  or  jwf^si- 
lly  hy  hy-law  or  contract  — Notice  of  the  /r«.— Such  a  lien  as 
this  in  favor  of  the  corporation  may  be  created  by  statute,*  by 
charter,*  and  the  weight  of  authority  holds  that  it  may  be 
created  by  by-law. 

"With  respect  to  the  right  of  a  corporation  to  enact  a  by-law 
creating  such  a  lien,  it  is  held  in  many  jurisdictions  that  such  a 
by-law  is  valid  and  binding  upon  all  persons  who  buy  or  trans- 
fer the  shares.*     There  is  nevertheless  strong  authority  for  the 


Hiissey  v.  Manufacturers',  etc.  Bank, 
27  Mass.  414  (1830);  Bryon  v.  Carter, 
22  La.  Ann.  98  (1870).  In  New  York 
the  rule  that  there  is  no  lien  at  com- 
mon law  is  applied  to  banking  cor- 
porations. Bank  of  Attica  v.  IManu- 
facturers',  etc.  Bank,  20  N.  Y.  501 
(1859).  And  to  corporations  formed 
under  the  General  Manufacturing 
Companies  Act.  Driscoll  v.  AVest 
Bradley,  etc.  Co.,  59  N.  Y.  96  (1874). 

1  Quoted  and  approved  in  Boyd  v. 
Eedd,  27  S.  E.  Rep.  35  (N.  C,  1897). 

2  Craig  V.  Hesperia,  etc.  Co.,  113  CaL 
7  (1896). 

3Cassagne  v.  Marvin,  143  N.  Y.  292 
(1894). 

4  Pittsburgh,  etc.  R.  R.  v.  Clarke,  29 
Pa.  St.  146  (1857);  First  Nat.  Bank  v. 
Hartford,  etc.  Ins.  Co.,  45  Conn.  22 
(1877) ;  Presbyterian  Cong.  v.  Carlisle 
Bank,  5  Pa.  St.  345  (1847);  Rogers  v. 
Huntingdon  Bank,  12  Serg.  &  R.  (Pa.) 
77  (1824);  National  Bank  v.  Watson- 
town  Bank,  105  U.  S.  217  (1881). 

5  Union  Bank  v.  Laird,  2  Wheat. 
390  (1817);  Stebbins  v.  Phoenix  F.  Ins. 


Co.,  3  Paige  350  (1832);  Reese  v.  Bank 
of  Commerce,  14  Md.  271  (1859):  Brent 
V.  Bank  of  Washington,  10  Pet.  596 
(1836);  German  Security  Bank  v.  Jef- 
ferson, 10  Bush  (Ky.),  326  (1874);  Ar- 
nold V.  Suffolk  Bank,  27  Barb.  424 
(1857);  Leggett  v.  Bank  of  Sing  Sing, 
24  N.  Y.  283  (1862);  Bank  of  Utica  v. 
Smalley,  2  Cow.  770  (1824);  Farmers' 
Bank  v.  Igleliart,  6  Gill  (Md.),  50 
(1847);  Bohmer  v.  City  Bank,  77  Va, 
445  (1883);  Hodges  v.  Planters'  Bank, 
7  Gill  &  J.  (Md.)  308  (1835);  Sabin  v. 
Bank  of  Woodstock,  21  Vt.  353  (1849) ; 
Cross  V.  Phenix  Bank,  1  R  L  39  (1840); 
St.  Louis,  etc.  Ins.  Co.  v.  Goodfellow, 
9  Mo.  149  (1845);  Mechanics'  Bank  v. 
Merchants'  Bank,  45  Mo.  513  (1870). 

« Knight  V.  Old  Nat.  Bank,  3  Cliff. 
429  (1871);  S.  C,  14  Fed.  Cas.  772;  Mc- 
Dowell V.  Bank  of  Wilmington.  1 
Harr.  (Del.)  27  (1832);  Bank  of  Holly 
Springs  i\  Pinson,  58  Miss.  421  (1880); 
Spurlock  V.  Pacific  R.  R.,  61  Mo.  31^ 
(1875);  Re  Bachman,  12  Nat.  Bankr. 
Reg.  223  (1876);  S.  C,  2  Fed.  Cas.  310; 
People  V.  Crockett,  9  CaL  112  (1858); 


968 


en.  XXXI.]  LIEN    OF   THE   COKPORATION    ON    STOCK. 


[§  522, 


rule  that  such  a  by-law  cannot  create  a  lien  on  the  stock  so  as  to 
Itind  a  lonafide  purchaser,  or  other  person  into  whose  hands 
the  shares  may  come,  to  whom  actual  knowledge  of  the  by-law 
cannot  be  imputed. 

Such  is  the  rule  in  Xew  York,^  Louisiana,^  Massachusetts,' 
Alabama,*  Pennsylvania,'California,*'  Missouri/  Mississippi,*  and, 
it  seems,  in  some  other  states.' 


Penderffast  r.  Bank  of  Stockton,  3 
Sawyer,  108  (1871);  S.  C,  19  Fed.  Cas. 
135;  Lo<jk\vood  v.  Mechanics'  Nat. 
Bank,  9  R,  L  308  (18C9);  Ciinningliam 
V.  Alabama,  etc.  Co.,  4  Ala.  (N.  S.)  6.53 
(18-13);  Geyer  v.  Western  Ins.  Co.,  3 
Pittsb.  41  (1807);  Re  Dunkerson,  4 
Bis.s.  237  (18G8):  S.  C,  8  Fed.  Ca.s.  48; 
Young  V.  Vough,  33  N.  J.  Eq.  32.j 
(1873);  Brent  r.  Bank  of  Wasliinprton, 
10  Pet  MO,  615  (1S30);  Child  r.  Hud- 
son's Bay  Ca,  3  P.  Wnis.  207  (1723); 
Planters',  eta  Co.  r.  Selma  Sav.  Bank, 
63  Ala.  585  (1879);  BinninKham  Trust, 
etc  Co.  V.  E^t  L-'ike  Land  Co.,  101 


Ala.  304  (1893).  Cf.  Heart  v.  State 
Bank,  3  Dev.  Eq.  (N.  C.)  Ill  (1831); 
Farmers',  etc.  Bank  v.  Wasson,  48 
Iowa,  336,  340  (1878).  In  Tuttle  v. 
Walton,  1  Ga.  43  (1840),  it  was  said 
tliat  as  between  the  oorix)ratoi's  them- 
selves such  a  by-law  will  be  held 
valid.  A  by-law  creating  a  lien  ia 
bciialf  of  the  corporation  on  stock  is 
valid  as  against  a  stockholder  and 
any  one  who  purchases  his  stock  with 
notice  that  such  by-law  exists.  John, 
etc  Co.  V.  Woodside,  39  AtL  Rep.  413 
(Md.,  1898). 
1  DriscoU  V.  West  Bradley,  etc.  Co., 


2  Bryon  v.  Carter,  23  I>a.  Ann.  98        '  A  by-law  giving  the  corporation  a 


(1870);  Bitot  v.  Johnson.  33  La.  Ann. 
1286  (1881).  Cf.  New  Orleans,  etc 
AS.SOC  V.  Wiltz,  10  Fed.  Rep.  330  (1881). 
'  In  Nesmith  v.  Washington  Bank, 
23  Mass.  334  (1828),  the  court  doubted 
whetlier  a  by-law  could  under  any 
circumstances  cre;ite  a  lien  on  the 
sliares  as  against  the  creditors  of 
the  share-owner,  but  did  not  decide 
the  point.  In  Sargent  v.  Franklin 
Ins.  Co..  35  Mass.  90  (1829),  there  is 
a  somewhat  decided  ground  taken 
against  the  validity  of  any  by-law 
which  tends  to  limit  the  free  trans- 
fer of  shares.  In  Plymouth  Bank  v. 
Rank  of  Norfolk,  27  Mass.  454  (1830), 
Chief  Justice  Shaw  seems  to  doubt 
the  validity  of  a  by-law  giving  the 
bank  a  lien  on  its  own  stock. 

*  Planters',  etc.  Mut.  Ins.  Co.  v. 
Sol  ma  Sav.  Bank,  63  Ala.  585  (1879). 

*  Steamship  Dock  Co.  v.  Heron,  53 
Pa.  St  380  (1800;;  Merchants' Bank 
r.  Shouse.  102  Pa.  St  488  (1883). 

*  AngUhCalifornian  Bank  i'.  Gran- 
gers' Bank,  63  CaL  359  (1883). 

069 


lien  on  stock  is  not  good  as  against  a 
bona  fide  purchaser  of  the  certificate 
who  ha<l  no  notice  of  the  by-law. 
BrinkerhofF-Farris,  etc.  Co.  v.  Hom& 
Lumber  Co.,  118  Mo.  447  (1893).  So, 
also,  as  to  a  pledgee.  Bank  of  Atclii- 
son  County  v.  Durfee,  118  Mo.  431 
(1893). 

8  Bank  of  Holly  Springs  v.  Pinson, 
58  Miss.  431  (1880). 

9  Carroll  r.  MuUanphy  Sav.  Bank,  8 
Mo.  App.  349  (1880);  Evansville  Nat. 
Bank  v.  Metropolitan  Nat.  Bank,  2 
Biss.  527  (1871);  S.  C,  8  I^cd.  Cas.  891 ; 
Lee  V.  Citizens'  Nat  Bank,  3  Cin. 
Super.  Ct  (Ohio),  398  (1872).  Cf.  N.-alo 
V.  Janney,  3  Cranch  C.  C.  188  (1819); 
S.  C,  17  Fed.  Cas.  13G0.  A  lien  of- the 
corporation  on  stock  is  prevented  by 
a  statutory  provision  that  the  com- 
pany should  not  loan  money  on  the 
seciu-ity  of  its  own  stock.  Nicollet 
Nat  Bank  v.  City  Bank,  38  Minn.  8.> 
(1887).  As  to  national  banks,  see  §  533, 
infra. 


§  523.] 


LIEN    OF   TUE    COKI'OKATIo'n    ON    STOCK.  [CH.  XXil. 


Upon  the  whole  it  may  be  said  that  the  question  whether  a 
corporation  may,  by  by-law,  create  a  lien  in  its  own  favor  upon 
the  shares  of  its  stockholders  for  debts  due  by  them  to  the  cor- 
poration, is  not  settled.  The  wciglit  of  authority  in  this  country 
is  against  the  validity  of  the  by-iii\v,  and  such  would  seem  to 
be  a  result  most  in  accord  with  public  policy. 

§  523.  In  Pennsylvania  it  is  the  statutory  law  that  the  trans- 
fer of  shares  of  stock  in  a  railway  cor})oration  can  be  made  only 
upon  payment  of  any  indebtedness  that  may  exist  on  the  part 
of  the  shareholders  who  seek  to  transfer,  unless  the  lien  is  waived 
by  the  corporation.^  In  New  Hampshire  liens  upon  shares  are 
forbidden  by  statute.* 

When  a  lien  is  expressly  given  to  the  corporation  by  its  char- 
ter or  by  statute,  all  persons  dealing  with  the  corporation  are 
affected  by  it  and  must  take  notice  of  it.'  A  statutory  liei;  need 
not  be  set  out  in  the  certificate  in  order  to  give  notice  to  tho 
transferee.*    And  where  the  lien  is  not  authorized  by  the  char- 

69  N.  Y.  96  (1874);  Bank  of  Attica  v. 
Manufacturers',  etc.  Bank,  20  N.  Y. 
501  (1859);  Rosenback  v.  Salt  Springs 
Nat.  Bank,  53  Barb.  495  (1808);  Conk- 
lin  V.  Second  Nat.  Bank,  53  Barb.  512, 
note  (1868);  S.  C.  aflE'd,  45  N.  Y.  655 
(1871).  In  the  case  last  cited  it  was 
held  that  not  even  where  the  cerLifi- 
cate  of  stock  contained  a  provision 
that  the  stock  was  not  transferable 
until  all  the  liabilities  of  the  stock- 
holder to  the  bank  were  paid  did  the 
bank  acquire  a  lien  upon  the  shares 
for  the  subsequent  indebtedness  of 
the  share-ovmef.  And  all  the  New 
York  decisions  proceed  upon  the 
broad  ground  that  the  policy  of  the 
law  is  to  protect  a  bona  fide  vendee 
of  shares  of  stock  against  secret  or 
equitable  claims  thereto.  Cf.  Leg- 
gett  V.  Bank  of  Sing  Sing,  24  N.  Y.  283 
(1863);  McCready  v.  Rumsey,  6  Duer, 
574  (1857);  Arnold  v.  Suffolk  Bank, 
52  Barb.  424  (1857);  26  App.  Div.  213. 
1  Pittsburgh,  etc.  R.  R.  v.  Clarke,  29 
Pa.  St.  146  (1857);  Rogers  u.  Hunting- 
don Bank,  12  Serg.  &  R.  (Pa.)  77  (1824). 
■Cf.  Everhart  v.  West  Chester,  etc. 
E.  R.,  28  Pa.  St.  339  (1857). 


2  Hill  V.  Pine  River  Bank,  45  N.  EL 
300,  309  (1804). 

3  Bishop  V.  Globe  Co.,  135  Mass.  133 
(1883);  Citizens',  etc.  Bank  v.  Kala- 
mazoo, etc.  Bank,  69  N.  W.  Rep.  663 
(Mich.,  1896);  Birmingham  Trust,  etc. 
Co.  V.  East  Lake  Land  Co.,  101  Ala. 
304  (1893);  Union  Bank  v.  Laird,  2 
Wheat.  390  (1817);  Bohmer  v.  City 
Bank,  77  Va,  4-15  (1883);  Downer  v. 
Zanesville  Bank,  Wright  (Ohio),  477 
(1833);  Grant  v.  Mechanics'  Bank,  15 
Serg.  &  R.  (Pa.)  140  (1826);  St.  Louis, 
etc.  Co.  V.  Good  fellow,  9  Mo.  149  (1845); 
Bank  of  Utica  v.  Smallcy,  2  Cow.  770 
(1824);  Rogers  v.  Huntingdon  Bank, 
12  Serg.  &  R.  (Pa.)  77  (1824);  SeweU 
V.  Lancaster  Bank,  17  Serg.  &  R  (Pa.) 
285  (1828).  Cf.  Stebbins  v.  Phenix  F. 
Ins.  Co.,  3  Paige,  350  (1832). 

<  National  Bank  v.  Rochester  Tum- 
bler Co.,  172  Pa.  St.  614  (1896);  Mc- 
Cready v.  Rumsey,  6  Duer,  574  (1857); 
Reese  v.  Bank  of  Commerce,  14  Md. 
271  (1859);  First  Nat.  Bank  v.  Hart- 
ford, etc.  Ins.  Co.,  45  Conn.  22  (1877). 
A  lien  on  stock  created  by  statute 
gives  the  corporation  a  prior  right  in 
the  stock  as  against  a  subsequent 


970 


en.  XXXI.]  LIEN    or    the    COErOKAXION    ON    STOCK. 


[§  524. 


ter  or  by  statute,  the  mere  declaration  of  its  existence  in  tho 
certificate  will  not  avail  against  a  lonafide  purchaser.^ 

§  524.  It  is  a  salutary  rule  that  a  lien  created  by  by-law  can 
bind  only  those  who  take  the  stock  with  notice  of  the  by-law. 
This  is  because  by-laws  do  not  of  themselves  impart  or  convey 
notice.2  A  transferee  of  a  certificate  of  stock  is  not  bound  to 
take  notice  of  a  by-law  giving  a  corporation  a  lien  on  the  stock 
for  debts  due  from  the  registered  owner  to  the  corporation,  even 
though  the  certificate  of  stock  stated  on  its  face  that  it  was  sub- 
ject to  the  by-laws.'  So,  too,  a  by-law  enacted  subsequently  to 
a  transfer,  although  the  transfer  has  not  been  recorded  on  tho 
corporate  books,  cannot  affect  the  rights  of  the  parties  as  to 
that  transfer.*  By-laws  creating  liens  on  stock  liave  been,  how- 
ever, held  valid  and  enforceable  as  against  the  assignees  in 
bankruptcy  or  in  insolvency.* 

A  clause  in  a  charter  declaring  that  debts  due  from  the  stock- 
holders must  be  paid  before  a  transfer  will  be  allowed  is  suffi- 
cient to  create  a  lien  on  the  stock  without  other  action  on  tho 


pledgee  and  purchaser  at  the  pledgee's 
Bale,  even  though  tlie  certificate  of 
fctock  gives  no  intimation  of  a  lien. 
Hammond  v.  Hastings,  134  U.  S.  401 
( 1890).  But  where  the  by-law  under 
which  the  lien  is  claimed  directs  that 
notice  of  the  lien  should  be  given  in 
the  certificate  of  stock,  this  provis- 
ion must  be  regarded  as  meaning  that 
the  lien  should  notice  asserted  against 
a  r>orson  not  having  notice  by  the 
certificate.  And  the  issuance  of  cer- 
tificates not  containing  this  notice  is 
a  waiver  of  the  lien  contemplated  by 
such  by-law.  Bank  of  Holly  Springs 
V.  Pinson,  58  Miss.  421  (ISSU). 

1  Conklin  v.  Second  Nat  Bank,  45 
N.  Y.  655  (1871).  But  in  Vansands  v. 
Middlesex  County  Bank,  20  Conn.  144 
(1857),  it  is  held  that  a  statement  on 
the  face  of  tiie  certificate  of  stock 
that  it  is  issued  subject  to  all  debts 
due  from  the  owners  to  the  corpora- 
tion will  bind  a  transferee  as  a  quali- 
fication or  restriction  of  the  trans- 
ferrer's title,  and  that,  too,  although 
no  charter  provi-sion  or  by-law  au- 

9 


thorizes  such  a  lien  on  the  stock  So, 
also,  Jennings  v.  Bank  of  California, 
79  Cal.  323  (1889). 

2  DriscoU  V.  West  Bradley,  etc.  Co., 
59  N.  Y.  9G,  109  (1874);  Bank  of  Holly 
Springs  r.  Pinson,  58  Miss.  421,  435 
(1880);  Anglo-Califomian  Bank  v. 
Grangers'  Bank,  63  CaL  359  (1883). 
See  also  People  v.  Miller,  39  Hun,  557 
(1886',  concerning  the  validity  and 
effect  of  by-laws  regulating  the  sale 
and  transfer  of  seats  or  membership 
in  the  commercial  exchanges,  and 
the  enforcement  of  the  hens  created 
thereupon  by  such  by-laws  in  favor 
of  other  members  of  the  corporation. 

3Des  iloines,  etc.  Bank  v.  Warren 
etc"  Bank,  00  N.  W.  Rep.  154  (Iowa, 


Crockett,  9    CaL  113 


1896). 

*  People   V. 
(1858). 

*  Morgan  v.  Bank  of  Nortli  Amer- 
ica, 8  Serg.  &  Pu  (Pa.)  73  (1822);  S.  C, 
11  Am.  Dec.  575;  Vansands  v.  Middle- 
sex County  Bank,  20  Conn.  144  (1857); 
Re  Bigelow,  1  Nat.  Bankr.  Rog.  632, 
667  (1868);  S.  C,  3  Fed.  Cas.  341,  343. 


§  525.] 


LIEN    OF   TUE    COKPORATION    ON    STOCK.  [cU.  XXXI. 


part  of  the  corporation.^  And  so,  also,  a  power  conferred  l.y 
the  charter  upon  the  directors  to  refuse  a  transfer  so  long  as  the 
shareholder  who  wishes  to  transfer  is  indebted  to  the  corpora- 
tion, when  exercised  by  the  corporate  management,  supports 

the  licn.^ 

A  lien  may  be  created  by  special  agreement  among  the  share- 
holders.'' And  even  a  mere  usage  of  a  corporation  not  to  trans- 
fer shares  Avhile  the  owner  is  indebted  to  the  corporation  is 
sufficient  to  create  a  lien  on  stock,  valid  between  the  corpora- 
tion and  its  shareholders,  and  one  which  will  bind  a  share- 
holder who  borrows  money  with  knowledge  of  it.* 

§  525.  What  i)lirascs  in  charters  or  statutes  will  or  will  not 
authorize  the  corporation  to  create  or  enforce  a  lien  on  stock.— 
The  question  sometimes  arises  whether  or  not  the  corporation, 
by  the  charter  or  the  statute  under  which  it  acts,  has  authority 
to  enact  a  by-law  creating  a  lien  upon  its  stock  in  favor  of  the 


>  Farmers'  Bank  Case,  3  Bland,  Ch- 
'Md.)  394  (1830);  Kenton  Ins.  Co.  v. 
Bowman,  84  Ky.  430  (188G). 

2  Arnold  v.  Suffolk  Bank,  27  Barb. 
424  (1857). 

sVansands  v.  Middlesex  County 
Bank,  26  Conn.  144  (1857).  By  insert- 
ing in  the  certificate  of  stock  a  state- 
ment that  the  corporation  has  a  lien 
on  it  for  debts  due  to  the  corpo- 
ration, a  purchaser  takes  subject 
thereto.  It  is  a  contract  lien.  Jen- 
nings V.  Bank  of  California,  79  CaL 
323  (1889).  The  stockholders  may  as- 
sent to  a  lien  in  behalf  of  the  cor- 
poration on  stock  for  debts  due  to 
the  corporation  from  the  stockholder, 
and  the  method  of  foreclosing  it  may 
also  be  so  prescribed.  The  statute  of 
limitations  does  not  run  against  it. 
Reading  Trust  Co.  v.  Eeading  Iron 
Works,  137  Pa.  St.  282  (1890).  The 
corporation  cannot  create  a  lien  on 
stock  by  a  by-law;  but  where  the 
siu'ety  of  the  debt  secured  by  the 
stock  as  collateral  pays  the  debt,  his 
equities  are  not  superior  to  the  cor- 
poration, and  he  cannot  claim  the 
certificate  free  from  the  lien,  he 
having  aided  in  passing  the  by-law. 

973 


Bank  of  Atchison  County  v.  Durfee, 

118  Mo.  431  (1893). 

■  *  Morgan  v.  Bank  of  North  Amer- 
ica, 8  Serg.  &  R,  (Pa.)  73,88  (1822); 
S.  C,  11  Am.  Dec.  575.  Cf.  Vansands 
V.  Middlesex  Bank,  20  Conn.  144 
(1857).  Where  the  certificates  of 
stock  contain  on  their  face  a  state- 
ment that  a  corporation  has  a  Lien 
on  the  stock  for  debts  due  from 
the  registered  owner,  and  for  many 
years  all  the  stockholders  acquiesced 
therein,  such  a  lien  may  be  upheld, 
although  there  is  no  charter  provis- 
ion or  by-law  authorizing  the  lien. 
So  held  where  a  stockholder  brought 
an  action  for  himself  and  other  stock- 
holders complaining  of  various  mis- 
feasances and  malfeasances,  includ- 
ing the  charge  that  such  an  illegal 
claim  of  lien  existed  Reynolds  v. 
Bank  of  Mt.  Vernon,  6  App.  Div. 
(N.  Y.)  62  (1896).  So  in  Bryon  v.  Car- 
ter, 22  La.  Ann.  98  (1870),  it  is  held 
that  a  by-law  creating  a  lien,  while 
it  may  be  valid  as  between  the  par- 
ties if  it  be  brought  to  their  knowl- 
edge, is  not  binding  on  the  judgment 
creditors  of  the  shareholders. 


CH.  XXXI.]  LIEN    OF   THE    COKPORATIOX    ON    STOCK. 


[^  52G. 


corporation  for  debts  due  it  by  the  shareholders.  It  has  been 
held  that,  where  the  directors  are  authorized  to  make  "  regular 
tions  "  as  to  transfers,  they  may  make  a  by-law  creating  a  lien. 
So  various  other  phrases  have  been  held  sufficient  to  confer  this 
power  2  Where,  in  addition  to  the  articles  of  incorporation, 
the  statute  provides  for  articles  of  association,  the  corporation 
may  in  the  latter  provide  for  a  lien  on  the  stock.' 

§  526  The  Hen,  when  estahUshcd,  covers  all  the  stoclchoMcr  s 
shares  and  dividends.- A  xalid  lien  in  favor  of  the  corpora, 
tion  when  regularly  established,  attaches  to  all  the  shares  and 
dividends  of  the  indebted  stockholder.  Thus,  it  attaches  to  all 
the  shares  the  stockholder  owns,  although  the  debt  be  for  calls 
due  and  unpaid  upon  only  a  part  of  them.*    The  lien  attaches 


1  Cunninp^ham  v.  Alabama,  etc.  Co., 
4  Ala.  (N.  S.)  G.")-3  (181:3);  Spurlock  v. 
Pacific  R  R.,  61  Mo.  319  (1875);  Pen- 
dergast  v.  Bank  of  Stockton,  2  Saw- 
verriOS  (1871);  S.  C,  19  Fed.  Cas.  135. 
Cf.  Tuttle  V.  Walton,  1  Ga.  43  (184G). 

2  Bryon  v.  Carter,  23  La.  Ann.  98 
(1870);  Brent  v.  Bank  of.Washington, 
10  Pet.  596,  613  (1836);  Pondergast  v. 
•Bank  of    Stockton,   2    Sawyer,   108 
(1871);  S.  C,  19  Fed.  Cas.  135.    Ex- 
cept when  such  power  is  expressly 
given  to  the  directors  it  can  only  be 
exercised  by  vote  of  the  stockhold- 
ers.   Carroll  r.  MuUanphy  Sav.  Bank, 
8  Mo.   App.   249  (1880).    A    charter 
power  given  to  the  directors  of  a 
corporation  "  to  make  all  by-laws  not 
inconsistent  with  any  existing  law 
of  the  state  for  the  management  of 
Its  property,  the  regulation  of  its  af- 
fairs, and  the  transfer  of  its  stock," 
has  been  held  in  Missouri  to  include 
the  power  in  question.    Mechanics' 
Bank  r.  Merchants'  Bank,  45  Mo.  513 
(1870).     But  in  New  York  the  same 
language  used  in  the  general  statute 
wa.sheldnotto  include  it    Driscoll 
r.  West  Bradley,  etc.  Co.,  59  N.  Y.  96 
(1874).    See  also  St  Louis,  etc.  Ins. 
Co.  V.  Goodfellow,  9  Mo.  149  (1845); 
Vansands  v.  Middlesex  County  Bank, 
26  Conn.  144  (1857;;  Bank  of  Attica 

9 


V.  I^Ianufacturers'  Bank,  20  N.  Y.  501 
(1859).  For  a  discussion  of  this  ques- 
tion as  applied  to  national  banks,  see 
g  533,  infra. 

3  Mohawk  Nat  Bank  v.  Schenectady 
Bank,  78  Ilun,  90  (1894).  Where  the 
statute  allows  the  incorporators  to 
include  special  provisions  in  their 
articles  of  incorporation,  and  a  lien 
right  is  inserted,  and  the  certificate 
of  stock  on  its  face  refers  to  the  arti- 
cles of  association,  a  purchaser  of  a 
certificate  buys  subject  to  such  lien. 
Gibbs  V.  Long  Island  Bank,  83  Hun, 
92  (1894). 

*  Stebbins  v.  Phoenix  F.  Ins.  Co.,  3 
Paige,  350  (1832).  Cf.  Brent  v.  Bank 
of  Washington,  3  Cranch  C.  C.  517 
(1824);  S.  C,  4  Fed-  Cas.  01.  In  Vir- 
ginia, however,  it  seems  that  there 
can  be  no  lien  on  wholly  paid-up 
shares  to  secure  the  payment  of  an 
unpaid  subscription  to  other  sliares. 
Shenandoah  Valley  Pu  R.  v.  Griffith, 
76  Va.  913  (1^82).  Cf.  Va.  Co  le,  1887, 
§§  1127,  1128,  1130;  Petersburg  Sav. 
etc.  Co.  V.  Lumsden,  75  Va.  327  (1881). 
And  in  England  a  lien  on  stock  for 
unpaid  calls  is  a  lien  only  on  those 
particular  shares  upon  which  the 
call  is  niade  and  not  on  other  shares. 
Hubbersty  r.  ^fanchester,  etc  Ry, 
L.  R  2  Q.B.  471  (18G7). 


§  527.]  LIEN    OF   THE    CORrOKATION    ON    STOCK.  [CU.  XiXI. 

not  only  to  the  stock  itself,  but  to  dividends  declared  on  the 
stock.^  It  is  accordingly  held  that  a  corporation  may  lawfully 
retain  dividends,  and  apply  them  to  the  payment  of  a  debt  duo 
to  it  from  the  shareholder,  since  in  an  action  by  the  shareholder 
to  enforce  pa}Tnent  of  his  dividends  the  corporation  may  plead 
the  debt  by  Avay  of  set-off.-  But  dividends  declared  after  tho 
death  of  the  stockhoklcr  are  not  subject  to  a  lien  for  his  debts.* 
The  lien  attaches  to  the  shares  even  after  a  liquidation  or  dis- 
solution of  the  company.*  It  attaches  not  only  to  valid  stock, 
but  to  spurious  stock  obtained  by  forgery.*  So  also  the  lien 
attaches  to  trust  stock  for  debts  due  from  a  trustee  who  hohls 
stock  in  trust,  but  in  his  own  name,  and  without  any  indica- 
tion of  the  trust.*  Where  a  cestui  qyie  trust  owes  the  corpora- 
tion a  debt,  the  lien  attaches  to  his  stock  though  held  for  liim 
in  the  name  of  a  trustee.''  And  stock  standing  on  the  corpo- 
rate books  in  the  name  of  a  fictitious  person  is  subject  to  a  lien 
for  the  indebtedness  of  the  real  owner.' 

§  527.  The  Jicn  in'oUcts  the  corporalion  as  to  all  the  debts 
due  to  it  from  the  shareholder. —  It  is  a  general  rule  that  a  lien 

upon  stock  is  a  lien  for  all  debts  of  the  shareholder  due  to  the 

• 

1  Thus,  it  attaches  to  the  dividends,  3  Brent  v.  Bank  of  Washington,  3 
even  though  only  "  shares  and  stock  "  Cranch,  C.  C.  517  (1824) ;  S.  C,  4  Fed. 
be  specifically  named  in  the  statute  Cas.  Gl;  Merchants'  Bank  v.  Shouse, 
or  charter  as    subject  to  the  lien  103  Pa.  St.  488  (1883). 

(Hague  V.  Dandeson,  3  Exch.  741  —  *  Re  General  Exchange  Bank,  L.  R; 

1848),  and  though,  in  the  absence  of  6  Ch.  App.  818  (1871). 

express  provision,  it  is  held  that  no  *  Mount  Holly  Paper  Co. 's  Appeal, 

such  lien  impliedly  exists.    Sargeni  99  Pa.  St.  ol3  (1882). 

V.  Franklin  Ins.  Co.,  25  Mass.  90  (1829) ;  ^  New  London,  etc.  Bank  v.  Brockle- 

Bates  u  New  York  Ins.  Co.,  3  Johns,  bank,  L.   R  21   Ch.   D.   303    (1882); 

Cas.  238  (1803).    So,  in  Hagar  u  Union  Young  r.  Vough,  23  N.  J.  Eq.  325 

Nat.  Bank,  63  Me.  509  (1874),  it  was  (1873);  Burns  v.  Lawrie,  2  Sc.  Ct.  of 

held  that  the  terms  of  the  act  of  Sess.  Cas.  (2d  ser.)  1348  (1840),  other- 

1864  which  are  inconsistent  with  the  wise  cited,  2  Dunlop,  1348. 

existence  of  a  stock  lien  do  not  pre-  "^  Stebbins  v.  Phcenix  F.  Ins.  Co.,  3 

elude  a  lien  on  dividends.  Paige,  350  (1832). 

2  Hagar  v.  Union  Nat.  Bank,  63  Me.  8  Stebbins  v.  Phoenix  F.  Ins.  Co.,  3 
509  (1874);  Sargent  v.  Franklin  Ins.  Paige,  350  (1832),  where  the  president 
Co.,  25  Mass.  90  (1829) ;  Bates  v.  New  of  a  corporation  with  fraudulent  in- 
York  Ins.  Co.,  3  Johns.  Cas.  238  (1802).  tent  procured  sliares  to  be  recorded 
C/.  Merchants'  Bank  v.  Shouse,  103  in  a  fictitious  name,  and,  having  him- 
Pa.  St.  488  (1883);  Brent  v.  Bank  of  self  become  indebted  to  the  corpo- 
Washington,  2  Cranch  C.C.  517  (1824);  ration,  procured  an  assignment  of 
S.  C,  4  Fed.  Cas.  61.  See  also  §  544,  the  shares  to  another  creditor,  who 
infra.  sought  to  have  the  transfer  recorded. 

974 


CH.  XXXI.]  LIEN    OF   THE    COKPOKATION    ON    STOCK. 


[§  527. 


corporation ;  ^  and  it  is  not  necessary  that  tlie  debt  be  due  and 
payable  at  the  time  when  the  lien  is  sought  to  be  enforced.  It 
covers  debts  which  are  not  due  as  well  as  those  that  are  due, 
and  all  indebtedness  to  the  corporation,  whether  payable  pres- 
ently or  at  a  future  time.-  The  lien  will  continue  for  the  bene- 
fit of  the  corporation,  although  the  debt  be  barred  by  the  stat- 
ute of  limitations.'  The  lien  attaches  whether  the  stockholder's 
debt  to  the  corporation  accrued  before  or  after  he  became  a 
stockholder.*  A  lien  created  by  statute  applies  to  debts  due 
from  the  stockholder  to  the  corporation  prior  to  the  passage  of 
the  statute.'  It  also  secures  debts  for  wliicli  the  shareholder 
is  liable  only  as  indorser  or  surety,^  and  debts  due  from  a  part- 


Ileld,  that  the  lien  still  attached  for 
the  debts  of  the  original  holder. 

1  Union  Bank  v.  Laird,  3  Wheat 
390  (1817);  Mobile  Mat.  Ins.  Co.  v. 
Culloin,  49  Ala.  5.>8  (1873);  Cunning- 
ham V.  Alabama,  etc.  Co.,  4  Ala. 
(N.  S.)  052  (184S);  Rogers  v.  Hunting- 
don Bank,  12  Serg.  &  R.  (Pa.)  77 
(1824);  Ex  parte  Stringer,  L.  R.  9 
Q.  B.  D.  430  (1882);  Re  Peebles,  3 
Hughes,  394  (1875);  S.  C,  19  Fed.  Cas. 
94;  Planters',  etc.  Co.  v.  Selma  Sav. 
Bank,  03  Ala.  585  (1879).  Qucere, 
whetlier  tlie  lien  attaches  for  funds 
embezzled  by  the  stockholder.  Ilotch- 
kiss,  etc.  Co.  v.  Union  Nat,  Bank,  08 
Fed.  Rep.  70  (1895).       • 

2  Pittsburgh,  etc.  R  R.  r.  Clarke, 
29  Pa.  St.  140  (1857);  Re  Bachman,  13 
Nat  Bankr.  Reg.  223  (1870);  S.  C,  3 
Fed.  Cas.  310;  Do\vner  v.  Zanesville 
Bank.  Wright  (Ohio),  477  (1833); 
Brent  v.  Bank  of  Washington,  10  Pet 
590  (1830);  Rogers  v.  Huntingdon 
Bank.  13  Serg.  &  R  (Pa.)  77  (1824); 
Sewall  V.  Lancaster  Bank,  17  Serg. 
&  R  (Pa.)  285  (1828);  McCready  v. 
Rumsey,  0  Duer,  574  (1857);  St  Louis, 
etc  Ins.  Co.  v.  Goodfellow,  9  Mo.  149 
(1845);  Cunningliam  v.  Alabama,  etc, 
Co.,  4  Ala.  (N.  S.)  053  (1843);  Leggctt 
V.  Rink  of  Sing  Sing,  24  N.  Y.  283 
(1802).  Cf.  Re  Stockton,  etc.  Co.,  L. 
R  3  Ch.  D.  101  (1875).  In  Grant  v. 
Mechanics'  Bank,  15  Serg.  &  R  (Pa.) 


140  (1820),  it  was  held  that  a  bank  or- 
ganized under  the  Pennsylvania  law 
of  March  21,  1814,  might  lawfully  re- 
fuse to  permit  the  transfer  of  the 
stock  of  a  shareholder  who  was  the 
dniwer  of  a  bill  discounted  by  the 
bank,  but  not  payable  at  the  time 
the  transfer  was  demanded  —  botli 
the  shareholder  and  his  indorser  hav- 
ing, since  the  discount  of  the  paper, 
become  insolvent.  So,  also.  Downer 
V.  Zanesville  Bank,  Wright  (Ohio),  477 
(1833).  But  where  the  lien  is  expressly 
made  a  security  for  debts  "actually 
due  and  payable,"  it  will  be  held  to 
cover  only  debts  due  and  payable. 
Reese  v.  Bank  of  Commerce,  14  Md. 
271  (1859).  Cf.  Downer  v.  Zanesville 
Bank,  Wright  (Ohio),  477  (1833). 

3  Farmers*  Bank  v.  Iglehart,  0  Gill 
(Md.),  50  (1847);  Geyer  v.  Western  Ins. 
Co.,  3  Pittsb.  (Pa.)  41  (18C7);  Brent  v. 
Bank  of  Washington,  10  Pet  590,  017 
(1830). 

*  Schmidt  v.  Hennepin,  etc.  Co.,  35 
Minn."  511  (1880). 

*  Birmingham  Trust,  etc.  Co.  v.  East 
Lake  Land  Co.,  101  Ala.  304  (1893). 

"McLean  v.  Lafayette  Bank,  3  Mc- 
Lean, 587  (1840);  S.  C,  10  Fed.  Cas. 
204;  Leggett  v.  Bank  of  Sing  Sing, 
24  N.  Y.  283  (1802);  Union  Bank  v. 
Laird,  2  Wheat  390  (1817);  lilcDowell 
V.  Bank  of  Wilmington,  1  Harr.  (Uul.) 
27  (1S32);  Bank  v.  Bonnie,  43  &  W. 


975 


§  528.] 


LIEN    OF    THE    CORPORATION    ON    STOCK.  [cil.  XXXI. 


nersliip  in  wliicli  tlie  stockholder  is  a  partner.'  So,  also,  it 
secures  the  corporation  for  unpaid  calls  ujMjn  the  ori«,Mnal  sul>- 
scription.'  But  the  lien  does  not  attach  until  a  call  is  made.' 
The  fact  that  the  corporation  has  other  security  docs  not  pre- 
vent it  from  enforcing  its  charter  lien  on  the  stock.*  The  lien 
also  attaches  to  the  stock  of  a  depositor  wlio  has  overdrawn  liis 
account.* 

§  528.  liifjht  of  lien  as  (ujainst  miscellaneous  j^ttriies. —  The 
lien  of  a  corporation  on  shares  of  stock  as  security  for  the  pay- 
ment of  debts  due  to  the  corporation  from  the  owner  is  a  lien 


Eep.  407  (Ky.,  1897);  Brent  v.  Bank  of 
Washington,  10  Tct.  590,  G15  (1S;]G); 
St.  Louis,  etc.  Ins.  Co.  v.  Good  fellow, 
9  Mo.  149  (1845).  Cf.  Miles  v.  New 
Zealand,  etc.  Co.,  L.  R  33  Cli.  D.  2G0 
(188G);  West  Branch  Bank  v.  Arm- 
strong, 40  Pa.  St.  278  (18G1).  A  cor- 
poration, on  discounting  a  bill  or  note, 
may  take  security  from  one  of  the 
parties,  and  also  hold  the  shares  of 
another  party  as  security  for  the 
same  loan.  Union  Bank  v.  Laird,  2 
Wheat.  390  (1817).  Cf.  Conant  v.  Sen- 
eca County  Bank,  1  Ohio  St.  298 
<1853);  Helm  v.  Swiggett,  12  Ind.  194 
(1859);  Dunlop  v.  Dunlop,  L.  R  21 
Ch.  D.  583  (1882). 

1  Citizens',  etc.  Bank  v.  Kalamazoo, 
etc.  Bank,  G9  N.  W.  Rep.  GG3  (Mick, 
1896);  Re  Bigelow,  2  Ben.  4G9  (18G8); 
S.  C,  3  Fed.  Cas.  341;  Geyer  v.  West- 
ern Ins.  Co.,  3  Pittsb.  (Pa.)  41  (18G7); 
Arnold  v.  Suffolk  Bank,  27  Barb.  424 
(1857);  Planters',  etc.  Ins.  Co.  v.  Selma 
Sav.  Bank,  G3  Ala.  585  (1879). 

2  Spurlock  V.  Pacific  E.  R,  61  Mo. 
319  (1875);  McCready  v.  Eumsey,  6 
Duer,  574  (1857);  Regina  v.  Wing,  33 
Eng.  L.  &  Eq.  80  (1855);  Re  Hoy  lake 
E'y,  L.  R  9  Ch.  257  (1874);  Compa- 
nies Clauses  Consolidation  Act,  1845 
(8  &  9  Vict.,  c.  16,  g  16);  Shaw  v. 
Rowley,  5  Eng.  E'y  &  Can.  Cas.  47 
(1847);  Ex  parte  Tooke,  6  Eng.  E'y  & 
Can.  Cas.  1  (1849).  Cf.  Newry,  etc. 
E'y  V.  Edmunds,  2  Exch.  118  (1848); 
Ambergate,  etc.  E'y  v.  Mitchell,  4 
Exch.  540  (1849);   Great  North,  etc. 


E'y  I'.  Biddulpli,  7  M.  &  W.  2 13  (1840); 
Pittbburgli,  etc.  R  R  v.  Clarke,  29 
Pa.  St  14G  (1857);  Rogers  v.  Hunting- 
don Bank,  12  Serg.  &  R  (Pa.)  77  (1824); 
Petersburg  Sav,  etc.  Co.  v.  Lumsden, 
75  Va.  327  (1881).  Cf  Hall  v.  U.  S. 
Ins.  Co.,  5  Gill  (Md.),  484,  499  (1847), 
holding  that  instalments  not  called 
in  constituted  no  such  indebtedness 
as  was  contemplated  in  the  statutory 
provision  for  the  lien.  Such  a  con- 
struction "would  be  to  render  its 
stock  wholly  untransfeixible  until  the 
par  amount  of  it  had  been  paid  up, 
although  the  requisite  instalments  for 
that  purpose  had  never  been  called 
in."  The  lien  secures  general  debts 
as  well  as  unpaid  calls.  National  Bank, 
etc.  V.  Eochester  Tumbler  Co.,  172  Pa- 
st. 614  (1896). 

3  Hall  V.  V.  S.  Ins.  Co.,  5  Gill  (ild.), 
484  (1847).  Cf.  Re  Bachman,  12  Nat. 
Bankr.  Eeg.  223  (1876);  S.  C,  2  Fed. 
Cas.  310;  Pittsburgh,  etc.  R  R  t;. 
Clarke,  29  Pa.  St.  146  (1857).  A  di- 
rector transferring  his  shares  before 
the  call  avoids  the  lien,  although  he 
knew  the  call  was  to  be  made.  The 
call  is  made  when  the  date  of  piiy- 
ment  is  fixed,  and  not  by  a  mere  gen- 
eral resolution.  Re  Cawley,  etc.  Co., 
L.  R  42  Ch.  D.  209  (1889). 

4  German  Nat.  Bank  v.  Kentucky 
T.  Co.,  40  S.  W.  Eep.  458  (Ky.,  1897); 
Dunlop  V.  Dunlop,  L.  R  21  Ch.  D.  583 
(1882). 

5  Eeese  v.  Bank  of  Commerce,  14  Md. 
271  (1859). 

70 


en.  XXXI.]  LIEN    OF   THE     COEPOKATION    ON    STOCK.  [§  529. 

only  as  to  the  indebtedness  of  duly  recorded  shareholders.^ 
There  is  no  lien  on  the  stock  as  to  debts  of  an  intervening  un- 
recorded owner  of  the  stock.^  Where,  however,  the  corporation 
is  notified  of  the  sale  and  transfer  of  the  certificates  of  stock, 
without  a  return  of  the  certificates  to  the  corporation  and  the 
taking  out  new  certificates  in  the  name  of  the  purchaser,  and 
the  corporation  notes  the  fact  in  its  certificate  book,  the  cor- 
poration has  a  lien  on  the  stock  for  a  debt  due  from  the  pur- 
chaser, and  not  even  a  lonafide  purchaser  from  him  can  avoid 
such  lien.'  A  lien  of  a  corporation  on  stock  for  debts  due  it 
from  its  stockholders  does  not  attach  to  stock  purchased  by  an- 
other corporation,  the  latter  having  no  power  to  purchase.* 

§  529.  The  lien  can  he  enforced  fur  the  henift  of  the  corpora- 
tion only. —  The  right  of  a  corporation  to  a  lien  on  the  stock  of 
its  shareholders  as  security  for  the  payment  of  their  debts  to 
the  corporation  is  a  right  to  be  enforced  only  by  the  corpora- 
tion and  exclusively  for  its  own  benefit.  Accordingly,  it  is  held 
that  the  corporation  cannot  become  the  assignee  of  the  claim 
of  some  third  person  against  one  of  its  shareholders  in  order  to 
enforce  payment  of  that  claim  for  the  benefit  of  the  third  per- 
son by  a  recourse  to  the  corporate  lien  on  the  shareholder's 
stock.*  Neither  can  the  corporation  be  compelled,  for  the  benefit 
of  sureties  as  to  a  part  of  the  shareholders  indebtedness,  to  apply 
the  proceeds  of  the  sale  of  the  stock  to  the  liquidation  of  that 
part  of  their  claim  which  is  secured.^    The  lien  does  not  extend 

I  Cf.  %  526,  supra,  and  §  532,  infra,  at  the  time  of  the  purchase  knowing 
Where  "the  legal  title  to  shares  can  that  the  stock  had  been  pledged  by- 
only  be  acquired  by  a  transfer  made  the  stockholder  to  another  creditor, 
in  a  prescribed  mode,  yet  a  complete  Bank  v.  Bonnie,  43  S.  W.  Rep.  407 
equitable  title  may  be  otherwise  (Ky.,  1897);  "White's  Bank  v.  Toledo, 
acquired,  and  the  lien  may  attach  etc.  Ins.  Co.,  12  Ohio  St.  601  (1861). 
thereta  To  the  point  that  this  lien  is  one  ex- 

»  Helm   V.  Swiggett,  12   Ind.  194  clusively  for  the  beneGt  of  the  corpo- 

M8r)9i.  ration,  see  Bank  of  Utica  v.  Smalley, 

'Bank  of  Commerce  v.  Bank  of  2  Cow.  770  (1824). 
Newport,  63  Fed  Rep.  898  (1894).  » Cross  v.  Phenix  Bank,  1  R  L  39 

*  Lanier  Lumber  Ca  v.  Rees,  103  (1840).  But  see  Kuhns  v.  Westmore- 
Ala.  622  (1894).  land  Bank,  2  Watts  (Pa.),  136  (1833), 

*  A  bank  having  a  lien  by  statute  where  it  is  said  that  "the  principle 
for  any  debt  held  by  it  against  a  that  a  surety  is  entitled  to  the  benefit 
stockholder  cannot  purchase  notes  of  of  all  tbe  creditor's  securities  is  of 
the  stockholder  for  the  express  pur-  such  universal  application  tliat  it 
pose  of  acquiring  such  lien,  the  bank  would   require   strong   evidence   of 

62  9~7 


§  530.] 


LIEN    OF   THE    CORTOKATION    ON    STOCK.  [cil.  XXXI. 


to  claims  against  the  stocldiolder  on  paper  made  by  the  stock- 
holder and  purchased  by  the  corporation.'  The  lien  is  for  the 
benefit  of  the  corporation,  and  it  may  apply  the  proceeds  of  tho 
sale  of  the  stock  in  such  a  way  as  best  to  subserve  its  own  in- 
terest.^ 

§  530.  Metliods  of  enforcing  the  ?icn.— When  a  corporation 
has  a  lien  upon  the  stock  of  those  of  its  shareholders  who  are 
indebted  to  it,  it  may  refuse  to  allow  a  transfer  of  tlic  stock 
until  the  debt  is  paid  or  secured  to  its  satisfaction.  This  is  tho 
usual  method  of  enforcing  a  lien.'  And  the  corporation  may 
insist  upon  its  lien  and  hold  the  stock  even  against  a  honafide 
purchaser,  inasmuch  as  purchasers  of  stock  are  bound  to  take 
notice  of  legal  liens.*  It  may,  moreover,  hold  the  whole  amount 
of  the  shareholder's  stock,  although  tho  amonnt  of  the  debt  bo 
less  than  tho  value  of  the  shares.  It  cannot  be  compelled  to 
transfer  so  much  of  the  stock  as  is  in  excess  of  the  amount  of 


legislative  iBtention  to  make  the  pres- 
ent case  an  exception  to  it."  Cf.  also 
Klopp  V.  Lebanon  Bank,  46  Pa.  St.  88 
(1863);  Petersburg  Sav.  etc.  Co.  v. 
Lumsden,  75  Va.  327,  340  (1881). 

iBoyd  V.  Redd,  27  S.  K  Rep.  85 
(N.  C,  1897). 

2  Planters',  etc.  Ins.  Co.  v.  Selma 
Sav.  Bank,  63  Ala.  585  (1879);  Mount 
Holly  Paper  Co.'s  Appeal,  99  Pa.  St. 
513  (1882);  Anglo-Calif  ornian  Bank  v. 
Grangers'  Bank,  63  CaL  359  (1883); 
Bishop  V.  Globe  Co.,  135  Mass.  133 
(1883). 

3  Reese  v.  Bank  of  Commerce,  14 
Md.  271  (1859);  Brent  v.  Bank  of 
Washington,  10  Pet.  596  (1836);  First 
Nat.  Bank  v.  Hartford,  etc.  Ins.  Co., 
45  Conn.  22  (1877);  Vansands  v.  Mid- 
dlesex County  Bank,  26  Conn.  144 
(1857);  Farmers'  Bank  v.  Iglehart,  6 
Gill  (Md.),  50  (1847);  McCready  v. 
Rumsey,  6  Duer,  574  (1857);  Tuttle 
v.  Walton,  1  Ga.  43  (1846);  Sewall  v. 
Lancaster  Bank,  17  Serg.  &  R.  (Pa.) 
285  (1828);  Rogers  v.  Huntingdon 
Bank,  12  Serg.  &  R.'  (Pa.)  77  (1824); 
Grant  v.  Mechanics'  Bank,  15  Serg.  & 
R.  (Pa.)  140  (1826).  Cf.  Sabin  v.  Bank 
of  Woodstock,  21  Vt  353  (.1849);  West 


Branch  Bank  v.  Armstrong,  40  Pa. 
St.  278  (1801).  In  Bisliop  v.  Globe  Co., 
135  Mass.  132  (1883),  the  rule  is  de 
Glared  that  if  by  the  law  of  the  state 
under  which  a  corporation  is  organ- 
ized the  corporation  has  a  lien  on  tho 
stock  of  any  shareholder  for  a  debt 
due  from  him  to  the  corporation,  the 
lien  is  a  good  defense  to  an  action 
in  another  state  against  the  corpora- 
tion by  a  person  to  whom  the  share- 
holder has  transferred  his  stock,  but 
in  whose  name,  by  reason  of  the  lien, 
the  corporation  has  refused  to  regis- 
ter the  transfer. 

4  Newberry  v.  Detroit,  etc.  R.  R..  17 
Mich.  141  (1868);  Titcomb  v.  Union 
M.  &  F.  Ins.  Co.,  8  Mass.  326  (1811): 
Rogers  v.  Huntingdon  Bank,  12  Serg. 
&  R.  (Pa.)  77  (1824);  Grant  v.  Mechan- 
ics' Bank,  15  Serg.  &  R  (Pa.)  140 
(1826);  Sewall  v.  Lancaster  Bank,  17 
Serg.  &  R  (Pa.)  285  (1828);  West. 
Branch  Bank  v.  Armstrong,  40  Pa,  St. 
278  (1861);  Mechanics'  Bank  v.  Mer- 
chants' Bank,  45  Mo.  513  (1870);  St. 
Louis,  etc.  Ins.  Co.  v.  Goodfellow,  9 
Mo.  149  (1845);  Tuttle  v.  Walton,  1 
Ga,  43  (1846);  Dorr  v.  Life  Ins.  etc  Co., 
73  N.  W.  Rep.  635  (Minn.,  1898). 


978 


OH.  XXXI.]  LIEN   OF   THE   COEPOEATION   ON   STOCK.  [§  530. 

the  debt.^  But  the  corporation  can  enforce  its  lien  against  the 
transferee  only  by  a  refusal  to  allow  the  transfer  or  by  a  suit 
to  foreclose.  It  cannot  make  the  transferee  personally  liable 
for  the  debt. 

The  corporation  may,  however,  proceed  by  an  attachment  of 
the  stock.2  go  also,  upon  non-pajincnt  of  the  debt,  tlie  corpo- 
ration may  file  a  bill  in  a  court  of  chancery  and  have  tlic  shares 
sold  in  the  usual  way,  as  in  other  cases  of  property  held  under 
a  lien.'  In  a  suit  to  foreclose  a  lien  tlie  transferrer  is  not  a 
necessary  party.*  A  decree  authorizing  the  sale  of  stock  for  tlio 
payment  of  the  debt  need  not  give  the  shareholder  the  right  of 
redemption.  An  absolute  and  valid  title  may  pass  to  the  pur- 
chaser immediately  upon  the  sale.*  A  valid  lien  in  favor  of  a 
bank  upon  shares  of  stock  in  the  bank  belonging  to  the  estate 
of  a  deceased  person  will  not  yield  to  a  prior  claim  against  the 
estate  in  favor  of  the  government.^  But  an  unwarranted  claim 
of  lien  by  a  corporation,  and  a  consequent  refusal  to  register  a 
transfer  until  the  debt  as  to  which  the  lien  is  asserted  is  paid, 
is  a  conversion  of  the  shares,  and  the  transferrer  may  have  his 
action  against  the  corporation  therefor.^  In  order,  however,  to 
put  the  corporation  in  the  wrong  for  a  refusal  to  transfer  where 

J  SewaU  r.  Lancaster  Bank,  17  Serg.  etc.  Bank,  69  N.  W.  Rep.  063  (^lich., 

&  R.  (Pa.)  28o  (1828);  Pierson  r.  Bank  1890). 

of  Washington,  3  CrancU,  C.  C.  303  *  Reese  v.  Bank  of  Commerce,  14 

(1828);  S.  C,  19  Fed.  Cas.  671.  Md.  271,  284  (1859).    In  one  ciise  the 

2Sabin  v.  Bank  of  Woodstock,  21  lien  was  held  to  be  equivalent  to  a 

Vt  353  (1849).  pledge;  and  it  was  held  that,  after 

*Re  Morrison,  10  Nat  Bankr.  Reg.  giving  due  notice  to  the  delinquent 
105(1873);  S.  C,  17  Fed.  Cas.  831.  In  shareholder,  the  corporation  might 
Farmers'  Bank's  Case,  2  Bland,  Ch.  sell  at  public  auction  without  filing 
Old.),  394  (1830),  and  Brent  r.  Bank  of  a  bill  to  foreclose.  Farmers' Bank's 
Washington,  10  Pet.  596  (1836),  bills  Case,  2  Bland,  Cli.  (Md.)  394  (1830). 
were  filed  by  the  owners  of  the  stock  In  this  case  it  is  also  held  that,  wliere 
to  compel  a  transfer,  and  the  corpo-  the  corporation  neglects  or  refuses 
ration  defended  on  the  ground  of  its  to  sell  the  stock  of  a  deceased  share- 
lien.  Under  the  California  code  a  holder  wlio  is  in  arrears,  the  admin- 
corporation  may  by  suit  foreclose  a  istrator  may  file  a  bill  and  obtain  an 
lien  which  it  has  on  its  stock.  Me-  order  of  sale  directed  to  the  corpora- 
chanics",  etc  Assoc,  v.  King,  83  CaL  tion. 

440  (1890).    To  enforce  a  lien  upon  « Brent  v.  Bank  of  Washington,  10 

stock  under  the  Alabama  statute  no  Pet.  596  (1836). 

action  on  the  part  of  the  board  of  '^  Bank  of  America  v.  McNeil,  10 

directors  is  necessary.    Elliott  v.  Sib-  Bush  (Ky.),  54  (1873).     Cf.  Dickinson 

ley,  101  Ala.  344  (1893).  i'.  Central  Nat.  Bank,  129  ]\Iass.  279 

« Citizens',  etc.  Bank  f.  Kalamazoo,  (1880);  Case  v.  Bank,  100  U.  S.  446 

979 


§  631.] 


LIEN    OF   THE    CORPOEATION   ON    STOCK.  [CH.  XXXI. 


it  claims  more  than  is  due,  the  shareholder  must  tender  what 
he  admits  to  be  due.^  The  fact  that  a  stockholder  claims  tliat 
the  corporation  owes  him  more  monoy  than  he  owes  it  is  not 
sufficient  to  sustain  a  bill  in  equity  to  enjoin  the  corporation 
from  selling  the  stock  in  order  to  pay  the  amount  due  the  cor- 
poration. Some  other  ground  of  equitable  jurisdiction  must  be 
set  forth.2  "Where  a  corporation  has  other  security  also,  a  court 
of  equity  may  compel  it  to  resort  to  that  first.'  A  corporation 
is  liable  in  damages  for  selling  the  stock  of  a  stockholder  for 
non-payment  of  dues,  where  such  sale  was  irregular  and  ilk-gal.* 
§  531.  The  cori)oration  may  waive  its  lien. —  A  corporation 
which  has  a  lien  upon  its  stockholders'  stock  for  debts  due  to  it 
from  them  need  not  necessarily  depend  upon  or  insist  upon  its 
lien  for  the  collection  of  the  debt.  It  has  two  remedies  —  one 
to  enforce  the  lien,  the  other  to  collect  the  debt  as  though  there 
was  no  lien.'    Hence  it  is  that  the  lien  of  a  corporation  on 


(1879);  Skinner  v.  City  of  London  IL 
Ins.  Corp.,  L.  R  14  Q.  B.  D.  882  (1885), 
holding  also  that  only  nominal  dam- 
ages could  be  recovered  where  the 
terms  of  the  transfer  were  secret. 

1  Pierson  v.  Bank  of  Washington,  3 
Cranch,  C.  C.  363  (1828);  S.  C,  19  Fed. 
Cas.  671.  In  German  Security  Bank 
V.  Jefferson,  10  Bush  (Ky.),  326  (1874), 
it  was  held  that,  where  the  stock  sold 
under  the  lien  realized  a  sum  insuffi- 
cient to  satisfy  the  corporate  debt, 
the  unpaid  balance  of  the  claim  of 
the  corporation  could  not  be  paid 
until  there  had  been  a  proportionate 
payment  of  the  claims  of  other  cred- 
itors of  the  shareholder  out  of  his 
general  assets.  Cf.  Re  Peebles,  2 
Hughes,  394  (1875);  S.  C,  19  Fed. 
Cas.  94. 

2  Elliott  V.  Sibley,  101  Ala.  344 
(1893).  This  case  holds,  also,  that  in 
a  suit  in  equity  by  a  stockholder  to 
enjoin  a  sale  of  his  stock  by  the  cor- 
poration for  a  debt  due  the  corpora- 
tion, the  corporation  is  a  necessary 
party  defendant,  and  that  the  com- 
plainant must  aver  a  readiness  to 
pay  whatever  may  be  found  due. 


'  Covington,  etc.  Bank  v.  Commer- 
cial Bank,  65  Fed.  Rep.  547  (1895). 
Where  the  company  has  a  lien  on 
stock,  and  the  stockholder  sells  a  part, 
the  purchaser  may  require  the  com- 
pany to  first  have  recourse  to  the 
unsold  part  to  collect  its  debt.  A 
subsequent  execution  levied  on  the 
unsold  part  does  not  deprive  the  pur- 
chaser of  the  other  part  of  his  rights 
stated  abova  Gray  v.  Stone,  69  L.  T. 
Kep.  282  (1893). 

*  The  sale  here  was  contrary  to  the 
requirements  of  the  by-laws.  The 
corporation  bought  the  stock  itself 
at  such  sale.  The  fact  that  a  siirplus 
realized  at  the  sale  was  sent  to  the 
stockholder  by  check,  and  was  re- 
ceived by  him,  did  not  bar  his  rem- 
edy, he  being  in  ignorance  of  the 
illegality.  Allen  v.  American  Build- 
ing, etc.  Association,  49  Minn,  544 
(1892). 

5  A  subscriber  for  stock  cannot 
avoid  liability  to  the  corporation  by 
setting  up  that  the  corporation  has  a 
lien  on  the  stock  therefor  and  may 
enforce  it.  Lankershim,  etc.  Co.  v. 
Herberger,  82  Cal.  600  (1890). 


980 


on.  XXXI.]  LIEN    OF    THE    CORPOEATION   ON    STOCK.  [§  531. 

stock  may  be  asserted  and  enforced,  or,  in  tlie  discretion  of  the 
corporation,  it  may  be  ^vaived.^ 

Where  the  corporation  has  other  security  it  is  not  obliged  to 
resort  to  the  lien.-  Cases  may  arise  where  the  intervening  rights 
of  other  creditors  of  the  shareholder  render  it  inequitable  for 
the  corporation  to  waive  its  lien  on  the  stock,'  but  in  general 
the  right  of  the  corporation  to  waive  the  lien  at  its  option  is 
absolute. 

Accordingly,  where  a  note  discounted  for  a  shareholder  was 
protested  for  non-payment,  it  was  held  that  the  bank  might 
waive  its  lien  on  the  stocldiolder's  shares  in  the  bank  and  pro- 
ceed directly  against  the  indorser.*  And  the  corporation,  by 
waiving  the  lien,  does  not  discharge  a  surety,  unless  the  surety 
has  given  the  corporation  express  notice  not  to  waive  the  lien.» 
The  corporation  will  not  be  held  to  have  waived  its  lien  upon 
the  stock  of  its  debtor  merely  because  it  has  taken  other  or  ad- 
ditional security  for  the  debts;'  nor  because  it  assents  to  a  gen- 
eral assignment  by  the  shareholder  for  the  benefit  of  creditors.'' 
But  of  course  if  a  corporation,  having  a  statutory  lien  on  stock, 
agrees  to  take  other  security  in  place  thereof ,  it  thereby  waives 
it's  lien.*  The  corporation  may  allow  the  transfer  of  a  portion 
of  a  shareholder's  stock  witliout  waiving  its  lien  on  the  rest.' 

But  a  waiver  of  the  lien  for  a  limited  time  is  fatal,  provided 
the  stock  is  transferred  during  that  time." 
I  National   Bank   v.    Watsontown       >  iJe  Bachman,  12  Nat  Bankr.  Reg. 

Bank,  105  U.  a  217  (1881);  Hodges  v.    223  (1876);  S.  C,  2  Fed  Cas.  310. 

Planters'  Bank,  7  Gill  &  J.  (Md)  306        *  Cross  v.  Phenix  Bank,  1  R.  L  39 

(1835);  Hall  v.  U.  S.  Ins.  Co.,  5  GiU    (1840). 

<M(L),  48-1  (1847);  Re  Hoylake  R'y.       *Perrine  v.  Fireman's  Ins.  Co.,  23 

L.  r'o  Ch.  257,  259  (1874).     But  see    Ala.  575  (1853). 

Conant  v.  Seneca  County   Bank,  1        e  Union  Bank  u  Laird,  2  Wlieat  390 

Ohio  St  298  (1853);  Re  Bigelow,  1    (1817). 

Nat  Bankr.  Reg.  667  (1868);  S.  C,  3        ^  Dobbins  v.  Walton,  37  Ga.   614 

Fed-  Cas.  341.   A  waiver  is  the  inten-    (1868). 

tional  relinquishment  of  a  known        ^st  Paul  Nat  Bank  u  Life  Ins. 

right    It  is  not  to  be  inferred  and    etc.  Co.,  73  N.  W.  Rep.  713  (Mmn., 

imputed  to  a  corporation  in  the  ab-    1898). 

sence  of  proof  of  it  and  a  mere  faU-        9  First  Nat  Bank  of  Hartford  v. 

ore  to  assert  the  lien  is  not  equivalent    Hartford,  etc  Ins.  Co.,  45  Conn.  23 

to  a  relinquisliment  or  waiver  of  it    (1877).    But  c/.  Presbjterian  Cong.  v. 

First  Nat  Bank  v.  Hartford,  etc  Ins.    Carlisle  Bank,  5  Pa.  St  345  (1847). 

Ca,  45  Conn.  22,  44  (1877).  ^«Thus,  if  within    such   time  the 

2  Dunlop  V.  Dunlop,  L.  R.  21  Ch.  D.    stock  is  pledged  for  a  debt,  the  right 

583  (1882).  of  ^^®  corporation,  after  the  expira- 

981 


§  531.]  LIEN    OF   THE    COKPORATION    ON    STOCK.  [CU.  XXXI. 

A  waiver  which  will  bind  the  corporation  may,  in  the  ab- 
sence of  something  to  qualify  the  power,  be  made  by  the  cashier 
of  a  bank,  acting  by  virtue  of  an  express  or  implied  authority, 
for  the  board  of  directors;  *  or  the  secretary  of  an  insurance 
company; 2  or  the  gcnend  manager  or  properly-cjuulif led  gen- 
eral agent  of  the  corporation,  especially  if  that  is  a  general 
custom  of  the  company.'  Accordingly,  where  one  buys  shares 
on  the  faith  of  a  representation  of  the  corporate  officers  that 
the  stock  is  unincumbered,  ho  is  entitled  to  the  shares  free  from 
any  corporate  lien.'* 

And  where  the  corporate 'ofTicers  allow  a  transfer  to  be  reg- 
istered, and  a  new  certificate  to  be  issued,  there  is  a  waiver  of 
the  corporate  lien  as  to  the  debts  of  the  transferrer.'  Where 
the  corporation  sells  a  claim  it  has  against  a  stockholder  it 
thereby  loses  its  lien.*  The  lien  is  not  waived  by  a  by-law  that 
stockliolders  must  offer  their  stock  to  the  bank  before  selling 
elsewhere,  and  that  after  ten  days  they  may  sell  elsewhere.^ 
Where  a  party  about  to  take  stock  in  pledge  inquires  of  tlio 
corporation  as  to  its  value,  and  as  to  whether  there  was  any 
lien  upon  the  stock,  and  no  lien  is  claimed,  and  he  then  takes 

tion  of  the  time  to  acquire  its  charter  *  Moore  v.  Bank  of  Commerce,  53 

lien,  is  subordinate  to  the  right  of  the  Mo.  377  (1873). 

pledgee  until  the  debt  is  paid  or  the  *  Hill  v.  Pine  River  Bank,  45  N.  H. 

pledge  is  released.   Bank  of  America  300  {18G4);  Higgs  v.  Northern  Assam 

V.  McNeil,  10  Bush  (Ky.),  54  (1873).  Tea  Co.,  L.  R.  4  Exch.  387  (1869);  Be 

1  National  Bank  v.  Watsontown  Northern  Assam  Tea  Co.,  L.  R  10 
Bank,  105  U.  S.  217  (1881).  So,  also,  Eq.  458  (1870).  So,  also,  a  by-law  re- 
the  refusal  of  the  cashier  to  permit  quiring  the  consent  of  the  board  of 
a  transfer  is  the  act  of  the  bank,  for  directors  to  a  transfer  by  one  in- 
wliich  it  may  be  charged.  Case  v.  debted  to  the  corporation  is  held  to 
Bank,  100  U.  S.  446  (1879).  Where  be  repealed  where  a  custom  of  disre- 
the  cashier  of  a  bank  takes  part  in  garding  it  has  been  shown,  it  appear- 
the  pledging  of  stock  by  one  of  the  ing  also  that  the  secretary  had  been 
stockholders,  the  bank  cannot  subse-  allowed  to  exercise  his  own  discre- 
quently  claim  a  lien  on  the  stock  for  tion  about  such  transfers  without 
debts  incurred  by  the  stockholder  consulting  the  directors.  In  such  a 
after  such  pledga  Birmingham  case  the  consent  of  the  secretary  to 
Trust,etc.  Co.  V.Louisiana  Nat.  Bank,  the  transfer  is  a  waiver  of  the  lien. 
99  Ala.  379  (1893).  Chambersburg  Ins.  Co.  v.  Smith,  11 

2  Chambersburg  Ins.  Co.  v.  Smith,  Pa.  St.  120  (1849). 

11  Pa.  St.  120  (1849).    Cf.  Kenton  Ins.  6  Ralston  v.  Bank  of  California,  112 

Co.  V.  Bowman,  84  Ky.  430  (1886).  Cal.  208  (1896). 

3  See  Bishop  v.  Globe  Co.,  135  Mass.  •  Citizens',  etc.  Bank  v.  Kalamazoo, 
132  (1883);  Young  v.  Vough,  23  N.  J.  etc.  Bank,  69  N.  W.  Rep.  663  (Mich-, 
Eq.  325  (1873).  1896). 

983 


CH.  XXXI.]  LIEN    OF    THE    COKPOEATION    ON    STOCK.  [§  532. 

the  stock  in  pledge,  and  causes  an  indorsement  thereof  to  be 
made  on  the  stub  of  the  stock-book  of  the  corporation,  the  cor- 
poration cannot  thereafter  claim  a  lien  as  against  him ;  and 
moreover,  a  subsequent  transfer  of  the  stock  by  the  pledgor  to 
the  corporation  as  security  for  a  debt  due  from  him  to  it  does 
not  take  precedence  over  the  first  pledge,  the  certificates  them- 
selves having  been  transferred  to  the  first  pledgee,  but  not  trans- 
ferred on  the  books.* 

§  532.  The  lien  as  affected  hy  transfers  and  notice. —  A  pur- 
chaser of  stock  is  bound  to  take  notice  of  the  statute  giving  a 
lien  upon  the  stock.^  Nevertheless,  upon  a  transfer  of  stock, 
the  title  thereto  passes  absolutely  as  between  transferrer  and 
transferee,  even  though  the  corporation,  in  the  assertion  of  a 
lien  upon  the  stock  for  the  indebtedness  of  the  transferee,  re- 
fuses to  register  the  transfer  until  a  certain  debt  is  paid  or 
secured.'  But  of  course  the  assignee  or  transferee,  or  whoever 
succeeds  to  the  rights  of  the  shareholder  in  the  stock,  takes  it 
subject  to  the  lien  of  the  corporation.*  And  when  the  stock  is 
sold  by  the  corporation  to  pay  the  debts  of  the  transferrer,  the 
transferee  is  entitled  to  the  surplus,  if  any  there  be,  which  re- 
mains after  the  claim  of  the  corporation  is  satisfied.* 

1  Des  Moines,  etc.  Co.  v.  Des Moines,  325  (1S71);  People  v.  ^liller,  39  Hun, 
etc.  Bank,  66  N.  W.  Rep.  914  (Iowa,  537.  563  (1886).  Cf.  Dunn  v.  Coninier- 
1896>  Where  the  cashier  of  a  bank  cial  Bank,  11  Barb.  580  (1852);  Mer- 
tells  a  purchaser  of  stock  that  the  chants'  Bank  v.  Livingston,  74  N.  Y. 
bank  has  no  lien  upon  the  stock,  a  223  (1878);  Pittsburgh,  etc.  R  R.  u. 
statutory  lien  of  the  bank  on  the  Clarke,  29  Pa.  St.  146  (1857);  Sargent 
stock  is  waived  as  to  him.  Oakland  v.  Essex  Marine  Ry,  26  Mass.  202; 
C.  S.  Bank  v.  State  Bank,  71  N.  W.  (1829);  CarroU  v.  Mullanphy  Sav. 
Rep.  453  (Mich.,  1897).  Bank,  8  Mo.  App.  249  (1880).     Corpo- 

2  Dorr  r.  Life  Ins.  etc.  Co.,  73  N.  W.  rations  having  a  statutory  lien  on 
Rep.  635  (^linn.,  1898).  See  also  §  530,  stock  for  debts  nevertheless  must 
supra.  allow  transfer  to  one  who  takes  sul> 

3  National  Bank  v.  Watsontown  ject  to  the  corporate  lien  for  part  of 
Bank,  105  U.  S.  217  (1881) :  Johnston  v.  the-impaid  subscription.  Herdegen 
Laflin,  103  U.  S.  800  (1880);  Fitzhugh  v.  Cotzhausen,  70  Wis.  589  (1888).  Tlie 
V.  Bank  of  Shepherdsville,  3  Mon.  lien  attaches  when  a  call  is  made,  and 
(Ky.)  126  (1825);  St.  Louis,  etc.  Ins.  not  when  it  becomes  du&  Queen  v. 
Ca  V.  Goodfellow,  9  Mo.  149  (1845);  Londonderry,  etc.  R'y,  13  Q.  B.  998 
Commercial  Bank  v.  Kortright,  23  (1849). 

Wend.  348  (1839);  S.  C.  sub  norn.  <  Mobile  Mut  Ins.  Co.  v.  Cullom,  49 
Kortright  v.  Buffalo  Commercial  Ala.  558  (1873);  New  Orleans  Nat 
Bank,  20  Wend.  91  (1838);  Bank  of  Banking  Assoc,  r.  Wiltz,  10  Fed.  Rep. 
Utica  V.  Smalley,  2  Cow.  770  (1824);    330(1881). 

McNeil  V.  Tenth  Nat  Bank,  46  N.  Y.        ^Tuttle  v.  Walton,  1  Ga.  43  (1846); 

983 


§  532.] 


LIEN   OF   THE   CORPORATION   ON   STOCK.  [CH.  XXXI. 


The  corporation  cannot,  after  it  has  been  regularly  notified  of 
the  transfer,  assert  a  lien  upon  the  stock  to  secure  an  indebted- 
ness of  the  transferrer  contracted  subsequently  to  the  notice.' 
A  mere  notice  to  the  bank  is,  in  such  a  case,  sufTicient  to  pro- 
tect the  transferee.  It  is  immaterial  that  the  transfer  was  not 
registered.^  Where  the  directors  of  a  corporation  know  that  a 
stockholder  of  record  has  transferred  his  stock,  the  corporation 
cannot  claim  a  lien  for  debts  incurred  subsequently.'  And  in 
a  case  where  the  transfer  was  registered,  but  no  certificate  had 
been  issued,  it  was  held  that  a  pledgee  was  protected.*  But 
where  there  is  neither  a  register  of  the  transfer  nor  notice  of  it 
served  upon  the  corporation,  the  stock  may  properly  be  sub- 
jected to  a  corporate  lien  for  the  indebtedness  of  the  transfer- 
rer incurred  subsequently  to  the  transfer.*  A  pledgee  who  is 
duly  registered  on  the  corporate  books  as  a  shareholder,  but  to 
whom  no  certificate  has  been  issued,  is  nevertheless  protected 
against  liens  upon  his  shares  for  the  indebtedness  of  the  pledgor.® 


Foster  v.  Potter,  37  Mo.  525  (1866); 
AVest  Branch  Bank  v.  Armstrong,  40 
Pa.  St.  278  (1861);  Weston  v.  Bear 
River,  etc.  Co.,  5  Cai  186  (1855). 

1  Conant  v.  Seneca  County  Bank,  1 
Ohio  St.  298  (1853);  Nesmith  v.  Wash- 
ington Bank,  23  Mass.  324  (1828).  The 
same  rule  applies  where  the  stock  is 
pledged.  Bradford  Banking  Co.  v. 
Briggs,  L.  R.  12  App.  Cas.  29  (1886). 
But  where  the  shareholder  transfers 
his  stock,  and  subsequently,  without 
notifying  the  corporation  of  the 
transfer,  borrows  money  from  the 
coi"poration  in  regular  course  of  busi- 
ness, the  corporation  may  refuse  to 
register  the  transfer  and  may  insist 
upon  the  lien.  Piatt  v.  Birmingham 
Axle  Co.,  41  Conn.  255  (1874). 

3  Bank  of  America  v.  McNeil,  10 
Bush  (Ky.),  54  (1873). 

3  Prince,  etc.  Co.  v.  St.  Paul,  etc. 
Co.,  70  N.  W.  Rep.  1079  (Minn.,  1897). 

4  Cecil  Nat.  Bank  v.  Watsontown 
Bank,  105  U.  S.  217  (1881).  Where  it 
is  the  custom  to  have  the  corpora- 
tion, upon  request,  certify  that  it  has 
no  lien,  such  a  request  operates  as 
notice  to  the  corporation.    Coving- 


ton, etc.  Bank  v.  Commercial  Bank, 
65  Fed.  Rep.  547  (1895).  This  case 
holds  also  that  notice  to  the  corpo- 
ration by  a  loaner  of  money  to  the 
stoclcholder  does  not  enure  to  tlie 
benefit  of  a  purchaser  who  knew 
nothing  thereof. 

5  Piatt  V.  Birmingham  Axle  Co.,  41 
Conn.  255  (1874).  Where  the  statute 
gives  a  lien  for  debts  due,  the  lien 
applies  as  against  a  transfer  of  the 
certificate  made  before  the  debt  be- 
came due,  but  presented  to  the  cor- 
poration for  transfer  after  the  debt 
became  dua  IMicliigan,  etc.  Co.  v. 
State  Bank,  69  N.  W.  Rep.  645  (Mich., 
1896).  As  to  the  rvile  in  England,  see 
Miles  V.  New  Zealand,  etc.  Co.,  L.  R. 
32  Ch.  D.  266  (1886) ;  Dunlop  v.  Dunlop, 
L.  R.  21  Ch.  D.  583  (1882);  Societe 
Generale  v.  Tramways  Union  Co., 
L.  R  14  Q.  B.  D.  424  (1884) ;  New  Lon- 
don, etc.  Bank  v.  Brocklebank,  L.  R. 
21  Ch.  D.  302  (1882).  In  England, 
however,  unrecorded  transferees  of 
stock  have  few,  if  any,  rights  as 
against  the  corporation. 

•>  Cecil  Nat.  Bank  v.  Watsontown 
Bank,  105  U.  S.  217  (1881). 


984 


OH.  XXXI.]  LIEN    OF    THE    COEPOKATION    ON   STOCK.  [§  533. 

But  a  pledgee  who  neglects  to  notify  tlie  corporation  that  he 
holds  the  stock  in  pledge,  or  to  take  the  proper  steps  to  secure 
title  to  the  stock  in  his  own  name,  will  not  be  protected  against 
the  lien  of  the  corporation  upon  the  stock  to  secure  the  pay- 
ment of  an  indebtedness  contracted  to  the  bank  by  the  pledgor 
in  the  meantime  and  subsequently  to  the  pledge  of  the  shares.* 
A  corporate  lien  will  not  attach  to  stock  for  the  debts  of  a 
legatee  unless  the  legatee  accept  the  shares.^ 

Where  one  pays  a  debt  as  surety  for  a  shareholder,  he  is  en- 
titled to  be  subrogated  to  the  rights  of  the  corporation  by  way 
of  lien  on  the  shareholder's  stock.'  And  where  the  transferee 
pays  the  transferrer's  debt  to  the  corporation  in  order  to  ob- 
tain a  registry  of  the  transfer,  he  of  course  may  have  his  action 
to  recover  back  from  his  transferrer  the  amount  so  paid.* 

Where  the  company  has  a  lien  upon  the  stock  of  a  share- 
holder, the  latter  may  compel  the  company  to  assign  their  lien 
to  a  third  person  who  will  advance  the  money,  and  to  whom 
the  shares  are  at  the  same  time  transferred.* 

§  533.  Liens  on  national-lank  stoclc^l^a^tional  hanks  ^ere 
formerly  held  to  have  power  to  enact  by-laws  creating  a  lien  on 
stock  in  the  bank  for  debts  owed  by  its  ornier  to  the  bank." 
But  the  supreme  court  of  the  United  States,  when  the  question 
came  before  it,  refused  to  enforce  such  a  by-law,  and  decided 
that  its  enactment  was  not  within  the  spirit  of  those  provisions 
of  the  National  Banking  Act  of  18C4  which  confer  power  upon 
the  management  of  a  national  bank  to  regulate  the  business  of 
the  bank  and  to  conduct  its  affairs.'  In  the  present  state  of  the 

1  Piatt  V.  Birmingliam  Axle  Co.,  41  <  Bates  v.  New  York  Ins.  Co.,  3 
Conn.  255,  2CA  (1874);  Jennings  v.  Johns.  Cas.  238  (1802).  See  also  §  262, 
Bank  of  California,  79  CaL  323  (1889) ;    supra. 

Gemmell  v.  Davis,  75  Md.  546  (1892).        "  Everitt    v.   Automatic,   eta   Co., 

2  Fanners'  Bank  v.  Iglehart,  C  GiU     [1892]  3  Ch-  506. 

(Md.),  50  (1847).  ^  The  leading  case  was  Knight  v. 
»  Young  V.  Vough.  23  N.  J.  Eq.  325  Old  Nat  Bank,  3  CUff.  429  (1871); 
(1873);  Hodges  v.  Planters'  Bank,  7  S.  C,  14  Fed.  Cas.  772,  upholding  the 
Gill  &  J.  (Md.)  306,  310  (1835);  West  lien.  To  the  same  effect,  see  Lock- 
Branch  Bank  v.  Armstrong,  40  Pa.  wood  v.  Mechanics'  Nat  Bank,  9  R.  L 
St  278  (1861);  Klopp  v.  Lebanon  308  (1809);  i2e  Dunkerson,  4  Biss.  227 
Bank,  40  Pa,  St  88  (1863).  Cf.  Higgs  (1808):  S.  C,  8  Fed.  Cas.  48;  Young  v. 
V.  Northern  Assam  Tea  Co.,  L.  R.  4  Vough,  23  N.  J.  Eq.  325  (1873). 
Exch.  387  (1869);  iJe  Northern  Assam  ^  Bullard  v.  Bank,  18  Wall  589 
Tea  Co.,  L.  R  10  Eq.  458  (1870);  Na-  (1873).  See  also  Bank  v.  Lanier,  11 
tional  Exch.  Bank  v.  Silliman,  65  WalL  369  (1870);  Case  v.  Bank,  100 
N.  Y.  475  (1875).  U.  S.  446  (1879).    One  reason  for  deny- 

985 


§  533.] 


LIEN    OF    THE    COKPORATION    ON    STOCK.  [cil.  XiXI. 


law,  therefore,  no  national  bank  can,  by  any  by-law,  create  any 
lien  upon  shares  of  stock  in  the  bank  to  secure  the  payment  of 
any  indebtedness  which  the  owner  of  the  shares  may  contract  to 
the  bank.^  This  conclusion  is  in  accord  with  the  well-settled 
policy  of  the  federal  courts  to  protect  purchasers  of  certificates 


of  stock  against  all  secret  dangers. 


ing  this  power  to  national  banks  is 
that  they  are  prohibited  from  loan- 
ing money  to  stockholders  on  the 
security  of  their  stock. 

1  Delaware,  etc.  R.  R.  v.  Oxford  Iron 
Co.,  38  N.  J.  Eq.  840  (1884);  ]\Ieyers 
V.  Valley  Nat  Bank,  18  Nat  Bunkr. 
Eeg.  34  (1879);  S.  C,  17  Fed.  Cas.  2o0; 
Hagar  v.  Union  Nat  Bank,  G3  Ma  509 
(1874);  New  Orleans  Nat  Bank  v. 
Wiltz,  10  Fed.  Rep.  330  (1881);  Good- 
bar  V.  City  Nat  Bank,  78  Tex.  401 
(1890);  Second  Nat  Bank  v.  National 
State  Bank,  10  Bush  (Ky.),  307  (1874); 
Lee  V.  Citizens'  Nat  Bank,  2  Cin. 
Super.  Ct  (Oliio),  298,  306  (1872); 
Evansville  Nat  Bank  v.  Metropolitan 
Nat  Bank,  2  Biss.  527  (1871);  a  C,  8 


Fed.  Cas.  891.  In  the  case  last  cited, 
which  upon  appeal  was  affirmed  by 
the  supreme  court  of  the  United 
States,  it  was  held  that  such  a  by-law 
was  in  its  operation  the  same  thing 
as  though  a  loan  were  made  by  the 
bank  upon  the  security  of  the  stock  — 
a  transaction  forbidden  by  the  thirty- 
fifth  section  of  the  National  Banking 
Act  Conklin  v.  Second  Nat  Bank, 
45  N.  Y.  655  (1871).  Cf.  Xenia  Nat 
Bank  v.  Stewart,  107  U.  S.  676  (1882); 
Roseiibacrk  v.  Salt  Springs  Nat  Bank, 
53  Barb.  495  (180.8).  A  bank,  however, 
may  attich  the  stock  of  one  of  its 
stockliolders  for  debts  due  from  luin 
to  it  Hagar  v.  Union  Nat  Bank,  63 
Me.  509  (1874). 


986 


nn AFTER  XXXIL 


DIVIDENDS. 


534.  Definition  of  a  di\'i<lend  and 

the  four  kinds  of  divitlends. 

535.  Scrip  dividends,  property  divi- 

dends, and  bond  dividends. 
530.  Stock  dividentls. 

537.  Interost-bearinK  stock. 

538.  To  wlioiu  tlie  c(jrp<jration  is  to 

juiy  the  dividend. 

539.  To  whom  tlie  dividend  belongs. 

540.  Dividends  must  be  equal  and 

witliout  i)references. 

541.  A  dividend  wlien  declared  is  a 

debt  due  absolutely  to  the 
shareholder. 

542.  543.  It  is  a  debt  which  may  be 

collected  by  legal  proceed- 
ings. 
54L  Right  of  the  corporation  to 
apply  dividends  to  the  pay- 
ment of  debts  duo  to  it  by 
the  shareholder. 


§  545.  The  courts  very  rarely  compel 
tlie  directors  to  declare  a 
dividend. 

546.  Dividends  can  visually  be  made 

only  from  profits  — What 
are  profits  wliich  may  be 
used  for  dividends. 

547.  A  stockhoUler  may  enjoin  an 

illegal  dividend. 

548.  Dividends  which  impair  the 

capital  stock  may  be  ille- 
gal and  may  be  recovered 
back  from  the  stockhold- 
ers—  Dividends  on  dissolu- 
tion. »» 

549.  Proceedings  to  recover  back 

such  a  dividend. 

550.  The  liability  herein  of  the  cor- 

porate officers. 

551.  Guarantee    of    dividends   by 

contract. 


§534.  Definition  of  a  dividend  and  the  four  Icinds  of  divi- 
dends.— A  dividend  is  a  corporate  profit  set  aside,  declared,  and 
ordered  by  the  directors  to  be  paid  to  the  stockliolders  on  de- 
mand or  at  a  fixed  tirae.^  Until  the  dividend  is  declared  these 
corporate  profits  belong  to  the  corporation,  not  to  the  share- 
holders, and  are  liable  for  corporate  indebtedness.*  But  the 
board  of  directors  of  a  bank  have  no  power  to  pledge  its  future 
profits  unless  the  stockholders  assent  thereto.' 

A  corporation  may,  in  general,  make  four  difl"erent  kinds  of 


iLockhardt  r.  Van  Alstyne,  31 
Mich-  76  (1875);  Chaffee  v.  Rutland 
R.  R,  55  Vt  110,  129  (1882);  Hyatt 
V.  Allen,  56  N.  Y.  553  (1874).  "The 
term  'dividend,'  in  its  technical  as 
well  as  in  its  ordinary  acceptation, 
means  that  portion  of  its  profits 
which  the  cori^ration,  by  its  direct- 
ory, sets  ai)art  for  ratable  division 
among  its  shareholders."  Mobile,  etc. 
R  R  r.  Tennessee,  153  U.  S.  486  (1894). 


2  Goodwin  v.  Hardy,  57  Ue.  143, 145 
(1869) ;  Rand  v.  Hubbell,  115  Mass.  461, 
474  (1874);  Minot  v.  Paine,  99  Mass. 
101  (1868);  Hyatt  v.  Allen,  56  N.  Y. 
553  (1874);  Mickles  v.  Rochester,  etc. 
Bank,  11  Paige,  11^  (1844).  holding 
that  stockholders  are  nei*  her  tenants 
in  common  nor  copartnets  of  corpo- 
rate proi>erty. 

3  Brown  v.  Bradford,  72  N.  W.  Rep^ 
648  (Iowa,  1807). 


987 


§  53i.] 


DIVIDENDS. 


[CH.  IXXII. 


dividends :  namely,  a  dividend  payable  in  cash,  in  stock,  in  bonds 
or  scrip,  or  in  property. 

Dividends  are  declared  by  the  directors  and  not  by  the  stock- 
holders.^ A  division  of  profits  witliout  the  formality  of  declar- 
ing a  dividend  is  equivalent  to  a  dividend.'  A  division  of  the 
profits  is  a  dividend  even  though  not  called  such  and  not  con- 
sidered such  by  the  directors  and  stockholders.^'  A  stockholder 
cannot  prove  by  parol  that  a  dividend  was  declared,  the  records 
not  showing  the  same.  His  remedy  is  by  proceedings  to  cor- 
rect the  corporate  record.* 

Numerous  cases  on  the  definition  of  the  word  "  dividend " 
have  arisen  in  connection  with  the  taxation  of  corporations.' 


1  See  §  545,  infra, 

2Rorke  V.  Thomas,  56  N.  Y.  559 
(1874);  Reading  Trust  Co.  v.  Reading 
Ironworks,  137  Pa.  St.  283  (1891);  Mo- 
Kusick  V.  Seymour,  etc.  Co.,  48  Jlinn. 
172  (1892).  See  also  §  572a,  infra. 
Where  a  fixed  per  cent  is  paid  annu- 
ally to  stockholders  instead  of  divi- 
dends and  charged  to  them,  and  the 
stock  held  in  pledge  for  the  same, 
such  a  payment  to  the  life  tenant 
does  not  create  a  valid  lien  on  the 
stock  as  against  the  remainderman. 
Reading  Trust  Co.  v.  Reading  Iron- 
works, 137  Pa,  St.  282  (1891). 

3  Commonwealth  v.  Pittsburg,  etc. 
R'y,  74  Pa.  St.  83,  90  (1873),  holding 
that  a  stock  dividend  was  not  such  a 
dividend  as  entered  into  the  rate  of 
taxation.  Lehigh  Crane  Iron  Co.  v. 
Commonwealth,  55  Pa.  St.  448  (1867), 
where  the  capital  stock  was  $100,000, 
but  dividends  were  declared  on  an 
assumed  capital  of  §1,000.000,  the 
property  being  worth  the  latter  figiire 
by  reason  of  profits  invested  in  it. 
The  same  device  was  resorted  to  in 
Citizens',  etc.  R.  R.  v.  Philadelphia, 
49  Pa.  St.  251  (18G5).  "  Dividends  de- 
clared," as  used  in  an  employee's  con- 
tract of  payment  for  services,  the 
rate  of  payment  being  according  to 
such  "  dividends,"  were  construed  to 
mean  profits,  even  though  not  dis- 
tributed  by   divi  lends,   the    intent 


being  clear.  Acceptance  of  part  pay- 
ment is  no  bar  to  an  action  to  collect. 
Scase  I'.  Gillette-Herzog  Mfg.  Co.,  55 
Minn.  349  (1893 1.  Where  large  salaries 
are  paid,  instead  of  decUiring  divi- 
dends, the  object  being  "conceal- 
ment and  delusion,"  the  court  will 
not  hold  tliut  such  "  salaries  "  are  a 
part  of  the  manufacturing  expense 
of  a  defendant  gmlty  of  infringing  a 
patent.  Rubber  Co.  v.  Goodyear,  9 
Wall  788  (1869);  Scabury  v.  Am 
Ende,  152  U.  S.  561  (1894).  A  stock- 
holder cannot  maintain  a  suit  for  a 
dividend  which  the  stockholders  in- 
formally agreed  shovdd  be  declared, 
but  which  never  was  declared.  Amer- 
ican Wire  Nail  Co.  v.  Gedge,  96  Ky. 
513  (1895). 

<  Dennis  v.  Joslin,  etc.  Co.,  36  AtL 
Rep.  129  (R.  L,  1896). 

5  A  tax  upon  the  receipts  of  a  rail- 
road is  not  a  tax  upon  dividends. 
Comm'rs,  etc.  v.  Buckner,  48  Fed  Rep. 
533  (1891).  Profits  applied  to  better- 
ments are  not  "dividends  earned" 
within  the  meaning  of  a  statute  im- 
posing taxation.  State  v.  Comptroller, 
54  N.  J.  L.  135  (1891).  Where  aU  the 
shares  are  reduced  in  par  value  from 
§50  to  $38,  and  the  $12  difference  is 
paid  to  the  stockholders  in  cash,  this 
is  a  reduction  of  capital  stock,  and 
not  a  dividend,  and  cannot  be  taxed 
as  a  dividend  Commonwealth  v.  Cen- 


988 


o:i.  XXXII.] 


DIVIDENDS. 


[§  535. 


Corporations  have  inherent  power  to  declare  and  pay  dividends, 
even  though  they  have  no  capital  stock.^ 

§  535.  Scrij)  dividends,  j^roperty  dividends,  and  lond  divi- 
dends.—A  scriip  dividend  is  a  dividend  of  certificates  giving 
the  holder  certain  rights  which  are  specified  in  the  certificate 
itself.  These  dividends  arc  usually  declared  when  the  company 
has  profits  which  are  not  in  the  shape  of  money,  but  are  in  other 
forms  of  property,  and  the  company  wishes  to  anticipate  tlie 
time  when  the  property  may  be  sold  for  cash,  and  the  cash  dis- 
tributed by  a  money  dividend.  The  certificate  sometimes  en- 
titles the  holder  to  a  sum  of  money  payable  with  interest  at  a 
certain  time  after  date,  or  at  the  option  of  the  compan}^,  or 
when  the  company  shall  have  accumulated  sulficient  sm^plus  to 
pay  the  certificates  in  full.  Sometimes  the  certificates  are  cer- 
tificates of  indebtedness,  and  are  made  convertible,  at  the  option 
of  the  holder,  into  bonds  or  stocks  ;2  and  sometimes  the  certifi- 


tral  Transp.  Co.,  145  Pa.  St  89  (1891). 
Where  a  tax  is  levied  on  dividends 
the  officers  cannot  defend  on  the 
ground  that  the  dividend  was  illegal 
Central  Nat.  Bank  v.  U.  S.,  137  U.  S. 
355  (1890).  In  Commonwealth  v.  Pitts- 
burg, etc,  R'y,  7-4  Pa.  St  83  (1873),  a 
lessor  company  having  twelve  per 
cent  dividends  guaranteed  on  its 
stock  declared  a  stock  dividend  so 
that  the  guarantee  should  be  seven 
per  cent  on  the  stock  thus  increased. 
The  court  held  that  such  a  dividend 
did  not  subject  the  company  to  a  tax 
based  on  dividends.  In  Louisiana 
taxes  are  assessed  on  franchises,  the 
value  of  which  is  ascertained  from 
the  earning  capacity  of  the  corpora- 
tion. Crescent  City  R.  Co.  v.  New 
Orleans,  44  La.  Ann.  1057  (1892);  New 
Orleans,  etc.  R.  Co,  v.  New  Orleans, 
44  La.  Ann.  1053  (1892);  New  Orleans, 
etc  R.  Co.  V.  New  Orleans,  44  La. 
Ann.  1055  (1892). 

1  In  McKean  v.  Biddle,  37  AtL  Rep. 
528  (Pa.,  1897),  where  a  mutiial  in- 
surance company  for  one  hundred 
and  thirty-two  years  had  not  paid 
dividends,  but  had  accumulated  a 
surplus  of  over  four  million  dollars. 


the  coiirt  held  that  the  company 
might  resume  the  payment  of  divi- 
dends. The  court  also  held  that 
every  corporation  has  the  inherent 
right  to  declare  dividends. 

2  Chaffee  v.  Rutland  R.  R.,  55.  Vt 
110  (1882);  State  v.  Baltimore,  etc.  Co., 
6  GiU  (Md.),  3G3  (1848).  In  Rogers  v. 
New  York,  etc.  Land  Co.,  134  N.  Y. 
197  (1892),  land  had  been  sold  to  the 
company  for  a  certain  amoimt  of 
preferred  stock,  and  also  a  certain 
amount  of  "  land  scrip,"  such  scrip 
entitling  the  holder  to  exchange  them 
for  land  so  conveyed  at  a  price  to  be 
thereafter  determined.  The  company 
had  the  right  to  pay  off  the  scrip  and 
retire  it  The  company  sold  part  of 
the  land,  and  then  proceeded  to  make 
a  scrip  dividend  of  the  scrip  so  taken 
up  by  it  A  dissenting  scriphokler 
brought  suit  to  undo  the  transaction 
on  the  ground  that  the  scrip  taken 
up  by  the  company  should  be  can- 
celed. The  court  su-stained  his  action, 
and  held  that  from  the  original  con- 
tract it  was  clear  that  the  land  waa 
received  as  a  trust  fund  to  ultimately 
pay  off  the  scrip.  Reversing  Rogers 
V.  Phelps,  9  N.  Y.  Supp.  886  (1890).    In 


989 


§  535.] 


DIVIDEN'DS. 


[cn.  ixxii. 


cate  entitles  the  holder  to  exchange  the  certificate  for  lands  of 
the  corporation  to  an  amount  equivalent  in  value  to  the  face 
value  of  the  certificate ;  or  to  receive  from  the  corporation  any 
other  benefit  or  advantage  which  the  corporation  may  lawfully 
confer.  Sometimes  the  certificate  so  far  partakes  of  the  char- 
acter of  a  certificate  of  stock  as  to  entitle  tlio  holder  to  divi- 
dends.*   "Where  the  corporation,  having  a  large  surplus,  issues 

Brown  v.  Lehigh,  etc.  Co..  49  Pa.  St  resenting  earnings  spent  for  improve- 
270  (18G5),  a  dividend  of  scrip  had  raonts,  and  payable  out  of  future 
been  declared,  the  scrip  being  as  fol-  earnings  with  dividends,  or  convert- 
lows:  .         - 

"  No. .  SCRIP.  Shares. 

"Tliis  is  to  certify  that , heirs 

or  assigns,  will  be  entitled,  upon  the  surren- 
der of  this  certificate,  to  —  shares  in  the 
capital  stock  of  the  Lehigh  Coal  and  Naviga- 
tion Company  as  soon  as  the  present  funded 
debt  of  the  company  has  been  paid  off,  or 
adequate  provision  made  for  its  di.=?cliarge 
when  due  and  payment  demanded;  and  will 
also  be  entitled  to  a  pro  rata  share  of  any 
future  distribution  of  scrip;  but  not  to  any 
cash  dividend  until  this  certificate  has  been 
converted  into  stock,  as  above  provid^'d. 

"  Or,  this  certificate  may,  at  any  time,  at 
the  option  of  the  holder  thereof,  be  converted 
into  stock  upon  payment  by  said  holder, 
either  in  cash  or  in  the  six  per  cent  loans  of 
the  company,  of  the  par  value  of  said  stock, 
and  the  surrender  of  this  certificate. 

"This  certificate  is  transferable  only  at 
the  office  of  the  company. 

"Witness,"  etc. 

Several  years  after  the  issue,  the 
mortgage  being  paid  off,  the  scrip- 
holders  claimed  that  they  were  en- 
titled to  back  dividends  equal  to  past 
dividends  paid  on  the  stock.  The 
court  held,  however,  that  the  terms 
of  the  contract  did  not  give  any  such 
right,  and  that  dividends  commenced 
only  from  the  time  the  scrip  was  con- 
verted into  stock. 

The  holder  of  a  certificate  of  in- 
debtedness convertible  into  stock  can- 
not claim  an  interest  in  a  stock  divi- 
dend until  he  has  converted  the  scrip 
into  stock.  Miller  v.  Illinois  Central 
R.  R,  24  Barb.  312  (1857);  Brtmdage 
V.  Brundage,  63  Barb.  397  (1873) ;  aff 'd, 
60  N.  Y.  544  (1875),  holding  that  as- 
signable "  interest  certificates  "  rep- 


990 


iblo  into  stock  at  the  company's  op- 
tion, did  not  pass  with  a  beque-st  of 
a  life  interest  in  certain  shares  of  the 
stock.  Seealso  Butler  v.  Olen  Cove,  etc. 
Co.,  18  Hun,  47  (1879).  See  §  283,  suj^ra. 
Cf.  Bailey  v.  Citizens'  Gas  Liglit  Co., 
27  N.  J.  Eq.  19G  (1876).  The  court 
in  this  case,  speaking  of  a  dividend 
of  interest-bearing  securities,  said: 
"  That  the  company  had  no  lawful 
authority  for  issuing  the  certificates 
cannot  be  doubted."  In  Merz  v.  In- 
terior Conduit,  etc.  Co.,  87  Hun,  430 
(1895),  the  issue  of  bonds  to  pay  cer- 
tificates of  indebtedness  which  had 
been  issued  as  a  dividend  was  en- 
joined. The  dissenting  opinion  in 
this  case  seems  the  better  view. 

'  Bailey  v.  Railroad  Co.,  22  Walk 
604  (1874).  Cf.  Brundage  u  Brun- 
dage, 60  N.  Y.  544  (1875). 

The  character  of  the  scrip  in  this 
case  is  shown  by  the  resolution  au- 
thorizing it,  as  follows: 

"Wliereas,  this  company  has  hitherto  ex- 
pended of  its  earnings  for  the  purpose  of  con- 
structing and  equipping  its  road,  and  In  the 
purchase  of  real  estate  and  other  properties 
with  a  view  to  an  increase  of  its  traffic, 
moneys  equal  in  amount  to  eighty  per  cent 
of  the  capital  stock  of  the  company;  and 
whereas,  the  several  stockholders  of  the  com- 
pany are  entitled  to  evidence  of  such  expen- 
diture, and  to  reimbursement  of  the  same  at 
some  convenient  future  period: 

"  Now,  therefore,  resolved,  that  a  certifi- 
cate signed  by  the  president  and  treasurer  of 
this  company  be  issued  to  the  stockholders 
severally,  declaring  that  such  stockholder  is 
entitled  to  eighty  per  cent  of  the  capital 
stock  held  by  him,  payable  ratably  with  the 


CH.  XXXII.] 


DIVIDENDS. 


[§  535. 


such  certificates,  they  are  held  not  to  transfer  the  title  to  that 
surplus  from  the  corporation  to  the  holders  of  the  certificates.^ 
In  general  the  issue  of  scrip  dividends  may  be  entirely  lawful, 
and  they  are  upheld  by  the  courts;  but  when  they  are  declared 
in  fraud  of  the  rights  of  third  parties  they  may  be  set  aside.' 
Scrip  is  practically  the  same  thing  as  shares  of  stock,  except 


other  certificates  issued  under  this  resolu- 
tion, at  the  option  of  the  company,  out  of  its 
future  earnings,  with  dividends  thereon  at 
the  same  rates  and  times  as  dividends  shall 
be  paid  on  the  shares  of  the  capital  stock  of 
the  company,  and  that  such  certificates  may 
be,  at  the  option  of  the  company,  convertible 
Into  stock  of  the  company,  whenever  the 
compauy  shall  be  authorized  to  increase  ita 
capital  stock  to  an  amount  sufficient  for  such 
conversion." 

This  was  the  famous  scrip  dividend 
made  by  the  New  York  Central  R.  R. 
Co.  under  the  management  of  Com- 
modore Vanderbilt. 

The  form  of  the  certificate  was  as 
follows: 

"  THE  N-EW  YORK  CENTBAT.  RAIUIOAO  COMPAATT. 

"  No. .    Interest  Certificate. 

"  Under  a  resolution  of  the  board  of  direct- 
ors of  this  company,  passed  December  19th, 
1868,  of  which  the  above  is  a  copy,  the  New 
York  Central  Railroad  Company  herd  y  cer- 
tifies that  A.  B.,  being  the  holder  of  —  shares 
of  the  capital  stock  of  said  company,  is  en- 
titled to dollars,  payable  ratably  with 

the  other  certificates  issued  under  said  reso- 
lution, at  the  pleasure  of  the  company,  out  of 
its  future  earnings,  with  dividends  thereon, 
at  the  same  rates  and  times  as  dividends  shall 
be  paid  upon  the  shares  of  the  capital  stock 
of  said  comptiny. 

"This  certificate  may  be  transferred  on 
the  books  of  the  company  on  the  surrender 
of  this  certificate. 

"In  witness  whereof,  the  said  company 
has  caused  this  certificate  to  be  signed  by  its 
president  tind  treasurer,  this  19th  day  of  De- 
cember, 1868. 

•• ,  President. 

"Treasurer." 

At  the  foot  of  each  certificate  there 
was  a  form  of  transfer  in  blank: 

"  For  a  valuable  consideration,  I,  A.  B.,  do 
hereby  sell,  assign,  and  transfer  all  interest 
In  the  above  certificate  to  C.  D.,  and  do 
hereby  irrevocably  appoint  E.  F.  attorney, 
to  execute  a  transfer  thereof  on  the  books  of 
the  railroad  company  therein  mentioned 


See  Bailey  v.  Railroad  Co.,  22  Wall 
COS  (1874).  This  dividend  was  de- 
clared although  the  company  by  its 
charter  was  limited  to  ten  per  cent 
dividends. 

A  dividend  of  scrip  —  i.  e.,  a  paper 
entitling  the  holder  to  dividends 
equal  to  dividends  thereafter  de- 
clared on  the  capital  stock  —  is  prac- 
tically a  stock  dividend,  except  that 
the  scrip  cannot  vote,  and  provision 
is  generally  made  for  taking  it  up  in 
some  manner.  Such  a  dividend  was 
involved  in  Gordon  v.  Richmond,  etc 
R  R.,  78  Va.  501  (1884). 

1  People  V.  Board  of  Assessors,  76 
N.  Y.  202  (1879),  affirming  S.  C,  16 
Hun,  19G.  In  this  case  it  was  held 
that  the  issue  of  these  certificates 
could  not  operate  to  relieve  the  cor- 
poration from  their  obligations  to  pay 
their  tax  upon  the  surplus,  becaase 
the  surplus  remained  in  the  hands  of 
the  company,  and  as  such  was  liable 
to  assessment  and  taxation.  See  also 
Bailey  v.  Railroad  Co.,  22  Wall  604 
(1874).   See  87  Fed.  Rep.  51. 

^  While  negotiations  were  pending 
between  two  gas  companies  for  their 
consolidation  by  «one  company  buy- 
ing the  stock  of  the  other,  upon  a 
certain  basis  of  capital  and  indebted- 
ness, one  of  them  without  the  knowl- 
edge of  the  other  passed  a  resolution 
declaring  a  scrip  dividend  of  ten  per 
cent  on  its  capital  stock,  thus  in- 
creasing its  indebtedness  by  that 
amount  The  certificates  were  ac- 
cordingly is  ued ;  but  after  the  con- 
solidation, upon  a  bill  filed  for  that 
purpose,  the  scrip  was  declared  void. 
Bailey  v.  Citizens'  Gas  Light  Ca,  27 
N.  J.  Eq.  196  (1876). 


991 


g  535  1  DIVIDENDS.  [cn.  XXXII. 

that  it  has  no  voting  power.  It  is  issued  sometimes  because 
the  company  cannot  issue  any  more  capital  stock,  the  whole 
capital  stock  being  already  out;  sometimes  to  avoid  taxes,  and 
sometimes  to  increase  the  transferable  shares  without  giving  to 
the  new  shares  a  voting  power.  If  the  interest  or  dividends 
are  payable  only  from  the  profits,  the  issue  of  the  scrip  is  legal 
whenever  a  stock  dividend  would  be  legal,  that  is,  whenever 
the  property  of  the  company  is  equal  in  value  to  the  capital 
stock  plus  the  scrip  dividend. 

A  property  dividend  is  where  property  is  divided  instead  of 
that  property  being  sold  for  cash  and  the  cash  then  used  to  pay 
a  dividend.*  A  property  dividend  occurs  where  a  corporation 
sells  all  its  property  to  another  corporation  and  takes  in  pay- 
ment thereof  the  stock  and  the  bonds  of  the  purchasing  corpo- 
ration and  then  makes  a  distribution  of  the  same  among  its 
stockholders.  It  has  been  held  that  any  one  of  its  stockholders 
may  object  and  insist  on  payment  of  his  shares  in  cash.'  This, 
however,  is  practically  a  dissolution  of  the  company  and  a  dis- 
tribution of  its  assets,  a  subject  which  is  considered  elsewhere.' 
A  dividend  or  distribution  of  the  company's  bonds  among 
its  stockholders  is  legal,  if  the  capital  stock  is  not  thereby  im- 
paired and  if  corporate  creditors  existing  at  that  time  do  not 
object.''  Unless  some  statute  prohibits  it,  or  some  one  objects, 
a  corporation  may  declare  a  dividend  out  of  its  capital  stock, 
subject  to  the  common-law  liability  for  so  doing.* 

In  the  absence  of  a  special  provision  to  the  contrary,  divi- 
dends will  be  presumed  to  be  payable  in  cash,  and  in  lawful  or 
current  money .^  But  where  the  dividend  is  paid  in  depreciated 
currency,  a  stockholder  cannot  insist  that  he  shall  be  paid  any 
more  than  what  the  depreciated  currency  is  worth  in  regular 
currency.'^ 

1  An  amendment  to  the   charter  2  gee  §  671,  infra, 

may  prescribe  that  imnecessary  cor-  '  See  g  548,  infra. 

porate  real  estate  shall  be  divided  *  See  §  766,  infra. 

among  or  partitioned  between  the  5  people  v.  Barker,  141  N.  Y.  251 

stockholders.    Merchant  v.  Western  (1894).    See  also  g§  546,  548,  671,  infra. 

Land    Assoc,  56   Minn.   327    (1894).  6  Ehle  v.  Chittenango  Bank,  24  N.  Y. 

Where  corporate  land  is  deeded  by  548  (1862). 

way    of    dividend   or    distribution  "^  Back  dividends  may  be  recovered 

among  stockholders,  there  is  no  war-  on  stock  which  has  been  illegally 

ranty  of  title.    Olsen  v.  Homestead,  confiscated;  but  where  the  dividends 

etc.  Co.,  87  Tex.  368  (1894).  to  other  stockholders  were  paid  in 


CH.  XXXII.] 


DIVIDENDS. 


[§  536. 


§  53G.  Stocic  dividends. —  A  stock  dividend,  as  the  name  im- 
ports, is  a  dividend  of  the  stock  of  the  corporation.  Such  a 
dividend  is  lawful  when  an  amount  of  money  or  property 
equivalent  in  value  to  the  full  par  value  of  the  stock  distril)- 
uted  as  a  dividend  has  been  accumulated  and  is  permanently 
added  to  the  capital  stock  of  the  corporation.  Corporations 
frequently  make  a  dividend  of  this  character  when  improve- 
ments of  the  corporate  property  or  extensions  of  the  business 
have  been  made  out  of  the  profits  earned.  It  is  also  made  when 
the  corporate  plant  has  increased  in  value,  and  it  seems  better 
to  issue  new  stock  to  represent  the  excess  of  value  than  to  sell 
the  increase  and  declare  a  cash  dividend.  In  this  country  these 
dividends  are  frequently  made,  and  are  constantly  sustained 
by  the  courts.'     The  shareholders,  having  voted  to  declare  such 


Confedemte  currency,  the  back  divi- 
dends jiaid  after  the  war  to  a  north- 
em  stockholder  are  a  sum  equal  in 
value  to  the  Confederate  currency 
when  the  dividends  were  declared- 
Keppel  V.  Petersburg  R  R,  Chase's 
Dec  167  (18(58);  Scott  v.  Central  Ry, 
etc  Co.,  53  Barb.  45  (ISa'i).  In  this 
case  two  of  the  three  judges  held 
that  though  the  dividends  were  de- 
clared without  s[x.'cifying  liow  they 
should  be  paid,  yet  where  they  were 
paid  as  a  matter  of  fact  in  depreci- 
ated Confederate  currency,  a  north- 
ern stockholder  could  not,  after  the 
war,  claim  the  same  dividends  pay- 
able in  United  States  currency. 

1  Williams  v.  Western  Union  TeL 
Co.,  93  N.  Y.  16i,  188  et  seq.  (1883); 
Dock  V.  Schlichter,  etc  Co.,  1G7  Pa- 
st. 370  (1895);  Farwell  v.  Great  West- 
ern Tel.  Co.,  101  III  522  (1890),  a  dic- 
tum; City  of  Ohio  v.  Cleveland,  etc 
R  R.,  6  Ohio  St  489  (ISOGi;  Howell  v. 
Chicago,  etc  P^  R,  51  Barb.  378(1868); 
Clarkson  r.  Clarkson,  18  Barb.  646 
(1855);  Simpson  v.  Moore,  30  Barb. 
<J;J7  (1859);  Gordon  r.  Richmond,  etc 
R  R,  78  Va.  501,  521  (1^84  ;  Minot  v. 
Paine. 93 Ma.ss.  101  (ISfW):  Poston, etc 
R  R  r.  Ck>mmonwealth.  100  Ma.ss. 
399  (186.S);  Deland  v.  WiUiam.s,  101 
Mass.  571  (1809);    Rand  r.  Uubbell, 


115  Mass.  461,  474  (1874);  Gibbons  v. 
JIaiion.  4  Mackey,  130  (1885);  Jones 
r.  .Morrison,  31  Minn.  140  (1883);  Earp's 
Ap|>eal,  28  Pa.  St.  308  (1857);  Wilt- 
bank's  ApfHjal,  64  Pa.  St  256  (1870); 
Commonwealth  v.  Pittsburgh,  etc 
R  R,  74  Pa.  St  83  (1873);  Brown  v. 
Lehigh  Coal,  etc.  Co.,  49  Pa.  St.  270 
(1805);  Commonwealth  v.  Cleveland, 
etc  R  R.  29  Pa.  St  370  (1857);  Parker 
r.  Mason,  8  R  L  427  (1807);  Stite  v. 
Baltimore,  etc.  R  R,  6  Gill  (Md.),363 
(1847).  See  Harris  v.  San  Francisco, 
Sugar,  etc  Co.,  41  Cal.  393  (1871), 
holding  that  one  who  is  entitled  to 
and  receives  a  stock  dividend  cannot 
claim  also  a  part  of  the  cash  profits 
which  are  used  for  improvements, 
even  though  a  contract  calls  for  caslu 
See  also  g  51,  supra,  and  ch.  XXXIII, 
infra.  As  to  the  taxation  of  stock  div- 
idends, see  §  572a,  infra.  In  England 
a  stock  dividend  lias  been  declared 
to  l)e  ultra  vires  so  far  as  dissenting 
stockholders  are  concerned.  It  can- 
not be  forced  upon  a  stockholder. 
Hoole  V.  Great  We- tern  R'y,  L.  R  3 
Ch.  202  (1867).  In  Ee  E;i.stera,  etc 
Co..  68  L.  T.  Rep.  321  (18'J3t,  a  stock 
dividend  was  involved,  but  its  legality 
was  not  pa.ssed  ujKjn.  It  is  discretiou- 
ary  with  the  directors  as  to  whether 
they  will  declare  a  stock  or  a  cash 


03 


993 


§§  537,  538.]  DIVIDENDS.  [cii.  xxxn. 

a  dividend,  may,  at  any  time  before  the  certificates  are  issued, 
reconsider  the  matter  and  revoke  the  dividend.*  PrefeiTed 
stockholders  are  entitled  to  share  in  the  distribution  of  stock 
by  a  stock  dividend  according  to  the  terms  of  tlieir  preferred 
stock.'  In  some  of  the  states  a  stock  dividend  is  prohibited  by 
statute  or  constitutional  provision.' 

§  537.  Interest  hearing  stock.— It  has  already  been  shown 
that  a  corporation  may  issue  stock  and  make  a  contract  witli 
the  subscriber  that  the  company  will  pay  interest  upon  the  sums 
paid  in  by  the  subscriber.*  Such  a  contract  is  legal,  however, 
only  when  the  interest  is  to  bo  pai<l  from  the  net  profits  of  tlio 
enterprise,  and  not  from  the  capital  stock.  Unless  net  profits 
have  been  earned  the  stipulated  interest  cannot  legally  be  paid. 
Consequently  there  is  little  difference  between  interest-bearing 
stock  and  preferred  stock. 

§  538.  To  whom  the  corporation  is  to  imy  the  dividend— Tho 
question  as  to  whom  a  dividend  shall  be  paid  after  it  has  been 
reo-ularly  declared  is  one  w^hich  sometimes  involves  the  corpora- 
tion in  considerable  dilliculty.  It  is  not  always  easy  to  decido 
which  one  of  two  or  more  claimants  is  entitled  to  the  dividend. 

The  general  rule  is  that  the  corporation  may  pay  the  dividen<l 
to  the  person  in  whose  name  the  stock  stands  registered  upon 
the  corporate  stock  book  at  the  time  the  dividend  is  declared.* 
It  may  do  so  without  inquiring  whether  he  has  transferred  the 

dividend.  Howell  u  Chicago,  etc.  R'y,  Alleghery  v.  Pittsburgh,  etc  R'y,  1~» 
51  Barb.  378  (18G8).  Where  a  consoli-  Pa.  St  414  (1897). 
dation  of  three  corporations  is  made  i  Terry  v.  Eagle  Lock  Co.,  47  Conn, 
by  increasing  the  capital  stock  of  141  (1879).  After  cancellation  there 
one  and  issuing  the  increased  stock  is  no  statutory  liability  on  such  stock, 
to  the  stockholders  of  all  tliree  cor-  Hollingshead  v.  Woodward,  35  Hun, 
porations  in  the  propoi-tion  agreed  410  (1885).  A  stock  dividend  after 
upon,  this  is  not  a  stock  dividend,  declaration  cannot  be  revoked,  ex- 
even  though  the  aggregate  capital  cept  possibly  for  some  extraordinary 
stock  was  $400,000,  but  by  the  con-  causa  Dock  v.  Schlichter,  etc.  Co., 
solidation  is  $1,000,000.  AUegheny  v.  167  Pa.  St  370  (1895).  Cf.  %  541,  infra. 
Federal,  etc.  R'y,  179  Pa.  St  424  (1897).  2  Gordon  v.  Richmond,  etc.  R.  R., 
Where  a  company  leases  its  prop-  78  Va.  501  (1884).  See  also  PliUlips  v. 
erty  to  another  company  at  a  nom-  Eastern  R.  R,  138  Mass.  123  (1884), 
inal  rental,  and  the  stockholders  of  and  ch.  XVI,  supra. 
the  first  company  transfer  their  stock  3  See  ?;§  51, 287,  supra;  50  N.  E.  R  648. 
to  the  second  company  in  exchange  *  See  ch.  XVI,  supra. 
for  stock  of  the  latter,  no  dividend  is  ^  Brisbane  v.  Delaware,  etc.  R.  R, 
involved,  and  a  tax  on  dividends  of  94  N.  Y.  204  (1883),  aflirramg  25  Hun, 
the  first  corporation  does  not  attach.  438  (1881);    Donnally  v.   Hearndon, 

994 


CH.  XXXII.] 


DIYIDEXDS. 


[§  538. 


stock,  and  without  requiring  the  production  of  the  certificate.* 
Moreover,  it  is  a  well-settled  rule  that  the  corporation  is  pro- 
tected in  paying  dividends  to  a  recorded  shareholder,  although 
he  may  have  transferred  his  shares,  no  notice  of  the  transfer 
having  been  given  to  the  company.^  But  after  notice  of  a  trans- 
fer the  corporation  must  pay  the  dividend  to  the  transferee, 
although  no  registry  has  been  made.'  And  between  two  claim- 
ants of  the  dividend,  one  being  the  cestui  que  trust  and  the 
other  a  hona  fide  transferee,  the  corporation  may  interplead.* 
The  riglit  to  dividends  docs  not,  however,  depend  upon  the 
issue  of  the  certificate,  and  the  owner  of  shares  may  claim  his 
dividends  though  no  certificate  has  ever  been  issued  by  the 


41  W.  Va.  519  (1895);  Jones  v.  Terre 
Haute,  etc.  R.  Pu,  29  Barb.  3.J3  (1839); 
anirineil,  57  N.  Y.  196;  Northrup  v. 
Newton,  etc.  Tnrnp.  Co.,  3  Conn.  544 
(1821).  Cf.  Planning  i».  Quicksilver 
Min.  Co.,  24  Hun,  3G0  (1881),  in  regard 
to  the  assignment  of  dividends.  The 
guaranty  accumulations  of  an  insur- 
ance company  conducted  both  on  the 
mutual  and  stock  principle  belong 
to  the  stockholders  and  not  to  the 
policy-holders.  Traders',  etc.  Ins.  Co. 
V.  Brown,  Ul  Mass.  403  (188G).  As  to 
dividends  on  a  tontine  insunince  pol- 
icy, see  Pierce  v.  Equitable  Life  Ass. 
Ca,  145  Mas.s.  56  (1887).  As  to  a  divi- 
dend by  way  of  redeeming  stock  in 
a  building  association,  see  Mechan- 
ics', et<?.  Assoc. 's  Appeal,  7  AtL  Rep. 
728  (Pa.,  1887). 

1  Brisbane  v.  Delaware,  etc.  R.  R., 
94  N.  Y.  204  (1883),  aff'g  25  Hun,  438; 
Cleveland,  etc.  R  R  r.  Robbins,  35 
Ohio  St.  483  (1880). 

2  Rink  of  Commerce's  Appeal,  73 
Pa.  St.  59  (1873),  where  a  distribution 
of  assets  was  made;  Bell  v.  Lafferty, 
1  Pa.  Sup.  Ct.  454  (1881),  where  the 
assignee  of  a  dividend  without  a  cer- 
tificate oVitained  payment,  and  the 
court  held  the  company  not  liable  to 
an  imrecorded  pledgee ;  Bank  of  Utica 
r.  Smalley,  2  Cow.  770  (1824) ;  Smith  r. 
American  Coal  Co.,  7  Lans.  317  (1873); 
Cleveland,  etc.  R  R  v.  Robbins,  35 


Ohio  St.  483  (1880),  the  corporation 
not  having  been  notified. 

'See  same  cases  as  in  preceding 
nota  The  corjMDration  is  liable  to 
a  transferee  for  dividends  declared 
after  a  registry  has  been  requested 
and  improperly  refused.  Robinson 
V.  New  Berne  Nat.  Bank,  95  N.  Y.  637 
(1884).  Where  the  transferee  and 
holder  of  the  certificate  notifies  the 
corporation  thereof  after  a  dividend 
has  been  declared,  but  before  it  is 
paid,  ho  is  entitled  to  the  dividend, 
and  may  sue  the  corporation  for  it. 
Timberlake  v.  Shippers'  Compress 
Co..  72  Miss.  323  (1895). 

*  Salisbury  Mill  v.  Town.send,  109 
Mass.  115  (1871);  Cross  v.  Eureka,  etc. 
Co.,  73  CaL  302  (1887),  a  case  between 
pledgor  and  pledgea  See  also  §  387, 
supra.  Cf.  Stone  v.  Reed,  152  ^lass. 
179  (1890),  where  a  corporate  creditor 
sued  the  treasurer  for  distributing 
property  among  the  stockliolders.  A 
corporation  cannot  interplead  as  be- 
tween stockholders  for  the  purpose 
of  determining  the  ownership  of 
stock,  there  having  been  no  claini 
made  ui)on  it  in  regard  to  registry  or 
in  regard  to  dividends.  It  mast  be 
shown  also  tiiat  the  company  has  not 
acted  in  a  partisan  manner  as  between 
the  different  claimants.  Hinckley  v. 
Pfister,  83  Wis.  64  (1892). 


995 


6  509.]  DIVIDENDS.  [cn.  XXXII. 

corporation.^  The  corporation  is  protected  if  it  pay  dividends 
to  the  administrator  without  notice  of  a  transfer  by  hini.'^ 

With  respect  to  the  dividends  on  the  stock  of  a  married 
woman,  the  corporation  must  pay  them  to  the  husband  or  not, 
according  to  the  Law  of  the  domicile  of  the  corporation,  and 
not  according  to  the  hiw  of  the  domicile  of  the  married  woman.' 
The  husband,  by  collecting  dividends  on  his  wife's  shares,  does 
not  thereby  reduce  the  stock  to  possession.* 

Even  though  the  corporation  closes  its  transfer-book  several 
days  before  a  dividend  is  declared,  nevertheless  those  are  en- 
titled to  the  dividend  who  apply  for  registry  on  or  before  the 
day  of  the  declaration  of  the  dividend.' 

If  the  hokler  of  acertilicate  of  stock  has  applied  for  transfer 
and  been  refused,  he  may  sue  for  the  dividend  before  bringing 
a  suit  in  equity  to  obtain  a  transfer  of  his  stock.' 

§  539.  To  tvliom  the  dividoid  hclonys.— As  between  the  vendor 
and  vendee  of  shares  of  stock,  it  is  a  settled  rule  that  the  vendee 
is  entitled  to  all  the  dividends  on  the  stock  which  are  declared 
after  the  sale  of  the  stock.  Even  though  the  transfer  has  not 
been  recorded,  the  transferee  has  a  right  to  the  dividends  as 
against  the  transferrer.  The  law,  moreover,  refuses  to  inves- 
tigate the  question  when  the  dividend  was  earned.  In  con- 
templation of  law  the  net  profits  are  earned  at  the  instant  the 
dividend  is  declared.    This  rule  is  just,  inasmuch  as  the  ac- 

1  Ellis  u  Essex  Merrimack  Bridge,  nail,  14  Gratt.  (Va.)  309,383  (1858); 
19  Mass.  343  (1834).  Searing  v.  Searing,  9  Paige,  383  (1841). 

2  Brisbane  v.  Delaware,  etc.  R  R,  A  receipt  of  dividends  by  f^e  hus- 
94  N.  Y.  304  (1883).  The  heirs  of  a  bandonly  reduces  the  dividends  into 
stockholder  must,  in  order  to  entitle  possession  and  not  tlie  stock.  See 
themselves  to  dividends,  procure  a  §  319.  supra. 

transfer  of  their  ancestor's  shares  5  Jones  v.  Terre  Haute,  etc.  R  R., 
into  their  own  names  on  the  corpo-  57  N.  Y.  19G,  305  (1874);  Robinson  v. 
rate  books,  where  the  certificates  New  Berne  Nat.  Bank,  95  N.  Y.  637 
have  been  pledged  and  the  company  (1884).  Frequently,  however,  the  char- 
notified.  State  V.  New  Orleans,  etc  ter  or  statutes  provide  otherwise. 
R  R,  30  La.  Ann.  308  (1878).  6Hill  v.  Atoka,  etc.  Co.,  31  S.  W. 

3  Graham  v.  First  Nat.  Bank  of  Rep.  508  (Mo.,  1893);  Robinson  r.  New 
Norfolk,  84  N.  Y.  393  "(1881),  affirm-  Berne  Nat.  Bank,  95  N.  Y.  637  (1884). 
ing  S.  C.,  30  Hun,  335.  As  to  the  rule  But  not  if  the  transferee  has  treated 
in  California,  see  Dow  v.  Gould,  etc.  the  refusal  to  transfer  as  a  conver- 
Co.,  31  Cal.  639  (1867).  sion.  Hughes  r.  Vermont  Copper  Min. 

4  Burr  V.  Sherwood,  3  Bradf.  (N.  Y.  Co.,  73  N.  Y.  307  (1878). 
Surr.)  85  (1854).     Cf.  Harcum  v.  Hud- 

996 


en.  XXXII.] 


DIVIDENDS. 


[§  53&. 


crued  profits  and  expected  dividends  enter  into  the  value  and 
price  at  which  the  stock  is  sokl.^ 

A  transfer  of  stock  passes,  of  course,  all  dividends  declared 
subsequently  to  the  transfer,  although  the  dividend  was  earned 
before  the  transfer  was  made.^ 


1  Jermain  v.  Lake  Shore, etc.  R.R.,  91 
N.  Y.  483  (1883) ;  Marcli  v.  Railroad  Co., 
43  N.  IL  515,  520  (18C2);  Ryan  v.  Leav- 
enwortli,  etc.  R  R.,  21  Kan.  005,  403 
(1879);  Foot  v.  Worthington,  39  Mass. 
299  (1839);  Jones  v.  Terre  llautc,  etc. 
R.  R.,  57  N.  Y.  196  (1874);  Currier. 
"White,  45  N.  Y.  823  (1871);  Brundage 
V.  Brundap;e,  65  Barb.  397,  408  (1873); 
affirmed,  60  N.  Y.  514;  Goodwin  v. 
Hardy,  57  Jle.  143  (1809);  Hill  v.  Ne- 
wichawanick  Co.,  8  Hun,  459  (1870); 
afT'd.  71  N.  Y.  593  (1877);  Bates  v. 
McKinley.  31  L.  J.  (Ch.)  389  (1862); 
King  V.  Follet,  3  Vt  085  (1831);  Aber- 
crombio  r.  Riddle,  3  Md.  Ch.  320  (1850). 
See  also  ch.  XXXIII,  infra.  Cf.  Kane 
r.  Bloodgood,  7  John.s.  Ch.  90  ( 1823). 
A  person  who  guarantees  to  another 
a  dividend  and  is  obliged  to  pay  it 
liimself  cannot  claim  a  subsequent 
dividend  by  way  of  rein>bui-senicnt. 
Parks  V.  Automatic,  etc.  Co.,  14  Daly, 
424  (1888 1.  A  dividend  declared  after 
the  certificates  have  been  sold  be- 
longs to  the  transferee  as  against  the 
transferrer.  Gemniell  v.  Davis,  75 
Md.  540  (1892),  approving  the  text 
lierein.  Where  a  stockliolder  assigns 
by  contract  the  stock  and  all  divi- 
dends to  another,  he  must  pay  to 
the  latter  any  subsequent  dividends 
which  he  receives.  Cook  v.  Monroe, 
45  Neb.  349  (1895).  Where  stock  is 
sold  at  auction  on  August  1  and  a  , 
deposit  paid,  the  balance  to  be  paid 
August  29,  a  dividend  declared  on 
Augu-st  24  belongs  to  the  purchaser. 
Black  r.  Ilomersham,  L.  R.  4  Exch.  D. 
24  (1878).  Where  a  company  piir- 
cha.se.s  shares  of  its  own  stock  and  suV>- 
Beqnently  uses  it  to  declare  a  stock 
dividend,  a  stockholder  wlio.soM  part 
of  his  stock  in  the  interim  is  entitled 

99 


to  the  dividend  on  only  such  stock  as 
he  owned  when  the  dividend  was  de- 
clared. Coleman  v.  Columbia  Oil  Co., 
51  Pa.  St.  74  (1805).  Where  defendant 
purchased  stock  for  the  plaintiff  and 
accounted  therefor,  but  refused  to 
account  for  dividends  received  while 
ho  held  the  stock,  the  defendant  ia 
guilty  of  conversion.  Shaughnessy 
V.  Chase,  7  N.  Y.  St.  Rep.  293  (1887). 
Although  the  purchaser  of  stock  is 
entitled  to  a  dividend  declared  after 
the  contract  of  sale  is  made,  even 
though  the  contract  has  not  yet  been 
carried  out,  yet  the  purchasers  can- 
not insist  on  the  vendor's  giving  an 
order  on  the  corporation  for  such 
dividends.  The  vendee  should  col- 
lect without  such  order.  He  rescinds 
the  sale  by  insisting  on  such  order. 
Phinizy  v.  Murray,  83  Ga.  747  (1889). 
An  alleged  vendee's  suit  for  a  divi- 
dend is  res  judicata  as  to  a  suit  for 
the  stock.  Shepard  v.  Stockham,  45 
Kan.  244  (1891).  Where  an  agent  to 
sell  was  to  have  all  that  he  sold  for 
above  a  certain  price,  a  sum  in  ex- 
cess thereof  belongs  to  him,  although 
it  was  for  dividends  not  yet  declared. 
Blakeslee  v.  Ervin,  40  Neb.  130  (1894). 
'  Kane  v.  Bloodgood,  7  Johns.  Cli. 
90  (1823),  by  Chancellor  Kent;  Good- 
win V.  Hardy,  57  Me.  143  (1809- ;  ^larch 
V.  Ea.stem  R,  R.,  43  N.  H.  515  (1802); 
Phel-ps  V.  Farmers',  etc.  Bank,  20 
Conn.  209  (1857);  Brundage  v.  Brun- 
dage,  1  Thomp.  &  C.  82;  aff'd,  00  N.  Y. 
544  (1875);  Jones  v.  Terre  Haute,  etc. 
R.  R.,  57  N.  Y.  190  (1874);  Currie  v. 
White,  45  N.  Y.  823  (1871).  And  a 
purchaser  of  stock  at  a  tax  sale,  if  the 
proceedings  are  legal  and  regular,  is 
entitled  to  a  certificate  and  to  divi- 
dends subsequently  declared.   Smith 


539.] 


DIVIDENDS. 


[cn.  XXXI  I. 


A  pledgee  is  entitled  to  dividends  on  the  stock  held  in  pledge, 
but  must  account  for  them  when  the  pledge  is  redeemed.^ 

When  a  dividend  is  made  payable  on  a  day  subsequent  to  tho 
day  on  which  it  is  formally  declared,  it  belongs  to  tho  stock- 
holder who  owns  the  shares  on  the  day  the  dividend  is  declared, 
and  not  to  the  owner  at  the  time  it  is  payable.^ 

"Where  stock  is  bought  deliverable  at  the  seller's  option,  tho 
dividends  declared  between  the  day  of  the  purcliase  and  tho 
delivery  belong  to  the  purchaser.'  But  a  contract  to  sell  on 
demand  entitles  the  vendor  to  dividends  declared  before  the  de- 
mand is  made.'*  But  of  course  any  agreement  between  vendor 
and  vendee,  modifying  or  changing  the  above  rules,  will  be  up- 
held. Dividends  are  a  proper  subject  for  a  contract,  and  a  valid 
contract  may  be  made  in  reference  to  them.*    The  vendor  may 


V.  Northampton    Bank,  58  Mass.   1 
(1849). 

1  See  §  4C8,  suprcu 

2  Wheeler  v.  Northwestern  Sleigh 
Co.,  39  Fed.  Rep.  347  (1889);  Wright 
V.  Tuckett,  1  Johns.  &  H.  266  (18»)0): 
De  Gendre  v.  Kent,  L.  R  4  Eq.  2s;i 
(18G7);  Hill  v.  Newichawanick  Co.,  71 
N.  Y.  593  (1877),  affirming  S.  C,  8 
Hun,  459;  48  How.  Pr.  427  (1874); 
Spear  v.  Hart,  3  Rob.  (N.  Y.)  420  (1865) ; 
Bright  V.  Lord,  51  Ind.  272  (1875), 
wliere  an  option  had  been  given.  Cf. 
Hopper  V.  Sage,  112  N.  Y.  530  (1889); 
IManning  v.  Quicksilver  INIin.  Co.,  24 
Hun,  360  (1881);  Board  man  v.  Lake 
Shore,  etc.  R.  R.,  84  N.  Y.  157,  178 
(1881);  Re  Kernochan,  104  N.  Y.  618 
(1887);  Clive  v.  Clive,  Kay,  600  (1854). 
Contra,  Burroughs  v.  North  Carolina 
R.  R.,  67  N.  C.  376  (1872).  The  trans- 
fer of  stock  does  not  transfer  past 
stock  dividends  which  have  been  de- 
clared, even  though  the  stock  divi- 
dend has  not  been  actually  delivered. 
City  of  Ohio  v.  Cleveland,  etc.  R  R., 
6  Ohio  St.  489  (1856).  See  also  ch.  XVI, 
supra.  "Where  a  pledge  of  stock  is 
renewed  and  a  new  note  given,  divi- 
dends accruing  before  the  renewal 
go  to  the  pledgor.  Fairbank  v.  INIer- 
chants',  etc.  Bank,  132  III  120  (1889). 


« CuiTie  r.  White.  45  N.  Y.  822  (1871) ; 
Black  V.  Homersham,  Ti.  R.  4  Exch.  D. 
24  (1878).  Under  a  contract  of  a  per- 
son to  buy  certain  stock  within  a  cer- 
tain time  if  the  other  party  desired 
to  sell  (a  "put"),  the  first  person  re- 
serving all  dividends  "  declared  dur- 
ing the  time,"  a  dividend  declared 
before  but  payable  during  the  time 
of  the  option  belongs  to  the  Seller. 
Hopper  r.  Sage,  112  N.  Y.  530  (1889). 
Contra,  Harris  v.  Stevens,  7  N.  H.  454 
(1835). 

*  Bright  V.  Lord,  51  Ind.  272  (1875). 

5  Brewster  v.  Lathrop,  15  CaL  21 
(18G0);  Hyatt  v.  Allen,  56  N.  Y.  553 
(1874);  Union  Screw  Co.  v.  American 
Screw  Co.,  11 R.  L  569  (1877);  affirmed, 
13  R.  L  673  (1880),  in  which  it  was  held 
that  where  a  contract  between  two 
corporations  for  the  purchase  of  the 
stock  of  one  of  them  on  a  certain  day 
was  by  agreement  postponed  to  a 
later  day,  a  dividend  declared  in  the 
:iterval  belonged  to  the  purchaser. 
Where  the  vendor  of  stock  reserves 
"  one-half  of  whatever  price  the  same 
should  be  sold  for,  when  sold,  over 
and  above  that  sum,"  he  is  not  en- 
titled to  an  account  of  dividends,  or 
other  income  received  by  the  vendee 
from  or  on   account  of  the  stock. 


998 


CH.  XXXII.]  DIVIDENDS.  [§  540. 

provide  by  contract  that  lie  should  have  the  dividends  in  lieu 
of  interest  on  the  purchase  price  until  such  pui'chase  price  is 
paid.^ 

A  legatee  of  shares  takes  the  stock  as  it  was  at  the  time  of 
the  testator's  death.  All  dividends  declared  previous  to  that 
event  go  to  the  administrator.^ 

The  question  of  whether  a  dividend  is  apportionable  is  con- 
sidered elsewhere.' 

A  person  who  claims  to  be  the  owner  of  stock  cannot  estab- 
lish his  rights  in  a  court  by  suing  the  party  in  possession  of  the 
stock  for  the  dividends  declared  and  paid.* 

It  seems  that  a  stockholder  may  lease  his  stock.  He  may 
for  a  certain  sum  assi^rn  to  another  all  dividends  durino:  the 
specified  time  and  give  to  the  lessee  the  right  to  vote  the  stock 
during  that  time.* 

§  540.  Dividends  vuist  le  equal  and  tvitlioiit  irreferences. — 
Dividends  among  stockholders  of  the  same  class  must  be  al- 
Wixysjyro  rata,  equal,  and  witliout  preference.  If  the  company 
has  issued  preferred  stock,  the  holders  thereof  constitute  a  class 
by  themselves,  ahd  shareholders  of  that  class  will  be  entitled, 
as  a  class,  to  dividends  in  preference  to  holders  of  the  common 

Jones  V.  Kent,  80  N.  Y.  585  (1880).    A  the  testator's  deatli.     Cf.  Johnson  v. 

person  who  sells  stock  reserving  a  Bridgewater  Iron  Mfg.  Co.,  80  Mass. 

dividend  that  may  be  declared  at  a  274  (1859);  §  301,  supra.    The  profits 

certain  date  cannot  claim  a  stock  and  surplus  funds  of  a  corporation, 

dividend  which  is  declared  at  the  whenever  they  may  have  accrued, 

specified  date.    He  can  only  claim  are,  until  separated  from  the  capital 

the  cash  dividend.  I^ufraan  v.  Char-  by  the  declaring  of  a  dividend,  a  i)art 

lottesville  Woolen  Mills,  93  Va.  673  of  the  stock  itself,  and  will  pass  under 

(1896).  A  contract  by  which  the  "  sur-  that  name  in  a  transfer  or  bequest, 

plus  fimd  "  on  stock  in  a  corporation  Phelps  v.  Farmers',  etc.  Bank,  26  Conn, 

■up  to  a  cei-tain  time  shall  belong  to  269  (1857).   Cf.  Clapp  v.  Astor,  2  Edw. 

a    certain  party  was  construed    in  Ch.  379  (1831).  In  regard  to  tlie  rights 

Thompson  v.  Hudgins,  22  S,  Rep.  632  of  a  life  tenant  of  stock  as  again.st 

(Ala.,  1897).    Where  an  employee  is  a   remainderman,  see   ch.  XXXIII, 

paid  according  to  the  percentage  of  infra. 

dividends,  it  is  for  the  jury  to  say  3  See  §  558,  infra. 

■whether  dividends  on  an  increased  *Peckham    v.  Van   Wagenen,  83 

capital  stock  are  the  proper  gage  of  N.  Y.  40  (1880).     Conversion  lies  for 

such  salary.   Bradbum  v.  Solvay  Pro-  an  unauthorized  sale  of  stock  and 

cess  Co.,  18  N.  Y.  App.  Div.  542  (1897).  also  for  dividends  received  thereon. 

» Hancock  v.  Clark,  68  Vt.  302  ( 1896).  Shaughnessy  v.  Chase,  7  N.  Y.  St.  Repi 

'Brundage  r.  Brundage,  60  N.  Y.  293  (1887). 

544  (1875);  Re  Kemochan,  104  N.  Y.  ^Zachry  v.  NoLan,  66  Fed-  Rep.  467 

«18  (1887),  where  it  was  payable  after  (1895). 

999 


§  540.] 


DIVIDENDS. 


[ell. 


XXX  ir. 


stock.  But  as  between  shareholders  of  the  same  chiss  there 
can  be  no  discrimination,  and  profits  set  aside  for  dividends 
must  be  evenly  divided  among  the  stockholders  according  to 
the  amount  of  stock  each  one  owns.^  Accordingly  there  can  bo 
no  lawful  discrimination  in  the  division  of  dividends,  although 
the  subscription  price  of  part  of  the  stock  is  due  and  unpaid ;  * 
or  because  the  contract  work  has  not  been  done ; '  nor  can  there 
be  a  discrimination  between  the  largo  and  snudl  stockholders 


1  Luling  V.  Atlantic  JIut.  Ins.  Co., 
45  Barb.  510  (18G5),  wliero  part  were 
paid  in  gold;  Jones  r.  Terre  Haute, 
etc.  R.  R.,  57  N.  Y.  190  (1874).  alT'g  29 
Barb.  353  (1859);  Morgan  v.  Croat 
Eastern  Ry,  1  Hem.  &  M.  5G0  (1863); 
Ryder  v.  Alton,  etc.  R.  R.,  13  111.  510 
(1851),  a  case  of  preferred  stock ;  State 
V.  Baltimore,  etc.  R.  R,  0  Gill  (Md.), 
363  (1847),  where  some  were  paid  in 
cash  and  others  were  offered  part 
cash  and  part  stock;  Atlantic,  etc. 
Tel.  Co.  V.  Commonwealth,  3  Brewst. 
(Pa.)  3GG  (1870),  where  a  tax  was  lev- 
ied on  the  assumption  of  an  equal 
dividend  to  all:  Hale  v.  Republican 
River  Bridge  Co.,  8  Kan.  406  (1871), 
where  by  mistake  a  stockholder  got 
more  land  scrip  than  was  his  share; 
Jackson  v.  Newark  Plank  Road  Co., 
31  N.  J.  L.  277  (1865).  Cf.  Chase  v.  Van- 
derbilt,  63  N.  Y.  307  (1875).  Holder 
of  receipt  under  reorganization,  en- 
titling him  to  preferred  stock  in  the 
new  company,  is  entitled  to  dividends 
declared  before  he  obtains  the  cer- 
tificates.  Elsworth  v.  New  York,  etc. 
R  R,  19  Week.  Dig.  211 ;  aff  "d,  98  N.  Y. 
648  (1885).  See  also  Coey  v.  Belfast, 
etc.  R'y,  Jr.  Rep.  2  C.  L.  112  (1866); 
Harrison  v.  Mexican  R'y,  L.  R  19 
Eq.  358  (1875),  preferred  stock  cases. 
As  to  preferred  stock,  see  ch.  XVI, 
supra.  Although  dividends  are  guar- 
anteed to  a  certain  date,  and  are  paid, 
the  stock  is  entitled  to  participate  in 
all  subsequent  dividends.  Parks  v. 
Automatic,  etc.  Co.,  14  N.  Y.  St.  Rep. 
710  (1888).  If  a  stockholder  by  ac- 
cepting  the    benefits   assents   to  a 


change  in  the  privileges  which  i)er- 
tain  to  his  stock,  he  cannot  after- 
wards object  thereto.  Comjjton  r. 
The  Chelsea.  59  Hun,  024  (1891);  aff'd, 
128  N.  Y.  537. 

•'^Oakbank  Od  Co.  v.  Crum,  L.  R.  8 
App.  Ca.s.  05  (1882).  AVhere  a  .sul>- 
scription  for  stock  is  paid  up,  the 
stockholder  is  entitled  to  his  stock 
and  past  dividends,  even  though  for 
thirty  years  he  has  slept  upon  hi* 
rights.  KolK>gum  v.  Jackson  Iron 
Co.,  70  MiclL  498  (1889);  Bedford 
County  V.  Nashville,  etc.  R.  R,  14  Lea 
(Tenn.),  525  (1884).  It  has  been  held 
in  Maryland  that  a  subscriber  to  the 
increased  capital  stock  of  a  company 
is  not  entitled  to  a  certificate  until 
he  has  paid  for  the  stock  in  full,  and 
such  subscriber  is  not  entitled  to  the 
rights  of  a  stockholder  until  he  has 
paid-in  full  The  court  stated  that 
such  stockholders  are  not  entitled  to 
dividends  equally  with  other  stock- 
holders. The  basis  of  the  decision 
was  the  difference  between  original 
stock  and  increased  stock.  The  court 
refused  to  compel  the  corporation  to 
issue  a  certificata  Baltimore,  etc. 
R'y  V.  Hambleton,  77  Md.  341  (1893). 

2  Although  stock  is  issued  to  con- 
tractors before  they  are  entitled  to 
it,  yet  they  are  entitled  to  the  divi- 
dends on  such  stock  unless  there  was 
some  agreement  to  the  contrarj'. 
Central  R.  R  etc.  Co.  v.  Papot,  59  Ga. 
342  (1877);  S.  C.  sub  nom.  Southwest- 
ern R  R  u  Papot,  67  Ga.  675,  690 
(1881). 


1000 


CH.  XXXII.]  DIVIDENDS.  [§  541. 

of  a  company  as  to  the  manner  of  payment  of  dividends.^  After 
paying  a  dividend  to  a  part  of  the  shareholders  the  corpora- 
tion cannot  refuse  to  pay  the  rest  upon  the  ground  that  by  so 
doing  the  capital  stock  will  be  impaired,-  or  that  all  the  sur- 
plus earnings  have  been  either  paid  out  as  dividends  or  invested 
in  permanent  improvements.' 

A  bill  in  equity  may  be  maintained  by  a  stockholder  to  pre- 
vent an  unequal  or  unfair  distriljution  of  the  profits  of  the 
company/  and  for  an  injunction  to  restrain  a  dividend  when 
stock  has  been  fraudulently  overissued,  until  a  true  list  of  the 
holders  of  genuine  stock  can  be  obtained.* 

§  541.  A  dividend  when  declared  is  a  deht  due  absolutely  to 
the  shareholder. —  When  a  dividend  out  of  the  earnings  of  the 
company  has  been  regularly  declared  and  is  due,  it  becomes  im- 
mediately the  individual  property  of  the  shareholder.  There 
is,  eo  instantly  a  severance,  for  the  use  and  benefit  of  the  mem- 
bers of  the  corporation,  of  so  much  of  the  accumulated  earnings 
as  are  declared ;  and  the  dividend  thereafter  exists  as  a  separate 
fund,  distinct  from  the  capital  stock  or  surplus  profits.  It  then 
becomes  the  absolute  property  of  the  stockholders.^ 

» Accordingly,  where  a  dividend  Co.,  34  Conn,  542  (1868).  The  validity- 
was  declared,  viz.,  to  all  stockholders  of  a  dividend  cannot  be  called  into 
owning  less  than  fifty  shares,  cash,  question  by  a  bank  in  a  suit  to  col- 
but  to  all  of  fifty  shares  and  over,  lect  taxes  on  sucli  dividend.  Cen- 
part  cash  and  part  in  interest-bear-  tral  Nat  Bank  v.  U.  S.,  137  U.  S.  355 
ing  bonds  of  the  corporation,  the  dis-  (1890). 

crimination  was    held  invalid  and  '  Beers  v.  Bridgeport  Spring  Co.,  42 

unlawful    State  v.  Baltimore,  etc  Conn.  17  (1875). 

R  R.,  6  Gill  (^Md.),  363  (1848);  Jones  <  Luling  v.  Atlantic  Mut.  Ins.  Co., 

V.  Terre  Haute,  etc.  R  R.,  57  N,  Y.  45  Barb.  510  (1865).    The  minority 

196(1874).    So  also  where  a  part  of  may  bring  the  officers  to  an  account- 

the    authorized    capital    stock    re-  ing  for  an  unfair  distribution  of  the 

mained  untaken,  and  a  resolution  of  bonds,  etc.,  owned  by  a  construction 

the  directors  was  carried  into  effect,  company.    ^Meyers  v.  Scott,  2  N.  Y. 

by  which  the  untaken  portion  of  the  Supp.  753  (1888).     Or  the  stockliolder 

stock  was  issued  to  those  sharehold-  may  sue  at  law  for  an  equal  dividentL 

ers  not  in  arrears  upon  shares  pre-  See  §  542,  infra. 

viously  taken,  to  the  exclusion,  as  to  ^  Underwood    v.    New  York,  •  etc. 

the  new  shares,  of  those  in  arrears  R.  R,  17  How.  Pr.  537  (1859),  a  case 

upon  the  original  issue,  it  was  held  growing  out  of  the  Schuyler  frauds 

an  invalid  discrimination  and  an  un-  in  New  York. 

lawful  iiniK)sition  of  a  penalty  upon  6  Van  Dyck  v.  McQuade,  86  N.  Y.  38 

those  in  arrears.     Reese  i'.  Montgom-  (1881);  Jennain  v.  Lake  Shore,  etc 

ery  County  Bank.  31  Pa.  St.  78  (1855).  P.  R,  91  N.  Y.  483  (1883);  Kepp-I  r. 

2 Stoddard   v.  Shetucket  Foundry  Petersburg  R  R,  Chase's  Dec  167 

1001 


§  541.]  DIVIDENDS.  [cn.  XXXI L 

Accordingly,  whenever  a  dividend  is  regularly  declared  and 
credited  to  a  depositor  it  becomes  bis  property,  to  wbicb  bo  is 
entitled  in  preference  to  the  creditors  of  the  corporation.'  If 
the  funds  to  pay  a  dividend  are  placed  by  the  corporation  on 
deposit  at  a  bank  or  elsewhere,  the  deposit  is  made  and  remains 
at  the  risk  of  the  corporation  and  not  of  the  sharehoUlers,  until 
a  reasonable  time  after  actual  notice  is  given  to  the  latter.'  IJut 
it  cannot  be  withdrawn  and  ruchiimed  either  by  tlie  corpora- 
tion or  a  receiver  of  tlio  corporation,  since  the  shareholders 
acquire,  by  virtue  of  the  dechiration  of  the  dividend,  a  lien  in 
equity  upon  the  deposit.'  And  tlie  sharehoklers'  riglit  to  a  divi- 
dend regularly  declared,  and  to  the  fund  set  apart  by  the  cor- 
poration to  pay  the  dividend,  is  not  affected  by  the  subsequent 
insolvency  of  the  corporation.*  But  vvliere  no  specific  fund  lias 
been  set  aside,  a  shareholder  not  having  claimed  or  received 
his  dividend  has,  upon  the  insolvency  of  the  corporation,  merely 
a  claim  of  debt  against  the  corporation,  and  must  come  in  and 
faro  as  the  other  creditors  do.*  A  dividend  is  something  dis- 
tinct and  separable  from  the  fund  upon  which  it  is  declared, 
and  it  may  be  the  subject  of  assignment  by  a  shareholder  bo- 

<1868);  King  v.  Paterson,  etc.  It  R,  Nor  can  it  be  levied  on  the  dividend 
29  N.  J.  L.  83,  504  (18G0);  Hill  r.  No-  from  such  stock.  So  held  where  stock 
wichawauick  Co.,  71  N.  Y.  593  (1877),  was  owned  by  a  city  in  trust  for 
affirming  S.  C,  8  Hun,  459  (187G);  the  citizens.  Hitchcock  r.  Galveston 
Brundage  v.  Brundage,  GO  N.  Y.  544  Wharf  Co.,  50  Fed.  Rep.  263  (1880). 
(1875),  affirming  S.  C,  65  Barb.  397  i  Van  Dyck  v.  McQuade,  86  N.  Y.  38 
(1873);  Spear  v.  Hart,  3  Rob.  (N.  Y.)  (1881);  Peckham  u.  Van  Wagenen.  83 
420  (1865);  Manning  v.  Quicksilver  N.  Y.  40  (1880).  A  dividend  declared 
Mill.  Co.,  24  Hun,  360  (1881);  Kane  r.  and  ordered  deposited  to  the  order  of 
Bloodgood,  7  Johns.  Ch.  90  (1823);  the  stockliolders  and  so  held  until 
Beers  v.  Bridgeport  Spring  Co.,  42  the  f  urther  order  of  the  court  is  legal. 
Conn.  17  (1875);  Fawcett  v.  Laurie,  1  and  the  amount  cannot  be  taxed  as 
Dr.  &Sm.  192  (1860);  i^eLe  Blanc,  14  belonging  to  the  bank.  Pollard  v. 
Hun,  8  (1878).  Upon  the  latter  point  First  Nat.  Bank,  47  Kan.  406  (1891). 
compare  People  v.  ]\Ierchants',  etc.  2  King  v.  Paterson,  etc  R.  R,  29 
Bank,  78  N.  Y.  269  (1879).  Dividends  N.  J.  L.  82,  504  (1860). 
on  life-insurance  policies,  when  once  ^  Re  Le  Blanc,  14  Him,  8  (1878); 
declared,  cannot  be  varied  by  the  aff'd,  75  N.  Y.  598;  Beers  v.  Bridge- 
company  subsequently.  Heusser  v.  port  Spring  Co.,  42  Conn.  17  (1875). 
Continental,  etc.  Ins.  Co.,  20  Fed.  Rep.  *  Le  Roy  i'.  Globe  Ins.  Co.,  2  Edw. 
222  (1884).     Execution  or  garnishee  Ch.  657  (1836). 

process  cannot  be  levied  on  stock  5  Lowne  v.  American  Fire  Ins.  Co., 
held  by  an  individual  as  trustee,  6  Paige,  482  (1837);  Curry  v.  Wood- 
where  the  debt  is  his  individual  debt,  ward,  44  Ala.  305  (1870). 

1003 


CH.  XXXII.] 


DIVIDENDS. 


[§  542. 


fore  it  is  received  from  or  declared  by  the  corporation.^  So  it 
is  held  that  a  dividend  must  be  made  payable  within  a  reason- 
able time  after  it  is  declared,  and  when  once  declared  cannot 
be  revoked.2  But  where  the  fact  that  a  dividend  has  been 
voted  by  directors  is  not  made  public,  or  communicated  to  the 
stockholders,  and  no  fund  is  set  apart  for  payment,  the  vote 
may  be  rescinded.'  Kot  only  must  the  time  of  payment  be 
reasonable,  but  a  reasonable  place  of  pa}^nent  must  be  desig- 
nated, and  the  entire  transaction  must  be  in  good  faith.'' 

§  542.  It  is  a  (hit  which  may  le  collected  hj  legal  proceed- 
iff'gs,— The  debt  which  the  corporation  owes  its  shareholders, 
when  a  dividend  is  declared  and  the  day  of  payment  arrives, 
is  one  which  may  be  collected  by  the  usual  action  at  law.  A 
suit  to  enforce  the  declaration  of  a  dividend  must  be  in  equity; 
but  when  the  dividend  is  not  paid  after  it  has  been  regularly 
declared,  the  shareholder's  action  is  at  law,  and  he  niay  sue 
in  assumpsit  for  the  amount  due  liim  by  the  resolution  de- 
claring the  dividend,*  or  he  may  file  a  bill  in  equity  for  an 


1  Marten  v.  Gibbon.  33  L.  T  Rep. 
5G1  (l«7.j).  Cf-  Jerniain  v.  Lake  Shore, 
etc.  R.  R.,  91  N.  Y.  483  (1883).  Bar- 
gains in  prospective  dividends  are 
transactions  wliich,  by  rule  Gl  of  tlie 
Ktock  exchange,  the  committee  will 
not  recoprnize  or  enforce.  The  con- 
tract is,  however,  one  which  is  not  con- 
trary to  law,  and  it  is  good  between 
the  parties.  Marten  v.  Gibbon,  33  L.  T. 
Rep.  561  (1875V     Cf.  §  536,  siipra. 

2  Beers  v.  Bridgeport  Spring  Co.,  42 
Ck)nn.  17  (1875). 

8  Ford  i\  Easthampton,  etc.  Co.,  158 
^las-s.  84  (1893).  A  stockholder  who 
accepts  a  dividend  which  has  been 
declared  in  lieu  of  one  already  de- 
clared, and  thereby  revoked,  cannot 
claim  Ixjth  dividends.  Albany,  etc 
Co.  V.  Arnold,  29  S.  E.  Rep.  695  (Ga., 
18971 

♦King  V.  Patei-son,  etc.  R.  R.,  29 
N.  J.  L.  82  (1860  >. 

*  Jackson  v.  Newark  Plank  Road 
Co.,  31  N.  J.  L.  277  (1865);  West  Ches- 
ter, etc.  R  R.  V.  Ja«;kson.  77  Pa.  St. 
321  (1875);  Coey  i".  Belfast,  etc.  R'y. 
Ir.  Rep.  2  C.  L,  112  (1806);  King  v. 


Paterson,  etc.  R.  R.,  29  N.  J.  L.  504 
(I860);  Stoddjyd  v.  Shetucket  Foun- 
dry Co..  34  Conn.  542  (18G8);  Hall  v. 
Rose  Hill,  etc.  Co.,  70  111.  673  (1873); 
City  of  Ohio  v.  Cleveland,  etc.  R.  R., 

6  Ohio  St.  489  (1856);  Marine  Bank  v. 
Biays,  4  Har.  &  J.  (Md.)  338  (1818); 
State  V.  Baltimore,  etc.  R.  R,  6  Gill 
(Md.),  363  (1847);  Kane  v.  Bloodgood, 

7  Johns.  Ch.  90,  132  (1823);  Jones  v. 
Terre  Haute,  etc.  R.  R.,  57  N.  Y.  196 
(1874);  Fawcett  v.  Laurie,  1  Dr.  & 
Sm.  192,202  (1860);  Dalton  u  Midland 
Counties  R'y»  13  C.  B.  474  (1853); 
Scott  V.  Central  R.  R.  etc.  Co.,  53 
Barb.  45  (1868).  See  Beers  v.  Bridge- 
port Spring  Co.,  42  Conn.  17  (1875), 
sastaining  a  remedy  in  equity.  But 
if  a  shareholder  is  not  entitled  to 
share  in  the  dividend  according  to 
the  terms  of  tiie  resolution  declaring 
it,  he  cannot  have  his  action  of  as- 
sumpsit. State  V.  Baltimore,  etc.  R. 
R,,  6  Gill  (Md,),  363  (1848i.  In  suing 
for  a  dividend  the  plaintiff  must  al- 
lege that  the  dividend  has  been  de- 
clared. Hill  V.  Atoka,  etc.  Co.,  21  S. 
AV.  Rep.  508  (Mo.,  1893).    Where  a 


1UU3 


§  543.] 


DIVIDENDS. 


[cii. 


XX  Air. 


accounting.'     But  mandaiuus  is  not  a  proper  remedy  in  such  a 


case. 


§  543.  A  contract  of  directors  to  pay  a  dividend  as  a  debt  at 
fixed  intervals,  being  in  reality  a  preferred  dividend,  cnnnot  bo 
enforced  either  at  law  or  in  equity,  except  out  of  net  i)rolits,  like 
other  dividends.'  A  demand  is  necessary  before  the  action  at 
law  by  the  shareholder  can  be  maintained.* 

It  has  been  held,  however,  that  tlie  commencement  of  the  suit 
constitutes  in  itself  a  sufficient  demand.*  Under  ordinary  cir- 
cumstances interest  is  not  recoverable  upon  dividends  which 
have  been  declared,  but  which  the  shareholder  has  not  claimed. 
The  right  to  interest  arises  only  upon  a  demand  and  a  refusal 
to  pay.*^  A  stockholder  is  not  entitled  to  interest  on  dividends, 
even  where  he  has  donanded  tlie  same  after  they  have  been 
declared,  where  an  attachment  is  pending  against  his  stock.^ 
The  statute  of  limitations  begin  to  run  only  after  demand." 


dividend  lias  been  paid  to  all  stock- 
holders except  one,  he  may  collect 
his  by  a  suit.  Southwestern,  etc.  R'y 
V.  Martin,  57  Ark.  335  ^1893). 

J  Keppel  V.  Petersburg  R.  R,  Chase's 
Dec.  167  (1868);  S.  C,  14  Fed.  Cas.  357. 
This  is  the  usual  remedy  where  pre- 
fen-ed  stockholders  sue  to  have  a  div- 
idend declared.    See  ch.  XVI,  aupra. 

^  Van  Norman  v.  Central  Car,  etc. 
Co.,  41  Mich.  166  (1879).  But  see  dicta 
in  King  v.  Patersou,  etc.  R.  R.,  29  N.  J. 
L.  504  (1861),  and  Le  Roy  v.  Globe  Ins. 
Co.,  2  Edw.  Ch.  657  (1836). 

3  Painesville,  etc.  R  R.  v.  King,  17 
Ohio  St.  534  (1867).  See  also  ch.  XVI, 
supra. 

*  Hagar  v.  Union  Nat.  Bank,  63  ]\Ia 
509  (1874);  Scott  v.  Central  R.  R.  etc. 
Co.,  52  Barb.  45  (1868);  State  v.  Balti- 
more, etc.  R.  R.,  6  Gill  (Md.),  363 
(1847);  King  v.  Paterson,  etc.  R  R., 
29  N.  J.  L.  504  (1860).  A  mere  letter 
of  inquiry  has  been  held  imder  this 
rule  an  insufficient  demand.  Scott  v. 
Central  R.  R  etc.  Co.,  52  Barb.  45 
(1868).  A  demand  while  the  shares 
are  under  and  subject  to  an  attach- 
ment by  the  corporation  is  not  such 
a  demand  as  this  rule  contemplates. 


Hagar  v.  Union  Nat  Bank,  63  Me.  503 
(1874). 

5  Robinson  v.  New  Berne  Nat.  Bank, 
95  N.  Y.  637  (1884);  Keppel  v.  Peters- 
burg R  R,  Chase's  Dec.  167  (1868). 
This  accords  with  the  settled  theory 
of  the  law  as  to  demand  in  similar 
cases.  See  East  New  York,  etc.  R  R 
V.  Elmore,  5  Ilun,  214  (1875);  Dela- 
mater  v.  Miller,  1  Cow.  75  (1823); 
Everett  v.  Coffin,  6  Wend.  693  (1831); 
"Walradt  v.  Maynard,  3  Barb.  584 
(1848);  Carroll  v.  Cone,  40  Barb.  220 
(1862);  Ayer  v.  Ayer,  33  Mass.  327 
(1835). 

**  Keppel  V.  Petersburg  R.  R,  Chase  "s 
Dec.  167  (1868);  Boardman  v.  Lake 
Shore,  etc.  R  R.,  84  N.  Y.  157,  187 
(1881);  State  v.  Baltimore,  etc.  R  R, 
6  Gill  (Md.),  363,  387  (1847);  Phila- 
delphia, etc.  R  R.  V.  Cowell,  28  Pa.  St, 
329  (1857);  Bank  of  Louisville  r.  Gray, 
84  Ky.  565  (1886).  As  to  interest  ou 
preferred  dividends,  see  ch-  XVI, 
siqyra. 

■^  Mustard  v.  Union  Nat.  Bank,  86 
Me.  177  (1893). 

8  The  statute  of  limitations  begins 
to  run  against  a  stockholder's  suit  to 
collect  dividends  only  after  a  demand 


1004 


CH,  XiXn.]  DIVIDENDS.  [§  5«- 

In  England,  however,  it  has  been  held  that  .shere  dividends 
are  credited  up  to  the  personal  accounts  of  the  stockholders, 
and  for  nearly  t«'enty  years  certain  stockholders  do  not  claim 
dividends  so  credited  to  them,  the  statute  of  limitations  is  a 
bar,  and,  the  company  having  been  sold  out  by  authority  of  a 
statute,  the  proceeds  are  to  be  divided  among  the  stockholdei^ 
^■ithout  regard  to  such  past-due  and  unpaid  dividends  The 
statute  of  Umitations  began  to  run  from  the  time  the  dividends 
became  payable,  and  the  company  is  not  to  be  considered  as  a 
trustee  in  that  respect.'  ,  •  u  i    „ 

The  action  at  law  for  the  paj-mont  of  a  dividend  wli.ch  has 
been  declared  should  be  against  the  corporation,  and  not  against 
the  corporate  officers.'-    But  where  the  treasm'er  of  an  incorpo- 
rated company  withheld  a  dividend  belonging  to  one  of  the 
stockholders  on  the  ground  that  he  himself  owned  the  stock 
an  action  of  assumpsit  against  him  in,lividually  was  sustained  _ 
\nd  in  a  case  where  a  stockholder  had  been  unjustly  deprived 
li  his  stock,  it  was  held  that  he  could  not  sue  an  mdividua 
shareholder  to  recover  a  dividend  which  should  have  been  paid 
to  him,  but  that  his  action  was  properly  against  the  corpora, 
tion'    In  actions  on  the  part  of  shareholders  to  enforce  the 
payment  of  dividends,  the  validity  or  legality  of  the  dividend 
cannot  be  questioned  by  the  corporation.'    But  when  a  corpo- 

rGr^y84K;5^^^^  Compare  the  time  when  his  admrnxstrator  in- 

wSSfester  etc.  Co   u  Wickliflfe,  38  quires  at  the  corporate  office  as  to 

Tw  Reu8^^^^^^      1897).    The  stat-  whether  all  dividends  had  been  paid 

LVuSufatilnJ  does  not  oegin  to  to  decedent,  e- th.u^h  a  fals^^^^^^ 

run  against  the  collection  of  a  divi-  swer  m  the  affirmative  vv  as  made  by 

dend  until  it  is  demanded.    A  pro  the  corporation.  ^.^ 

vision  of  a  new  charter  into  which  f^f-,^-'t;Jj;T L- 

the  old  company  is  merged,  applymg  t  rt^ncn  u   r  uiicr, 

athreyear'statute  of  limitations  to  (1839);   Smith    ..    ^oor^^^^^' 

^vidends,  dees  not  affect  dividends  (1855);  S.  C  3  Ware,  148  (18.8),  S.  U, 

on  old  stock-hichhas  n^t  co^^^^^^^  ^^  wIIiSL  .  Fullerton.  20  Vt.  316 
the  reorganization.    Armant  u.  i>ew  >*iiiu»iiio 

Orlpins  etc.  R.  R,  41  La.  Ann.  lOCO  (1848). 

ri^rKoS;gum;jac..o„IronCo.,  ^<Peckl>am   ..  Van  ^Vagonon.    83 

"R  Atirh  498(1889);  Bedford  County  N.  \.  40  (l»bU).  ,    ,  t-        i_ 

;'N^!:;ilIe!e^Rr.,14Lea(Tenn.),  ^Stoddard  u  Shetu^^^^^  Foundiy 

525  (1884).    In  Bills  v.  Silver  King  Co.,  34  Conn.  543  USCS^ 

lOOJ 


§  544.] 


DIVIDENDS. 


[cu. 


XXXIL 


ration  is  sued  for  a  dividend  by  two  claimants  therefor,  it  may 
support  a  bill  of  interpleader  between  tliem.' 

§  544.  Bi(fht  of  the  corporation  to  apphj  divUhnds  to  the  pay- 
ment oj  dchts  due  to  it  hy  the  shanh older.— It  is  well  settled 
that  if,  at  the  time  a  dividend  becomes  payal)le,  the  stockholder 
owes  the  corporation  any  debt,  the  dividend  duo  that  share- 
holder may  be  applied  in  licpiidation  of  the  indebtedness;  and 
if  the  corporation  is  sued  for  the  dividend  it  may  set  up  the  debt 
by  way  of  set-oil  or  counter-claim.'  This,  liowevcr,  amounts 
to  a  corporate  lien  on  the  stock  so  far  as  dividends  arc  concerned  ; 
and  it  is  not  u{)held  wln^re  the  registered  stockholder  has  sold 
and  transferred  his  certilicatc  of  stock  before  the  dividend  is 
-payable.''    The  company  cannot  retiun  the  dividend  to  secure 


1  Salisbury  Mills  v.  Townsend,  109 

Mass.  115  (1871).  See  also  §  387,  siqira. 
In  England  the  rule  was  formerly 
otherwise.  Dalton  v.  Midland  li'y, 
13  C.  B.  438  (1852).  Where  a  corpo- 
ration is  sued  by  a  stockholder  for 
a  dividend  declared  by  the  directors, 
and  all  the  other  stockholders  liave 
received  their  dividends  and  retained 
them,  the  company  cannot  be  al- 
lowed to  set  up  i^^  defense  to  the  suit 
that  the  dividend  has  not  been  earned, 
and  that  its  payment  would  withdraw 
a  part  of  the  capital  of  the  company. 
Stoddard  v.  Shetucket  Foundry  Co., 
34  Conn.  543  (1868). 

2  Hagar  v.  Union  Nat.  Bank,  63  ^le. 
509  (1874);  Philadelphia,  etc.  R.  R.  v. 
Cowell,  28  Pa.  St.  339  (1857);  King  v. 
Paterson,  etc.  R,  R,  29  N.  J.  L.  504 
(18G0);  Sargent  v.  Franklin  Ins.  Co.,  25 
Mass.  90  (1839) ;  Bates  v.  New  York  Ins. 
Co.,  3  Johns.  Cas.  338  (1803);  Donnally 
V.  Hearndon,  41  W.  Va.  519  (1895). 


30  Fed.  Cas.  312.  By  agreement  a 
dividend  may  bo  applied  to  an  un- 
paid call  Kenton,  etc.  Co.  v.  Mc-- 
Alpin,  5  Fed.  Rep.  737  (18.80).  For  a 
contract  of  a  cori)oration  to  sell  to 
its  suiKjrintendent  shares  of  its  stock 
at  his  option,  and  to  allow  him  to 
pay  for  tlie  stock  by  the  dividends, 
see  Goodwin,  etc.  Co.'s  Api>eal,  117 
Pa.  St.  514  (1888).  The  only  riglit 
that  a  corporation  has  to  retain  a 
dividend  from  a  stockholder  who 
owes  it  money  is  based  on  set-off. 
Gemmell  v.  Davis,  75  Md.  540  (1893). 
3  Where  a  stockholder  of  record 
pledges  his  certiRcates  of  stock,  ami 
no  transfer  is  made  on  the  books,  and 
subsequently  a  dividend  is  declared, 
and  after  such  dividend  is  payable, 
but  before  it  is  actually  paid,  the 
pledgee  presents  to  the  company  the 
stock  for  transfer  with  a  written  re- 
quest of  the  pledgor  to  the  same  ef- 
fect, together  with  an  assignment 


See  also  §  536,  supra.  But  a  contrary  by  the  pledgor  to  the  pledgee  of  the 
rule  prevails  as  to  a  deceased  stock-  dividend,  it  is  no  defense  to  the  corn- 
holder,  upon  a  winding  up  of  the    pany  that  it  has  a  claim  against  the 


company  and  a  distribution  of  its 
assets.  See  Merchants'  Bank,  etc.  v. 
Shouse,  103  Pa.  St.  488  (1883);  Brent 
V.  Bank  of  Washington,  3  Cranch, 
C.  C.  517  (1834);  S.  C,  4  Fed.  Cas.  61. 
See  also,  contra,  in  general,  Ex  parte 
Winsor,  3  Story,  C.  C.  411  (1844);  S.  C, 


pledgor  for  a  personal  debt  or  for  a 
debt  of  a  firm  in  which  he  is  inter- 
ested. American,  etc.  Bank  v.  Nash- 
ville, etc.  Co.,  36  S.  W.  Rep.  960  (Tenn., 
1896).  This  set-off  is  not  good  on  a 
debt  against  the  transferrer  wliere 
the  certificates  were  sold,  although 


1006 


CU.  XXXII.] 


DIVIDENDS. 


[§  545. 


a  debt  for  wliich  the  stockliolder  is  only  surety,  tlie  debt  not 
yet  being  due.^ 

§  545.  The  <;ourts  very  rarely  compel  the  directors  to  declare 
a  dividend.— The  board  of  directors  declare  the  dividends,  and 
it  is  for  the  directors,  and  not  the  shareholders,  to  determine 
whether  or  not  a  dividend  bhall  be  declared.^ 

When,  therefore,  the  directors  have  exercised  this  discretion 
and  refused  to  declare  a  dividend,  there  ^vill  be  no  interference 
by  the  coilrts  with  their  decision,  unless  they  are  guilty  of  a 
wilful  abuse  of  their  discretionary  powers,  or  of  bad  faith  or  of 
a  neglect  of  duty.  It  requires  a  very  strong  case  to  induce  a 
com-t  of  equity  to  order  the  directors  to  declare  a  dividend,  in- 
asmuch as  equity  has  no  jurisdiction,  unless  fraud  or  a  breach 
of  trust  is  involved.  There  have  been  many  attempts  to  sus- 
tain such  a  suit,  yet,  although  the  court  did  not  disclaim  juris- 
diction, it  has  quite  uniformly  refused  to  interfere.* 


not  transferred  on  the  books,  before 
the  dividi'n.l  was  de<^lared.  Gemmell 
V.  Davis,  73  Md.  54G  (1892).  A  pledgee 
of  stock,  even  though  not  recorded  as 
a  stockholder,  is  entitled  to  dividends 
declareil  after  the  pledge  was  made, 
as  against  a  claim  of  the  corporation 
against  tlie  pledgor  as  an  ofTset.  Gem- 
mell V.  DavLs,  75  Md.  5-lG  (1892). 

1  Solomon  v.  First  Nat.  Bank,  72 
Miss.  8.11  (1893).  Dividends  due  may- 
be held  by  the  corporation  as  an  off- 
set to  debts  due  from  the  corporation, 
but  not  for  a  debt  guivranteed  by  the 
stockholder,  where  such  guaranty 
has  not  become  dua  First  Nat  Bank 
V.  De  Morse,  26  S.  W.  Rep.  417  (Tex., 
1894). 

»"The  directors  of  a  corporation, 
and  they  alone,  have  the  power  to  de- 
clare a  dividend  of  the  earnings  of 
the  corporation  and  to  determine  its 
amount."  Hunter  r.  Roberts,  83  Mich. 
63  (1890).  The  board  of  directors  and 
not  the  stockholders  declare  divi- 
dends. Grant  v.  Ross,  37  S.  W.  Rep. 
263  (Ky..  1896).  See  also  the  various 
cases  in  this  and  succeeding  sections. 
»New  York,  etc.  R.  R,  v.  Nickalls, 
119  U.  S.  296  (1886),  rev'g  15  Fed.  Rep. 

100 


575;  Ely  r.  Sprague,  Clarke,  Ch.  351 
(1840);  Williams  r.  Western  Union 
Tol.  Co.,  93  N.  Y.  162  (1883);  Reynolds 
r.  Bank  of  :^It.  Vernon,  6  N.  Y.  App. 
Div.  62  (1896);  Park  v.  Grant  Locomo- 
tive Works,  40  N.  J.  Eq.  114  (1885); 
Barnard  v.  Vermont,  etc.  R.  R.,  8f> 
:Ma.ss.  512  (1863);  Chaffee  v.  Rutland 
Pu  R,  55  Vt.  110,  133  (1882);  Smith  v. 
Prattville  Mfg.  Co.,  29  Ala.  503  (1857); 
Barry  v.  Merchants'  Exchange  Co.,  1 
Sand'f.  Ch.  280  (1844);  Rex  v.  Bank  of 
England,  2  B.  &  Aid.  620  (1819),  where 
the  court  refased  to  grant  a  manda- 
mus for  an  examination  of  the  ac- 
counts with  a  view  to  compelling  a 
diridend.   The  directors  are  bound  to 
distribute  as  profits  only  such  part  of 
the  net  income  as  they  think  proper; 
and  their  judgment  of  what  is  proper 
is  conclusive  upon  the  stockholders. 
State  V.  Baltimore,  etc.  R.  R.,  6  Gill 
(Md.),  363  (1848).    Cf.  Dent  v.  London 
Tramways  Co.,  L.  R.  16  Ch.  D.  344 
(1880).    In  Park  v.  Grant  Locomotive 
Works,  40  N.  J.  Eq.  114  (1885),  the 
court  said :  "  In  cases  where  the  power 
of  the  directors  of  a  corporation  is 
without  limitation  and  free  from  re- 
straint, they  are  at  liberty  to  exercise 


§  545.] 


DIVIDENDS. 


[cil.  XXXII. 


Accordingly  the  directors  may,  in  tlie  fair  exercise  of  their 
discretion,  invest  prolits  to  extend  and  develop  the  business, 
and  a  reasonable  use  of  the  prolits  to  provide  additional  facili- 

a  very  liberal  discretion  as  to  what 
disposition  shall  be  made  of  the  gains 
of  the  business  of  the  corporation. 
Their  power  over  them  is  al)Solute  so 
long  as  they  act  in  tlie  exorcise  of  an 
honest  judgment.  Tliey  may  reserve 
of  them  whatever  their  judgment  ap- 
proves as  necessary  or  judicious  for 
repairs  and  improvements,  and  to 
meet  contingencies,  both  present  and 
prospective."  In  the  above  case,  how- 
ever, a  contract  that  all  the  net  profits 
should  be  divided  annually  varied 
these  rules.  The  court  refused  to 
order  a  dividend. 

In  State  v.  Bank  of  Louisiana,  6  La. 
745  (1834),  the  court  refused  to  order  a 
bank  to  declare  a  dividend  altliough 
it  had  profits  on  hand  of  about  one- 
tenth  of  its  capital  The  court  said : 
^'  If  the  board  honestly  err  in  these 
matters,  we  are  not  ready  to  say  the 
courts  possess  the  power  to  rectify 
its  mistakes."  The  remedy  is  in  the 
elections.  Courts  will  not  order  a 
dividend  to  be  declared  unless  the 
directors  "  refuse  to  declare  a  divi- 
dend when  the  corporation  has  a  sur- 
plus of  net  profits  which  it  can, 
without  detriment  to  its  business, 
divide  among  its  stockholders,  and 
when  a  refusal  to  do  so  would 
amount  to  such  an  abuse  of  discre- 
tion as  would  constitute  a  fraud  or 
breach  of  that  good  faith  which  they 
are  bound  to  exercise  towards  the 
stockholders."  A  dividend  will  not 
be  ordered  when  the  profits  are  in- 
vested in  the  plant  and  in  long-time 
notes.  Hunter  v.  Roberts,  83  Mich. 
63  (1890).  In  Smith  v.  Prattville,  etc. 
Co.,  29  Ala.  503  (1857),  the  com-t  re- 
fused to  order  a  dividend,  inasmuch 
as  the  charter  expressly  vested  dis- 
cretion as  to  that  matter  in  the  board 
of  directors. 

Where  large  dividends  are  made 


by  a  manufacturing  company,  it  is 
entirely  within  the  fair  and  honest 
discretion  of  the  directors  whetlier 
the  remaining  profits  shall  be  passed 
to  surplus  or  used  for  dividends. 
McNab  V.  ISIcNab,  etc.  Co.,  62  Hun,  18 
(1891).  The  fact  tliat  a  manufactur- 
ing company  extended  its  business  so 
as  to  include  iron  pipe  as  well  as  brass, 
and  loaned  money,  which  loans,  how- 
ever, tlie  president  was  willing  to  take 
up,  and  had  owned  goyernment  bonds, 
is  not  sufficient  to  entitle  a  stock- 
holder who  has  acquiesced  therein 
to  demand  tliat  all  profits  be  paid 
out  in  dividends.  McXab  v.  McNab, 
etc.  Co.,  62  Hun,  18  (1891).  Although 
the  road  was  leaocd  and  the  floating 
debt  was  only  $1,000,  and  the  bonded 
debt,  $70,000,  was  due  in  seventeen 
years,  and  the  other  expenses  only 
§G,000,  while  the  company  had  .$:36,000 
on  hand  and  the  regular  rental  for 
its  road  coming  in,  yet  the  court  re- 
fused to  order  a  dividend,  in  Karnes 
V.  Rocliester.  etc.  R.  R,  4  Abb.  Pr. 
(N.  S.)  107  (1867),  the  court  holding 
also  that  a  demand  must  first  be 
made,  and  that  the  directors,  instead 
of  the  company,  are  the  proper  par- 
ties defendant  See  ch.  XVI,  supra. 
In  Barnard  r.  Vermont,  etc  R.  R.,  89 
Mass.  512  (1863),  there  was  a  contract 
to  pay  dividends,  and  it  was  upon 
this  contract  that  the  court  based  its 
right  to  pass  upon  the  ability  of  tlie 
company  to  declare  a  dividend.  The 
coiu-t  refused  to  order  a  dividend.  In 
Richardson  v.  Vermont,  etc.  R  R,  44 
Vt.  613  (1872),  the  com-t  decreed  tJie 
payment  of  what  was  substantially 
a  dividend  to  the  stockholders,  but 
stated  that  an  accounting  must  first 
be  had  to  ascertain  whether  there 
was  available  for  that  purpose  "  a 
fund  adequate,  not  only  for  the  pay- 
ment of  the  claims  of  the  plaintiffs 


1008 


en.  XXXII.] 


DIVIDENDS. 


[§  545. 


ties  for  the  business  cannot  be  objected  to  or  enjoined  by  a 
minority  of  the  stockholders.* 

Profits  may  also  be  set  aside  for  the  payment  of  indebted- 
ness, though  it  is  not  yet  due.-  "Where  stock  is  pledged  and  the 
pledgee  is  in  control  of  the  company,  and  instead  of  declaring 
dividends  he  honestly  and  intelligently  applies  the  profits  to 
improvements,  the  pledgor  cannot  hold  him  liable  for  not  de- 
claring dividends,  and  for  not  thus  decreasing  the  debt  for  which 
the  stock  Y?-as  given  in  pledge.^  The  free  exercise  of  the  di- 
rectors' discretion  cannot  be  interfered  with  by  the  contracts 
of  promoters  or  original  incorporators  as  to  the  disposition  of 


in  the  cause,  but  for  the  payment  of 
all  stockholders  having  like  claims; 
and  there  must  be  a  surplus  fund 
over  and  above  what  is  requisite  for 
the  payment  of  the  current  expenses 
of  the  busmess,  for  discharging  its  du- 
ties to  creditors,  and  over  and  above 
what  reasonable  prudence  would  re- 
quire to  be  kept  in  the  treasury  to 
meet  the  accidents,  risks,  and  contin- 
gencies incident  to  the  business  of 
operating  the  railroad."  In  Dent  v. 
London  Tramways  Co.,  L.  K.  IG  Ch. 
D.  344  (1880),  the  court  compelled  the 
company  to  pay  a  dividend  on  the 
preferred  stock,  where  there  were 
profits  available,  but  the  common 
stockholders  proposed  to  vise  all  the 
profits  for  long-neglected  repairs,  the 
real  reason  being  that  there  were 
profits  sufficient  for  a  dividend  on 
the  preferred,  but  not  on  both  the 
common  and  preferred.  The  court 
said  that  profits  meant  the  "  surplus 
in  receipts,  after  paying  expenses  and 
restoring  the  capital  to  the  position 
it  was  in  on  the  first  of  January  in 
that  year."  Where  a  bill  in  equity, 
filed  for  the  purpose  of  obtaining  an 
accovmting  and  the  declaration  of  a 
dividend,  does  not  clearly  make  out 
the  existence  of  a  surplus  which  the 
directors  ought  to  distribute,  the  suit 
wUl  fail.  A  discovery  will  not  be 
granted  where  there  is  no  allegation 
that  information  is  refused,  or  that 


the  party  cannot  examine  the  books, 
or  that  a  raandamits  was  inadequata 
Wolfe  V.  Underwood,  96  Ala,  329 
(1892). 

1  Where  a  corporation  having  a 
large  surplus  proposed,  with  the  con- 
currence of  a  majority  of  the  share- 
holders, to  employ  the  surplus  in 
extending  the  .business,  although 
such  extension  was  opposed  by  a 
minority  of  the  shareholders,  it  ap- 
pearing tliat  the  proposed  enlarge- 
ment of  the  corporate  enterprise  was 
clearly  intra  vires,  it  was  held,  on  a 
bill  brought  by  the  dissenting  minor- 
ity for  an  in j  miction  against  the  pro- 
posed use  of  the  surplus,  and  praying 
a  distribution  of  it  among  the  share- 
holders, that  the  facts  were  not  such 
as  to  require  the  interposition  of  the 
court  on  behalf  of  the  minority. 
Pratt  V.  Pratt,  33  Conn.  446  (1866),  the 
court  saying:  "  On  a  question  of  this 
sort  much  must  necessarily  be  left 
to  the  discretion  of  the  managing  di- 
recters;  and  so  long  as  they  keep 
within  the  objects  contemplated  by 
the  articles  of  association,  and  the 
expenditvire  is  not  imreasonable  in 
reference  to  the  amount  of  their 
capital,  a  court  of  equity  ought  very 
seldom  to  interfere  with  them." 

^  Karnes  v.  Rochester,  etc.  R  R,  4 
Abb.  Pr.  (N.  S.)  107  (1867). 

3  Zellerbach  v.  Allenberg,  99  CaL  57 
(1893). 


64 


1009 


§  5i5.] 


DIVIDENDS. 


[cn.  XXXII. 


corporate  profits.'    A  court  ^vill  not  compel  a  foreign  corpora- 
tion to  declare  a  dividend.- 

Nevertheless  the  discretion  of  the  directors  in  the  matter  of 
declarino-  or  refusing  to  declare  a  dividend  is  not  absolute ;  and 
where  there  is  a  clear  abuse  of  power  in  refusing  to  declare  the 
dividend,  a  court  of  equity  ^vill,  at  the  instance  of  any  share- 
holder, compel  the  proper  authorities  to  deckire  and  pay  the 
dividend."  Laches  on  the  part  of  the  shareholders  in  failing  to 
commence  their  suit  to  compel  the  payment  of  a  dividend  until 


1  The  agreement  of  the  promoters 
and  preliminary  subscribers  to  the 
stock  of  the  proposed  company  as  to 
the  division  and  disposition  of  the  net 
profits  does  not  bind  tie  company 
unless  it  has  expressly  acquiesced 
in  such  agreement.  Coyote,  etc.  Ca 
V.  Ruble,  8  Oreg.  284  (1880).  But  if 
expressly  ratified  by  the  company  it 
is  binding.  Richardson  v.  Vermont, 
etc.  R  R.,  44  Vt.  613  (1872),  where  an 
agreement  to  pay  annual  interest  to 
the  stockholders  out  of  the  net  profits 
was  considered. 

2  Berford  v.  New  York  Iron  Mine, 
4  N.  y.  Supp.  836  (1888).  See  also 
§  757,  infra. 

3  Where  two  directors,  forming  a 
majority  of  the  board,  vote  them- 
selves very  large  salaries,  and  refuse 
information  to  another  director  who 
is  the  only  other  stockholder,  and  re- 
fuse to  declare  dividends,  and  pro- 
ceed to  convey  the  property  of  the 
company  to  another  company  con- 
trolled by  themselves,  a  court  of 
•equity  will  set  aside  the  illegal  con- 
veyances and  the  resolutions  author- 
izing the  salaries,  and  will  order  the 
books  to  be  opened  to  the  other  di- 
rector, and  w^ill  order  dividends  to 
be  declared.  The  coiu-t,  however,  will 
not  appoint  a  receiver  and  enjoin 
the  continuance  of  the  business,  and 
will  not  order  a  distribution  of  the  as- 
sets of  the  company.  Laurel  Springs 
Land  Co.  v.  Fougeray,  50  N.  J.  Eq. 
756  (1893),  rev'g  Fougeray  v.  Cord,  50 
N.  J.  Eq.  185.    Where  for  seven  years 


a  stockholder  who  owned  a  majority 
of  the  stock  elected  himself  and  two 
of  liis  dummies  as  directors  of  the 
company,  and  caused  the  board  to 
vote  a  large  salary  to  liimseif  as 
president  and  manager,  and  had 
leased  to  the  company  his  property  at 
a  large  rental,  the  salary  and  rental 
are  illegal  and  void.  Where  the  com- 
pany had  failed  to  pay  its  dividends 
by  reason  of  such  acts,  a  court  of 
equity,  upon  the  suit  of  another 
stockholder,  ordered  the  president  to 
account,  and  appointed  a  receiver  of 
the  company  and  directed  that  its 
affairs  be  wound  up.  Miner  v.  Belle 
Isle  Ice  Co.,  93  Mich.  97  (1892).  In 
this  case  the  directors  had  voted  to 
themselves  large  salaries  and  had  re- 
stored the  same  upon  the  order  of 
the  court.  The  court  ordered  a  dis- 
tribution of  the  money  by  way  of 
dividends.  Brown  v.  Buffalo,  etc. 
R.  R.,  27  Hun,  842  (1882).  See  also 
Park  V.  Grant  Locomotive  Works, 
40  N.  J.  Eq.  114  (1885).  In  this  case 
there  was  a  contract  that  the  net 
profits  shoiild  be  divided  annually 
Scott  V.  Eagle  Fire  Ins.  Co.,  7  Paige, 
198  (1838);  Pratt  v.  Pratt,  33  Conn. 
446  (1866);  Beers  v.  Bridgeport  Spring 
Co.,  42  Conn.  17  (1875).  Upon  a  sale 
of  all  the  property  of  the  corporation 
the  directors  may  be  compelled  to 
declare  a  dividend.  Cramer  v.  Bird, 
L.  R,  6  Eq.  143  (1868).  A  stockholder 
cannot  sue  for  profits  until  a  divi- 
dend is  declared.  Beveridge  v.  New 
York,  etc.  R  R,  112  N.  Y.  1  (1889). 


1010 


CH.  XXXII.]  DIYEDEXDS.  [§  546. 

the  corporation  becomes  insolvent  is  fatal.^  And  tlie  court  will 
also  consider  that  the  aggrieved  shareholders  may,  if  a  major- 
ity, refuse  to  re-elect  the  directors  at  the  next  election,  or  may 
sell  their  shares.'^ 

§546.  Dividends  can  usually  le  made  only  from  profits — 
What  are  profits  wlmli  may  he  used  for  dividends.—  As  against 
the  dissent  of  stockholders  or  creditors,  a  dividend  can  law- 
fully be  made  only  out  of  profits.  The  payment  of  it  must 
leave  the  capital  stock  of  the  company  intact  and  unimpaired, 
or  the  dividend  itself  will  be  held  illegal.''  A  company  may, 
however,  legally  pay  interest  on  such  part  of  the  subscription 
as  is  paid  in  before  required  by  calls.  Such  interest  may  be 
paid  although  there  are  no  profits.^ 

In  view  of  the  rule  that  dividends  can  be  made  only  from 
profits,  it  becomes  important  to  ascertain  what  part  of  the  in- 
come of  a  corporation  constitutes  "  profits  "  which  may  be  used 
for  a  dividend.  This  question  has  caused  the  courts  consider- 
able difficulty.  There  have  been  various  definitions,  explana- 
tions, and  different  states  of  facts  involved  in  the  cases  which 
have  come  before  the  comets.  The  supreme  court  of  the  United 
States  say  that  "the  terra  'profits,'  out  of  which  di\idends 
alone  can  properly  be  declared,  denotes  what  remains  after 
defraying  every  expense,  including  loans  falling  due,  as  well 
as  the  interest  on  such  loans."  ^  An  English  court  says  that 
profits  are  the  "  excess  of  the  current  gains  over  the  working 
expenses  as  shown  by  revenue  accounts  as  distinguished  from 
capital  accounts." «  A  clear  idea  of  what  constitutes  profits 
available  for  dividends  can  be  obtained  only  by  a  study  of  the 
cases  themselves.^ 

1  Scott  V.  Eagle  Fire  Ins.  Co.,  7  mobile,  etc.  R.  R.  v.  Tennessee,  153 
Paige,  198  (1838).  U.  S.  486  (1894),  a  dictum. 

2  Barry  v.  Merchants'  Exchange  «  Re  London  &  Gen.  Bank,  73  L.  T. 
Ck).,  1  Sandf.  Ch.  280  (1844).  Rep."  227,  229  (1894). 

3  Lockhardt  r. Van  Alstyne,  31  Mich.  '  «  Net  earnings  are,  properly,  the 
76  (1875) ;  Hughes  v.  Vermont  Copper  gross  receipts,  less  the  expenses  of 
Min.  Co.,  72  N.  Y.  207,210  (1878).  See  operating  the  road  to  earn  such  re- 
also  ch.  XVI.  ^pra,  and  cases  in  notes  ceipts.  Interest  on  debts  is  paid  out 
to  this  section.  As  to  what  consti-  of  what  thus  remains;  that  is,  out  of 
tutes  a  payment  of  dividends  out  of  net  earnings.  Many  other  liabilities 
capital,  see  3  R'y  &  Corp.  L.  J.  409,  are  paid  out  of  the  net  earnings, 
reviewing  recent  English  decisions.  When  all  liabUities  are  paid,  either 

♦Lock  V.  Queensland,  etc.  Co.,  out  of  the  gross  receipts  or  out  of  net 
[1896]  A.  C.  461.  earnings,  the  remainder  is  the  profit 

1011 


§  54G.] 


DIVIDENDS. 


[cn.  XXXII. 


There  are  some  general  principles  connected  witli  this  sul> 
ject  which  have  been  established  by  the  adjudications.     It  is 


of  the  shareholders,  to  go  towards 
dividends,  which  in  that  way  are 
paid  out  of  the  net  earnings."  St 
John  V.  Erie  R'y,  10  Blatchf.  271, 
279  (1873);  S.  C,  21  Fed.  Cas.  1G7; 
S.C.afr'd,  22  Wall.  180  (1874);  Warren 
V.  King,  108  U.  S.  389  (1882);  Van 
Dyok  V.  McQuado,  86  N.  Y.  38,  47 
(1881).  "  Popularly  speaking,  the  net 
receipts  of  a  business  are  its  profits." 
Eyster  v.  Centennial  Board,  94  U.  S. 
500  (187G).  "Surplus  earnings"  are 
said  to  be  the  moneys  available  for 
dividends.  Williams  v.  Western 
Union  Tel.  Co.,  93  N.  Y.  1G2,  191 
(1883).  "Net  earnings"  is  a  term 
synonymous  with  "  net  income,"  and 
also  "  net  income "  as  used  in  the 
statute  under  consideration.  Phil- 
lips V.  Eastern  R  K.,  138  JIass.  122 
(1884).  In  Belfast,  etc.  R.  R  r.  Bel- 
fast, 77  Ma  445  (1885),  it  is  said  tliat 
the  term  "net  earnings"  does  not 
imply  that  the  company  is  wholly 
out  of  debt.  The  profits  mean  "  the 
clear  gains  of  any  business  venture, 
after  deducting  the  capital  invested 
in  the  business,  the  expenses  incurred 
in  its  conduct,  and  the  losses  sus- 
tained in  its  prosecution."  Bills  re- 
ceivable are  counted  as  part  of  the 
assets  or  net  profits,  but  are  not  to  be 
considered  as  the  basis  of  a  dividend, 
unless  they  can  be  sold  without  ma- 
terial loss.  Park  v.  Grant  Locomo- 
tive Works,  40  N.  J.  Eq.  114  (1885). 
In  the  following  cases  the  term  "net 
profits,"  or  an  equivalent  plu-ase,  is 
defined:  Coltness  Iron  Co.  v.  Black, 
L.  R.  6  App.  Cas.  315  (1881);  New 
York,  etc.  R.  R.  v.  Nickals,  119  U.  S. 
296  (1886).  In  Richardson  v.  Bulil,  77 
Mich.  632  (1889),  the  court  approved 
of  the  following  statement:  "That 
the  first  thing  to  be  done  by  any 
manufactiu'er,  who  would  ascertain 
his  net  earnings  during  the  preced- 
ing year,  is  to  take  a  careful  inven- 
tory of  what  he  has  left,  including 


his  plant  and  machinery,  and  then 
make  just  and  full  allowances  for  all 
losses  and  shrinkages  of  ever^'  kind 
that  he  has  suffered  in  his  property 
during  the  year,  and  for  all  exi>ense3 
of  every  kind,  ordinary  or  extraordi 
nar>',  that  have  occurred  during  the 
year;  and,  having  made  such  inven- 
tory, and  deducted  such  losses  and 
shrinkage  of  every  kind,  Im  net  earn- 
ings will  be  the  difference  between 
all  his  investments  in  his  business 
and  all  liis  expenses  of  every  kiml  on 
the  other  hand,  and  this  new  inven- 
tory, with  the  deductions  properly 
made,  and  all  that  he  has  received 
of  every  kind,  on  the  other  hand ;  and 
if  his  books  are  properly  kept  and 
proper  deductions  made,  these  net 
earnings  will  finally  appear  on  the 
balance  sheet  to  the  credit  of  the 
profit-and-loss  account."  In  Gratz  v. 
Redd,  4  B.  Mon.  (Ky.)  178,  187  (1843), 
it  is  held  that  capital  paid  in  on  stock 
wliich  is  afterwards  forfeited  does 
not  thereby  become  profits  and  lia- 
ble to  be  distributed  as  a  dividend. 
Money  paid  in  as  capital  must  re- 
main and  be  treated  and  expended 
as  capital,  whether  tlie  stock  that 
represents  it  is  forfeited  or  not.  To 
distribute  such  money  as  profits  is 
to  squander  and  dissipate  the  capital 
stock.  "Gross  earnings"  include 
earnings  of  the  railroad  through  a 
transfer  company  operated  by  it. 
DardaneUe.  etc.  R'y  v.  Shinn,  52  Ark. 
93  (1889).  "The  assets,  resources, 
and  fvmds  of  the  corporation  must 
consist  of  cash  on  hand  and  other 
property,  and,  if  such  assets  exceed 
the  liabilities,  a  dividend  can  law- 
fully be  declared ;  in  other  words,  a 
profit  exists."  Hubbard  v.  Weare,  79 
Iowa,  678  (1890);  Miller  v.  Bradish, 
69  Iowa,  278  (1886).  See  also  Mc- 
Dougall  V.  Jersey,  etc.  Co.,  2  Hem.  & 
M.  528  (1864);  PhiUips  v.  Eastern  R. 
R,  138  Mass.  122  (1884). 


1012 


CH.  XXXII.] 


DIVIDENDS. 


[§  5^6. 


not  necessary  for  a  railroad  or  other  corporation  to  use  its 
profits  to  pay  its  funded  or  bonded  debt  instead  of  using  those 
profits  for  a  dividend.  Such  bonded  debt  is  practically,  though 
not  theoreticaUy,  a  part  of  the  capital  of  the  company .^  But  it 
is  necessary  to  pay  the  interest  on  such  bonded  debt  before  any 
dividend  is  declared.- 

The  floating  debt  should  be  paid  or  funded  before  a  divi- 
dend is  declared.'    A  corporation  often  owes  large  debts  and 

1 A  company  has  power  to  and  Whether  the  interest  on  debentures 

does  raise  its  capital  both  by  stock  can  be  legally  charged  upon  the  cap- 

and  by  borrowing.    "They  expend  ital   account  of  the  company,  the 

that  money  in  executing  the  works,  revenue  available  for  dividend  being 

and,  the  works  having  been  executed,  thereby  increased,  was  not  decided 

the  capital  of  the  company  remains  in  Bloxam  v.  Metropolitan  R'y,  L-  R- 

in  the  shape  of  the  station  houses,  3  Ch.  337,  344,  350  (1808),  but  a  pre- 

the  permanent  way,  the  warehouses,  liminary  injunction  against  the  divi- 

and  evervthing  else  which  requires  dend  was  granted, 

expenditure  of  capital    The  share-  ^The  funded  debt  need  not  be  paid 


holders  ...  are  not  to  be  told  that 
all  those  things  are  to  be  paid  for  be- 
fore they  are  to  have  any  dividend 
out  of  the  incoma"  Mills  v.  North- 
em  R'y,  L.  R.  5  Ch.  021,  031  (1870). 
For  a  learned  and  very  satisfactory 
discussion  of  when  net  earnings  are 


before  dividends  are  declared,  but 
"  any  debts  which  have  been  incurred 
and  which  are  due  from  the  directors 
or  the  company,  either  for  steam- 
engines,  for  rails,  for  completin-j;  sta- 
tions, or  the  like,  which  ouyht  to 
have  been  and  would  have  been  paid 


to  be  retained  for  the  purpose  of  ac-  at  the  time,  liad  the  defendants  i)0s- 
cumulating  a  fund  to  pay  a  corpo-  sessed  the  necessary  funds  for  tliat 
rate  debt  not  yet  due,  see  Hazeltine    purpose,  those  are  so  many  deduc- 


V.  Belfast,  etc.  R.  R.,  79  Ma  411  (1887) 
All  interest  must  be  paid  out  of  prof- 
its, and  should  not  be  cliarged  to  con- 
struction account.  The  court  said 
also  that  a  sinking  fund  should  also 


tions  from  the  profits,  which,  in  my 
opinion,  are  not  ascertained  until  tlie 
whole  of  them  are  paid."  Cony  v. 
Londonderry,  etc  R'y,  29  Beav.  203, 
273  (1800).    However,  in  Stevens  v. 


be  provided  and  an  annual  contribu-    South  Devon  R'y,  9  Hare,  313,  3'26 


tion  made  to  it  out  of  the  profits. 
Gratz  V.  Redd,  4  B.  Mon.  (Ky.)  178, 
188(1843). 

2  Mobile,  etc.  R.  R  r.  Tennessee,  153 
U.  S.  480,  498  (1894);  Gratz  v.  Redd, 
4  B.  Mon.  (Ky.)  188  (1343).    A  divi- 


(1851),  a  stockholder  failed  in  his  suit 
to  enjoin  dividends  until  the  floating 
debt  was  paid.  The  court  said:  "I 
am  .of  opinion  that  the  couit  ought 
not,  upon  this  ground,  to  interfere 
by  injimction.  .  .  .  I  think,  also,  tliat 


dend  cannot  properly  be  based  on  a    the  question  upon  this  third  point  is 


statement  which  includes  accrued 
interest  with  no  allowance  for  inter- 
est on  liabilities;  outstanding  ac- 
coimta  with  no  allowance  for  bad 
debts;  and  expense  for  perfecting  a 
machine,  it  not  being  a  success.  Hub- 
bard V.  Weare,  79  Iowa,  078(1890). 


one  of  internal  management,  with 
which  the  court  cannot  intcrfera" 
Net  earnings  are  the  gross  receipts 
less  the  expenses  of  operating  the 
road  to  earn  such  receipts;  also  less 
the  interest  on  the  bonded,  funded, 
pennanent,  or  standing  debt;  also 


1013 


54G.] 


DITIDE^'DS. 


[cn.  XXXII. 


still  has  its  capital  stock  intact.     So  also  outstanding  and  dis- 
puted claims  need  not  be  first  paid.^ 

A  proper  sura  must  first  be  expended  or  set  aside  for  repairs 
and  reconstruction  to  replace  depreciation  due  to  wear  and 
tear.2    In  otlier  words,  the  fund  available  for  dividends  is  as- 


floating  debts  "  which  it  is  not  wise 
and  prudent  to  place  in  the  form  of 
a  fvinded  debt  or  to  postpone  for 
later  pajonent;  "  also  an  annual  con- 
tribution to  a  sinking  fund  to  pay 
the  funded  debt  when  the  condition 
of  the  company  renders  it  expedient, 
as  where  the  company  will  at  some 
future  time  earn  only  its  operating 
expenses.  As  to  wliether  the  float- 
ing debt  should  bo  paid  and  a  con- 
tribution be  made  to  a  sinking  fund 
"depends  upon  the  financial  re- 
sources and  abilities  of  the  corpora- 
tion and  the  prospects  of  its  road." 
The  cost  of  construction  may  be 
charged  to  the  capital-stock  account. 
Belfast,  etc.  R.  R  v.  Belfast,  77  Me. 
445  (1885). 

1  The  coiirt  will  not  enjoin  a  divi- 
dend where  the  company  shows  that 
it  has  the  necessary  profits,  even 
though  there  are  outstanding  claims 
on  illegally  issued  stock.  Carpenter 
V.  New  York  &  N.  H.  R.  R.,  5  Abb.  Pr. 
277  (1857).  Where  the  company  de- 
nies that  the  complainant  is  a  stock- 
holder, a  preliminary  injunction  falls. 
Blatchford  v.  New  York  &  N.  H.  R.  R., 
6  Abb.  Pr.  276  (1857).  Directors  are 
not  liable  to  replace  dividends  de- 
clared (by  reason  of  a  statute  making 
them  so  liable  if  the  dividends  are 
not  "from  the  surplus  profits"),  al- 
though dividends  were  declared  while 
the  company,  being  engaged  in  min- 
ing, assumed  a  mortgage  debt  in 
buying  additional  property,  a  sink- 
ing fund  being  begun  to  meet  that 
liability  gradually,  and  although  the 
money  to  pay  the  dividend  was  bor- 
rowed, money  to  that  amount  hav- 
ing been  put  into  improvements,  and 
although  losses  due  to  an  inj\mction 


against  using  a  stream  of  water  were 
not  at  once  charged  up  to  operating 
expense.  Excelsior,  etc.  Co.  v.  Pierce, 
90  Cal.  1.31  (1891). 

2  In  Davison  v.  Gillies,  L.  R  16  Ch. 
D.  347,  note  (1879).  the  court,  at  the 
instance  of  a  stockholder,  enjoined 
the  declaration  of  a  dividend  on  the 
ground  that  the  street-railway  tracks 
of  the  company  had  become  worn 
out,  and  needed  very  expensive  re- 
pairs, for  which  no  provision  had 
been  made  by  the  company,  and  that 
this  capital  so  used  up  mast  be  re- 
stored before  a  dividend  was  declared. 
The  by-laws  prohibited  dividends  ex- 
cept from  the  capital  stock.  The 
court  said:  "A  tramway  company 
lay  do"svn  a  new  tramway.  Of  course 
the  ordniary  wear  and  tear  of  the 
rails  and  sleepers,  and  so  on,  causes 
a  smn  of  money  to  be  required  from 
year  to  year  in  repairs.  It  may  or 
may  not  be  desirable  to  do  the  re- 
paid all  at  once;  but  if  at  the  end  of 
the  first  year  the  line  of  tramway  is 
still  in  so  good  a  state  of  repair  that 
it  requires  nothing  to  be  laid  out  on 
it  for  repairs  in  that  year,  still,  before 
you  can  ascertain  the  net  profits,  a 
sum  of  money  ought  to  be  set  aside 
as  representing  the  amount  in  wliich 
the  wear  and  tear  of  the  line  has,  I 
may  say,  so  far  depreciated  it  in 
value  as  that  that  siim  will  be  re- 
quired for  the  next  year  or  next  two 
years.  ...  I  should  think  no  com- 
mercial man  would  doubt  that  this 
is  the  right  course  —  that  he  must 
not  calculate  net  profits  imtil  he  has 
provided  for  all  the  ordinary  repairs 
and  wear  and  tear  occasioned  by  his 
business. "...  That  being  so,  it  ap- 
pears to  me  that  you  can  have  no  net 


1014 


CH.  XXXII.] 


DIVIDENDS. 


[§  546. 


certained  by  taking  into  account  the  cost  of  repairs  and  a 
reasonable  aUowance  for  depreciation,  for  wear  and  tear,  or  con- 
stant use,  giving  credit  for  aU  actual  permanent  improvements.^ 
But  in  the  case  of  a  mining  company  whose  product  when  once 
used  can  never  be  replaced,  it  is  not  necessary  to  set  aside  funds 
for  the  purpose  of  purchasing  a  new  mine.^ 


profits  unless  this  sum  has  been  set 
asida  When  you  come  to  the  next 
year,  or  the  third  or  fourth  year,  wliat 
hapRens  is  this:  as  the  line  gets  older 
the  amount  reqviired  for  repairs  in- 
creases. If  you  had  done  what  you 
ought  to  liave  done,  that  is,  set  aside 
every  year  the  sum  necessary  to  make 
good  the  wear  and  tear  in  that  year, 
then  in  the  following  years  you  would 
have  a  fund  sufficient  to  meet  the 
extra  cost."  See  also,  as  to  construc- 
tion account,  Mackintosh  v.  Flint, 
etc.  R.  R.,  34  Fed.  Rep.  583  (1888). 

1  Depreciation  at  the  rate  of  two 
per  cent  a  year  was  charged  in  this 
case.  The  directors  were  held  liable 
vmder  the  New  Jersey  statute  for  ille- 
gally declaring  dividends.  Whittaker 
V.  AmweU  Nat.  Bank,  52  N.  J.  Eq.  400 
(1894). 

2  A  company  owning  a  mine,  lease, 
or  patent  may  declare  dividends  out 
of  its   net   proceeds,   although    the 


which  I  am  endeavoring  to  explain 
is  to  say  that  fixed  capital  may  be 
sunk  and  lost,  and  yet  that  the  ex- 
cess of  current  receipts  over  current 
payments  may  be  divided,  but  that 
floating  or  circulating  capital  must 
be  kept  up,  as  otherwise  it  will  enter 
into,  and  form  part  of,  such  excess, 
in  which  case,  to  divide  such  excess 
without  deducting  the  capital  which 
forms  part  of  it,  will  be  contrary  to 
law."  In  Lambert  v.  Neuchatel  As- 
phalte  Co.,  51  L.  J.  (Ch.)  883  (1882),  a 
stockholder  sought  to  enjoin  a  divi- 
dend on  the  ground  that  the  beds  of 
asphalt  belonging  to  the  company 
were  being  consumed  by  the  com- 
pany, and  that  fxmds  sufficient  to  re- 
place this  consumption  should  be  set 
aside  before  any  dividend  was  de- 
clared. Otherwise  the  capital  would 
gradually  be  entirely  \ised  up.  The 
court  refused  the  injvmction,  inas- 
much as  the  by-laws  of  the  company 


OI   Its    nei;    pruueeus,    aiunuufjii    i/"^^     .^^^^  ^^  . j  — 

necessary  result  is  that  that  much  is    gave  absolute  discretion  to  flie  stock- 


permanently  taken  away  from  the 
substance  of  the  estate.  Excelsior, 
etc.  Co.  V.  Pierce,  90  CaL  131  (1891). 
Judge  Lindley,  in  Vemer  v.  General, 
etc.  Trust,  [1894]  2  Ch.  239,  206,  said: 
"But  the  word  'profits'  is  by  no 
means  free  from  ambiguity.  The  law 
is  much  more  accurately  expressed 
by  saying  that  dividends  cannot  be 
paid  out  of  capital  than  by  saying 
that  they  can  only  be  paid  out  of 
profits.  The  last  expression  leads  to 
the  inference  that  the  capital  mvist 
always  be  kept  up  and  be  represented 
by  assets  which,  if  sold,  would  pro- 
duce it;  and  this  is  more  than  is  re- 
quired by  law.  Perhaps  the  shortest 
way  of  expressing   the    distinction 


holders  to  determine  the  net  profits. 
No  creditor's  rights  were  involved  in 
the  case. 

A  very  full  and  careful  discussion 
of  the  right  to  declare  dividends  out 
of  a  mining  property  is  to  be  fovmd 
in  Lee  v.  Neuchatel  Asphalte  Co., 
L.  R.  41  Ch.  D.  1,  20,  22,  24  (1889).  In 
tha't  case,  however,  the  mines  were 
at  the  time  of  the  litigation  more 
valuable  than  at  the  time  when  the 
company  was  formed,  and  it  is  to  be 
noticed  tliat  the  rules  laid  down  ex- 
pressly assumed  that  enough  prop- 
erty existed  to  pay  all  creditors  after 
declaring  the  dividend.  The  court 
said,  per  Lindley,  J. : 

"  It  is  obvious  with  respect  to  such 


1015 


5JtG.] 


DIVIDENDS. 


[cn. 


XXXII. 


In  estimating-  tlie  profits  for  a  year  for  tlie  purpose  of  declar- 
ino-  a  dividend,  it  is  not  necessary  to  take  into  account  the  de- 
crease in  the  value  of  the  assets  and  the  impairment  of  the 
capital  stock  of  the  company  prior  to  that  year.  The  fact 
that  in  a  year  prior  to  the  dechiration  of  the  dividend  some 
portion  of  the  capital  of  an  incorporated  company  has  been 
lost  and  has  not  since  been  made  good  affords  no  ground  for  re- 
straining the  pa}ancnt  of  a  dividend  out  of  profits  subsequently 


property,  as  with  respect  to  varioiis 
other  properties  of  a  like  kind,  mines 
aud  quarries,  and  so  on,  every  ton  of 
stuif  wliich  you  get  out  of  that  wliich 
you  have  bought  with  your  capital 
may,  from  one  point  of  view,  be  con- 
sidered as  embodying  and  containing 
a  small  portion  of  your  capital,  aud 
that  if  you  sell  it  and  divide  the  pro- 
ceeds you  divide  some  portion  of  that 
which  you  have  spent  your  capital 
in  acquiring.  It  may  be  represented 
that  this  is  a  return  of  capital  All 
I  can  say  is,  if  that  is  a  return  of  cap- 
ital, it  appears  to  me  not  to  be  such 
a  return  of  capital  as  is  prohibited  by 
law,  .  .  . 

"  As  I  pointed  out  in  the  course  of 
the  argument,  and  I  repeat  now,  sup- 
pose a  company  is  formed  to  start  a 
daily  newspaper;  supposing  it  sinks 
£250,000  before  the  receipts  from  sales 
and  advertisements  equal  the  cur- 
rent expenses,  and  supposing  it  then 
goes  on,  is  it  to  be  said  that  the  com- 
pany must  come  to  a  stop,  or  that  it 
cannot  divide  profits  until  it  has  re- 
placed its  £250,000,  which  has  been 
sunk  in  building  up  a  property  which, 
if  put  up  for  sale,  would  perhaps  not 
yield  £10,000?  That  is  a  business 
matter  left  to  business  men.  If  they 
think  their  prospects  of  success  are 
considerable,  so  long  as  they  pay 
their  creditors  there  is  no  reason 
why  they  shovdd  not  go  on  and  divide 
profits,  so  far  as  I  can  see,  although 
every  shilling  of  the  capital  may  be 
lost.  It  may  be  a  perfectly  flourish- 
ing concern,  and  the  contrary  view, 


I  think,  is  to  be  traced  to  this^  tliat 
there  is  a  sort  of  notion  that  the  com- 
pany is  debtor  to  capitiiL  In  an  ac- 
countant's jKjint  of  view  it  is  quite 
right,  in  order  to  see  how  you  stand, 
to  put  down  company  debtor  to  cap- 
ital. But  the  company  do  not  owe 
the  capital.  What  it  means  is  simply 
this:  that  if  you  want  to  find  out  how 
you  stand,  whether  you  have  lost  your 
money  or  not,  you  must  bring  your 
capital  into  account  somehow  or  an- 
other. .  .  . 

"  If  a  company  is  formed  to  acquire 
and  work  a  property  of  a  wasting 
nature,  for  example,  a  mine,  a  quarry, 
or  a  patent,  the  capital  expended  in 
acquiring  the  property  may  be  re- 
garded as  sunk  and  gone,  and  if  the 
company  retains  assets  sufficient  to 
pay  its  debts,  it  appears  to  me  tliat 
there  is  nothing  whatever  in  the  act 
to  prevent  any  excess  of  money  ob- 
tained by  working  the  property  over 
the  cost  of  working  it  from  being 
divided  amongst  the  shareholders; 
and  this,  in  my  opinion,  is  true,  al- 
though some  portion  of  the  property 
itself  is  sold,  and  in  some  sense  the 
capital  is  thereby  diminished.  ,  .  . 

"  But  it  is,  I  think,  a  misapprehen- 
sion to  say  that  dividing  the  surplus 
after  payment  of  expenses  of  the 
produce  of  your  wasting  property  is 
a  retm'n  of  capital  in  any  such  sense 
as  is  forbidden  by  the  act." 

The  court  held  consequently  that 
the  stockholder's  suit  to  enjoin  the 
dividend  must  faiL 


1016 


CH.  XXXII.] 


DIVIDENDS. 


[§  546. 


earned.^  In  fact,  a  corporation  "which  has  lost  part  of  its 
capital  can  lawfully  declare  or  pay  a  dividend  without  first 
making  good  the  capital  which  has  been  lost."  ^  Thus,  although 
a  mining  company  for  several  years  is  obliged  to  pay  the  inter- 
est on  its  debts  out  of  the  capital  stock,  nevertheless  in  subse- 
quent years,  when  large  profits  are  earned,  it  may  use  such 
profits  for  di\ddends  in  any  year  after  paying  the  interest  on 
the  debt  for  that  year.  The  company  need  not  first  restore  the 
capital  stock.'  This  rule  is  of  course  subject  to  statutory  re- 
strictions, as,  for  instance,  in  New  York  state,  where  dividends 
can  be  made  only  from  "  surplus  profits."  *  A  dividend  may 
be  declared  although  the  company  has  not  yet  completed  its 
works.*  In  the  case  of  railroads,  the  cost  of  additional  rolling- 
stock  and  improvements  may  be  charged  to  capital  account, 
and  need  not  be  paid  before  a  dividend  is  declared."    Where 


1  Hence  where,  in  1882,  $350,000  was 
charged  off  for  bad  debts,  but  this 
was  offset  by  credit  for  $350,000  for 
increase  in  the  value  of  land  owned 
by  the  company,  this  transaction  was 
not  to  be  considered  in  1885  in  ascer- 
taining the  profits  of  1885.  It  is  im- 
material whether  tlie  alleged  increase 
in  the  value  of  the  land  was  correct 
or  not.  Bolton  v.  Natal  Land,  etc. 
Co.,  65  L.  T.  Rep.  786  (1891).  Though 
the  capital  stock  has  been  impaired 
in  time  past,  it  has  been  held  that 
dividends  may  be  declared  out  of 
profits  subsequently  earned  without 
setting  them  aside  to  restore  the  lost 
capital  Healey,  Companies  Law  & 
Pr.  132.  See  also  cases  in  last  note. 
"Where  a  bank  sells  its  business  for  a 
certain  sum,  and  subsequently  buys 
back  a  portion  of  it  for  another  sum, 
it  may  declare  the  dividend  of  the 
svirplus  that  remains  after  deducting 
from  the  first-mentioned  sujn  the  sec- 
ond-mentioned sum,  and  also  the  cap- 
ital stock.  Lubbock  v.  British  Bank, 
etc.,  [1892]  2  Ch.  198. 

2  Vemer  u  General,  etc.  Trust,  [1894] 
2  Ch.  239.  Where  the  value  of  the 
assets  of  a  solvent  company  has  fallen 
below  the  nominal  amoimt  of  the 


share  capital,  the  company,  in  the  ab- 
sence of  any  special  provisions  in  its 
articles  or  of  a  contract  binding  the 
company,  is  under  no  obligation  to 
make  good  such  depreciation  in  the 
value  of  the  assets  before  declaring  a 
dividend  out  of  the  profits.  Depre- 
ciation in  the  value  of  the  lease  and 
good-will  of  a  company  is  a  loss  of 
"  fixed  "  as  distinguished  from  "  float- 
ing "capital  The  balance  sheet  of 
a  company  cannot  therefore  be  im- 
peached on  the  grovmd  that  it  does 
not  charge  anything  against  revenue 
in  respect  of  depreciation  of  good- 
will Wilmer  v.  McNamara  &  Co., 
[1895]  2  Ch.  245. 

3  Bosanquet  v.  St  John,  etc.,  Ltd., 
77  L.  T.  Rep.  200  (1897). 

4SeeL.  1892,  ch.  688,  §  23. 

5  In  Browne  v.  Monmouthshire  R'y, 
13  Beav.  32  (1851),  the  court  refused  to 
enjoin  a  company  from  declaring  a 
dividend,  the  only  groimd  of  com- 
plaint being  that  the  company  had 
not  yet  completed  its  -works. 

6  Rolling-stock  may  be  carried  to 
capital  account  instead  of  being 
charged  to  operating  expensa  Mills 
V.  Northern  R'y,  L.  R.  5  Ch.  App.  621 
(1870).    For  a  definition  of  "  net  earn- 


lOli 


§  5^0.] 


DIVIDENDS. 


[cn.  XXXII. 


one  company  buys  out  another  and  agrees  to  pay  a  certain 
salary  to  an  officer  of  the  latter,  or  a  lump  sum  in  lieu  thereof, 
such  lump  sum,  if  paid,  is  a  part  of  the  capital  stock,  and  need 
not  be  considered  as  expenses.^ 

Insurance  companies  cannot  declare  dividends  out  of  un- 
earned premiums.^  Banks  cannot  declare  dividends  out  of 
interest  not  yet  received.'  The  question  of  what  constitutes 
profits  applicable  to  dividends  arises  often  in  connection  with 
preferred  stock.* 

Profits  earned  and  invested  in  times  of  prosperity  may  proi> 
erly  be  paid  out  as  dividends  subsequently  and  at  a  time  when 
no  dividends  have  been  earned.*  AVhcn  the  company  has  used 
profits  for  improvements,  it  may  lawfully  borrow  an  equiva- 
lent sum  of  money  for  the  purpose  of  a  dividend.'    And  it  may 


ings  "  as  used  in  the  fedeml  statutes 
in  regard  to  the  government's  claims 
on  the  Pacific  railroads,  see  Union 
Pacific  R  R  u.  U.  S.,  99  U.  S.  402 
(1878);  U.  S.  V.  Central  Pac.  R  R,  99 
U.  S.  449  (1879);  U.  S.  v.  Kansas  Pac. 
R  R,  99  U.  S.  455  (1879);  U.  S.  v. 
Sioux  City,  etc.  R  R.,  99  U.  S.  491 
(1879).  Although  ordinarily  from  the 
gross  earnings  there  should  be  de- 
ducted "a  reasonable  amount  for 
betterments  and  improvements,  ren- 
dered necessary  by  the  gradual  in- 
crease of  traffic,  the  better  discharge 
of  business,  and  the  public  accommo- 
dation," in  arriving  at  the  net  earn- 
ings under  the  Thurman  act  relative 
to  the  Pacific  raili'oads,  no  such  de- 
ductions are  to  be  made.  U.  S.  v.  Cen- 
tral Pacific  R  R,  138  U.  S.  84  (1891). 

1  Royal  Ins.  Co.  v.  Watson,  [1897] 
A.  C.  1. 

2  Unearned  premiums  received  by 
an  insurance  company,  on  which  the 
risks  are  still  nm^ning,  are  not  sur- 
plus profits  out  of  which  dividends 
can  legally  be  made,  there  not  being 
a  sviificient  surplus  on  hand  in  excess 
of  the  capital  stock  to  meet  the  prob- 
able losses  on  risks  not  yet  termi- 
nated. De  Peyster  v.  American  Fire 
Ins.  Co.,  6  Paige,  486  (1837).  See  also 
Scott  V.  Eagle  Fire  Ins.  Co.,  7  Paige, 


198  (1838);  Lexington,  etc.  Ins.  Co.  v. 
Page,  17  B.  Mon.  (Ky.)  412  (1856). 

3 "  Money  earned  as  interest,  how- 
ever well  secured,  or  certain  to  be 
eventually  paid,  cannot  in  fact  be 
distributed  as  dividends  to  stock- 
holders, and  does  not  constitute  sur- 
plus profits."  People  v.  San  Francisco 
Sav.  Union,  72  Cal.  199  (1887).  In 
Iowa  it  has  been  held  that  where  a 
bank  with  a  capital  of  $100,860;  as- 
sets of  $156,904;  liabilities  of  $56,005, 
declares  and  pays  a  dividend  of  ten 
per  cent,  i.  e.,  $10,686,  the  corporate 
creditors  could  not  compel  the  stock- 
holders to  return  the  dividend.  Miller 
V.  Bradish,  69  Iowa,  278  (1886).  In  Ee 
London  &  Gen.  Bank,  72  L.  T.  Rep. 
227,  230  (1894),  the  coxirt  intimates 
"  that  nothing  ought  to  be  included 
as  annual  profit  which  could  not  be 
realized  as  a  profit  if  need  should 
be,"  the  court  having  before  it  the 
question  of  interest  earned  but  not 
collected. 

•  *  See  ch.  XVI,  supra. 

5  Mills  V.  Northern  Railway,  etc. 
Co.,  L.  R  5  Ch.  621  (1870);  Hoole  v. 
Great  Western  R'y,  L.  R  3  Ch.  262 
(1867);  Beers  v.  Bridgeport  Spring 
Co.,  42  Conn.  17  (1875);  Ee  MercantUe 
Tradmg  Co.,  L.  R  4  Ch.  475  (1869). 

•'  Mills  V.  Northern  Railway,  etc 


1018 


en.  XXXII.] 


DIVIDENDS. 


[§  546. 


properly  borrow  money  to  pay  a  dividend  if,  upon  a  fair  esti- 
mate of  its  assets  and  liabilities,  it  has  assets  in  excess  of  its 
liabilities  and  capital  stock  equal  to  the  amount  of  the  proposed 
dividend.^  The  subsequent  insolvency  of  the  corporation  does 
not  invalidate  a  dividend  declared  when  there  were  net  profits.^ 
The  English  authorities  go  further  and  hold  that  where  profits- 
have  been  earned  and  proporly  entered  as  profits  on  the  corpo- 
ration books  they  belong  to  the  stockholders,  even  though  there- 
after the  corporation  becomes  insolvent  and  is  wound  up  before 
such  profits  are  declared  to  be  dividends.^  And  even  though 
the  business  is  a  hazardous  one,  money  need  not  be  set  aside 
for  possible  disasters.* 

Upon  a  reduction  of  the  capital  stock  the  surplus  funds  over 
and  above  the  full  amount  of  the  capital  stock  as  reduced  may 
be  divided  among  the  stockholders,  the  only  restriction  being 
that  such  a  distribution  must  leave  the  reduced  capital  stock 
entire  and  unimpaired.  A  stockholder  may  insist  upon  a  divis- 
ion of  such  a  surplus.*    The  qupstion  of  dividends  where  one 


Co..  L.  R  5  Ch.  621  (1870);  Stringer's 
Case.  L.  R.  4  Ch.  475,  492  (18G9).  A 
dividend  may  be  declared  if  the  rev- 
enue account  shows  profits,  even 
tliough  sucli  profits  are  not  on  hand 
in  the  way  of  cash.  Re  London  & 
Gen.  Bank,  72  L.  T.  Rep.  227  (1894); 
aff'd,  [1895]  2  Ch.  160,  673. 

1  Stringer's  Case,  L.  R.  4  Ch.  475 
(1869).  "  A  company  is  quite  as  com- 
petent to  declare  dividends  out  of 
property  which  is  invested  for  the 
time  being  in  buildings,  or  anything 
else,  as  it  is  out  of  cash  in  hand,  and 
it  is  not  at  all  necessary  that  a  com- 
pany, any  more  than  an  individual, 
should  have  cash  at  tha  bank  on 
which  he  can  draw  in  order  to  declare 
dividends."  Municipal,  etc.  Land  Co. 
V.  Pollington,  63  L.  T.  Rep.  238  (1890). 

2Reid  V.  Eaton  Iron  Mfg.  Co.,  40 
Ga.  98  (1869);  Le  Roy  v.  Globe  Ins. 
Co.,  2  Edw.  Ch.  657  (1836).  In  decid- 
ing  whether  a  dividend  was  right- 
fully made,  the  transaction  must  be 
viewed  from  the  standpoint  of  that 
time,  and  not  in  the  light  of  subse- 
quent events.    Notes  or  overdrafts  by 


persons  then  considered  abundantly 
good,  included  among  the  coriiorate 
assets  when  the  dividend  was  tle- 
clared  and  paid,  should  not  be  re- 
garded as  losses  sustained  by  tlie 
corporation  because  they  afterwards 
proved  to  be  unavailable.  Main  v. 
Mills,  6  Biss.  98  (1874);  S.  C,  16  Fed. 
Cas.  506.  Cf.  Flitcroft's  Case,  L.  R.  21 
Ch.  D.  519  (1882),  where  the  directors 
figured  in  what  they  knew  were  bad 
debts. 

3  The  creditors  of  the  corporation 
are  entitled  to  the  corpus  of  the  es- 
tate, but  not  to  any  profits.  If  there 
is  preferred  stock,  such  profits  go  to 
that  £tock.  Bishop  v.  Smyrna,  etc. 
Co.,  [1895J  2  Cli.  265. 

*  A  balance  sheet  sustaining  a  divi- 
dend is  upheld  where  the  business  is 
extra  hazardous,  such  as  blockade 
runnmg,  and  such  dividend  need  not 
be  refunded,  even  though  the  block- 
ade runners  are  lost  and  other  assets 
turn  out  to  be  worthless.  Re  Mer- 
cantile Co.,  L.  R.  4  Ch.  App.  475  (1869). 

*  Seeley  v.  New  York,  etc.  Bank,  8 
Daly,  400  (1878);  S.  C,  Thompson  Nat. 


1019 


5-17.] 


DIVIDENDS. 


[oh.  XXXII. 


road  is  consolidated  with  another  is  considered  elsewhere.^  Un- 
less some  statute  prohibits  it,  or  some  one  objects,  a  corporation 
may  declare  a  dividend  out  of  its  capital  stock,  subject  to  the 
common-law  liability  for  so  doing.'^ 

§  547.  A  stoclchoJder  may  enjoin  an  illegal  dividend. —  A  court 
of  equity  will,  upon  the  application  of  a  stockholder*  enjoin  an 
attempt  to  distribute  in  dividends  any  part  of  the  capital  stock.' 
But  the  courts  will  not  lightly  review  the  decision  of  the  board 
of  directors  in  regard  to  whether  the  necessary  profits  actually 
exist.'*     If  the  dividend  has  been  declared,  but  not  paid,  it  has 


Bank  Cas.,  804;  aff'd,  78  N.  Y.  008 
(1879);  Strong  v.  Brooklyn  Crosstown 
R  R,  93  N.  Y.  420,  435  (1883);  Parker 
V.  Mason,  8  R  I.  427  (1807).  See  also 
§  548,  infra;  Eyster  v.  Centennial 
Board,  94  U.  S.  500  (1870). 

1  See  ch.  XVI,  §  270,  supra. 

2  People  V.  Barker,  141  N.  Y.  251 
(1894).  See  also  §§  548,  071,  infra, 
and  §  535,  supra.  Where  the  sole 
owner  of  the  stock  of  a  coiporation 
executes  the  note  of  the  corporation 
for  his  individual  indebtedness,  no 
one  but  the  creditors  of  the  corpora- 
tion can  complain.  Millsaps  v.  Mer- 
chants', etc.  Bank,  71  Miss.  301  (1893). 
Where  a  few  persons  o\vn  all  the 
stock  of  a  company,  and  use  the  profits 
for  personal  expenses  and  miscellane- 
ous purposes,  irrespective  of  the  cor- 
poration, all  the  stockholders  know- 
ing thereof  and  assenting  thereto,  a 
policy  of  insurance  issued  to  one  of 
them  is  his,  even  though  the  pre- 
miums were  paid  out  of  the  corpo- 
rate profits,  it  being  shown  that  all 
this  was  done  while  the  corporation 
was  solvent,  and  that  no  rights  of 
creditors  then  intervened,  and  that 
all  the  debts  represented  by  the  re- 
ceiver arose  subsequently.  Little  v. 
Garabrant,  90  Hun,  404  (1895);  aff'd, 
153  N.  Y.  001.  Even  though  a  bond 
dividend  results  in  tlie  impairing  of 
the  capital  stock,  the  court  will  not 
interfere  if  no  harm  can  come  from 
it.  The  court  refused  to  "  interfere 
after  all  danger  had  passed  and  for 


tlie  sake  of  vindicating  general  prin- 
ciples." Chaffee  v.  Rutland  R  R,  55 
Vt.  110  (1882).    See  also  §  3,  stqrra. 

^Macdougall  v.  Jersey  Imperial 
Hotel  Co.,  2  Hen.  &  M.  528  (1804); 
Bloxam  v.  Metropolitan  R'y,  L.  R  3 
CIl  337(1807);  Salisbury  u  Metropoli- 
tan R'y,  38  L.  J.  (Ch.)  249  (1809);  Car- 
lisle V.  Southeastern  R'y,  1  Macn.  & 
G.  089  (1850);  Wardu  Sittingbourne, 
etc.  Ry,  L.  R  9  Ch.  488  (1874);  Davi- 
son V.  Gillies,  L.  R  10  Ch.  D.  347,  n. 
(1879).  "  Dividends  can  be  rightfully 
paid  only  out  of  profits.  Corporations 
are  liable  to  be  enjoined  by  share- 
holders or  creditors  from  making  a 
distribution  in  dividends  of  capital." 
Mobile,  etc.  R.  R  v.  Tennessee,  153 
U.  S.  480  (1894),  a  dictum.  A  stock- 
holder has  the  right  to  enjoin  the 
payment  of  a  dividend  from  the  cajv 
ital  stock,  but  the  bill  for  that  pur- 
pose must  be  explicit  in  its  allega- 
tions. Coquard  v.  National,  etc.  Co., 
49  N.  E.  Rep.  503  (lU.,  1898).  See  also 
cases  in  preceding  section. 

^  Where  the  directors  declare  a  divi- 
dend after  a  proper  investigation  of 
the  financial  position  of  the  company, 
the  court  will  not  lightly  interfere 
with  the  payment  thereof;  but  where 
they  declare  it  without  proper  inves- 
tigation or  professional  assistance, 
and  it  is  called  in  question,  the  bur- 
den of  proof  is  upon  them  to  show 
that  it  is  to  be  fairly  paid  out  of  net 
profits.  lie  County  Marine  Ins.  Co., 
L.  R.  0  Ch.  App.  104  (1870).    See  also 


1020 


CH.  XXXII.]  DIVIDENDS.  [§  548. 

been  held  that  all  the  stockholders  must  he  joined  as  parties.* 
The  court  will  not  interfere  if  neither  the  stockholders  nor  the 
corporate  creditors  can  be  injured  by  the  dividend.^  The  courts 
of  one  state  will  not  enjoin  a  corporation  created  by  another 
state  from  declaring  a  dividend,  unless  a  fraud  is  being  perpe- 
trated on  citizens  of  the  first-mentioned  state.''  A  corporate 
creditor  has  no  standing  in  court  to  enjoin  a  dividend,  even 
though  it  will  impair  the  capital  stock.'*  But  owners  of  claims, 
even  though  not  yet  due,  may  prevent  a  distribution  of  capital 
stock  upon  a  reduction  thereof,  unless  security  is  given.** 

§  548.  Dividends  which  impair  the  capital  stocli  may  le  ille- 
gal, and  may  le  recovered  hack  from  the  stoclcholders  —  Divi- 
dends on  dissolution.— As  already  shown,  as  against  dissenting 
stockholders  and  as  against  corporate  creditors  a  dividend  can 
be  lawfully  declared  only  when  sufficient  net  profits  have  been 
earned  to  pay  that  dividend.  Accordingly,  a  dividend  paid 
wholly  or  partly  from  the  capital  stock  may  be  illegal,  and  may 
subject  the  corporation  and  the  shareholders  who  are  parties 
to  it  to  serious  liability.  It  is  the  well-determined  doctrine  of 
the  courts  of  this  country  that  the  capital  stock  is  a  fund  to  be 
preserved  for  the  benefit  of  corporate  creditors.®    Hence  the 

Hoole  V.  Great  Western  R'y,  L.  R  3  land  R.  R,  55  Vt.  110, 133  (1882),  where 

Ch.  App.  262  (1867).  the  court  stated  and  acted  upon  the 

1 A  stockholder  may  file  a  bill  in  be-  principle  of  law  stated  above, 
half  of  himself  and  other  stockhold-  3  Howell  v.  Chicago,  etc.  R.  R.,  51 
ers  to  enjoin  the  declaration  of  divl-  Barb.  378  (1868).  In  Massachusetts  no 
dends  where  there  are  no  net  profits ;  equitable  relief  can  be  granted  against 
but  where  he  has  not  joined  all  the  a  foreign  corporation,  which  has 
stockholders  as  parties,  he  cannot  neither  officers  nor  place  of  business 
enjoin  the  payment  of  a  dividend  in  that  state,  to  compel  the  company 
already  declared,  even  though  the  to  declare  and  pay  dividends  accord- 
time  of  payment  has  not  yet  arrived,  ing  to  the  stipulations  of  their  cer- 
Fawcett  v.  Lam-ie,  1  Dr.  &  Sm.  192  tificates  of  preferred  stock.  Willis- 
(1860).  To  same  effect,  Carlisle  v.  ton  v.  Michigan  Southern,  etc.  R.  R., 
Southeastern  R'y,  1  Macn.  &  G.  689  95  M&ss.  400  (1866);  Berford  v.  New 
(1850).  See  Browne  v.  Monmouthshire  York,  etc.  Co.,  4  N.  Y.  Supp.  836  (1889). 
R'y&  Canal  Co..  13  Beav.  32  (1851);  4  Mills  u  Northern  R'y,  etc.  Co.,  L.R 
Coates  V.  Nottingham  Water-works  5  Cli.  App.  621  (1870).  See  also  ch. 
Co.,  30  Beav.  86  (1861).  XLV,  g  735,  infra. 

2  "  Equity  would  not  interfere  with  ^Ee  Telegraph  Const  Co.,  L.  R  10 

a  dividend  unless  it  appeared  that  Eq.  384  (1870). 

somebody  in  particular  was  hurt  or  ^gee  §  199,  supra;  Goodwin  v.  Mo- 
liable  to  be  injured.  It  would  not  in-  Gehee,  15  Ala.  232,  247  (1849),  holding 
terfere  after  all  danger  had  passed,  that  a  corporation  cannot  give  away 
and  for  the  sake  of  vindicating  gen-  its  effects  to  the  prejudice  of  credit- 
eral  principles."    See  Chaffee  v.  Rut-  ors;  and  any  arrangement  made  by 

1021 


§  54S.] 


DIVIDENDS. 


[cn.  XXXII. 


rule  has  been  firmly  established  that,  where  dividends  are  paid 
in  whole  or  in  part  out  of  the  capital  stock,  corporate  creditors, 
being  such  when  the  dividend  was  declared,  or  becoming  such 
at  any  subsequent  time,  may,  to  the  extent  of  their  claims,  if 
such  claims  are  not  otherwise  paid,  compel  the  shareholders  to 
whom  the  dividend  has  been  paid  to  refund  whatever  portion 
of  the  dividend  was  taken  out  of  the  capital  stock.^  In  this 
country  shareholders  are  bound  to  take  notice  of  the  true  char- 
acter and  condition  of  the  capital  stock,  and  they  cannot  escape 
liability  by  reason  of  their  ignorance. 

If  a  dividend  has  been  paid  out  of  the  capital  stock  the  stock- 
holders are  conclusively  presumed  to  have  knoAvn  it,  and  are 
liable  to  an  action  for  a  repayjnent.  They  cannot  claim  to 
hold  the  position  of  innocent  or  honajlde  holders.^    It  has  been 


it  with  its  stockholders  to  defeat  the 
claims  of  creditors  will  be  held  void 
both  in  law  and  in  equity,  and  that 
a  stockholder  cannot  buy  up  claims 
against  the  company  as  an  offset  to 
his  subscription. 

1  Curran  v.  State  of  Arkansas,  15 
How.  (U.  S.)  304  (1853);  Railroad  Co. 
V.  Howard,  7  "VVaU.  392  (1868);  Os- 
good V.  Laytin,  48  Barb.  463  (1867); 
aff 'd,  3  Keyes,  521 ;  Johnson  v.  Laflin, 
5  Dill.  65,  86,  note  (1878);  aff'd,  103 
U.  S.  800  (1880);  Hastings  v.  Drew,  76 
N.  Y.  919  (1879);  Sagory  v.  Dubois,  3 
Sandf.  Ch.  466  (1846);  Wood  v.  Dum- 
mer,  3  Mason,  308  (1824) ;  S.  C,  30  Fed. 
Cas.  435;  Gratz  v.  Redd,  4  B.  Mon. 
(Ky.)  178  (1843);  Bank  of  St.  Mary's  v. 
St.  John,  25  Ala.  566  (1854);  Bartlett 
V.  Drew,  57  N.  Y.  587  (1874);  Heman 
V.  Britton,  88  Mo.  549  (1886);  Story, 
Eq.  Jiir.  (13th  ed.,  1886),  §  1252.  A 
stockholder  who  receives  an  illegal 
dividend  is  liable  for  it,  even  though 
he  has  paid  it  over  to  another  person 
to  whom  the  stock  belonged.  Finn 
V.  Brown,  142  U.  S.  56  (1891).  Where 
the  stockholders  distribute  the  assets 
among  themselves,  a  creditor  may 
follow  the  assets.  Panhandle,  etc. 
Bank  v.  Emery,  78  Tex.  498  (1890). 
The  shareholders  of  a  corporation 
have,  in  Louisiana,  no  right  to  appro- 
priate any  part  of  its  assets  to  pay 


largo  salaries  to  themselves  as  offi- 
cers of  the  company,  vmtil  all  credit- 
ors who  are  not  stockholders  have 
been  paid.  Cochran  v.  Ocean  Dry 
Dock  Co.,  30  La.  Ann.  1365  (1878).  In 
Lexington  Life,  et*.  Ins.  Co.  v.  Page, 
17  B.  Mon.  (Ky.)  412  (1856),  it  is  held 
that  the  action  to  recover  the  divi- 
dend in  such  a  case  may  be  main- 
tained by  the  company  or  its  assigns 
where  the  dividend  had  been  paid 
by  mistaka  See  also,  in  general, 
Skrainka  v.  Allen,  7  Mo.  App.  434 
(1879);  Ward  v.  Sittingbourne,  etc.  R. 
R.,  L.  R  9  Ch.  App.  488  (1874);  Clapp 
V.  Peterson,  104  III  26  (1882),  holding 
that  the  property  so  withdrawn  was 
liable  for  the  creditor's  whole  debt 
and  not  merely  for  a  pro  rata  share 
thereof.  If  a  fixed  per  cent  is  drawn 
out  by  stockholders  instead  of  a  divi- 
dend, and  this  per  cent  exceeds  the 
profits,  a  stockholder,  upon  the  in- 
solvency of  the  corporation,  must  pay 
back  the  excess  received  by  him. 
Reading  Trust  Co.  v.  Reading  Iron 
Works,  137  Pa.  St.  282  (1891).  Cred- 
itors may  reach  shares  of  stock  that 
the  corporation  which  becomes  in- 
solvent has  distributed  without  a 
dividend.  McKusick  v.  Seymour,  etc. 
Co.,  48  Minn.  158  (1892). 

2  Quoted    and   approved    in    Fort 
Payne  Bank  v.  Alabama  Sanitarium, 


1022 


CH.  XXXII.]  DIVIDENDS.  [§  548. 

held  in  England,  however,  that  where  the  by-laws  provide  that 
the  directors,  for  salary,  shall  have  ten  per  cent  of  the  surplus 
profits  over  a  certain  dividend,  they  may  recover,  it  although 
they  sue  for  it  many  years  afterwards,  when  it  turns  out  that 
the  assets  were  overestimated,  but  in  good  faith.^ 

A  stockholder  may  by  bill  in  equity  compel  a  return  of  the 
dividend  paid  out  of  the  capital  stock.^  A  stockholder  who 
receives  dividends  ^vrongfully  declared  cannot  then,  as  a  corpo- 
rate creditor,  hold  other  stockholders  liable  on  a  statutory  lia- 
bility for  wrongfully  declaring  dividends.*  In  Massachusetts 
at  an  early  day  it  was  held  that  an  action  at  law  would  not  lie 
to  reach  dividends  paid  out  of  the  capital  stock.*  Notes  given 
by  an  insolvent  corporation  for  unearned  dividends  are  not 
legal  except  in  hona  fide  hands.* 

A  corporate  creditor  may  compel  stockholders  to  refund  the 
amount  received  by  them  on  a  distribution  of  the  corporate 
assets  upon  dissolution  or  a  sale  of  all  the  assets  of  the  com- 
pany, to  the  extent  that  his  claim  has  not  been  paid,  after  he 
has  exhausted  his  remedy  against  the  corporation  itself.^  But 
aside  from  this  it  is  legal  for  the  stockholders  to  dispose  of  the 
assets.  So  long  as  corporate  creditors  are  paid,  no  one  is  in- 
jured by  the  stockholders  distributing  among  themselves  the 
assets."'  And  a  corporate  creditor  may  by  his  acts  be  estopped 
from  attacking  the  dividend.^ 

103  Ala.  358  (1894).    A  stockholder  *  Vose  v.  Grant,  15  Mass.  505,  517 

miist  turn  back  iUegal  dividends,  al-  (1819);  Spear  v.  Grant,  16  Llass.  9,  15 

though  he  knew  nothing  of  the  iUe-  (1819);  PaschaU  v.  Whitsett,  11  Ala. 

gaUty.    Finn  v.  Brown,  142  U.  S.  56  472  (1847). 

(1891)-  Re  Denham,  L.  R.  25  Ch- D.  5  Alabama,  etc.  Co.  v.  Chattanooga, 

752  (1883).  etc.  Co.,  37  S.  W.  Rep.  1004  (Tenn., 

1  Re  Peruvian  Guano  Co.,  [1894]  3  1896). 

QYu  690.  ^  See  §  549,  infra,  and  ch-  XL,  §  672, 

2  Holmes   v.    Newcastle,  etc.   Co.,    infra. 

L.  R  1  Ch.  D.  682  (1875).  ^See    g§  668,  763,    infra.    Where 

3  Thompson  v.  Bemis,  etc.  Co.,  127    three  persons  have  formed  a  corpo- 
Mass.  595  (1879).  ration  and  transferred  a  patent  to  it 

8  Thus,  where  a  company  is  insolv-  ment  the  bondholders  decline  to  sell 

ent,  and  bondholders  have  agreed  to  and  proceed  to  foreclose  their  mort- 

seU  their  bonds  to  a  certain  party  at  gage,  and  realize  ninety  cents  on  the 

eighty  cents  on  the  dollar,  and  that  dollar,  the  court  will  not  compel  the 

party  then  agrees  with  the  corpora-  stockholders  to  pay  to  the  bondhold- 

tion  to  acquire  and  cancel  the  bonds  ers  the  corporate  assets  which  the 

and  take  the  property  from  the  cor-  stockholders  have  distributed  among 

poration  for  a  nominal  consideration,  themselves.    Brooks  v.  Brooks,  174 

and  after  he  has  made  such  agree-  Pa.  St.  519  (1896). 

1023 


§  549.] 


DIVIDENDS. 


[cn.  XXXII. 


The  distribution  of  the  assets  among  tlie  stockholders  upon 
dissolution  is  made  upon  equitable  principles.' 

§  540.  Froceedings  to  recover  lack  such  a  dividend. —  It  is  in 
o-eneral  the  practice,  where  dividends  have  been  paid  out  of  the 

the  mortgage  cover  existing  property 
of  the  vendee  company.  The  vendee 
company  at  tlie  same  time  agreed  to 
construct  new  lines  and  place  them 
under  the  mortgage.  The  whole 
scheme  was  awkward,  and  was  sus- 
tained by  the  courts  only  after  pro- 
longed litigation. 

Unless  some  statute  prohibits  it, 
or  some  one  objects,  a  corporation 
may  declare  a  dividend  out  of  its 
capital  stock.  Tlu;  common-law  lia- 
bility for  so  doing  remains  of  course. 
People  V.  Barker,  141  N.  Y.  251  (1894). 
See  also  §  671,  infra,  %%  535, 540,  supra. 
After  dissolution  has  been  decreed  it 
is  too  late  for  a  corporate  creditor  to 
bring  an  action  to  hold  the  directors 
liable  for  declaring  dividends  out  of 
the  capital  stock,  no  fraud  in  obtain- 
ing the  dissolution  being  alleged. 
Coxon  V.  Goi-st,  [1891]  2  Ch.  73.  Al- 
though a  corporation  sells  all  its 
property  to  an  individual  forpurchase- 
money  mortgage  bonds,  and  distrib- 
utes these  bonds  among  its  stock- 
holders, without  paying  the  creditors, 
nevertheless  a  bona  fide  purchaser  of 
such  bonds  is  protected  as  against 
the  corporate  creditors.  A  former  de- 
cree in  a  court  of  equity  against  the 
trustee  of  the  mortgage  in  regard  to 
the  matter  does  not  bind  the  bond- 
holders, although  a  suit  at  law  against 
the  trustee  would  have  bound  them. 
Lebeck  v.  Ft.  Payne  Bank,  22  S.  Rep. 
75  (Ala.,  1897).  Where  a  coi-poration 
distributes  all  its  assets  among  its 
stockholders  without  paying  the 
debts,  a  corporate  creditor  may  hold 
them  liable,  but  he  must  first  obtain 
a  judgment  against  the  corporation, 
and  execution  must  be  retmned  un- 
satisfied. Lamar  v.  Allison,  28  S.  E. 
Rep.  686  (Ga.,  1897). 
1  See  §  641,  infra. 


for  all  its  capital  stock,  and  are  the 
sole  stockholders,  there  being  no  cred- 
itors, they  may  purchase  tlio  patent 
back  and  give  the  corporation  their 
*note  for  the  par  value  of  the  whole 
capital  stock.  Although  the  corpo- 
ration subsequently  becomes  insolv- 
ent the  transaction  cannot  be  im- 
peached. Skinner  v.  Smith,  56  Him, 
437  (1890);  all'd,  134  N.  Y.  240  (1892). 
A  debt  of  a  stockholder  to  be  paid 
from  •'  dividends  "  must  be  paid  from 
the  dividends  of  assets,  if  the  com- 
pany dissolves.  Cozad  v.  JIcKee,  130 
Pa.  St.  406  (1889).  Distribution  of 
funds  of  incoi'porated  association. 
Aston  V.  Dashaway  Assoc,  84  Cal.  61 
(1890).  It  is  legal  for  a  coal  corpora- 
tion, with  the  assent  of  all  its  stock- 
holders, to  sell  all  its  property  to  its 
president,  and  for  him  to  pay  there- 
for in  cash  and  by  a  mortgage  on  the 
property  so  purchased,  he  also  agree- 
ing to  pay  all  the  debts  of  the  com- 
pany. Payment  was  made  directly 
to  the  stockholders,  and  they  trans- 
ferred their  stock  to  him  in  addition 
to  the  transfer  of  the  property.  A 
subsequent  creditor  of  the  company 
who  knew  all  the  facts  cannot  com- 
plain. Parke,  etc.  Co.  v.  Terre  Haute, 
etc.  Co.,  129  Ind.  73  (1891). 

Practically  there  was  a  division  of 
tlie  coi-porate  assets  among  the  stock- 
holders in  Boston,  etc.  Trust  Co.  v. 
Bankers',  etc.  Tel.  Co.,  36  Fed.  Eep. 
288;  aff'd  suh  nom.  United  Lines  TeL 
Co.  V.  Boston  S.  D.  &  Trust  Co.,  147 
U.  S.  431  (1893).  In  this  case  the  usual 
and  simple  process  of  one  company 
selling  all  its  property  to  the  other 
company  and  taking  purchase-money 
mortgage  bonds  in  payment,  and 
then  distributing  the  bonds  among 
its  stockholders,  was  not  adopted,  but 
the  mortgage  was  given  by  the  vendor 
company,  the  object  being  not  to  have 


CH.  XXXII.] 


DIVIDENDS. 


[§  549. 


capital  stock  in  prejudice  of  the  rights  of  corporate  creditors,  for 
a  judgment  creditor,  upon  the  return  of  his  common-law  execu- 
tion against  the  corporation  wholly  or  partly  unsatisfied,  to 
commence  an  action  in  equity  on  behalf  of  himself  and  all 
other  creditors  who  may  come  in,  in  the  nature  of  a  creditors' 
bill,  against  the  stockholders  to  whom  the  dividend  was  un- 
lawfully paid,  to  recover  back  so  much  thereof  as  was  paid  out 
of  the  capital  stock.^ 

It  is  a  necessary  condition  precedent  to  the  right  to  bring 
this  action  that  a  valid  judgment  shall  have  been  obtained 
against  the  corporation,  and  that  execution  thereon  shall  have 
been  returned  wholly  or  partly  unsatisfied,  and  this  judgment 
is  conclusive  as  to  the  merits  of  the  creditor's  claim.-    If  the 


1  Hastings  v.  Drew,  76  N.  Y.  9  (1879); 
Bartlett  v.  Drew,  57  N.  Y.  587  (1874); 
McLean  v.  Eastman,  21  Hun,  313 
(1880);  Gratz  v.  Redd,  4  B.  Mon.  (Ky.) 
178  (1843);  Curran  r.  State  of  Arkan- 
sas, 15  How.  304  (1853);  Grant  v.  Ross, 
37  S.  W.  Rep.  2G3  (Ky.,  1896).  See  also 
U.  S.  V.  Globe  Works,  7  Fed.  Rep. 
530  (1881);  Brewer  v.  Michigan  Salt 
Assoc,  58  Midi.  351  (1885).  See  also 
(^  548,  supra.    And  see  Vose  v.  Grant, 

15  Mass.  505  (1819),  where  it  was  held 
that  an  action  as  for  tort  covild  not 
be  maintained  by  a  creditor  against 
an  individual  stockholder  who  had 
received  dividends.    Spear  v.  Grant, 

16  Mass.  9,  15  (1819),  holding  that  an 
action  at  law  will  not  lie.  An  ac- 
tion on  the  case  for  fraud  lies  for  a 
conspiracy,  the  stock  having  been 
sold  back  to  the  corporation  bank 
and  the  bank  then  closed.  Bartholo- 
mew V.  Bentley,  15  Ohio,  659  (1846). 
Where  all  the  property  of  a  tele- 
graph company  is  sold  and  the  pro- 
ceeds distributed  among  the  stock- 
holders, a  creditor  of  the  company 
may  by  a  bill  in  equity  compel  the 
stockholders  to  pay  the  claim  against 
the  corporation,  the  proceeds  being 
&  trust  fund-  Baltimore,  etc.  Co.  v. 
Interstate,  etc.  Co.,  54  Fed.  Rep.  50 
(1893). 


2  Stiu-gis  V.  Vanderbilt,  73  N.  Y.  384 
(1878).  In  this  case  there  was  no  re- 
covery against  a  director  who  had 
sold  his  stock  and  ceased  to  partici- 
pate in  the  company's  affairs  five 
yeai-s  before  the  dissolution.  Dudley 
V.  Price,  10  B.  Mon.  (Ky.)  84  (1849); 
Andrew  v.  Vanderbilt,  37  Hun,  468 
(1885);  Hastings  v.  Drew,  76  N.  Y.  9 
(1879),  where  this  liability  was  en- 
forced against  one  who  had  become 
a  purchaser  of  stock  after  the  cause 
of  action  arose  upon  which  the  judg- 
ment was  secm-ed,  the  shares  being 
by  the  terms  of  the  transfer  subject 
to  all  claims  against  it.  In  New  York 
the  receiver  of  an  insolvent  corpora- 
tion may  maintain  an  action  for  the 
benefit  of  the  creditors  against  the 
shareholders  to  recover  the  sums  re- 
ceived by  them  as  dividends  at  the 
time  the  company  was  insolvent; 
and  in  .sucli  an  action  the  creditors 
of  the  corporation  are  proper  parties 
defendant  for  the  puriwse  of  restrain- 
ing them  from  proceeding  individ- 
ually against  the  shareholders  sepa- 
rately to  recover  tlie  unlawful  divi- 
dends. Osgood  V.  Laytin,  3  Keyes,  521 
(1867).  See  also  Lexington  Life,  etc. 
Ins.  Co.  V.  Page,  17  B.  Mon.  (Ky.)  312 
(1856),  holding  that  an  assignee  of  the 
comjiany  for  the  benefit  of  the  conir 


65 


1025 


§  549.] 


DIVIDENDS. 


[cn.  XXXIT- 


treasurer  is  sued  he  cannot  interplead.'  A  receiver  may  insti- 
tute the  suit.2  lie  may  file  a  bill  in  equity  to  compel  stockhold- 
ers to  refund  dividends  illegally  paid  to  them.'  lie  represents 
the  creditors  as  well  as  the  corporation  and  stockholders.  As 
an  officer  of  the  court  he  may  sue,  and  is  not  estopped  by  the 
acts  of  the  corporation. 

In  the  creditot's  suit  all  the  stockholders  who  can  be  reached 
should  be  made  parties  defendant,  and  as  to  those  unknown  or 
insolvent  or  beyond  the  jurisdiction  there  should  be  a  proper 
averment  in  the  bill.*  The  corporation  also  should  be  made  a 
party  defendant  to  the  bill.* 


pany  might  sue.  But  a  receiver's 
suit  cannot  in  such  a  case  be  brought 
for  the  benefit  of  the  stockholders. 
Butterworth  v.  O'Brien,  39  Barb.  193 
(1863),  Cf.  McLean  v.  Eastman,  21 
Hun,  312  (1880). 

1 A  treasurer  cannot  interplead  be- 
tween the  stockholders  and  a  corpo- 
rate creditor  who  is  seeking  to  reach 
bonds  received  by  tlie  corporation  in 
payment  for  its  property.  Stone  v. 
Eeed,  153  Mass.  179  (1890). 

2  A  receiver  of  the  corporation  is 
the  proper  party  to  sue  to  recover 
back  any  dividends  which  were  paid 
from  the  capital  stock.  Corporate 
creditors  cannot  sue  for  these  after 
the  receiver  goes  in.  It  is  doubtful 
whether  the  corporation  itself  could 
complain  of  such  dividends.  A  sale 
of  the  assets  by  the  receiver  does  not 
carry  this  cause  of  action.  Minne- 
sota, etc.  Co.  V.  Langdon,  44  Minn.  37 
(1890). 

3  Hayden  v.  Thompson,  71  Fed.  Rep. 
60  (1895),  rev'g  67  Fed.  Rep.  273. 

<Wood  V.  Dummer,  3  Mason,  308 
(1834);  S.  C,  30  Fed.  Cas.  435;  Bart- 
lett  V.  Drew,  57  N.  Y.  587  (1874).  In 
the  case  last  cited  —  a  leading  au- 
thority in  New  York  —  it  is  held  that 
the  creditor  is  not  required  to  bring 
his  suit  on  behalf  of  other  creditors 
who  may  choose  to  come  in,  but  may 
sue  alone  and  for  his  own  benefit  ex- 
clusively, and  that  he  need  not  make 


all  the  stockholders  parties,  but  may 
pursue  one,  any,  or  all,  as  he  may 
elect,  upon  the  theory  that  with  th© 
equities  between  the  stockholders 
themselves  he  has  nothing  to  do,  un- 
less he  choose  to  intervene  to  settle 
them.  Brewer  v.  Michigan  Salt,  etc., 
58  Mich.  351  (1885).  See  also  Pacific 
R.  R,  V.  Cutting,  27  Fed.  Rep.  638 
(1886);  Williams  v.  Boice,  38  N.  J.  Eq. 
364  (1884).  Many  stockholders  may 
be  joined  as  defendants  in  a  suit  in 
equity  to  recover  back  illegal  divi- 
dends, even  though  some  received  a 
greater  number  of  dividends  than 
others.  Hayden  v,  Thompson,  71  Fed. 
Rep.  GO  (1895). 

5  First  Nat.  Bank  v.  Smith,  6  Fed. 
Rep.  215  (1879).  followed  in  Dormitzer 
V.  Illinois,  etc.  Bridge  Co.,  6  Fed.  Rep. 
217  (1881).  Where  all  the  assets  have 
been  distributed,  an  action  against 
the  stockholders  to  recover  back 
damages  for  a  tort  committed  by  the 
corporation  must  include  the  corpo- 
ration as  a  co-defendant.  Swan,  etc. 
Co.  V.  Frank,  39  Fed.  Rep.  456  (1889). 
In  a  suit  to  compel  stockholders  of  a 
foreign  corporation  to  discover  and 
accovmt  for  corporate  property  ille- 
gally divided  among  them,  the  prop- 
erty must  be  definitely  described. 
Service  on  the  corporation  by  publi- 
cation is  insuflScient.  King  v.  Sulli- 
van, 93  Ga.  021  (1894). 


1036 


CH.  XXXII.] 


DIVIDENDS. 


[§  550. 


The  shareholder  who  is  compelled  to  pay  more  than  his  equi- 
table proportion  of  any  unpaid  corporate  debt  may,  in  a  proper 
proceeding,  resort  to  his  associates  for  contribution.^  A  trans- 
feree of  stock  against  which  creditors  have  this  claim  at  the 
time  of  transfer  is  not  liable  to  respond  in  a  creditor's  suit 
therefor.^  The  statute  of  limitations  runs  in  favor  of  share- 
holders, who  receive  such  dividends  in  good  faith  and  without 
actual  notice,  from  the  time  they  are  paid  as  against  the  corpo- 
ration and  its  creditors.^ 

§  550.  The  UahUitij  herein  of  the  corporate  officers. —  The  lia- 
bility of  the  corporate  oificers  as  to  dividends  paid  out  of  the 
capital  stock  is  not  definitely  determined.  That  they  are  liable 
for  the  amount  of  any  such  dividend  that  they  themselves  re- 
ceive as  shareholders  cannot,  however,  be  questioned.* 

Some  cases  go  to  the  full  extent  of  holding  the  directors  lia- 


iBartlett  v.  Drew,  57  N.  Y.  587 
(1874). 

2Hurlbut  V.  Tayler,  63  Wis.  607 
(1885). 

3  The  statute  of  limitations  runs 
against  an  action  to  recover  back 
illegal  dividends  from  stockholders. 
It  begins  to  run  from  the  time  when 
the  dividend  is  paid,  provided  the 
stockholder  did  not  know  or  have 
reason  to  know  the  condition  of  the 
company.  Hayden  v.  Thompson,  71 
Fed.  Rep.  60  (1895);  Lexington  Life, 
etc.  Ins.  Co.  v.  Page,  17  B.  Mon.  (Ky.) 
412, 446  (1856).  See  also  Re  Mammoth 
Copperopolis,  50  L.  J.  (Ch.)  11  (1880); 
'  Dudley  v.  Price,  10  B.  Mon.  (Ky.)  84 
(1849). 

*  Main  v.  Mills,  6  Biss.  98,  and  note 
(1874):  S.  C,  16  Fed.  Cas.  506,  where  a 
dividend  paid  to  the  president,  but  not 
legitimately  earned,  was  recovered 
from  the  president  of  a  bank  by  the 
assignee  in  bankraptcy ;  Ranee's  Case, 
L.  R.  6  Cli.  App.  104  (1870),  which  was 
the  case  of  a  marine  insurance  com- 
pany, where  the  directors  declared  a 
bonus  on  the  shares  of  stock  without 
making  out  a  profit  and  loss  accovmt, 


and  it  was  held  that  a  director  who 
had  received  such  bonus  on  a  bal- 
ance sheet  thus  carelessly  drawn  v;p 
should,  in  consequence  of  his  neglect 
of  duty,  repay  the  amount  to  tlie 
liquidator.  It  was  the  gross  neglect 
of  tlie  directors  which  militated  so 
strongly  against  them,  and  both  the 
lord  justices  declared  the  court  would 
not  have  so  held  had  there  been  bona 
fides  and  regularity  in  the  declara- 
tion of  the  bonus.  lie  Denham,  L.  R. 
25  Ch.  D.  752  (1883).  Here  it  was  held 
that  an  innocent  director  was  not 
personally  responsible  for  the  fraudu- 
lent reports  and  balance  sheets  and 
the  dividends  paid  under  them,  and 
that  —  having  regard  to  the  extraor- 
dinary powers  vested  by  the  articles 
in  the  .chairman,  and  to  the  fact  that 
the  books  had  been  kept  and  audited 
by  duly  authorized  officers,  and  that 
the  director  sought  to  be  charged 
had  no  reason  to  suspect  any  mis- 
conduct —  he  was  not  liable  to  repay 
any  of  the  dividends  so  received  by 
him,  although  they  were  in  fact  paid 
out  of  the  capital. 


1027 


§  550.] 


DIVIDENDS. 


[cn.  XXXII. 


ble  absolutely  for  all  dividends  paid  out  of  capital  stock.  But 
the  better  rule  is  that,  when  the  directors  dccLaro  a  dividend  in 
good  faith  and  without  negligence,  they  are  not  to  be  held  lia- 
ble merely  because  the  dividend  turns  out  to  have  impaired  the 
capital  stock.^  Directors  are  not  personally  liable  for  dividends 
improperly  paid,  where  they  honestly  believe  in  a  state  of  facts 
which  would  justify  the  pajnnent  and  rely  upon  the  general 
manager's  certificate  as  to  the  assets.^  But  where  the  directors 
negligently  or  wilfully  and  knowingly  declare  and  pay  a  divi- 
dend out  of  the  capital  stock,  they  are  personally  liable  to  refund 
that  dividend.'    AVhere  the  directors  of  a  national  bank  place 


1  Excelsior  Petroleum  Co.  v.  Laccy, 
63  N.  Y.  433  (1875).   In  Stringer  s  Case, 
L.  R.  4  Ch.  App.  475  (18G9),  it  was  held, 
in  accordance  with  this  view,  that 
where  the  action  of  a  board  of  di- 
rectors in  making  a  dividend  was 
hona  fide,  they  are   not  liable  for 
errors  of  judgment  in  preparing  a 
balance  sheet  showing  the  assets  of 
the  concern.    In  this  case  it  appears 
that  the  directors  included  among 
the  corporate  assets  a  debt  due  the 
company  by  the  government  of  the 
Confederate    States;    some    cotton 
owned  by  the  company  but  stored 
within  the  limits  of  the  Confederacy; 
and  certain  merchant  ships  engaged 
in  running  the  blockade,  all  which 
were  estimated  at  their  full  value. 
These  assets  being  subsequently  de- 
stroyed and  lost  to  the  company,  its 
bankruptcy  followed.  Osgood  v.  Lay- 
tin,  3  Keyes  (N.  Y.),  531  (1867),  was 
an  action  by  a  receiver  to  recover 
dividends  improperly  declared.    The 
court  said:  "Ignorance  of  facts  that 
it  was  the  duty  of  the  managers  to 
know  —  not  to  know  which  was  gross 
ignorance  —  cannot  excuse  the  man- 
agers and  impart  any  virtue  or  va- 
lidity to  acts  otherwise  clearly  illegal, 
and  which  were  a  palpable  fraud 
upon  the  creditors."    But  the  direct- 
ors of  a  bank  are  not  liable  for  divi- 
dends declared  in  good  faith,  even 


though  it  subsequently  turns  out  that 
debts  to  the  bank  which  they  con- 
sidered good  were  found  to  be  bad. 
Witters  v.  Sowles,  31  Fed.  Rep.  l" 
(1887).  However,  the  court  in  Re  Ox- 
ford Building,  etc.  Soc,  55  L,  T.  Rep. 
598  (1886),  say  it  is  settled  that  "  di- 
rectors who  improperly  pay  divi- 
dends out  of  capital  are  liable  to 
repay  such  dividends  personally  upon 
the  company  being  woimd  up;  "  that 
the  company,  or  a  creditor,  or  a  liqui- 
dator may  enforce  it;  that  the  ac- 
quiescence of  the  stockholders  does 
not  affect  creditors;  that  the  statute 
of  limitations  does  not  apply;  and 
that  the  innocent  intent  of  tlie  di- 
rectors is  no  defense.  The  directors 
are  not  personally  liable  for  divi- 
dends declared,  even  though,  in  esti- 
mating the  assets,  claims  are  included 
which  ultimately  prove  to  be  bad,  the 
result  thereby  being  that  the  divi- 
dend was  paid  out  of  the  capital.  Be 
London  &  Gen,  Bank,  73  L.  T.  Rep. 
237  (1894);  aflf'd,  [1895]  3  Ch.  166,  67:J. 
2i2e  Kingston  Cotton  Mill  Co., 
[1896]  1  Ch.  331. 

3  In  order  to  ascertain  profits  the 
directors  should  have  a  revaluation. 
If  they  employ  persons  whom  they 
reasonably  believe  to  be  competent 
and  adopt  their  conclusions,  they  are 
not  liable  for  mistakes.  Where,  how- 
ever, the  directors  take  no  active,  iu- 


1038 


CH.  XiXlI.] 


divide:nds. 


[§  550. 


a  fictitious  value  on  the  assets  of  the  bank  in  order  to  declare  a 
stock  dividend,  such  directors  are  liable  for  the  par  value  of  the 
stock  to  the  receiver  of  the  bank  for  the  benefit  of  its  creditors, 
unless  the  directors  show  that  the  stock  could  not  have  been 


telligent,  guiding  part  in  the  afifairs  of 
the  compauy,  and  really  do  nothing 
except  as  suggested  by  the  secretary, 
and  do  not  examine  the  accounts  at 
all,  and  cause  the  stockholders  to  de- 
clare dividends  on  a  statement  which 
omits  large  liabilities,  so  that  divi- 
dends are  really  paid  out  of  the  capi- 
tal stock,  such  directorsare  personally 
liable  to  corporate  creditors  for  such 
dividends.  The  secretary  also  is 
Uable,  he  being  the  active  manager 
of  the  company.  The  six-years  stat- 
ute of  limitations,  however,  applies, 
and  only  tliose  dividends  which  have 
been  declared  within  six  years  must 
be  repaid.  Interest,  however,  will  be 
allowed.  Municipal,  etc.  Land  Co.  v. 
PoUington,  63  L.  T.  Rep.  238  (1890); 
Re  National  Funds,  etc.  Co.,  L.  R.  10 
Ch.  D.  118  (1878);  Gratz  v.  Redd,  4  B. 
Mon.  (Ky.)  178,  l'J4  (1843);  Hill  v. 
R-azier,  23  Pa.  St.  320  (1853);  Re  Alex- 
andra Palace  Co.,  L.  R.  21  Ch.  D.  149 
(1882);  Salisbury  v.  Metropolitan  R'y, 
22  L.  T.  (N.  S.)  839  (1870),  where 
the  suit  was  by  a  non-participating 
stockholder;  Flitcroft's  Case,  L.  R.  21 
Cli.  D.  519  (1882);  Evans  u  Coventry,  8 
De  G.,  ]\L  &  G.  835  (1857);  Turquand  v. 
Marshall,  L.  R.  4  Ch.  App.  376  (1869),  de- 
nying this  remedy  to  the  stockholders 
as  a  body.  In  Burnes  v.  Pennell,  2  11. 
L.  Cas.  497, 531  (1849),  Lord  Brougham 
said:  "I  beg  to  be  understood  as 
going  with  those  who  view  with  the 
grejitest  severity  the  conduct  of  rail- 
way directors  in  declaring  dividends 
which  can  only  be  paid  out  of  capital, 
because  I  consider  tliat  that  is  of  it- 
self a  most  vicious  and  fraudulent 
course  of  conduct.  It  is  telhng  the 
world  that  their  profits  are  large 
when  it  may  be  that  their  profits  are 
nil,  or  that  their  losses  are  large  with 


no  profits.  It  is  a  false  and  fraud- 
ulent representation  by  act  and  deed, 
much  to  be  reprobated;  and  I  go  to 
the  full  length  of  what  my  noble  and 
learned  friend  has  laid  down,  that  it 
would  be  a  just  ground,  if  a  course 
of  conduct  of  this  sort  were  pursued, 
coupled  with  such  circumstances  as 
clearly  to  show  a  fraudulent  intent, 
for  proceedings  of  a  graver  natui-o 
against  these  parties."  The  payment 
of  a  dividend  out  of  the  capital  stcok 
is  ultra  vires,  and  incapable  of  ratifi- 
cation by  the  stockliolders.  Accord- 
ingly, where  the  directors  mislead 
the  sliareholders  by  representing  in 
the  reports  and  balance  sheets,  as 
good,  debts  which  they  know  to  be 
bad,  and  thus  knowingly  pay  divi- 
dends which  in  fact  impair  the  capi- 
tal stock,  it  is  not  a  defense  that  the 
shareholders,  relying  in  good  faith 
upon  the  representations  and  reports 
of  the  directors,  pass  resolutions  de- 
claring the  dividends  at  regular 
meetings  of  the  coi-poration;  and  au 
action  will  lie  on  behalf  of  ci-editora 
to  compel  the  directors  to  refund.  In 
such  an  action  the  directors  cannot 
set  off  any  money  due  from  the  com- 
pany to  them,  nor  have  they  recourse 
to  the  shareholders  who  took  the  divi- 
dends bona  fide.  Re  Exchange  Bank- 
ing Co.,  L.  R  21  Ch.  D.  519  (1882);  Re 
County  Marine  Ins.  Co.,  L.  R.  6  Ch. 
104  (1870).  See  also  Scott  v.  Eagle  F. 
Ins.  Co.,  7  Paige,  198  (1838).  In  Ken- 
tucky it  is  doubted  whether  directors 
are  liable  to  creditors,  the  courts  of 
that  state  .seeming  to  incline  to  hold 
them  liable  only  to  the  corporation 
or  the  stockholders.  Lexington,  etc. 
R.  R.  V.  Bridges,  7  B.  Mon.  (Ky.)  556, 
559  (1847). 


1029 


§  550.] 


DIVIDENDS. 


[CH.  XXXII. 


otherwise  issued  or  sold.^  Where  the  directors  make  even  grave 
errors  in  the  exercise  of  judgment  they  are  not  liable ;  but  where 
they  surrender  their  judgment  to  others,  cither  the  manager  or 
auditors,  they  are  liable  for  dividends  illegally  paid,  especially 
where  they  include,  as  good,  loans  which  they  had  not  looked 
into,  and  where  they  do  not  take  into  consideration  overdrafts. 
They  will  be  held  liable  from  the  date  when  a  prudent  man 
would  not  have  included  in  the  profits  unpaid  interest.  Each 
director  is  liable  only  for  dividends  declared  or  recommended 
at  meetings  when  he  was  present.^  Frequently  also,  when  a 
dividend  is  paid  out  of  the  capital  stock,  the  directors  are  made 
liable  therefor  by  statute  without  reference  to  any  fraud  or 
fraudulent  intent  on  their  part.''  In  England,  the  auditors  of 
a  company  are  officials,  and  are  liable  for  dividends  improperly 
paid,  based  on  balance  sheets  improperly  made  up  by  the  audi- 
tors, especially  where  the  auditors  included  as  regular  invest- 
ments loans  for  which  there  was  no  proper  security.*    The 


iCockrill  V.  Abeles,  86  Fed.  Rep. 
505  (1898). 

2  Ee  London  &  Gen.  Bank,  72  L.  T. 
Rep.  227  (1894);  aflfd,  [18951  2  Ch.  166, 
673.    See  78  L.  T.  Rep.  729. 

3  In  Massachusetts,  officers  of  a  cor- 
poration can  be  charged,  under  the 
statute  in  force  upon  the  subject  in 
that  state  (Stat.  1862,  ch.  218,  §  3; 
Stat.  1870,  ch.  224,  §§  40,  42),  with 
corporate  debts  after  a  judgment 
against  the  corporation,  and  after  a 
demand  and  return  upon  the  execu- 
tion. Chamberlin  v.  Huguenot  Mfg. 
Co.,  118  Mass.  532,  536  (1875);  Priest 
V.  Essex  Mfg.  Co.,  115  Mass.  380  (1874). 
So,  in  New  Jersey,  directors  are  sim- 
ilarly liable  by  statute.  N.  J.  Rev. 
(1877),  p.  178;  Williams  v.  Boice,  38 
N.  J.  Eq.  364  (1885).  The  New  Jersey 
statute  imposing  a  liability  on  direct- 
ors for  illegally  declared  dividends 
was  applied  in  Whittaker  v.  Am  well 
Nat.  Bank,  52  N.  J.  Eq.  400  (1894). 
Under  the  New  York  statute  making 
directors  liable  for  declaring  divi- 
dends from  the  capital  stock,  they 
are  liable  to  the  extent  to  which  the 


capital  stock  is  reduced  by  the  divi- 
dend, and  in  the  case  of  bank  direct- 
ors they  may  show  that  notes  which 
it  is  claimed  they  should  have  charged 
off  were  actually  paid  later.  Dyk- 
man  v.  Keeney,  10  N.  Y.  App.  Div.  610 
(1896).  Under  the  New  York  statute 
the  directors  are  liable  to  repay  only 
such  part  of  an  illegal  dividend  as 
will  recoup  the  corporation  or  its 
creditors  for  the  actual  loss  siistained 
thereby.  Dykman  v.  Keeney,  16  N. 
Y.  App.  Div.  131  (1897).  Dividing  the 
property  is  equivalent  to  a  declara- 
tion of  dividend  so  far  as  the  direct- 
ors are  concerned.  Rorke  v.  Thomas, 
56  N.  Y.  559  (1874).  In  Massachvisetts 
the  liability  of  the  directors  has  been 
held  to  be  enforceable  by  corporate 
creditors  only.  Smith  v.  Hui'd,  53 
Mass.  371  (1847),  and  cases  supra. 

*Re  London  &  Gen.  Bank,  72  L.  T. 
Rep.  227  (1894);  aff'd,  [1895]  2  Ch.  166, 
673.  Auditors  are  not  officers  in  the 
true  sense  of  the  word.  Be  Western, 
etc.  Co.,  Ltd.,  76  L.  T.  Rep.  239  (1897), 
rev'g  75  L.  T.  Rep.  64a 


1030 


€H.  XXXII.] 


DIVIDENDS. 


[§  551. 


manager  of  a  corporation  who  makes  up  tlie  accounts  may  also 
be  liable  for  dividends  illegally  declared.^ 

Under  certain  circumstances,  in  the  absence  of  actual  fraud, 
the  directors  who  have  been  compelled  to  pay  the  claims  of 
corporate  creditors  may  in  turn  recover  what  they  have  paid 
in  an  action  against  the  shareholders.^  But  a  director  from 
whom  a  recovery  is  had  under  the  Pennsylvania  statute,*  as  a 
wrong-doer,  has  no  right  of  subrogation  as  against  the  corpo- 
ration.* And  claims  against  directors  who  are  made  liable 
by  statute  in  these  cases  may,  in  the  absence  of  actual  fraud 
•on  their  part,  be  barred  by  laches.'  A  statutory  liability  in 
reference  to  illegal  dividends  may  not  survive  the  death  of  a 
director  who  is  liable.^ 

§  551.  Guaranty  of  dividends  hy  contract. —  A  guaranty  of 
dividends  is  often  made  by  the  corporation  itself  that  issues 
the  stock.  The  stock  is  then  called  guaranteed  or  preferred 
stock.     This  class  of  stock  is  fully  considered  elsewhere.' 

A  guaranty  of  dividends  frequently  is  made  by  a  third  per- 


1  Be  London  &  Gen.  Bank,  72  L.  T. 
Rep.  227  (1894);  aff'd,  [1895]  2  Ch.  166, 
073. 

^  Salisbury  v.  Metropolitan  R'y,  22 
L.  T.  (N.  S.)  839  (1870);  Re  Alexandra 
Palace  Co.,  L.  R  21  Ch.  D.  149  (1882). 
Cf.  §  548,  supra.  A  director  who, 
with  knowledge  of  the  insolvency  of 
the  company,  loans  money  to  the 
corporation  for  the  purpose  of  de- 
claring a  dividend,  is  not  entitled, 
upon  an  assignment  of  the  corporate 
effects,  to  repayment  of  any  part  of 
the  loan  so  made  until  the  claims  of 
stockholders  are  satisfied  Kister- 
bock's  Appeal,  51  Pa.  St.  483  (1866). 

3  Act  of  April  7,  1849,  §  9. 

*  Hill  V.  Frazier,  22  Pa.  St.  320  (1853). 
In  this  case  it  was  held  that,  in  the 
creditor's  suit  against  the  director, 
the  corporation  itself  is  not  a  neces- 
sary co-defendant. 

^  Re  Mammoth  Copperopolis  of 
Utah,  50  L.  J.  (Ch.)  11  (18S0).  The  ac- 
quiescence of  stockholders  does  not 
bind  creditors,  and  the  statute  of 
limitations  does  not  apply.    Re  Ox- 


ford, etc.  Soc,  55  L.  T.  Rep.  598  (1886). 
That  the  statute  of  limitations  does 
not  apply,  see  also  Flitcroft's  Case, 
L.  R  21  Ch.  D.  519  (1882).  The  stat- 
ute of  limitations  does  not  commence 
to  run  against  an  oflScer  of  the  cor- 
poration who  has  paid  dividends  to 
himself  out  of  the  capital  stock  until 
the  fraud  is  discovered.  Main  v.  Mills, 
6  Biss.  98  (1874);  S.  C,  16  Fed.  Cas. 
506.  Where  the  directors  paid  out 
dividends  from  the  organization  of 
the  company  in  1868  imtil  1878,  and 
were  then  stopped  at  the  instance  of 
the  board  of  trade,  and  the  company 
was  wound  up  in  1886,  and  in  1890 
the  receiver  brought  suit  to  hold  the 
directors  liable,  it  was  held  that 
there  was  not  such  delay  as  to  bar 
the  remedy,  since  the  defendants 
had  not  been  prejudiced  by  the  delay. 
Masonic,  etc.  Ass.  Co.  v.  Sharpe,  [1892] 
1  Ch.  154. 

6  Boston,  etc.  R  R  u  Graves,  80 
Fed.  Rep.  588  (1897). 

'  See  ch.  XVI,  supra. 


1031 


§  551.]  DIVIDEXDS.  [CII.  XXXII. 

son.  Such  a  guaranty  is  often  made  when  one  person  sells 
stock  to  another  and  guarantees  that  the  corporation  will  pay 
certain  dividends  thereon.  It  often  arises,  also,  where  one  com- 
pany buys  out  another  or  leases  the  property  of  another  corpo- 
ration and  guarantees  dividends  on  the  stock  or  the  interest  oq 
the  bonds  of  the  latter.  This  subject,  also,  is  considered  else- 
where.* 

» See  ch.  XLVI,  §  775,  infra. 
1032 


CHAPTER  XXXIII. 


LIFE  ESTATES  AND  REMAINDERS  IN  SHARES  OF  STOCK. 


§  558.  The  apportionment  of  divi- 
dends. 

559.  The  right  to  subscribe  for  new 
sliares  as  between  life  tenant 
and  remainder-man. 

5G0.  Miscellaneous  questions 
herein. 


§  552.  The  subject 

553.  The  three  rules  in  regard  to 

stock  or  extraordinary  cash 
dividends. 

554.  The  American  or  PennsylvSr 

nia  rul& 

555.  The  Massachusetts  rule. 

556.  557.  The  English  rule. 

§  552.  The  sulject—^here  shares  of  stock  are  held  by  an 
estate,  and  the  income  of  the  estate  is  to  go  to  a  life  tenant 
for  life,  and  the  remainder  to  another  party,  the  question  of 
whether  the  life  tenant  or  the  remainder-man  is'  entitled  to  a 
stock  dividend  or  extraordinary  cash  dividend  is  a  perplexing 
one.  The  stock  dividend  or  extraordinary  cash  dividend  may 
represent  profits  which  were  earned  or  accumulated  before  the 
life  tenancy  began.  In  that  case  it  is  clear  that  in  justice  the 
remainder-man  should  receive  it.  If,  however,  it  was  earned 
after  the  life  tenancy  began,  it  is  clear  that  the  life  tenant 
should  have  it.  If  it  was  earned  partly  before  and  partly  after 
the  life  tenancy  began,  then  it  is  apparent  that  in  justice  some 
apportionment  should  be  made  if  possible. 

The  courts,  however,  differ  widely  in  laying  down  rules  on 
this  subject.    These  differences  form  the  subject  of  this  chapter. 

§  553.  The  three  rules  in  regard  to  stoch  or  eztraordinarij 
cash  dividends.— ^yhe^l  a  stock  or  extraordinary  cash  dividend 
is  declared  upon  shares  held  in  trust,  or  owned  in  such  a  way 
that  one  person  has  an  estate  therein  for  life  and  another  per- 
son the  remainder  over,  there  at  once  arises  a  contest  between, 
life  tenant  and  remainder-man.  Their  interests  necessarily 
conflict,  because,  if  such  dividend  is  held  to  be  income,  it  be- 
longs to  the  tenant  for  life;  whereas  if  it  is  held  to  be  a  part 
of  tie  corpus,  or  principal,  it  enures  to  the  benefit  of  the  remain- 
der-man's estate.  There  are  three  well-defined  rules  upon  this 
subject,  which  may  be  denominated  respectively  the  Ameri- 
can or  Pennsylvania,  the  Massachusetts,  and  the  English  rule. 

1033 


554.]       LIFE   ESTATES    AND    REMAINDERS    IN    STOCK.       [cH.  XXXIII. 


They  lead  to  essentially  contrary  conclusions,  and  will  be  con- 
sidered in  order. 

§  554.  The  American  or  Pennsylvania  rule. —  This  rule,  in- 
asmuch as  it  obtains  in  nearly  every  state  in  the  Union,  may 
well  be  called  the  American  rule.  It  proceeds  upon  the  tlicory 
that  the  court,  in  disposing  of  stock  or  property  dividends,  as 
between  life  tenant  and  remainder-man,  may  properly  inquire 
as  to  the  time  when  the  fund  out  of  which  the  extraordinary 
dividend  is  to  be  paid  was  earned  or  accumulated.  If  it  is  found 
to  have  accrued  or  been  earned  before  the  life  estate  arose,  it  is 
held  to  be  principal,  and,  witliout  reference  to  the  time  when 
it  is  declared  or  made  payable,  to  belong  to  the  corj)us  of  the 
estate,  and  not  to  go  to  the  life  tenant.  But  when  it  is  found 
that  the  fund  out  of  which  the  dividend  is  paid  accrued  or  was 
earned,  not  before  but  after  the  life  estate  arose,  then  it  is  held 
that  the  dividend  is  income,  and  belongs  to  the  tenant  for  life.' 
This  equitable  rule  prevails  not  only  in  Pennsylvania,  where  it 
seems  to  have  been  first  clearly  declared,  but  also  in  many  other 
jurisdictions.'^ 

lEarp's    Appeal,    28    Pa.    St.    3G8    the  company  in  which  the  trustee 


(1857);  Wiltbank's  Appeal,  G4  Pa.  St 
256  (1870).  See  also  tlie  following 
later  Pennsylvania  cases  in  point: 
Moss's  Appeal,  83  Pa.  St.  2G4  (1877); 
Biddle's  Appeal,  99  Pa.  St.  278  (1882); 
Vinton's  Appeal,  99  Pa.  St.  434  (1882); 
Re  Thomson's  Estate,  11  W.  N.  Cas. 
482  (1882).  Cf.  Roberts's  Appeal,  92 
Pa.  St.  407  (1880);  Thomson's  Atv 
peal,  89  Pa.  St.  36  (1879).  A  scrip 
dividend  converted  into  stock  be- 
longs to  the  life  tenant.  Philadel- 
phia Trust,  etc.  Co.'s  Appeal,  16  AtL 
Rep.  734  (Pa.,  1889).  A  large  dividend 
in  cash,  owing  to  a  sale  of  part  of  the 
property  of  an  unincorporated  asso- 
ciation, is  income,  and  goes  to  the 
life  tenant.  Oliver's  Estate,  136  Pa. 
St.  43  (1890).  Money  received  by  the 
corporation  from  new  stock  issued 
to  obtain  funds  to  replace  profits 
which  liad  been  used  for  improve- 
ments is  capital  and  not  income,  and 
does  not  go  to  the  life  tenant.  Smith's 
Estate,  140  Pa.  St.  344  (1891).   Where 


holds  stock  gives  to  its  stockholders 
the  option  to  subscribe  to  the  stock 
of  another  comi)any,  tlie  premium  at 
which  the  trustee  sells  this  option  is 
principal  and  not  income.  Thom- 
son's Estate,  153  Pa.  St.  332  (1893). 

^Connecticut:  A  stock  dividend 
based  upon  the  profits  actually  in- 
vested in  the  bvisiness  is  not  income 
or  dividends  such  as  pass  to  the  life 
tenant.  Spooner  v.  PhiUips,  62  Conn. 
62  (1892).  Where  an  estate  is  merged 
into  a  corporation,  the  life  tenant  of 
the  real  estate  cannot  claim  that  a 
part  of  the  capital  stock  represents 
past  increase  of  value  and  that  she 
is  entitled  absolutely  to  that  part 
of  the  stock.  Hotchkiss  v.  Brainerd 
Quarry  Co.,  58  Conn.  120  (1889).  Where 
it  is  impossible  for  the  comi)any  to 
pay  arrears  of  dividends  on  cumu- 
lative preferred  stock,  and  a  com- 
promise is  made  by  which  the  divi- 
dend is  to  be  reduced  one-half  and 
double  the  amount  of  stock  is  to  be 


1034 


en.  XXXIII.]       LIFE    ESTATES    AND    KEMAIXDEES    IN    STOCK,       [§  554. 


Where  a  cestui  que  trust  is  to  receive  the  income  until  he 
reaches  a  certain  age  and  then  is  to  receive  the  principal,  he  is 
considered  a  life  tenant  until  he  arrives  at  that  afje.  The  life 
tenant  takes  the  entire  interest  on  bonds,  although  the  premium 


given  to  each  stockholder,  this  new 
stock  goes  to  the  remainder-man. 
Mills  V.  Britton,  G4  Conn.  4  (1894). 

Kentucky:  As  between  a  life  ben- 
<»ficiar>-  in  corporate  stock  and  the 
remainder-man,  a  stock  dividend  will 
be  treated  as  income  if  it  in  fact  rep- 
resents a  proflt.  A  privilege  given 
Viv  a  corjwration  to  its  stockholders 
to  take  additional  stock  at  par  is  ap- 
purtenant to  the  old  stock,  and  does 
not  belong  to  the  life  beneficiary. 
Hite  V.  Hite,  93  Ky.  257  (1892);  S.  C. 
below,  2  R'y  &  Corp.  L.  J.  5G8. 

Maine:  For  the  rule  in  Elaine,  see 
Richardson  v.  Richardson,  73  Me.  070 
(1884).  A  dividend  consisting  of 
stock  purcliased  by  an  issue  of  bonds 
by  the  company  belongs,  not  to  the 
life  estate,  but  to  the  body  of  the  es- 
tate. Gilkey  v.  Paine.  80  Me.  319  (1888). 

Maryland:  See  Thomas  v.  Gregg, 
78  Md.  545  (1894). 

New  Hampshire:  Lord  v.  Brooks, 
52  N.  H.  72  (1872);  Wheeler  v.  Perry, 
18  N.  H.  307  (1846);  Peirce  r.  Bur- 
roughs, 58  N.  H.  302  (1878).  An  in- 
crease of  stock  upon  consolidation 
and  a  stock  dividend  thereon  are 
principal  Law  v.  Alley,  29  Atl.  Rep. 
636  (N.  H.,  1892).  Where  new  stock 
is  issued  and  the  right  to  subscribe 
therefor  is  sold,  the  proceeds  of  such 
sale  belong  to  the  remainder-inan, 
and  only  the  income  to  the  life  ten- 
ant A  fifty  per  cent  cash  dividend 
is  presumed  to  be  from  the  profits 
and  to  belong  to  the  life  tenant. 
Walker  v.  Walker,  39  Atl.  Rep.  432 
(N.  EL,  1896). 

Neu- Jersey:  "Van  Doren  v.  Olden,  19 
N.  J.  Eq.  176  (1868);  Ashliurst  r.  Field, 
26  N.  J.  Eq.  1  (1875):  40  Atl.  Rep.  278. 

New  York:  ^IcLoutli  v.  Hunt,  154 
N.  Y.  179  (1897);  Riggs  v.  Cragg,  89 

10 


N.  Y.  479  (1882);  Re  Kemochan,  104 
N.  Y.  618  (1887);  Riggs  v.  Cragg,  26 
Hun,  89  (1881);  Clarkson  v.  Clarkson, 
18  Barb.  646  (1855) ;  Simpson  v.  Moore, 
30  Barb.  637  (1859);  Woodruff's  Es- 
tate, Tucker,  58  (1805),  and  Gold- 
smith I'.  Swift,  25  Him,  201  (1881). 
Cf.  Cragg  V.  Riggs,  5  Redf.  82  (1880); 
Scovel  V.  Roosevelt,  5  Redf.  121  (1881). 
Profits  upon  the  sale  of  stock  are 
principal  and  not  income  in  New 
York.  Whitney  v.  Phoenix,  4  Redf. 
180  (1880'.  In  Hyatt  v.  Allen,  56 
N.  Y.  553,  557  (1874),  the  court  of  ap- 
peals intimated  plainly  its  disap- 
proval of  the  rule  prevailing  in  Eng- 
land upon  this  subject.  Farwell  v. 
Tweddle.  10  Abb.  N.  Cas.  94  (1881); 
Prime's  Estate,  N.  Y.  L.  J.,  March  6, 
1891,  reviewing  the  authorities.  A 
dividend  arising  from  the  sale  of 
part  of  the  assets  of  tlie  company 
belong  to  the  remainder-man.  Re 
Curtis,  N.  Y.  L.  J.,  Jan.  24,  1890. 
Money  received  from  stock  upon  the 
winding  up  of  the  corporation  be- 
longs to  the  remainder-man.  Re 
Skillman's  Estate,  9  N.  Y.  Supp.  469 
(1890).  Where  the  capital  is  reduced 
and  returned  to  the  stockholders 
with  a  svirplus,  the  surplus  goes  to 
tlie  life  tenant.  Re  Warren's  Estate, 
11  N.  Y.  Supp.  787  (1890j.  TJiough  tlie 
dividends  are  necessarily  from  the 
capijtal  stock,  as  in  mining  or  other 
similar  corporations,  the  life  tenant 
is  entitled  to  them.  Re  James,  78 
Hun,  121  (1894).  Where  all  the  prop- 
erty of  a  corporation,  excepting  the 
cash  and  certain  bonds,  is  turned 
over  to  a  new  corporation  for  stock 
of  the  latter  at  the  rate  of  ten  shares 
of  the  stock  in  the  new  coi"iioration 
for  each  sliare  of  stock  in  tlie  old  cor- 
poration, and  then  the  cash  and  bonds 


§  555.]       LIFE    ESTATES    AXD    KEMAINDEKS    IN    STOCK.       [cil.  XXXIII. 


on  the  bonds  gradiially  disappears  as  tliey  come  nearer  to  beini,' 
due.  A  stock  dividend  representing  accumulated  prolits  g«>('S 
to  the  life  tenant,  the  court  stating  that  the  question  is  alwa}'s 
to  be  decided  according  to  the  actual  facts  of  the  transaction. 
The  court  said:  "For  all  corporate  purposes  the  corporation 
may  doubtless  convert  earnings  into  capital,  when  such  power 
is  conferred  by  its  charter;  but  when  a  question  arises  between 
life  tenants  and  remainder-men  concerning  the  ownership  of 
the  earnings  thus  converted,  the  action  of  the  corporation  will 
not  conclude  the  courts."  ^ 

§  555.  The  Massaclmsetts  rule. —  Tliis  rule,  which  prevails 
in  Massachusetts,  Georgia,  and  PJiodo  Island,  is  sometimes 
called  "  the  rule  in  !Minot's  Case."  It  regards  cash  dividends, 
whether  large  or  small,  as  income,  and  stock  dividends,  when- 
ever earned  and  however  declared,  as  capital,  and  the  rule,  ac- 
cordingly, is  a  simple  one.  Cash  dividends  belong  to  the  tenant 
for  life  and  stock  dividends  to  the  corpus?    There  is  little  doubt, 


are  distributed  among  the  stock- 
holders of  the  old  corporation,  the 
new  stock  goes  to  the  remainder-man, 
but  the  dividend  of  cash  and  bonds 
goes  to  the  life  t;'iiant.  Matter  of 
Rogers,  23  N.  Y.  App.  Div.  428  (1897). 
Concerning  the  question  as  to  the 
rights  of  the  life  tenant  and  remain- 
der-man where  trustees  buy  securi- 
ties at  a  premium  or  sell  them  at  a 
premium,  see  Scovel  v.  Roosevelt,  5 
Redf.  121  (1881);  Townsend  v.  U.  S. 
Trust  Co.,  3  Redf.  220  (1877);  Duclos 
u  Benner,  5  N.  Y.  Supp.  733  (1888) ; 
Farwell  u  Tweddle,  10  Abb.  N.  Cas. 
94  (1881);  Whittemore  v.  Beekman,  3 
Dem.  275  (1883);  Cridland's  Estate, 
132  Pa.  St.  479  (1890).  See  note  in  18 
Abb.  N.  Cas.  185. 

South  Carolina:  Profits  and  in- 
come existing  when  the  trust  is 
created  are  corpus,  but  subsequent 
profits  and  income  are  income. 
Cobb  V.  Fant,  36  S.  C.  1  (1892). 

Tennessee:  Stock  dividends  de- 
clared from  net  earnings  made  after 
the  death  of  testator,  who  bequeatlied 
the  stock  on  which  the  dividends 
were  declared,  for  life,  belong  to  the 


life  tenant  as  income,  not  to  the  re- 
mainder-men as  part  of  the  corpus. 
Pritchitt  V.  Nashville  Trust  Co.,  9G 
Tenn.  472  (189G).  For  articles  ou 
"  Right  to  dividends  as  between  life 
tenant  and  remainder-man,"  see  2G 
Am.  L.  Rev.  1,  and  24  Am.  Rep.  169. 

1  McLouth  V.  Hunt,  154  N.  Y.  179 
(1897). 

2  Minot  V.  Paine,  99  Mass.  101  (1868>. 
In  this  case  the  principle  is  thus 
stated:  "A  sunple  rule  is  to  regard 
cash  dividends,  however  large,  as  in- 
come, and  stock  dividends,  however 
made,  as  capital."  In  subsequent 
cases  this  rule  has  been  affirmed  and 
elaborated.  Daland  v.  Williams,  101 
Mass.  571  (1869);  Leland  v.  Hayden, 
102  Mass.  542  (1869);  Heard  v.  El- 
dredge,  109  Mass.  258  (1872);  Rand  v. 
Hubbell,  115  Mass.  461  (1874);  Gifford 
V.  Thompson,  115  Mass.  478  (1874); 
Hemenway  v.  Hemenway,  134  Mass. 
446  (1883);  New  England  Trust  Co. 
V.  Eaton,  140  Mass.  532  (1886).  See 
also  Harvard  College  v.  Amory,  26 
Mass.  446  (1830);  Balch  v.  Hallet,  76 
Mass.  402  (1858);  Atkins  u  Albree,  04 
Mass.  359  (1866). 


1036 


■CH.  XXXni.]       LIFE    ESTATES    AISTD    KEMAINDEES   IN    STOCK.        [§  555. 


however,  that  this  rule  works  great  hardship  and  injustice  in 
many  cases. 

The  court,  in  deciding  whether  the  distribution  is  a  stock  or 
a  cash  dividend,  may  consider  the  actual  and  substantial  char- 
acter of  the  transaction,  and  not  its  nominal  character  merely.^ 


1  Thus,  in  Daland  v.  Williams,  101 
Mass.  571  (18G9),  where  the  directors, 
having  voted  to  increase  the  capital 
stock  by  three  thousand  shares,  de- 
clared a  cash  dividend  of  forty  per 
cent,  and  authorized  the  treasiu-er  to 
receive  that  dividend  in  payment  for 
two  thousand  eight  hvmdred  of  the 
shares,  the  remaining  two  hundred 
shares  to  be  sold,  the  court  held  that 
the  transaction  was  virtually  a  stock 
dividend,  and  that  tlie  shares  must 
go  to  the  remainder-man's  fund.  Cf. 
Band  v.  Hubbell,  115  Mass.  461  (1874). 
In  Leland  v.  Hayden,  103  Mass.  542 
(1869),  where  it  appeared  that  the 
company  had  invested  its  surplus 
earnings  in  its  o^vn  stock,  and  sub- 
sequently declared  a  dividend  of  that 
stock,  the  life  tenant  was  held  abso- 
lutely entitled  to  it.  The  life  tenant 
takes  the  dividend  where  it  is  in 
casli,  although  the  cash  is  derived 
from  increased  stock  whicli  is  offered 
to  the  old  stockholders  for  subscrip- 
tion, the  profits  having  been  used  for 
improvements.  This  is  not  a  stock 
dividend.  Davis  v.  Jackson,  152  Mass. 
58  (1890).  See  also  Balch  v.  Hallet, 
76  Mass.  402  (1858);  Reed  v.  Head,  88 
Mass.  174  (1863);  Harvard  College  v. 
Amory,  26  Mass.  446  (1830);  Gifford 
V.  Thompson,  115  Mass.  478  (1874); 
Hemenway  v.  Hemenway,  134  Mass. 
446  (1883).  In  New  England  Tmst 
Co.  V.  Eaton,  140  Mass.  532  (1886),  it 
was  held,  in  an  elaborate  opinion  by 
Devens,  J.,  that  the  gain  or  loss  aris- 
ing from  the  sale  of  stock  held  in 
trust  is  the  gain  or  loss  of  the  corpus, 
and  that  the  sum  received  consti- 
tutes a  new  principal.  Accordingly, 
a  trustee  who  has  invested  in  bonds 
at  a  premium  may  retain  annually 

10 


from  the  income  payable  to  the  life 
tenant  such  sums  as  will  restore  to 
the  fund  at  its  maturity  what  Avas 
taken  therefrom  at  tlie  time  of  the 
investment.  See  also  the  dissenting 
opinion  of  Mr.  Justice  Holmes  in 
this  case;  and  cf.  Bowker  r.  Pierce, 
130  Mass.  202  (1881);  Dodd  v.  Win- 
ship,  133  Mass.  359  (1882);  Wright  v. 
White,  136  Mass.  470  (1884) ;  Parsons 
V.  Winslow,  16  Mass.  361  (1820);  Lov- 
eU  V.  Minot,  37  Mass.  116  (1838).  The 
court  will  take  into  consideration,  in 
determining  the  question  as  between 
life  tenant  and  remainder-man,  the 
whole  character  of  the  transaction, 
and  the  nature  and  source  of  the 
property  distributed,  with  due  regard 
to  all  the  facts  preceding,  attending, 
and  resulting  from  the  declaration 
of  the  dividend-  In  Heard  v.  El- 
dridge,  109  Mass.  258  (1872),  it  is  said: 
"  The  suggestion  that  the  intention 
of  the  directors  should  determine  the 
question  whether  the  dividend  is 
capital  or  income  cannot  be  correct. 
...  It  is  more  safe  to  look  at  the 
character  of  the  property  and  the 
transaction."  See  three  interesting 
and  valuable  little  pamphlets  by  "  A 
Layman,"  wherein  the  merits  of  the 
question  are  fully  and  learnedly  dis- 
cussed, and  entitled  respectively 
"  Common  Sense  versus  Judicial  Leg- 
islation;" "Stock  Dividends:  the 
Rule  in  ]\Iinot's  Case  Again  Restated 
with  Variations  by  the  Supreme  Ju- 
dicial Court  of  Massachusetts,"  and 
"A  Third  Chapter  on  the  Rule  in 
Minot 's  Case."  (N.  Y. :  G.  P.  Putnam's 
Sons.)  See  5  Am.  L.  Rev.  720;  Perry, 
Trusts  (3d  ed. ),  §§  544, 545,  and  notes. 
In  Georgia  the  code  is  construed  so 
as  to  follow  tlie  Massachusetts  rule. 


§§  55G-7.]       LIFE  ESTATES  AND  REMAINDERS  IN  STOCK.       [CH.  XXXIII. 


The  supreme  court  of  the  United  States  has  held  that  a  lif(^ 
tenant  of  stock  does  not  take  a  stock  dividend  declared  durini' 

o 

the  life  tenancy.^ 

In  Rhode  Island  the  courts  have  adopted  a  rule  somewhat 
like  "the  rule  in  Minot's  Case,"  without  the  modilication 
engrafted  upon  it  by  the  subsequent  decisions  of  the  Massachu- 
setts courts.  It  is  a  rule  which  in  general  prefers  the  remain- 
der-man to  the  life  tenant.- 

§§  55G,  557.  The  EiKjJhh  rule. —  In  England  an  ordinary, 
regular,  usual  cash  or  stock  or  property  dividend  l)elongs  to 
the  life  tenant,  while  an  extraordinary  cash  or  stock  or  prop- 
erty dividend  belongs  to  the  corjnis  of  the  trust'  This  rulo 
was  established  in  1790  in  EnHand. 


Millen  v.  Guerrard,  07  Ga.  284  (1881); 
Ga.  Code,  §  22m. 

1  Gibbons  v.  Ma1:on,  13G  U.  S.  549 
(1890). 

2  Parker  v.  Mason,  8  R.  I,  427  (1867) ; 
Bushee  v.  Freeborn,  11  R  1. 149  (1875); 
Brown's  Petition,  14  R.  I.  371  (1884). 


dividend;  Re  Barton's  Trust.  L.  R. 
5  Eq.  238  (18G8),  a  stock  dividend; 
Paris  V.  Paris,  10  Ves.  Jr.  185  (1804),  a 
cash  dividend;  Clayton  v.  Gresliani, 
10  Ves.  Jr.  288  (1804),  a  cash  dividend ; 
Witts  V.  Steere,  V6  Ves.  Jr.  363  (1807),  a 
cash  dividend.     Cf.  Gilly  v.  Burley, 


A  stock  dividend  is  capital  and  not  22  Beav.  619  11856);  Straker  v.  Wil 

incoma    Greene  u.  Smitli,  17  R.  I.  28  son,  L.    R.   6  Ch.    App.  503  (1871); 

(1890).  Brander  r.  Brander,  4  Ves.  Jr.  80O 

3  The  courts,  perhaps  uniformly,  in-  (1799) ;  Preston  v.  Melville,  10  Sim.  16;> 


sist  upon  this  distinction.  Extraor- 
dinary dividends  may  be  either  of 
cash  or  stock,  and  appear  under  a 
variety  of  names,  such  as  "  partici- 
pations," "distributions,"  or,  more 
commonly,  "  bonuses."  See  Witts  v. 
Steere,  13  Ves.  Jr.  363  (1807);  Norris 
V.  Harrison,  2  Madd.  268  (1817);  Hooper 
V.  Rossitar,  McClel.  (Exch.)  527  (1824). 
To  the  point  that  regular  dividends, 
though  increased  in  amount,  go  as 
income  to  the  owner  of  the  life  es- 


(1848);  Murray  v.  Glasse,  17  Jur.  81f> 
(1853);  Johnson  v.  Johnson,  15  Jur. 
714  (1850);  Plumbe  v.  Neild,  6  Jur. 
(N.  S.)  529  (1860);  Hollis  v.  Allan,  Vi 
Jur.  (N.  S.)  638  (1866).  See  also  Re 
Hopkins's  Trusts,  L.  R.  18  Eq.  690 
(1874);  Scholefield  v.  Redfern,  2  Dr. 
&  Sm.  173  (1863);  Hartley  v.  Allen, 
4  Jur.  (N.  S.)  500  (1858);  Lock  v.  Ven- 
ables,  27  Beav.  598  (1859),  holding  to 
the  effect  that  a  specific  bequest  of 
"the    dividends,   interest,  and  pro- 


late, see  Barclay  v.  Wainewright,  14    ceeds  "  of  shares  will  not  pass  a  bonus 


Ves.  Jr.  66  (1807);  Price  v.  Anderson, 
15  Sim.  473  (1847);  Bates  u  Mackin- 
ley,  31  Beav.  280  (1862),  a  cash  divi- 
dend; to  the  point  that  "extra"  or 
imusual  dividends,  whether  of  cash 
or  shares,  go  to  augment  the  princi- 
pal of  the  trvist  fund,  see  Irving  v. 
Houstoun,  4  Pat.  H.  L.  Cas.  521  (1803), 
a  stock  dividend;  Hooper  v.  Rossiter, 
McCleL  (Exch.)    527  (1824),  a  stock 


1038 


on  the  shares.  In  Alcock  v.  Sloper, 
2  MyL  &  K  699  (1833),  the  income  of 
the  testator's  long  annuities  was 
given  to  the  life  tenant.  Wilday  v. 
Sandys,  L.  R  7  Eq.  455  (1869).  In 
Lane  v.  Loughnan,  7  Vict.  L.  R.  Eq.  10 
(1881),  it  was  held  that  the  premium 
on  a  lease  of  part  of  a  trust  estate  be- 
longed to  the  tenant  for  life  and  not 
to  the  corjyus.      An  executor  may 


CH.  XXXIII.]       LIFE  ESTATES  AND  KEMAINDERS  IN  STOCK.       [§§  55G-7. 


There  are,  however,  recent  cases  in  England  to  the  effect 
that  extraordinary  cash  dividends  may  be  decreed  to  belong  to 
the  life  tenant.^  There  of  course  is  no  question  that  ordinary 
cash  dividends  belong  to  the  life  tenant.-  This  rule  applies 
even  though  it  may  be  shown  that  the  dividend  in  question  was 


plainly  transfer  the  stock  to  pay  the 
decedent's  debts,  although  it  is  be- 
queathed for  life  with  remainder 
over.     Franklin  v.  Bank  of  England, 

1  Russ.  575  (1826).  In  Clive  v.  Clive, 
Kay,  GOO  (1854),  by  the  terms  of  the 
deed  of  settlement  the  net  profits  of 
the  concern  were  to  be  divided  rata- 
bly to  such  an  amount  as  should  be 
declared  at  the  semi-annual  meet- 
ings, and  were  to  be  paid  within 
twenty-one  days  thereafter;  and  it 
was  provided  that  a  shareholder  was 
not  to  receive  any  dividend  after  the 
period  at  which  he  ceased  to  be  a 
proprietor  of  shares,  but  the  divi- 
dends on  sixch  shares  were  to  con- 
tinue in  suspense  until  some  other 
person  should  become  proprietor  of 
them.  When  a  shareholder  died 
sixty-nine  days  after  a  half-yearly 
meeting  at  wliich  a  dividend  had 
been  declared,  but  before  notice  had 
been  given  that  such  dividend  was 
jmyable,  having  by  his  will  be- 
queathed the  interest  and  annual  in- 
come arising  from  all  his  shares  to 
one  for  life,  and  then  in  remainder 
to  others,  it  was  held  that  this  divi- 
dend belonged  to  the  legatee  for  life, 
and  not  to  the  general  personal  estate 
of  the  testator.  See  also  Title  to  Divi- 
dends, 19  Am.  L.  Rev.  571 ;  Bostock 
V.  Blakeney,  2  Bro.  Ch.  G53  (1789); 

2  Perry,  Trusts,  ^"^  544,  545.  Mr. 
Moak's  note,  31  Eng.  Rep.  328-332; 
Browne  v.  Collins,  L.  R.  12  Eq.  586 
(1871),  is  to  the  effect  that  profits  of 
a  partnership  accrued  and  earned 
before,  but  not  set  aside  qua  profits 
until  after  the  death  of  tlie  testator, 
belong  to  the  corjms  of  the  estate, 
and  that  profits  accruing  after  lus 
death  go  to  the  tenant  for  life  as  in- 

lO:; 


come.  See  also  the  recent  and  im- 
portant review  of  the  whole  subject 
in  Bouch  v.  Sproule,  L.  R  12  App, 
Cas.  385  (1887),  reversing  the  court 
below,  Sproule  v.  Bouch,  L.  R.  29  Clu 
D.  635  (1885). 

1  In  Sugden  v.  Alsbury,  L.  R.  45  Ch. 
D.  237  (1890),  the  court  held  that  the 
life  tenant  was  entitled  to  an  ex- 
traordinary dividend  payable  in  cash. 
The  dividend  was  called  a  bonus,  but 
was  nothing  more  or  less  than  a  large 
dividend,  being  a  division  of  accumu- 
lated profits.  In  Ellis  v.  Barfield,  64 
L.  T.  Rep.  625  (1891),  the  court  held 
tliat  a  large  dividend  was  income 
and  belonged  to  the  life  tenant,  al- 
though it  was  used  by  the  trustee  to 
pay  up  the  stock  in  full,  and  also  to 
purchase  new  shares  which  he  imme- 
diately sold ;  but  the  excess  for  which 
he  sold  the  stock  at  a  profit  belongs 
to  the  remainder-man. 

'^  A  cash  dividend  of  profits  which 
have  been  earned  since  the  last  pre- 
ceding dividend,  such  last  preceding 
dividend  having  been  made  in  a  reg- 
ular and  reasonable  time  previously, 
belongs  to  a  life  tenant  of  stock,  and 
not  to  the  remainder-man.  Barclay 
r.  Wainewright,  14Ves.  Jr.  66  (1807); 
Norris  v.  Harrison,  2  JIadd.  268  (1817); 
Clive  r.  Clive,  Kay,  600  (1854);  Mur- 
ray v.  Glasse,  17  Jur.  810  (1853);  Pres- 
ton V.  Melville,  16  Sim.  163  (1848); 
Cuming  v.  Boswell,  2  Jur.  (N.  S.)  1005 
(1856).  Cf.  Ware  v.  McCandlish,  11 
Leigh  (Va.),  595  (1841);  Price  v.  An- 
derson, 15  Sim.  473  (1847);  Witts  v. 
Steere,  13  Ves.  Jr.  363  (1807).  As  will 
be  seen  hereaiter,  in  England  a  dif- 
ferent nile  prevails  if  the  cash  divi- 
dend is  made  from  long-accumulated 
profits. 
39 


§  558.]       LIFE    ESTATES    AND    KEMAINDEKS    IN    STOCK.       [ciI.  XXX II I. 


earned,  wholly  or  in  part,  befor  the  commencement  of  the  life 
estate.^ 

Where  it  is  shown  that  dividends  have  been  fraudulently  re- 
tained in  prejudice  of  the  rights  of  the  life  tenant,  and  subse- 
quently a  bonus  is  paid  upon  the  sliarcs,  it  belongs,  as  income 
deferred,  to  the  tenant  for  life,  even  though  it  be  called  a  bonus.^ 
The  life  tenant  does  not  take  any  part  of  the  surplus  value  of 
shares  upon  distribution  after  dissolution,  if  such  surplus  was 
clearly  capital.' 

In  all  cases,  however,  the  intent  of  the  grantor  or  testator  is 
the  pole-star,  and  will  be  carried  out  by  the  courts.* 

§  558.  The  apiyoriionment  of  dividends. —  When  a  life  tenant 
dies  before  the  date  at  which  a  dividend  is  declared,  tlie  ques- 
tion arises  whether  the  dividend  declared  next  after  his  death 
ought  or  ought  not  to  be  apportioned  between  the  reversioner 
or  remainder-man  and  the  estate  of  tlie  life  tenant  for  the  period 
of  time  partially  covered  by  the  life  estate.  It  is,  in  general, 
the  rule  in  such  a  case  that  the  dividend  is  not  apportionable, 
but  belongs  entirely  to  the  corpus  of  the  trust  fund.*   But  where 


1  Bates  V.  IMackinley,  31  Beav.  280 
(18G3);  Jones  v.  Ogle,  L.  R.  8  Cli-  App. 
193  (1872). 

2MacIareii  v.  Stainton,  L.  R.  11  Eq. 
383  (1871);  S.  C,  3  De  G.,  F.  &  J.  203 
(18G1),  reversing  S.  C,  27  Beav.  460 
(1859) ;  Edmondson  v.  Crostliwaite,  34 
Beav.  30  (1864);  Dale  v.  Hayes,  40  L. 
J.  (Ch.)  244  (1871).  Cf.  Lean  v.  Lean, 
83  L.  T.  Rep.  305  (1875);  Lambert  v. 
Lambert,  29  L.  T.  (N.  S.)  878  (1874); 
Re  Tinkler's  Estate,  L.  R  20  Eq.  Cas. 
456  (1875). 

3i2e  Armitage,  [1893]  3  Cli.  337. 

*  Sproule  V.  Bouch,  L.  R.  29  Ch.  D. 
635  (1885);  Be  Hopkins's  Trusts,  L.  R 
18  Eq.  696  (1874);  Scholefield  u  Red- 
fern,  2  Dr.  &  Sm.  173  (1863);  Jones  v. 
Ogle,  L.  R.  14  Eq.  419  (1872);  Re  Box, 
1  Hem.  &  M.  552  (1863).  Cf.  Reed  v. 
Head,  88  IMass.  174  (1863);  Clarkson 
V.  Clarkson,  18  Barb.  646  (1855) ;  Millen 
V.  Guerrard,67Ga.284(1881);  Thomp- 
son's Appeal,  89  Pa.  St.  36  (1879).  The 
life  tenant  takes  a  dividend  paid  im- 
mediately after  the  death  of  the  tes- 


tator, where  tlie  will  provides  that 
each  share  bequeathed  by  the  will 
should  cany  the  dividend  accruing 
at  the  time  of  the  testator's  death. 
Lysaght  v.  Lysaght,  77  L.  T.  ReiJ.  037 
(1897). 

5  Pearly  v.  Smith,  3  Atk.  200  (1745); 
Sherrard  v.  Sherrard,  3  Atk.  502  (1747); 
Wilson  V.  Harman,  2  Ves.  Sr.  673 
(1755);  Hartley  v.  Allen,  4  Jur.  (N.  S.) 
500  (1858);  Re  Maxwell's  Trusts,  1 
Hem.  &  M.  610  (1803);  Footc,  Appel- 
lant, 39  Mass.  299  (1839);  Granger  v. 
Bassett,  98  Mass.  402  (1808);  Clapp  v. 
Astor,  2  Edw.  Ch.  379  (1834).  Cf. 
Hyatt  V.  Allen,  50  N.  Y.  553  (1874): 
Brundage  v.  Brundage,  GO  N.  Y.  54'!, 
551  (1875);  Perry,  Trusts,  §  550.  But 
in  Massachusetts  it  has  been  held 
that  sometimes  dividends  declared 
after  the  life  tenant's  death  will, 
nevertheless,  go  to  his  estate.  Thus, 
a  life  tenancy  in  stock  for  the  sui>- 
port  of  the  testator's  widow  and  chil- 
dren was  held  to  entitle  the  widow's 
estate  to  a  dividend  declared  after 


1040 


CD.  XXXIII.]       LIFE    ESTATES    AXD    KEMAINDEKS    IX    STOCK.       [§  559, 

a  tenant  for  life  dies  after  the  dividend  is  declared,  but  before 
the  dividend  becomes  due,  bis  estate  will  be  entitled  to  the 
whole  of  that  dividend.^  In  England,  however,  under  the  stat- 
ute kno^vn  as  the  Apportionment  Act  of  1870,  dividends  are 
apportionable  in  these  cases  between  the  estate  of  the  life 
tenant  and  the  corpus;  -  and  in  this  country  at  common  law,  in 
one  or  two  jurisdictions,  there  is  a  tendency  to  hold  that  divi- 
dends are  apportionable.^  In  Maryland  a  stock  dividend  has 
been  apportioned.* 

§  559.  The  right  to  siilscrile  for  new  shares  as  letween  life 
tenant  and  remainder-man.— The  right  to  subscribe  for  new 


her  death,  but  for  a  period  which  ex- 
pired before  that  event  Johnson  v. 
Bridgewater  Mfg.  Co.,  80  Mass.  274 
(1859).  See  also  Ellis  v.  Essex  Merri- 
mack Bridge,  19  Mass.  243  (1824);  Gif- 
ford  V.  Thompson,  115  Mass.  478  (1874). 
Cf.  King  V.  FoUett,  3  Vt  385  (1831),  in 
which  the  residuary  legatee  claimed 
from  the  legatee  of  certain  stock  the 
share  of  dividends  earned  in  the  life- 
time of  his  testator,  but  declared 
after  his  death;  the  covirt  holding 
that  a  sale  or  gift  of  stock  carries 
with  it  all  dividends  declared  after  it 
takes  effect,  whether  earned  before 
or  not. 

1  Wright  V.  Tuckett,  1  J.  &  H.  266 
(1860);  Baton  v.  Sheppard,  10  Sim.  186 
(1839). 

233  &  34  Vict.  c.  35,  §  2;  BoUock 
V.  Bollock,  L.  R  18  Eq.  329  (1874), 
qualifying  or  explaining  Whitehead 
V.  Whitehead,  L.  R  16  Eq.  528  (1873); 
Beavan  v.  Beavan,  53  L.  T.  Rep.  245 
(1885).  Cf.  Capron  v.  Capron,  L.  R. 
17  Eq.  288  (1874);  and  see  Banner  v. 
Lowe,  13  Ves.  Jr.  135  (1806);  Hay  v. 
Balmer,  2  B.  Wms.  501  (1728).  The 
statute  applies  only  to  dividends  upon 
the  stock  of  corporations,  strictly 
speaking,  and  not  to  those  upon  the 
shares  in  private  trading  corpora- 
tions. Jones  V.  Ogle,  L.  R.  8  Ch.  App. 
192  (1872).  And  does  not  apply  to 
stock  dividends.  Hartley  v.  Allen,  4 
Jur.  (N.  S.)  500  (1858).     Under  the 

66  1041 


Apportionment  Act  of  England,  a 
dividend  declared  after  the  death  of 
the  tenant  for  life  may  be  appor- 
tioned between  his  estate  and  the  re- 
mainder-man. Bulkeley  v.  Stephens, 
[1896]  2  Ch.  241. 

3  In  Ex  parte  Rutledge,  1  Harp.  Eq. 
(S.  C.)  65  (1824),  a  dividend  was  ap- 
portioned between  life  tenant  and  re- 
mainder-man. This  is  regarded  as  a 
leading  case  in  favor  of  apportion- 
ment In  Bennsylvania  the  interest 
on  mimicipal  bonds  and  on  the  bonds 
of  private  corporations  is  apportion- 
able; but  qxiere  whether  or  not  the 
interest  on  government  bonds  would 
be.  Wilson's  Appeal,  108  Ba.  St  344 
(1885),  overruling  Earp's  Will,  1  Bars. 
Eq.  Cas.  (Ba.)  453  (1850).  But  in 
Massachusetts  the  statute  of  appor- 
tionment is  held  not  to  apply  to  divi- 
dends upon  the  stock  of  corporations. 
Granger  v.  Bassett,  98  Mass.  462,  469 
(1868),  construing  Mass.  Gen.  Stat.,  cli. 
97,  §  24.  In  New  York  an  apportion- 
ment is  provided  for  by  Laws  of  1875, 
ch.  542.  See  Goldsmith  v.  Swift  25 
Hun,  201  (1881). 

<  A  stock  dividend  declared  in  1891 
to  represent  profits  which  for  three 
years  had  been  used  for  improve- 
ments should  be  apportioned  between 
the  life  tenant  and  remainder-men, 
the  testator  having  died  in  1890. 
Tiiomas  v.  Gregg,  78  Md.  545  (1894). 


§  5G0.]        LIFE    ESTATES    AND    REMAINDERS    IN    STOCK.       [CH.  XXXI 11. 

shares  at  par  upon  an  increase  of  the  capital  stock,  which  is  an 
incident  of  the  ownership  of  the  stock,  does  not  belong  as  a 
privilege  to  the  life  tenant,  but  such  an  increment  must  be 
treated  as  capital,  and  be  added  to  the  trust  fund  for  the  bene- 
fit of  the  remainder-man.  This  is  equally  the  rule  whether  the 
trustee  subscribqs  for  the  new  stock  for  the  benefit  of  the  trust 
or  sells  the  right  to  subscribe  for  a  valuable  consideration.  In 
either  event  the  increase  goes  to  tlie  corjnis)  The  subsequent 
income,  however,  of  such  increase  belongs,  during  the  continu- 
ance of  the  life  tenancy,  to  the  life  tenant  as  income;  the  new 
shares  are  part  of  the  corpus,  and  the  life  tenant,  being  entitled 
to  the  income  from  the  corpus,  takes  the  income  from  the  accre- 
tions thereto.'^ 

§  560.  Miscellaneous  questions  herein. —  The  life  tenant  must 
pay  calls  which  are  made'  and  taxes  levied*  during  the  con- 
tinuance of  his  estate  upon  shares  held  in  trust  for  his  benefit. 
And  where  stock  to  produce  a  fixed  income  is  bequeathed  for 


1  Atkins  V.  Albree,  94  Jlass.  359 
(18CG);  Brinley  v.  Grou,  50  Conn.  06 
(1882);  Biddle's  Appeal,  99  Pa.  St.  278 
(1882);  Moss's  Appeal,  83  Pa.  St.  264 
(1877);  Goldsmith  v.  Swift,  25  Hun, 
201  (1881);  Sanders  v.  Bromley,  55  L. 
T.  Rep.  145  (1886).  Profit  upon  the 
sale  of  stock  is  corpiis,  and  not  in- 
come for  the  life  tenant.  Whitney 
V.  Phoenix,  4  Redf.  (Surr.)  180  (1880). 
Cf.  Leitch  v.  Wells,  48  N.  Y.  585  (1872); 
Hemenway  f.  Hemenway,  134  IMass. 
446  (1883);  New  England  Trust  Co.  v. 
Eaton,  140  Mass.  532  (18SG).  Some- 
times certificates  of  new  stock  are 
not  stock  dividends.  Chicago,  etc. 
R.  R.  V.  Page,  1  Biss.  461  (1864);  S.  C, 
5  Fed.  Cas.  600.  In  Londesborough 
V.  Somerville,  19  Beav.  295  (1854), 
where  consols  were  sold  just  before  a 
dividend  day  and  the  proceeds  in- 
vested in  realty,  a  tenant  for  life  was 
held  entitled  to  be  paid,  as  income 
on  the  consols,  the  difference  between 
the  price  obtained  and  the  value  ex- 
clusive of  the  next  dividend.  See 
also,  in  general,  §  286,  supra. 


2  Quoted  and  approved  in  Re  Eis- 
ners Estate,  175  Pa.  St.  143  (1890): 
Moss's  Appeal,  83  Pa.  St.  264  (1877); 
Biddle's  Appeal,  99  Pa.  St.  278  (1882), 
and  the  cases  generally  cited  in  tlie 
preceding  note;  i2e  Bromley,  55  L.  T. 
Rep.  145  (1886). 

8i2e  Box,  1  Hem.  &  M.  552  (1863); 
Day  V.  Day,  1  Dr.  &  Sm.  261  (1860).  In 
case  of  a  life  estate,  followed  by  a 
life  estate,  followed  by  a  remainder 
to  the  nominees  of  the  first  life  ten- 
ant, the  estate  of  the  first  life  tenant 
is  liable  for  calls  made  after  the 
remainder  commences.  Hobbs  v. 
Wayet,  L.  R  36  Ch.  D.  256  (1887).  If 
a  call  becomes  due  the  day  after  the 
testator  dies,  it  is  the  duty  of  the 
executor  to  pay  it  from  the  general 
fund.  Emery  v.  Wason,  107  Mass.  507 
(1871). 

<Webb  V.  BurUngton,  28  Vt.  188 
(1856);  Citizens'  Mut.  Ins.  Co.  v.  Lott, 
45  Ala,  185  (1871).  Cf.  National  Al- 
bany Exch.  Bank  v.  Wells,  18  Blatchf. 
478  (1880).    See  also  §  248,  supra. 


1043 


CEL  XXXIII.]       LIFE    ESTATES   AND   KEMAINDEES    IX    STOCK.       [_{ 


5G0. 


life,  a  subsequent  increase  in  the  earnings  from  that  stock  en- 
ures to  the  benefit  of  the  life  tenant.^  But  the  enhanced  price 
for  which  stock  sells  by  reason  of  dividends  earned  but  not  de- 
clared belongs  entirely  to  the  remainder.^  A  life  tenant  is  not 
entitled  to  have  the  stock  transferred  to  him  on  the  corporate 
books.'  But  the  corporation,  if  it  had  notice  of  the  trust,  may 
be  held  liable  for  transferring  shares  in  prejudice  of  the  rights 
of  the  life  tenant.*  And  an  administrator  who  permits  an 
irregular  transfer  in  fraud  of  the  life  tenant's  rights  makes 
himself  personally  liable.**  A  dividend  declared  before  but  pay- 
able after  the  testator's  death  belongs  to  the  estate.^  A  claim 
of  the  company  against  the  life  tenant  for  dividends  paid  can- 
not be  enforced  against  the  remainder-man's  interest.'    "Where 


1  Russell  V.  Loring,  85  Mass.  121 
(1861).  But  when  a  fixed  income  is 
bequeathed  and  the  income  fails  or 
faUs  short,  tlie  principal  must  be  re- 
sorted to.  Bonham  v.  Bonham,  33 
N.  J.  Eq.  476  (1881);  Hay  del  v.  Hurck, 
73  Mo.  253  (1880).  The  opposite  nile, 
however,  prevails  in  New  York.  De- 
laney  v.  Van  Aulen,  84  N.  Y.  16  ( 1881), 
reversing  S.  C,  21  Hun,  274.  Cf.  Craw- 
ford V.  Dox,  5  Hun,  507  (1875).  See 
also  S  304,  supra, 

2Scholefield  v.  Redfem,  2  Dr.  & 
Sm.  173  (1803);  Abercrorabie  v.  Rid- 
dle, 3  Md.  Cli.  320  (1850);  Van  Blar- 
com  V.  Dager,  31  N.  J.  Eq.  783  (1879). 
Cf.  Loudesborough  v.  Somerville,  19 
Beav.  295  (1854);  Re  Stutzer,  20  Hun, 
481  (1882);  Re  Gerry's  Accounting 
103  N.  Y.  445  (1886). 

8  Collier  v.  Collier,  3  Ohio  St.  369 
(1854).  Cf.  State  v.  Robinson,  57  Md. 
486  (1881).  If  the  corporation  trans- 
fers the  stock  to  the  life  tenant,  even 
by  orders  of  the  coiirt,  but  issues  a 
certificate  not  stating  the  facts  of 
life  tenancy,  and  tells  a  purchaser  of 
the  certificate  tliat  it  is  all  right,  the 
corporation  is  liable  to  the  remainder- 
man. Caulkins  v.  Gaslight  Co.,  85 
Tenn-  683  (1887). 

♦Stewart  v.  Firemen's  Ins.  Co.,  53 


Md.  564  (1880).  Where  a  life  tenant 
transfers  the  stock  to  the  remainder- 
man, the  former's  executor  cannot 
claim  dividends  paid  to  the  latter. 
Kennedy  v.  First  Nat.  Bank,  115  N.  C. 
223  (1894).  Where  a  life  tenant  trans- 
fers the  stock  into  his  own  name, 
the  remainder-man  may  recover  the 
stock  upon  the  death  of  the  Ufa 
tenant,  even  though  the  latter  was 
insolvent.  Mercantile,  etc.  Co.  v. 
Weld,  36  Atl.  Rep.  445  (Md.,  1897).  A 
bank  is  liable  to  the  remainder-man 
for  allowing  a  transfer  to  the  life 
tenant,  even  though  the  transfer  to 
the  life  tenant  is  by  the  executors. 
Cox  V.  First  Nat  Bank,  26  S.  E.  Rep. 
22  (N.  C,  1896). 

5  Keeney  v.  Globe  Mill  Co.,  39  Conn. 
145  (1872).  See  also  Amiss  v.  William- 
son, 17  AV.  Va.  673  (1881). 

••De  Gendre  v.  Kent,  L.  R  4  Eq. 
283  (1867).  Cf.  Browne  v.  Collins,  L. 
R.  1^  Eq.  586,  594  (1871);  Lock  v.  Ven- 
ables,  27  Beav.  598  (1859).  See  also 
Cogswell  V.  Cogswell,  2  Edw.  Ch.  231 
(1834);  Abercrombie  v.  Riddle,  3  Md. 
Ch.  320  (1850);  Wright  v.  Tuckett,  1 
Johna  &  H.  206  (1860);  Furley  v. 
Hyder,  42  L.  J.  (Ch.)  626  (1873). 

'  Where  a  fixed  per  cent  is  paid  an- 
nually to  stockholders  instead  of  div- 


1043 


§  5G0.]        LIFE    ESTATES   AKD    REMAINDERS    IN    STOCK.       [CH.  XXXIII. 

a  life  interest  is  given  to  one  person  ^th  remainder  over,  and 
it  is  necessary  that  the  stock  be  sold  in  order  to  preserve  the 
estate,  a  decree  of  sale  is  valid  if  both  the  executor  and  life 
tenant  are  parties  to  such  suit.* 

Idends  and  charged  to  them,  and  the    Reading  Trust  Ca  r.  Reading  Iron 
stock  held  in  pledge  for  the  same,    Works,  137  Pa.  St  282  (1891)l 
such  a  payment  to  the  life  tenant        '  Drovers',  etc  Dank  u  Hughea,  83 
does  not  create  a  valid  lion  on  the    Md.  355  (1890> 
stock  as  against  the  remainder-man. 

1044 


CHAPTER  XXXIY. 


TAXATION  OF  SHAKES  OF  STOCK  AND  OF  CORPORATIONS. 


§  561.  The  four  methods  of  taxing 
corporate  interests. 

A.    TAXATION    OF    SHARES    OP  STOCK. 

562.  Relation  of  stockholders  to  the 
first  three  methods  of  taxa- 
tion- 

663.  Tax  on  shares  of  stock  as  dis- 
tinguished from  the  other 
methods. 

664  Tax  by  a  state  or  municipality 
on  stockholders  residing  in 
the  state  creating  the  corpo- 
ration. 

665.  Tax  on  resident  stockholders 
in  a  non-resident  or  foreign 
corporation. 

566.  Tax  on  non-resident  stockhold- 

ers in  resident  or  domestic 
corporation  —  Mode  of  col- 
lecting. 

567.  Double  taxation. 

568.  Exemptions  from  taxation  as 

affecting  tax  on  shares  of 
stock. 


B. 


TAXATION  OP  NATIONAIrBANK 
STOCK. 


§  569.  General  rules. 

570.  Place  in  which  shares  in  na^ 

tional-bank   stock   may  be 
taxed. 

571.  The  tax  must  not  be  greater 

than  that  imposed  on  other 
"moneyed  capital" 

572.  The  bank  may  bring  suit  to  re- 

strain illegal  tax  on  its  stock- 
holders. 

a  OTHER  METHODS  OF  TAXING  CORr 
PORATIONS. 

572a.  General  principles. 

5726.  Exemptions   from  taxation. 

572c.  Taxation  of  foreign  corpora- 
tions. 

572cZ.  Taxation  must  not  interfere 
with  interstate  commerce. 

572e.  Inheritance  tax. 


§  561.  The  four  mctlioils  of  taxing  corporate  interests. —  There 
are,  in  general,  four  methods  of  taxing  corporate  interests. 
These  are,  first,  by  a  tax  on  the  franchise ;  second,  on  the  cap- 
ital stock ;  third,  on  the  real  estate  and  personal  property  of 
the  corporation;  fourth,  by  a  tax  on  the  shares  of  stock  in  the 
hands  of  the  stockholders.^  There  is  another  mode  of  taxatid^ 
which  is  sometimes  adopted  —  a  tax  on  corporate  dividends; 
but  since  this  is  generally  construed  to  be  only  a  method  of 
valuing  the  franchise  or  capital  stock,  it  can  hardly  be  called 
a  fifth  method  of  taxing  corporate  interests.^ 

It  is  entirely  within  the  discretion  of  the  legislature  to  say 
which  one  of  these  four  methods  of  taxation  shall  be  adopted, 
where  the  matter  is  not  regulated  by  the  state  constitution. 

»2Redfield,  Railw.  (3d  ed.),  p.  453;    State,    8    Heisk.    (Tenn.)    663,    795 
Ottawa  Glass  Co.  v.  McCaleb,  81  III     (1875). 
656  (1876;;   Louis%-ille,  etc.  R  R  y.        2  gee  §  572a,  in/*** 

1045 


§  5G2.]  TAXATION    OF    STOCK    AND    COErOKATIONS.       [CH.  XXXIV. 

Kot  only  tliis,  but  it  is  also  within  the  discretion  of  the  legisla- 
ture to  tax  the  corporation  in  two  or  more  of  these  ways  —  to 
levy  a  double  tax  on  the  corporate  interests,  and  even  to  levy 
a  treble  or  quadruple  tax  thereon. 

A.    TAXATION   OF   SHARES   OP   STOCK. 

§  562.  BelaUon  of  stocMolders  to  the  first  three  methods  of 
taxation. —  The  stockholders  in  a  corporation  have  very  little 
to  do  directly  with  any  of  the  first  three  modes  of  taxing  cor- 
porate interests.  The  tax  is  levied  directly  against  the  corpo- 
.  ration,  and  is  paid  by  the  corporate  officers  out  of  the  treasury 
of  the  corporation.  If  the  tax  is  unauthorized  or  illegal,  or 
improperly  assessed,  or  is  based  on  too  high  a  valuation,  it  is 
ordinarily  the  duty  of  the  corporate  officers  to  rectify  or  oppose 
such  tax.  The  stockholders  have  nothing  to  do  with  the  ordi- 
nary transaction  of  corporate  business,  of  which  this  forms  a 
part.  Where,  however,  the  corporate  officers  refuse,  upon  re- 
quest of  one  or  more  stocldiolders,  to  oppose  or  decline  to  pay 
an  unauthorized  tax  levied  in  any  one  of  the  three  methods 
mentioned  above,  the  stockholder  himself  may  bring  a  suit  in 
a  court  of  equity,  in  behalf  of  and  for  the  protection  of  the  cor- 
porate interests,  to  enjoin  the  payment  and  collection  of  such 
unauthorized  tax.^ 

1  Dodge  V.  Woolsey,  18  How.  831  Louis,  etc.  R  R,  3  Dill.  13,  25  (1874); 
(1855);  Barnes  v.  Kornegay,  62  Fed.  S.  C,  18  Fed.  Cas.  1223,  1226.  But  the 
Rep.  671  (1894);  State  Bank  v.  Knoop,  stockholder  must  allege  actual  tender 
16  How.  369  (1853);  "Wilmington  R  R  of  the  amount  of  tax  conceded  to  be 
V.  Reed,  13  Wall.  264  (1871) ;  Delaware  dua  Allegation  of  readiness  to  pay 
R  R  Tax,  18  Wall  206  (1873);  Green-  is  insufficient  Huntington  u  Pal- 
wood  V.  Freight  Co.,  105  U.  S.  13  (1881) ;  mer,  8  Fed.  Rep.  449  (1881).  See  also 
Paine  v.  Wright,  6  McLean,  395  (1855) ;  Trask  v.  Magtiire,  18  WalL  391  (1873) ; 
S.  C,  18  Fed.  Cas.  1010;  Foote  v.  Wood  v.  Draper,  24  Barb.  187  (1857); 
Linck,  5  McLean,  616  (1853);  S.  C,  9  London  v.  Wilmington,  78  N.  C.  190 
Fed.  Cas.  366,  holding  also  that  the  (1878);  §494,  sztpm.  The  case  of  State 
coi-poration  is  a  necessary  party,  and  v.  Flavell,  24  N.  J.  L.  370  (1854),  denies 
that  if  the  complainant  is  a  non-resi-  this  right.  A  stockliolder's  injunc- 
dent  he  may  bring  the  suit  in  the  tion  against  a  tax  in  corporate  prop- 
United  States  circuit  court;  Daven-  erty  falls  when  the  property  is  subse- 
port  V.  Dows,  18  WaU.  626  (1873),  also  quently  sold  under  execution.  Secor 
holding  that  the  corporation  is  a  v.  Singleton,  35  Fed.  Rep.  376  (1888). 
necessary  party  defendant;  Bailey  v.  The  general  character  of  such  a  suit 
Atlantic,  etc.  R.  R,  3  Dill.  22  (1874);  as  this  comes  under  the  principles  of 
S.  C,  2  Fed.  Cas.  365;  Parmley  v.  St.  law  set  forth  in  Part  IV,  infra, 

1046 


CH.  XXXIT.]       TAXATION    OF    STOCK   AiO)    CORPORATIONS.  [§  563. 

§  5C3.  Tax  on  shares  of  stock  as  distinguisliedfrom  the  other 
methods.— A  tax  on  shares  of  stock  is  clearly  different  from  a 
tax  upon  the  franchise,  the  corporate  property,  or  the  capital 
stock.  Especially  is  it  important  to  distinguish  a  tax  on  shares 
of  stock  from  a  tax  on  the  capital  stock.^  The  latter  is  always 
taxed  against  the  corporation,  is  paid  by  the  corporation,  and 
is  based'on  a  valuation  which  does  not  necessarily  depend  on 


1  In  Porter  v.  Rockford,  etc.  R  R., 
76  IlL  561  (1875),  the  court  clearly 
recognized  this  distinction,  and  said: 
"The  legal  property  of  the  share- 
holder is  quite  distinct  from  that  of 
the  corporation,  although  the  shares 
of  stock  have    no  value  save  that 
which  they  derive  from  the  corpo- 
rate property  and  franchise,  and  a 
tax  levied  upon  the  property  of  the 
one  is  not,  in  a  legal  sense,  levied 
upon   the    property  of  the    other." 
See  also  Bradley  v.  Bander,  36  Ohio 
St.   28   (1880).     Cf.   Delaware  R.   R. 
Tax.l8  WalL  206,  236  (1873);  Farrmg- 
ton  V.  Tennessee,  95  U.  S.  679  (1877), 
where    the    distinction    is    clearly 
drawn;  Quincy  Bridge  Co.  v.  Adams 
County,  88  111.  615  (1878).    In  North 
"Ward  Nat.  Bank  v.  Newark,  39  N.  J. 
L.  380  (1877),  the  court  said:  "The 


erty  of  the  corporation  and  not  the 
aggregate    of  the   shares  of  stock. 
See  also  State  v.  Hamilton,  5  Ind.  310 
(1854),  where  the  word  "  stock  "  was 
construed  to  mean  the  tangible  prop- 
erty of   the    corporation.    But    see 
Trask  v.  Maguire,  18  Wall.  391  (1873). 
And  even  though  the  value  of  the 
capital  stock  is  estimated  by  the  ag- 
gregate value  of  the  shares,  it  is  still 
a  tax  on  the  capital  stock.    New  Or- 
leans, etc.  R.  R.  V.  Board  of  Assessors, 
32  La,  Ann.  19  (1880).    See  also  State 
Bank  v.  Richmond,  79  Va.  113  (1884).  So 
also  where  the  franchise  is  valued  in 
that  manner  for  taxation.    Common- 
wealth V.  Hamilton  Mfg.  Co.,  94  Mass. 
298  (1866);  Att'y-Gen.  v.  Bay  State 
Min.  Co.,  99  Mass.  148  (1868).    Hamil- 
ton Co.  V.  iMassachusetts,  6  Wall  633 
(1867),  holds  that  a  tax  on  the  excess 


moneyed  capital  of  a  bank  is  an  en-    of  the  market  value  of  the  stock 


tirely  different  thing  from  its  capital 
stock.  The  former  is  the  property 
of  the  corporation.  It  may  consist 
of  cash  or  bills  discounted,  or  be  in 
part  invested  in  real  estate  or  in  the 
securities  of  federal  government.  In 
whatever  form  it  is  invested,  it  is 
owned  by  the  bank  as  a  corporate 
entity  and  not  by  the  stockholders. 
The  stock  or  shares  represent  the  in- 
terests of  the  shareholders,  which 
entitle  them  to  participate  in  the 
net  profits  of  the  bank  in  the  em- 


over  the  value  of  the  corporate  realty 
and  machinery  is  a  franchise  tax. 
In  Indiana  it  is  held  that  a  tax  on 
the  shares  of  stock  is  the  proper 
mode  of  taxation  vmless  the  statute 
provides  otherwise.  Wliitney  v.  Mad- 
ison, 23  Ind.  331  (1864).  Cf.  Wright 
V.  Stelz,  27  Lid.  338  (1866).  The  mere 
fact  that  the  corporation  is  com- 
pelled to  pay  the  tax  does  not  pre- 
vent its  being  considered  a  tax  on 
the  shares.  National  Bank  v.  Com- 
monwealth, 9  Wall  353,  360  (1869), 


ployment  of  its  capital,  and  is  a  dis-  per  MUler.  J.    Stockliolders  are  ba- 

tinct    and   independent  interest  or  ble  for  taxes  levied  on  a  distillery, 

pror>ert  v  in  the  shareholders,  held  by  where  the  statute  levies  the  tax  on 

them  like  other  property."    The  case  «  persons  interested  in  the  use  of  the 

of  Porter  V.  Rockford,  etc.  R.  R.,  76  distUlery."    U.  S.  v.  Walters,  46  Fed. 

111.  561  (1875),  holds  also  that  a  tax  on  Rep.  509  (1891). 
the  "  capital  stock  "  means  the  prop- 

1047 


§  564.]  TAXATION   OF   STOCK   AND   COEPORATIONS.       [CH.  XXXIV. 

the  value  of  the  shares  of  stock.  A  tax  on  the  shares  of  stock 
is  generally  levied  directly  against  the  stockholders  themselves 
at  their  place  of  residence,  is  based  on  the  market  value  of  the 
stock,  and  is  entirely  distinct  from  the  location,  interests,  prop- 
erty, or  taxes  of  the  corporation  itself.  There  are,  however, 
some  instances  of  taxation  herein  which  are  on  the  border-lino 
between  the  tAvo.  Thus,  a  statute  expressly  laying  a  tax  on 
the  shares  of  stock,  but  requiring  the  corporation  to  pay  that 
tax  from  the  corporate  funds,  has  been  held  to  be  a  tax,  not  on 
the  shares  of  stock,  but  on  the  capital  stock.  In  other  juris- 
dictions it  has  been  held  to  be  a  tax  on  the  shares  of  stock. 
Taxes  on  shares  of  stock  in  national  banks  are  frequently  so 
levied  and  collected,  and  are  held  to  be  upon  the  shares  of  stock 
and  not  on  the  capital  stock.*  A  tax  laid  on  shares  owned  by 
non-residents  of  the  state  which  creates  the  corporation  and 
which  levies  the  tax  is  a  tax  on  the  shares  of  stock  and  not  on 
the  capital  stock,  even  though  the  corporation  is  required  to 
pay  it  and  to  collect  the  same  from  the  owners  of  those  shares. 
§  5G4.  Tax  hy  a  state  or  munid])ality  on  stocliholcJers  resid- 
ing in  the  state  creating  the  corporation. —  The  right  of  the 
state  to  tax  resident  stockholders  of  a  resident  corporation  on 
their  shares  of  stock  is  undoubted,  and  has  been  unquestioned 
except  where  double  taxation  would  result  therefrom  and  is 
prohibited ;  or  where  a  constitutional  provision  restricts  this 
mode  of  taxation.^  Generally  such  a  tax  on  resident  stock- 
holders is  levied  on  them,  not  in  the  municipality  where  the 
corporation  is,  but  in  the  cities,  counties,  or  towns  where  the 
stockholders  respectively  reside.  This  is  always  the  rule  if 
the  statute  is  silent,  and  is  the  rule  unless  the  statute  expressly 
provides  otherwise.' 

1  See  §  570,  infra.  taxed  on  their  "credits,"  no  deduc- 

2  In  Illinois,  under  the  act  of  1873  tion  is  allowed  from  the  tax  on 
taxing  railroad  corporations,  resident  shares  of  stock.  They  are  not  "  cred- 
stockholders  in  domestic  corpora-  its."  Bridgman  v.  Keokuk,  72  Iowa, 
tions  are  not  taxed.  Porter  u  Rock-  42(1887).  As  to  the  valuation  of  the 
ford,  etc.  R  R.,  76  111.  561  (1875).  In  shares  of  stock,  see  St.  Charles,  etc. 
Iowa  stock  is  taxed  under  §  813  of  R.  R.  v.  Assessors,  31  La.  Ann.  853 
the  Code.  See  Cook  u  Burlington,  (1879).  If  the  corporation  owns  shares 
59  Iowa,  251  (1883);  Henkle  u  Keota,  of  its  own  stock  it  is  taxable  the 
68  Iowa,  834  (1886).  Cf.  National  same  as  tJiough  owned  by  anotlier. 
State  Bank  v.  Young,  25  Iowa,  311  Richmond,  etc.  R.  R.  v.  Alamance 
(1808).    In  Iowa,  where  deductions  Co.,  84  N.  C.  504  (1881). 

for   debts   are    allowed  to    persons        3  EvansviUe  u.  Hall,  14  Ind.  27  (1859). 

1048 


OH.  XXXIY.]       TAXATION    OF    STOCK   AND    COKPOKATIONS.  [§  564. 


Controversies  sometimes  arise  as  to  tlie  power  of  a  munici- 
pality to  tax  stockholders  living  in  the  state,  but  not  in  the 
municipality  which  levies  a  tax  on  their  shares  of  stock,  the 
corporation  itself  being  located  within  that  municipality.  The 
law  plainly  is  that  such  a  tax  is  unauthorized,  illegal,  and  not 
collectible,  unless  the  municipality  is  authorized  by  statute  to 
levy  the  tax.^  A  mere  general  authority  to  the  municipality 
to  tax  all  property  within  its  boundaries  will  authorize  a  tax 
by  it  of  shares  of  stock  owned  by  persons  living  within  it.^  But 
such  authority  does  not  sustain  a  tax  on  stockholders  residing 
out  of  the  municipality,  although  within  the  state.  The  loca- 
tion of  such  shares  of  stock,  as  property  for  purposes  of  taxa- 
tion, is  not  where  the  corporation  is  located,  but  where  the 
stockholder  lives.'    The  statutes  of  the  state  may  change  this 


A  pledgor  is  tlie  proper  person  to  be 
assessed  on  stock  which  has  been 
pledged.  Tucker  v.  Aiken,  7  N.  H. 
113  (1834).  A  pledgee  of  stock  is  not 
subject  to  a  tax  levied  on  the  shares 
of  stock  held  by  him-  Waltham 
Bank  v.  Waltham,  51  Mas&  33-1  (1845). 
In  Massachusetts  shares  held  by  ex- 
ecutors or  administrators  are  taxed 
in  the  town  of  which  the  deceased 
was  an  inhabitant  at  the  time  of  his 
death,  and  shares  held  by  trustees 
are  taxed  in  the  towns  in  which  the 
cestxds  que  trust  respectively  re-^ida 
Revere  v.  Boston,  123  Mass.  375  (1877). 
As  to  the  legal  remedy  in  Massachu- 
.setts  for  an  unjust  valuation  of  stock 
for  taxation,  see  Boston  Mfg.  Co.  v. 
Ck>mmonwealth,  144  Mass.  598  (1887). 
As  to  taxation  of  stock  under  the 
Vennont  law,  see  Willard  v.  Pike,  59 
Vt.  203  (1887). 

1 A  city  has  no  inherent  power  to 
levy  a  tax  on  the  capital  stock  of  a 
corporation.  Macon  v.  Macon  Constr. 
Co.,  94  Ga.  201  (1894);  Stetson  v.  Ban- 
gor, 56  Me.  274  (1868),  the  court  say- 
ing: "Municipalities  can  tax  shares 
of  stock  only  when  authorized  so  to 
do  by  some  law  of  the  state.  They 
are  the  creatures  of  state  law,  and 
derive  their  powers  in  this  respect 
solely  from  state  enactments;  "  Grif- 

1049 


fith  V.  Watson,  19  Kan.  23  (1877);  Ev- 
ansville  v.  Hall,  14  Ind.  27  (1859); 
Conwell  V.  Conncrsville,  15  Ind.  150 
(1800).  Such  a  tax  may  be  levied 
linder  a  general  power  of  the  munici- 
pality to  tax  property.  Gordon  v. 
Mayor,  etc.,  5  Gdl  (Md.),  231  (1847). 
Cf.  Richmond  v.  Daniel,  14  Gratt. 
(Va.)  385  (1858) ;  Augusta  v.  National 
Bank,  37  Ga,  620  (1868).  Markoe  v. 
Hartranft,  6  Am.  L.  Reg.  (N.  S.)  487 
(1867),  holds  that  in  Pennsylvania 
such  a  tax  is  unconstitutional,  and 
that  a  tax  must  be  levied  where  the 
stockholder  resides.  See  also  Craft 
V.  Tuttle,  27  Ind.  333  (1866). 

2  But  a  municipality  can  levy  a  tax 
only  when  specially  authorized  so  to 
do,  and  can  tax  only  such  property  as 
the  statute  permits  it  to  tax.  Cooley, 
Taxation  (2d  ed.),  678.  Hence,  power 
to  a  municipality  to  levy  a  tax  for 
watchmen  puri^oses  will  not  author- 
ize" a  tax  on  shares  of  stock-  Bank 
of  Georgia  v.  Savannah,  Dudley  (Ga.), 
130  (1832).  Under  a  statute  author- 
izing it,  a  city  may  levy  a  tax  on  stock 
in  a  local  bank,  even  though  some  of 
the  stockholders  are  non-residents. 
Union  Bank  v.  City,  26  S.  E.  Rep.  831 
(Va.,  1897). 

3  See  §  566,  infra. 


§  505.]  TAXATION    OF    STOCK   AND    CORrORATIONS.       [CH.  XXXIV. 


situs  of  the  stock  so  as  to  render  it  taxable  where  the  corpora- 
tion is;  but  unless  there  is  a  statute  to  that  effect,  such  a  tax  by 
a  municipality  is  unauthorized  and  void. 

§  565.  Tax  on  resident  stoclJiohlcrs  in  a  non-resident  or  for- 
eign corimration. —  It  is  undoubtedly  within  the  constitutional 
power  of  the  legislature  of  a  state  to  enact  a  statute  that  per- 
sons residing  in  that  state,  who  are  stockholders  in  a  corpora- 
tion created  by  another  state,  shall  be  taxed  on  tiieir  shares  of 
stock  at  their  residence  within  the  former  state.'  This  princi- 
,ple  of  law  is  based  on  the  fact  that  shares  of  stock  are  personal 
propert}^ ;  that  they  are  distinct  from  the  corporate  property, 
franchises,  and  capital  stock ;  that  they  follow  the  domicile  of 
their  owner  like  other  personal  property,  and  that  consequently 
he  may  be  taxed  therefor  wherever  he  may  reside.  It  accord- 
ingly is  a  question  of  policy  and  expediency  with  a  state 
whether  or  not  it  will  tax  its  citizens  who  are  stockholders  in 
foreign  corporations.   A  few  of  the  states  ^  levy  such  taxes.   But 

511  (1884),  upholding  such  a  tax  in 
Oliio;  Newark  City  Bank  v.  Assessor 
30  N.  J.  L.  1  (18G2).  See  also  Webb 
V.  Burlington,  28  Vt.  188  (185G).  See 
Pa.  Act  of  April  29,  1844;  Lycoming 
County  V.  Gamble,  47  Pa.  St.  lOG 
(18G4).  See  also  Re  Short "s  Estate,  16 
Pa.  St.  63  (1851),  where  a  decedent 
who  died  a  resident  of  Pennsylvania 
left  a  fortune  in  stocks  of  non-resi- 
dent corporations.  The  stocks  were 
held  subject  to  a  collateral  inher- 
itance tax.  In  1879,  however,  Penn- 
sylvania adopted  in  large  part  the 
sj-stem  of  taxation  that  prevails  in 
New  York  for  the  taxation  of  coi-po- 
rations.  See  Hunter's  Appeal,  10  Atl. 
Rep.  429  (Pa.,  1887).  By  the  still  later 
statute  of  1885,  manufactiu-ing  cor- 
porations are  specially  favored  in  the 
way  of  taxation.  MacKellar,  etc.  Co. 
V.  Commonwealth,  10  Atl.  Rep.  780 
(Pa.,  1887).  In  ascertaining  the  value 
of  stock  for  purposes  of  taxation  the 
amount  paid  in  on  the  stock  may  be 
taken  as  the  value  if  there  liave  been 
no  sales  of  the  stock,  and  if  there  is 
no  other  evidence  as  to  its  value. 
Commonwealth  v.  People's,  etc.  Co.,  39 


1  Worthington  v.  Sebastian,  25  Ohio 
St.  1  (1874) ;  Bradley  v.  Bauder,  3G  Ohio 
St.  28  (1880),  holding  it  valid,  although 
the  corporation  is  taxed  in  the  state 
where  it  exists.  To  same  effect,  Sew- 
ard V.  Rising  Sun,  79  Ind.  351  (1881); 
Dyer  v.  Osborn,  11  R  L  3C1  (1876); 
McKeen  v.  Northampton  County,  49 
Pa.  St.  519  (1865);  Dwight  v.  Boston, 
94  Mass.  316  (18CG) ;  Whitesell  v.  North- 
ampton Coimty,  49  Pa.  St.  526(1865); 
Great  Barrington  v.  County  Com'rs, 
33  Mass.  572  (1835);  Worth  v.  Com'rs, 
82  N.  C.  420  (1880);  S.  C,  90  N.  C,  409 
(1884).  In  Illinois,  also,  resident  stock- 
holders in  foreign  corporations  are 
taxed  on  their  shares  of  stock.  Por- 
ter V.  Rockford,  etc.  R.  R.,  76  la  561 
(1875) ;  Cooley,  Taxation  (2d  ed.),  57, 
221:  Holton  v.  Bangor,  23  Me.  264 
(1843);  Smith  v.  Exeter,  37  N.  H.  556 
(1859).  A  citizen  of  California  may 
be  taxed  on  mortgage  bonds  held  by 
him  in  an  Arizona  railroad  company, 
payable  in  New  York.  Mackay  v.  San 
Francisco,  113  Cal.  392  (1896j. 

'^  State  V.  Hannibal,  etc.  R.  R.,  37  Mo. 
265  (1866);  Ogden  v.  St.  Joseph.  90  Mo. 
522  (1887);  Sturges  v.  Carter,  114  U.  S. 


1050 


on.  XXXIY.]      TAXATION    OF    STOCK   AND    COKPOEATIONS.  [§  5G5. 

Kew  York  pursues  the  more  broad  and  liberal  policy  tliat  shares 
of  stock  should  not  be  taxed  where  the  corporation  is  already 
taxed;  that  the  state  which  furnishes  facilities  to  the  corpora- 
tion for  the  earning  of  dividends  should  have  the  sole  benefit  of 
taxes  on  such  corporate  interests;  that  a  tax  on  resident  stock- 
holders in  non-resident  corporations  would  generally  result  m  a 
double  taxation  of  stockholders  not  residing  in  the  state  creat- 
ino-  the  corporation;  and  that  interstate  comity,  interests,  and 
financial  investments  are  promoted  best  by  taxing  corporations 
directly,  and  not  levying  a  tax  on  either  resident  stockholders 
in  non-resident  co-rporations  or  resident  stockholders  in  resident 
corporations  where  the  corporation  itself  is  subject  to  taxa- 


Atl.  Rep.  42  (Pa.,  1898).  In  New  Jersey 
now  there  is  no  tax  on  shares  of  stock 
except  in  banks.    See  Newark  Bank- 
ing Co.  V.  Newark,  121  U.  S.  163  (1887). 
Sliares  of  stock  owned  by  residents 
in  foreign  corporations  are  not  tax- 
able if  a  tax  is  paid  by  the  corpora- 
tion itself.    State  v.  Ramsey,  54  N.  J. 
L.  540  (1892).     In  Texas   shares  of 
stock  are  not  taxed  where  the  capital 
or   property  of  the    corporation    is 
taxed.    Gillespie  v.  Gaston,  C7  Tex. 
599  (1887).    California  made  a  -waso 
resolution  when,  in  1881,  it  repealed 
§  3640  of  its  political  code,  taxing 
shares  of  stock,  and  added  the  follow- 
ing (§  8608)  to  the  code:  "  Shares  of 
stock  in  corporations  possess  no  in- 
trinsic  value    over   and    above  the 
actual  value  of  the  property  of  the 
corporation  which  they  stand  for  and 
represent,  and  the  assessment  and 
taxation  of  such  shares  and  also  of 
the    corporate    property   would    be 
double  taxation.    Therefore  all  prop- 
erty belonging  to  corporations  shall 
be  assessed  and  taxed;  but  no  assess- 
ment shall  be  made  of  shares  of  stock, 
nor  shall  any  holder  thereof  be  taxed 
therefor."    Sustained  and  appUed  in 
Burke  v.  Badlam,  57  CaL  502  (1884); 


resident  corporations  was  yielded  to. 
See  San  Francisco  v.  Fry,  68  Cal.  470 
(1883);  San  Francisco  v.  Flood,  64  CaL 
504  (1884).    As  to  Ohio,  see  R.  S.  1886, 
g§  2737,  2739,  2744,  construed  in  Jones 
V.  Davis,  35  Ohio  St.  474  (1880).    See 
also  Worth  v.  Ashe  County,  90  N.  C. 
409  (1884);  Seward  v.  Rising  Sun,  79 
Ind.  351   (1881).    As  to  taxation  of 
shares  of  stock  in  foreign  corpora- 
tions under  the  Michigan  statutes, 
see  Graham  v.  St.  Joseph,  67  Midi.  653 
(1888).    Shares  of  stock  may  be  taxed 
although  the  corporation  is  also  taxed. 
The  corporation  may  be  compelled 
to  pay  tlie  tax  on  the  shares  of  stock 
by    deducting    it    from    dividends. 
South  NashviUe  Street  R.  R.  v.  Mor- 
row, 87  Tenn.  406  (1889).  In  Ohio  resi- 
dent stockholders  in  foreign  corpora- 
tions may  be  taxed  on  their  stock. 
Lee  V.  Sturges,  46  Ohio,  153  (1889). 
Under     the     Connecticut    statutes, 
shares  of  stock  owned  by  residents 
in  foreign   express    companies    are 
taxed,  even  though  such  companies 
are  not  incorporated.    Lockport  v. 
Weston,    61    Conn.    211    (1891):     In 
Mayor,  etc.  of  Baltimore  v.  Baltimore, 
etc.  St.  Ry,  57  Md.  31  (1881),  it  was 
held  that  stock  in  street  railway  com- 


Burke  u.  rsaaiam,  o<  y^a-t-  ^"-  v^>^^''»    — ,      ,  i     ^     „.i  „i 

Spring  Valley  Water  Worksr.  Schott-  panics  in  Maryland  may  be  taxed,  al- 
ler  6^  Ctl  69  118  (1882).  But  the  though  by  statute  stock  m  steam 
temptation totaxstockholdersinnon-    railway  compames  cannot  be. 

1051 


§  5CG.]  TAXATION    OF    STOCK    AND    COEPOEATIONS.       [CH.  XXXIV. 

tion.^  The  injustice  of  a  tax  on  resident  stockholders  in  for- 
eign corporations  is  at  once  apparent  when  it  is  considered 
that  the  state  creating  the  corporation  nearly  always  taxes  the 
corporation  itself  or  all  its  stocldiolders,  resident  and  non- 
resident; and  that  if  stockholders  residing  elsewhere  are  taxed 
again  where  they  reside,  they  are  taxed  both  in  the  state  of 
the  corporation,  directly  or  indirectly,  and  also  directly  in  the 
state  where  they  reside.  No  reduction  need  be  allowed  in  the 
latter  state  for  taxes  levied  upon  the  corporation  in  another 
state.2 

§  566.  Tax  on  non-resident  stocJcJioldcrs  in  resident  or  domes- 
tic corporation  — Mode  of  collecting.— ^Yhc■n.  it  is  determined 
by  a  state  that  it  prefers  to  icvy  a  tax  on  shares  of  stock  rather 
than  on  the  franchises,  capital  stock,  or  tangible  property  of 
the  corporation,  or  to  levy  a  tax  on  both,  there  is  no  doubt  as 
to  its  right  to  tax  the  stockholders  residing  within  the  state. 
But  more  difficulty  occurs  as  to  the  right  of  the  state  to  tax 
non-resident  stockholders  in  corporations  created  by  the  state. 
This  right  has  been  strenuously  denied  on  the  ground  that 
shares  of  stock  are  not  located  at  the  domicile  of  the  corpora- 
tion, but  follow  the  domicile  of  the  stockholder. 

1  See  Part  VII,  tn/m.    The  statute    stock.     See  Part  VII,  infra.     The 
is  as  follows:  "The  owner  or  holder    tax  generally  levied  on  corporations 
of  stock  in  any  incorporated  com-    in  New  York  is  held  to  be  a  tax  on 
pany  liable  to  taxation  on  its  capital    their  francnises.    See  People  v.  Home 
shall  not  be  taxed  as  an  individual    Ins.  Co.,  92  N.  Y.  328  (1883);  People 
for  such  stock."    See  also  People  v.    v.  McLean,  80  N.  Y.  254  (1880);  People 
Com.  of  Taxes,  4  Hun,  595  (1875);    v.  Ferguson,  38  N.  Y.  89  (18G8);  Peo- 
aff 'd,  62  N.  Y.  630,  holding  that  resi-    pie  v.  Williamsburgh  Gas  Light  Co., 
dents  of  this  state,  owning  shares  of    76  N.  Y.  202  (1879).    See  People  v. 
stock  in  a  corporation  created  under    New  York,  etc.   Co.,  92  N.  Y    487 
and  by  the  laws  of  this  state  or  of    (1883);  People  v.  Davenport,  91  N  Y 
any  foreign  state,  are  not  subject  to    574  (1883);  Nassau,  etc.  Co.  v.  Brook- 
be    personally   assessed    and    taxed    lyn,  89  N.   Y.    409    (1882);    Oswe-o 
thereon  under  the  laws  of  this  state.    Starch  Factory  v.  DoUoway,  21  N  Y 
Also  People  v.  Com'rs,  5  Hun,  200    449  (1860);  People  v.  Com'rs,  95  N.  Y. 
(1875);  Re  Enston's  Will,  113  N.  Y.    554  (1884);  VaUe  v.  Ziegler,  84  Mo. 
174  (1889).    For  the    purpose,  how-    214  (1884) ;  People  u  BracUey,  39  Iowa, 
ever,  of  makmg  the  taxation  of  mon-    130  (1866).     Cf.  Bank  of  Eepublic  v. 
eyed  corporations  correspond  to  tax-    Hamilton  County,  21  IlL  54  (1858) 
ation    of    shareholders    in   national    See  also  Smith  v.  Exeter,  37  N.  H  556 
banks  and  for  the  purpose  of  taxing    (1859),  and  Jersey  City  Gas  Light  Co. 
the  latter,  stockholders  in  banks  in-    v.  Jersey  City,  46  N.  J.  L.  194  (1884). 
corporated  under  the  laws  of  New        ^  See  m  ^m,  567,  infra. 
York  are  taxed  on  their  shares  of 

1052 


CH.  XIXIV.]      TAXATION   OF   STOCK   AKD   COKPOEATIONS.  [§  566. 

It  is  the  well-established  rule,  however,  that  although  shares 
of  stock  have  at  common  law  a  situs  at  the  domicile  of  the 
shareholder,  yet  that  a  statute  enacted  by  the  state  creating 
the  corporation  may  give  to  the  shares  of  stock  a  situs  at  the 
location  of  the  corporation ;  that  such  a  statute  may  thus  de- 
termine the  situs  of  shares  of  non-resident  stockholders  with- 
out changing  the  situs  of  shares  of  resident  stockholders;  and 
that  consequently,  under  a  statute  expressly  authorizing  such 
a  tax,  non-resident  stockholders  in  a  resident  corporation  may 
be  taxed  thereon  in  the  place  where  the  corporation  has  its 
domicile.^    The  method  of  enforcing  the  payment  of  this  tax 


1  In  Ottawa  Glass  Ca  v.  McCaleb, 
81  IIL  556  (1876),  the  court  said  that 
the  legislature  might  "require  the 
taxes  to  be  paid  by  the  corporation, 
and  collected  by  them  of  the  share- 
holder, by   dedvicting    the    amount 
from  his  dividends  or  otherwise;" 
State  V.  Mayhew,  2  Gill  (Md.),  487 
(1845),  where  the  corporation  was  to 
pay  the  tax  from  dividends  if  de- 
clared, and  from  profits  if  no  divi- 
dends were  declared;  St  Albans  v. 
National  Car  Co.,  57  Vt.  68  (1884), 
holding  that  the  statute  giving  shares 
of  stock  a  situs  at  the  location  of  the 
corporation  may  be  passed  after  the 
incorporation,  and  that  mandamus 
lies  to  compel  the  corporation  to  pay 
the  tax.    In  Tappan  v.  Merchants' 
Nat.  Bank,  19  WalL  490,  499  (1873), 
the  court  said:  "Personal  property, 
in  the  absence  of  any  law  to  the 
contrary,  follows  the  person  of  the 
owner,  and  has  its  sitas  at  his  domi- 
cile.   But,  for  the  purpose  of  taxa- 
tion, it  may  be  separated  from  him, 
and  he  may  be  taxed  on  its  account 
at  the  place  where  it  is  actually  lo- 
cated."   See  also  Whitney  u  Rags- 
dale,  33  Ind.  107  (1870);  Tallman  v. 
Butler  County.  13  Iowa,  531  (1801); 
Faxton    v.  McCarter,   13  Iowa,  527 
(1861);   Mayor,  etc.  of  Baltimore  v. 
Baltimore,  etc.  R'y,  57  Md.  31  (1881). 
The  last  case  holds  that  stock  in 
street  railways  in  Maryland  may  be 


taxed,  although  by  statute  stock  in 
steam  railways  cannot  he.    Cf.  Rich- 
mond V.  Daniel,  14  Gratt.  (Va.)  385 
(1858);    also  the    case    of  Oliver  v. 
Washington  Mills,  93  Mass.  268  (I860), 
which  holds  such  a  tax  to  be  uncon- 
stitutional    The  common-law  rule 
is  well  expressed  in  Union  Bank  v. 
State.    9    Yerg.   (Tenn.)    490    (1830), 
where  the  court  said:  "The  power  to 
tax  non-resident  stockholders  is  de- 
nied, and  we  think  correctly;  from 
its  very  nature  it  must  be  a  tax  in 
personam  and  not  in  rem.    Stock  is 
in  the  nature  of  a  chose  in  action 
and  can  have  no  locality;  it  must, 
therefore,  of  necessity  follow  the  per- 
son of  the  o\\nier.  .  .  .  Bank  stock  is 
not  a  tiling  in  itself  capable  of  being 
taxed  on  accovmt  of  its  locality,  and 
any  tax  imposed  upon  it  must  be  in 
the  nature  of  a  tax  upon  income, 
and  of  necessity  confined  to  the  per- 
son of  the  owner;  and  if  he  be  a  non- 
resident, he  is  beyond  the  jurisdic- 
tion of  the  state  and  not  subject  to 
her  laws."    See  also  Minot  v.  Phila- 
delphia, etc.  R.  R,  18  Wall  206  (1873); 
Davenport  v.  3Iiss.  etc.  R  R,  12  Iowa, 
539  (1861);  Howell  v.  Cassopolis,  35 
Midi.  471  (1877).    In  Bradley  v.  Ban- 
der, 36  Ohio  St.  28  (1880),  the  court 
said:  "That  shares  of  stock  may  be 
separated  from  the    person  of  the 
owner  by  statute,  and  given  a  situs 
of  their  own,  was  held  in  Tappan  v. 


1053 


5GG.]  TAXATION    OF   STOCK    AND    COKrOKATIONS.       [CU.  XXXIV. 


may  be  by  compelling  the  corporiition  to  piiy  it  and  giving  it  a 
lien  therefor  on  the  stock,  or  authorizing  it  to  deduct  the  tax 
from  the  non-resident  stockholders'  dividends;  or,  if  the  statute 
is  silent  as  to  the  mode  of  collection,  a  tax  warrant  or  an  attach- 
ment and  execution  therefor  may  be  levied  on  the  shares  of 
stock.^    In.  New  York,  where  neither  resident  nor  non-resident 


Merchants'  Nat.  Bank,  19  WalL  490 
(1873).  But  when  not  so  separated, 
that  this  situs  follows  and  adlieros 
to  the  domicile  of  the  owner,  is  sup- 
ported by  a  great  weight  of  author- 
ity." See  State  Tax  on  Foreign-held 
Bonds,  15  Wall.  1300  (187:2).  See  also 
Jenkins  v.  Charleston,  5  S.  C.  393 
(1874).  In  National  Com.  Bank  v. 
Mobile,  G3  Ala.  284  (1878),  the  court 
well  said:  "  It  may  be  made  tlio  duty 
of  a  bank  to  pay  for  its  shareholders 
the  tax  legally  assessed  against  their 
respective  shares,  whether  the  stock- 
holders reside  in  the  state  of  Ala- 
bama or  not.  Contestations  upon 
these  points  have  been  made  time 
and  again,  sometimes  by  the  banks 
and  sometimes  by  the  shareholders, 
to  avoid  this  liability.  But  it  is  es- 
tablislied  by  repeated  adjudications, 
and  ought  to  be  considered  definitely 
settled."  And  in  First  Nat.  Bank  v. 
Smith,  65  111.  44  (1872),  the  court  said: 
"  The  separation  of  the  situs  of  per- 
sonal property  from  the  domicile  of 
the  owner  for  the  purposes  of  taxa- 
tion is  familiar  doctrine  of  the  courts 
of  this  country,  and  has  been  sanc- 
tioned by  tliis  court  in  various 
cases.  .  .  .  The  act  of  congress  itself 
contemplates  a  severance  of  the  situs 
of  such  shares  from  the  person  of 
their  owner  by  providing  that  they 
should  not  be  taxed  except  in  the 
state  where  the  bank  is  established- 
But,  apart  from  this,  it  is  really 
much  more  reasonable  to  fix  the 
situs  of  shares  at  the  place  where 
the  bank  is  located,  and  where  it 
must  continue  to  do  its  business  or 
wind  up  its  affairs,  than  to  separate 
by  legislation  tangible  personal  proi> 


erty  from  the  person  of  its  o^^^le^." 
In  St.  Louis  Nat.  Bank  v.  Papin,  4 
Dill.  29  (1870);  S.  C,  21  Fed.  Cas.  203, 
the  following  statute  was  sustained: 
"The  taxes  assessed  on  shares  of 
stock  embraced  in  such  list  shall  be 
paid  by  the  corjxjrations  respectively, 
and  they  may  recover  from  the  own- 
ers of  sui'h  shares  the  amount  so 
paid  by  them,  or  deduct  the  same 
from  the  dividends  accruing  on  such 
shares;  and  the  amount  so  paid  shall 
be  a  lien  on  such  shares  respectively, 
and  shall  be  paid  before  a  transfer 
thereof  can  be  made."  And  again, 
in  American  Coal  Co.  v.  County 
Com'rs,  59  Md.  185  (1882),  the  court 
said :  "  The  state  may  give  tlie  shares 
of  stock  held  by  individual  stock- 
holders a  special  or  particular  situs 
for  purposes  of  taxation,  and  may 
provide  special  modes  for  the  collec- 
tion of  the  tax  levied  thereon."  But 
where  the  statute  merely  made  the 
bank  the  agent  to  pay  the  tax  and 
to  deduct  it  from  the  dividends,  the 
bank  is  not  liable  if  there  have  been 
no  dividends.  Hershire  v.  First  Nat. 
Bank,  35  Iowa,  272  (1872).  Non-resi- 
dent stockholders  in  Virginia  banks 
are  taxed.  Stockholders  v.  Supervis- 
ors, 88  Va.  293  (1891).  Concerning 
the  situs  of  stock,  see  also  an  article 
in  45  Alb.  L.  J.  330. 

1  In  Farrington  v.  Tennessee,  95  U.  S. 
679,  687  (1877),  the  court  said:  "The 
bank  may  be  required  to  pay  the  tax 
out  of  its  corporate  funds  or  be  au- 
thorized to  deduct  the  amount  paid 
for  each  stockholder  out  of  his  divi- 
dend." And,  in  general,  under  the 
act  of  congress  allowing  taxation  of 
shares  of  stock  in  national  banks,  a 


1054 


CH.  XXXIV.]       TAXATION    OF    STOCK   AXD    COEPOEATIONS.  [§  5C6. 


stockholders  in  either  foreign  or  domestic  corporations,  except- 
ing banking  corporations,  are  taxed  on  their  shares  of  stock, 
these  interstate  complications,,  hardships,  and  jealousies  do  not 
arise.^    Trover  and  case  lie  ao^ainst  a  tax  collector  for  sellinor 


stock  for  an  illegal  tax.'' 

situs  is  given  by  statute  to  the  shares 
so  as  to  locate  them  where  the  bank 
is  located,  even  though  the  share- 
holders be  non-resident.  But  collec- 
tions cannot  be  enforced  against  the 
corporation  unless  the  statute  spe- 
cially authorizes  it.  First  Nat.  Bank 
V.  Fancher,  48  N.  Y.  524  (1872).  As  to 
collection  by  execution,  see  Gordon 
V.  Mayor,  etc..  5  Gill  (Md.),  231  (18-47); 
Weld  r.  Bangor,  59  Me.  416  (1871).  But 
a  levy  of  execution  on  stock  can  only 
exist  when  the  statute  allows  stock 
to  be  so  taken.  Barnes  v.  Hall,  55  Vt. 
420(1883).  See  also  ^80,  Wi)ra.  As  to 
levy  under  a  tax  warrant,  see  McXeal 
V.  Mechanics',  etc.  Assoc,  40  N.  J.  Eq. 
351  (1885).  But  if  the  stockholder 
pays  the  tax,  even  imder  protest,  he 
cannot  recover  back  the  money  paid 
Sowles  V.  Soule,  59  Vt.  131  (1887).  In 
the  case  of  State  v.  Thomas,  26  X.  J. 
L.  181  (1857),  the  court  refused  to 
compel  the  corporation  to  pay  the  tax 
on  stock  of  non-residents,  and  said: 
"  It  has  been  decided  by  this  court 
that  the  bonds  and  stocks  of  corpo- 
rations in  this  state  held  by  non- 
residents are  not  liable  to  taxation, 
though  they  are  clearly  within  the 
letter  of  the  act."  A  state  may  col- 
lect a  non-resident  stockholder's  tax 
from  the  corporation  and  give  it  a 
lien  therefor  on  his  stock.  North 
Ward  Nat.  Bank  v.  Newark,  39  N.  J. 
L.  380  (1877);  but  see  Raleigh,  etc.  R 
R  V.  Wake  County  Com'rs,  87  N.  C. 
414  (1882).  A  tax  collector  cannot 
levy  on  and  sell  stock  under  the  law 
relative  to  attachments.  Kennedy 
V.  Mary  Lee.  etc.  R'y,  93  Ala.  494 
(1891).  The  statute  may  provide  for 
the  sale  of  stock  at  the  place  where 
the  corporation  exists,  in  case  the 


taxes  upon  such  stock  are  not  paid. 
A  purchaser  of  the  outstanding  cer- 
tificates after  the  assessment  has 
been  made  takes  subject  to  the  tax 
and  tax  seizura  Parker  v.  Sun  Ins. 
Co.,  42  La.  Ann.  1172  (1890).  It  is  clear, 
where  shares  of  stock  are  sold  under 
a  tax  warrant,  that  the  coi^poration 
is  not  obliged  to  oppose  tlie  sale.  Mc- 
Neal  V.  Mechanics'  Building,  etc. 
Assoc,  40  N.  J.  Eq.  351  (1885).  Where 
by  statute  taxes  levied  on  stock  are 
to  be  paid  by  the  corporation,  such 
taxes  must  be  paid  by  the  corporation 
although  it  becomes  insolvent.  Bos- 
ton, etc.  Co.  V.  Mercantile,  etc  Co.,  34 
AtL  Rep.  778  (Md.,  1896).  Cooley,  Tax- 
ation (2d  ed.),  433,  clearly  upholds  the 
rvde  that  the  state  may  le^y  a  tax  on 
shares  of  stock  and  compel  tlie  cor- 
poration to  pay  it,  citing  Maltby  v. 
Reading  R.  R,  52  Pa.  St.  140  (1866); 
Haight  V.  Railroad  Ca,  6  Wall  15 
(1867);  National  Bank  v.  Common- 
wealth, 9  Wall.  353  (1869);  U.  S.  v. 
Railroad  Co.,  17  Wall  322  (1872);  Mi- 
not  V.  Railroad  Co.,  18  Wall.  206 
(1873);  Ottawa,  etc  v.  McCaleb,  81  III 
556  (1876) ;  New  Orleans  v.  Saving,  etc 
Ca,  31  La.  Ann.  826(1879);  Baltimore 
V.  City  Passenger  R.  R.,  57  Md.  31 
(1881);  St.  Albans  r.  National  Car  Co., 
57  Vt.  68  (1884);  American  Coal  Ca  v. 
Allegany  Coimty,  59  Md.  185  (1882); 
Barney  v.  State,  42  Md.  480  (1875  j ;  Mc- 
Veagh  V.  Chicago,  49  IlL  318  (1868); 
First  Nat.  Bank  v.  Fancher,  48TS\  Y. 
524  (1872);  Leonberger  v.  Rowse,  43 
Ma  67  (1868);  Relfer.  Life  Ins.  Ca,  11 
Ma  App.  374  (1882). 

1  See  §  565,  note,  infra. 

-  Sprague  v.  Fletcher,  87  AtL  Rep. 
239  (Vt.,  1896). 


1055 


§  5G7.]  TAXATION    OF    STOCK    AND    CORPOEATIONS.       [cil.  XXMT. 


§  5G7.  Doulflc  taxation. —  The  most  objectionable  feature  of 
a  tax  levied  on  shares  of  stock  is  that  almost  inevitably  it  oper- 
ates to  impose  a  double  tax  on  a  part  or  all  of  the  stockholders.' 
Such  a  double  tax  exists  where  either  the  corporate  realty  or 
personalty  or  franchise  or  capital  is  taxed,  and  a  tax  is  also  lev- 
ied on  the  shares  of  stock  without  any  deduction  for  the  former 
taxation.'^  There  has  been  some  controversy  as  to  the  right  of 
a  state  to  levy  a  double  tax  on  property.  Sometimes  the  state 
constitution  prohibits  such  taxation.'  But,  aside  from  constitu- 
tional restrictions,  it  unquestionably  is  within  the  power  of  the 
state  to  levy,  not  only  a  double  tax,  but  even  a  treble  or  quad- 
ruple tax,  if  it  so  chooses.*     The  injustice  of  such  taxation, 


iln  Ohio  sucli  double  taxation  is 
advocated  and  recommended.  In 
Frazer  v.  Seibern,  IG  Ohio  St.  014 
(18GG),  the  court  said  that  an  equitable 
system  of  taxation  "  is  best  attained 
in  case  of  a  corporation  or  joint-stock 
company  by  taxing  the  stockholders, 
the  i)crsons  who  own  the  property, 
upon  the  full  value  of  their  shares 
therein,  including,  of  course,  their 
interest  in  the  franchise  or  privilege, 
and  in  all  tangible  property  o^vned 
by  the  company;  and  by  taxing  the 
corporation  also  upon  the  value  of 
such  tangible  property.  The  stock- 
holder is  thus  taxed,  as  all  other  in- 
dividuals who  own  tangible  and  in- 
tangible property  are  sometimes  un- 
avoidably taxed,  once  upon  all  he  is 
worth,  and  a  second  time  upon  that 
part  of  his  property  which  is  tangi- 
ble." 

2  This  is  practically  the  result.  In 
the  case  of  Farrington  v.  Tennessee, 
95  U.  S.  679,  687  (1877),  however,  the 
court  says  in  a  dictum:  "The  capital 
stock  and  the  shares  may  both  be 
taxed,  and  it  is  not  double  taxation." 
See  also  New  Orleans  v.  Houston,  119 
U.  S.  265,  277  (1886).  Cf.  Ryan  v. 
Com'rs,  30  Kan.  185  (1883).  A  tax  on 
the  tangible  property  and  on  the  cap- 
ital stock  is  not  double  taxation. 
Second  Ward  Sav.  Bank  v.  Milwau- 
kee, 94  Wis.  587  (1896). 


'County  Com'rs  v.  Farmers'  Nat 
Bank,  4«  Md.  117  (1877),  the  constitu- 
tion siiying  that  each  person  shall 
pay  a  tax  "  according  to  his  actual 
worth  in  real  or  personal  property." 
See  also  San  Francisco  v.  Mackey,  21 
Fed.  Kep.  539  (1884);  Burke  v.  Bad- 
lam.  57  CaL  594  (1881),  relative  to  the 
California  constitution,  art.  XII,  §  1, 
that  "  all  property  shall  be  taxed  in 
proportion  to  its  value." 

<  Salem  Iron,  etc.  Co.  v.  Danvers, 
10  Mass.  514  (1813),  where  corporate 
realty  was  taxed  although  the  shares 
of  stock  were  also  taxed.  See  also 
Belo  V.  Forsyth  Com'rs,  82  N.  C.  415 
(1880).  In  the  remarkable  case  of 
Toll  Bridge  Co.  v.  Osborn,  35  Conn. 
7  (1868),  it  seems  that  the  realty,  cap- 
ital stock,  and  shares  of  stock  of  a 
corporation  were  taxed,  and  that  the 
chief  stockholder,  a  railroad,  was 
taxed  on  its  capital  stock  and  shares 
of  stock,  making  four  or  five  taxa- 
tions of  the  same  property.  Evi- 
dently coi'porations  were  not  popu- 
lar in  Connecticut  in  1868,  except  for 
taxation  purposes.  Cf.  Jones,  etc. 
Co.  V.  Commonwealth,  69  Pa.  St.  137 
(1871).  See  also  Cook  v.  Burlington, 
59  Iowa,  251  (1882);  State  v.  Branin, 
23  N.  J.  L.  484  (1853);  State  v.  Bent- 
ley,  23  N.  J.  L.  532  (1852);  Memphis 
V.  Ensley,  6  Baxt.  (Tenn.)  553  (1873); 
Providence,  etc.  R  R.  v.  Wright,  2 


1056 


CH.  XXXIV.]       TAXATION    OF    STOCK   AKD    COKrOKATIONS.  [§  567. 


however,  generally  prevents  its  occurrence.  The  courts  also 
do  their  utmost  to  prevent  double  taxation,  and  will  construe 
a  taxation  statute  so  as  to  avoid  such  a  result,  and  sometimes 
even  in  opposition  to  the  plain  words  of  the  statute  itself.^ 


R  L  459,  404  (1853),  holding  that  a 
tax  on  the  stock  does  not  raise  a 
presumption  that  a  municii)ality  is 
thereby  prevented  fi-ona  taxing  the 
corporate  realty.  See  also  Hannibal, 
etc.  K  R.  V.  Shacklett,  30  Mo.  550,  5G0 
(1860).  Although  by  the  charter  a 
tax  is  levied  on  the  capital  stock,  a 
tax  may  also  be  levied  on  the  shares 
of  stock.  Memphis  v.  Home  Ins.  Co., 
91  Tenn.  558  (1892).  A  tax  on  the 
bonds  which  are  issued  by  a  corpo- 
ration does  not  constitute  double  tax- 
ation although  there  Ls  also  a  tax  on 
the  franchises  of  the  coq^oration. 
Commonwealth  v.  New  York,  etc. 
R.  R,  150  Pa.  St.  234  (1892).  Wliere 
the  stock  is  not  taxable  if  the  tan- 
gible property  is  taxed,  the  stock 
may  nevertheless  be  taxed  for  such 
part  of  its  value  as  the  capital  stock 
exceeds  in  value  the  tangible  prop>- 
erty.  Hyland  v.  Central  Iron,  etc. 
Co.,  129  Ind  G8  (1891).  A  tax  may 
be  levied  on  the  capital  stock  even 
though  the  shares  of  stock  are  also 
taxed.  Durham  County  v.  Black- 
well,  etc.  Co.,  116  N.  C.  441  (1895). 
The  franchise  may  be  taxed  although 
the  shares  of  stock  are  also  taxed, 
the  latter  tax  being  collected  also 
from  the  corporation.  U.  S.  Electric, 
etc.  Co.  V.  State,  79  "Sid.  03  (1894). 

iThus,  in  Illinois,  in  cases  where 
the  capital  stock  is  taxed  by  the  state, 
the  shares  of  stock  are  held  to  be  free 
from  taxation.  Republic  Life  Ins. 
Co.  V.  PoUak,  75  IlL  292  (1874).  See 
also  Lackawanna  County  v.  First 
Nat.  Bank,  94  Pa.  St.  221  (1880),  hold- 
ing that  under  the  act  of  March  31, 
1870,  releasing  corporations  from  all 
other  taxes  if  tliey  pay  one  per  cent 
tax  on  the  par  value  of  the  stock,  the 
corporate    realty  cannot    be    taxed 


after  such  one  per  cent  has  been 
paid;  State  v.  Hannibal  &  St.  J.  R  R, 
37  Mo.  265  (1860);  Jersey  City,  etc. 
Co.  V.  Jersey  City,  46  N.  J.  L.  194 
(1884);  Cheshire,  etc.  Teleph.  Co.  v. 
State,  03  N.  H.  167  (1884);  Valle  v. 
Zeigler,  84  Mo.  214  (1884);  Tax  Cases, 
12  G.  &  J.  (Md.)  117  (1841);  Provident 
Inst.  V.  Gardiner,  4  R  L  484  (1857); 
^lechanics'  Bank  v.  Thomas,  26  N.  J.  L. 
181  (1857);  American  Bank  v.  Mimi- 
ford,  26  N.  J.  L.  478  (1857);  State  v. 
Tunis,  23  N.  J.  L.  546  (1852);  Smith 
V.  Burlcy,  9  N.  IL  423  (1838);  Frazert;. 
Siebern,'lO  Ohio  St.  014  (1860);  Sav- 
ings Bank  v.  Nashua,  46  N.  H.  389 
(18661,  the  com-t  saying:  "It  is  a 
fundamental  principle  in  taxation 
that  the  same  property  shall  not  be 
subject  to  a  double  tax,  payable  by 
the  same  party,  either  directly  or  in- 
directly; and  where  it  is  once  decided 
that  any  kind  or  class  of  property  is 
liable  to  be  taxed  under  one  provision 
of  the  statutes,  it  has  been  held  to 
follow  as  a  legal  conclusion  that  the 
legislature  could  not  have  intended 
the  same  property  would  be  subject 
to  another  tax,  though  there  may 
be  general  errors  in  the  law  which 
would  seem  to  imply  that  it  was  to 
be  taxed  a  second  time."  In  Michi- 
gan, where  shares  of  stock  in  savings 
banks  are  taxed,  a  reduction  being 
allowed  for  realty,  which  is  taxed 
separately,  the  courts  held  that  no 
other  tax  can  be  levied  against  the 
corporation.  Lenawee,  etc.  Bank  v. 
Adrian,  66  Mich.  273  (1887).  The  Ken- 
tucky tax  statutes  are  so  construed, 
that  a  corporation  need  not  pay  a  tax 
on  its  property  in  addition  to  the  tax 
on  the  stock.  Louisville,  etc.  Co.  v. 
Barbour,  88  Ky.  73  (1888);  Common- 
wealth V.  St.  Bernard  Coal  Co.,  9  S. 


67 


1057 


§  508.]  TAXATION    OF    STOCK    AND    CORPORATIONS.       [cil.  XXXIV. 

§  5G8.  Exemptions  from  taxation  as  affecting  tax  on  shares 
of  stock. —  An  exemption  of  shares  of  stock  is  a  contract  pro 
tected  by  that  provision  of  the  constitution  of  tlio  United  States 
which  prevents  a  state  from  passing  a  hiw  wliidi  will  impair 
the  validity  of  contracts.*  This  provision  has  frequently  been 
construed  and  aj)plied  in  cases  involving  the  taxation  of  the 
corporate  franchises,  capital  stock,  or  tangible  pro})erty.  In  the 
numerous  decisions  on  this  subject  there  aj)pear  two  classes  of 
cases  of  exemptions  from  taxation  which  allect  the  taxation  of 
shares  of  stock.  The  first  class  involves  the  question  whether  an 
exemption  of  the  corporate  property,  franchises,  or  capital  stock 
from  taxation  exempts  also  the  shares  of  stock  from  any  tax; 
the  second,  whether  an  exemption  of  the  shares  of  stock  from 
taxation  exempts  the  corporate  property,  franchises,  and  cap- 
ital stock.  As  regards  the  former  exemption,  the  effect  thereof 
depends  largely  on  the  words  used  in  the  statute  or  charter 
granting  the  exemption.  The  question  has  given  rise  to  a  dif- 
ference of  opinions.  In  the  federal  courts,  New  Jersey,  In- 
diana, and  Kentucky,  it  has  been  decided  that  an  exemption  of 
the  corporation  from  taxation  on  one  or  more  of  the  first  three 
methods  of  taxation  exempts  by  implication  the  shares  of  stock,'^ 

W.  Rep.  709  (Ky.,  1888).    The  Penn-  Chicago,  etc.  R.  R  v.  Gufley,  120  U.  S. 

sylvania  acts  are  construed  so  as  to  569  (1887). 

prevent  double  taxation.  Pennsyl-  2  state  v.  Branin,  23  N.  J.  L.  43i 
vania  Co.  etc.  v.  Commonwealth,  15  (1852);  State  v.  Bentley,  23  N.  J.  L.  532 
AtL  Rep.  456  (Pa.,  1888).  "Where  a  (1852);  Jolmson  v.  Commonwealth.  7 
coal  company  owns  all  the  stock  of  Dana  (Ky.),  338  (1838);  King  v.  Mad- 
a  railroad  company,  and  taxes  have  ison,  17  Ind.  48  (1861),  holding  that 
been  paid  by  the  railroad  compahy  an  exemption  of  the  capital  stock 
on  the  appraised  value  of  its  capital  exempts  shares  of  stock.  An  exemp- 
stock,  the  coal  company  cannot  be  tion  of  the  corporation  on  its  prop- 
taxed  on  such  stock  again.  Double  erty  exempts  also  the  shares  of  stock, 
taxation  is  legal,  but  will  not  be  im-  and  exemption  of  the  shares  of  stock 
posed  imless  the  statute  clearly  re-  exempts  tlie  corporation.  State  v. 
qmres  it.  Commonwealth  v.  Fall  Heppenheimer,  34  AtL  Rep.  1061 
Brook  Coal  Co.,  156  Pa.  St.  488  (1893).  (N.  J.,  1896).  Gordon  v.  Appeal  Tax 
1  Farrington  v.  Tennessee,  95  U.  S.  Court,  3  How.  133  (1845),  held  that 
679  (1877).  See  also  §  497,  supra.  An  an  exemption  prohibiting  any  "  fur- 
exemption  of  the  stock  of  a  railroad  ther  tax  or  burden  upon  them,"  the 
company  does  not  exempt  stock  is-  banks,  exempted  the  shares  of  stock, 
sued  for  constructing  branch  roads  Again,  where  the  charter  provided 
of  that  company,  such  construction  that  "  the  capital  stock  of  said  corn- 
being  subsequent  to  a  constitutional  pauy  sliall  be  forever  exempt  from 
provision    prohibiting    exemptions,  taxation,  the  shares  of  stock  can- 

1058 


CH.  XXXIV.J       TAXATION    OF    STOCK   AXD    COErOKATlOXS. 


[^  5G8. 


althougli  the  supreme  court  of  the  United  States  has  recently 
held  that  exemption  of  the  capital  stock  does  not  necessarily 
exempt  the  stockholders.^  In  Tennessee,  North  Carolina,  and 
Maryland  an  exemption  is  strictly  construed.^ 

As  regards  the  second  class  of  exemptions,  it  seems  to  be  es- 
tablished by  the  great  weight  of  authority  that  an  exemption 


not  be  taxed.  .  .  .  Each  share  is  a 
part  of  the  whole,  and,  as  the  whole 
is  exempt  from  taxation,  it  follows 
that  each  part  or  share  must  also  be 
exempt."  Tennessee  v.  Whitworth, 
22  Fed,  Rep.  75  (1884).  And  the  pur- 
chaser and  successor  of  a  railroad, 
taking  by  statute  all  its  riglits  and 
privileges,  Ls  also  exempt  in  the  same 
manner.  Tennessee  v.  Whitworth, 
22  Fed.  Rep.  81;  aff'd,  117  U.  S.  139 
(1886).  An  exemption  of  the  corpo- 
ration exempts  it  from  a  tax  upon 
the  shares  of  shareholders,  which  the 
company  is  required  to  pay  irrespect- 
ive of  any  dividends  or  profits  pay- 
able to  the  shareliolder,  since  this  is 
substantially  a  tax  on  the  cori)orar 
tion  itself.  New  Orleans  v.  Houston, 
119  U.  S.  265  (1881).  Cf.  U.  S.  v.  Rail- 
road Co.,  17  Wall  322  (1872).  An 
exemption  of  shares  of  stock  from 
taxation  is  waived  by  the  acceptance 
of  subsequent  statutes  imposing  a 
tax.  Hannibal,  etc.  R  R.  v.  Shack- 
lett,  30  Mo.  550  (1800);  Cooley,  Taxa- 
tion (2d  ed.).  212. 

1  New  Orleans  v.  Citizens'  Bank, 
167  U.  S.  371  (1897). 

2  Union  Bank  v.  State,  9  Yerg. 
(Tenn.)  490  (1836),  holding  that  an 
exemption  of  the  capital  stock  did 
not  exempt  shares  of  stock.  To  same 
effect,  Memphis  v.  Farrington,  8  Baxt. 
(Tenn.)  539  (1870),  the  court  saying: 
"The  capital  stock  and  shares  of 
stock  are  two  distinct  properties,  and 
an  exemption  of  the  one  does  not 
thereby  necessarily  exempt  the  other, 
nor  the  taxation  of  the  latter  operate 
as  a  tax  on  the  former,  so  as  to  inter- 
fere with  its  exemption  from  such 


burdens."  A  tax  may  be  levied  on 
the  shares  of  stock  although  the  cap- 
ital stock  is  exempt.  State  v.  Bank 
of  Commerce,  95  Tenn.  221  (1895); 
Belo  V.  Forsyth  Com'rs,  82  N.  C.  415 
(1880),  holding  that  an  exemption 
of  the  corporate  realty  does  not  ex- 
empt the  sliares  of  stock;  Appeal 
Tax  Court  v.  Rice,  50  Md.-302  (1878); 
Tax  Cases,  12  G.  &  J.  (Md.)  117  (1841). 
In  County  Com'rs  v.  Annapolis,  etc. 
R  R.,  47  Md.  592  (1877),  the  court  said: 
"  To  make  out  the  claim  to  this  ex- 
emption from  the  taxing  power  of 
the  state,  so  essential  to  the  suppoi-fc 
of  its  government,  it  is  incumbent 
upon  corporations  to  show  that  the 
power  to  tax  has  been  clearly  relin- 
quished by  the  state;  and  if  this  has 
not  been  done  in  clear  and  explicit 
terms,  or  by  necessary  implication, 
the  question  whether  or  not  the  ex- 
einption  has  been  granted  must  be 
resolved  in  favor  of  the  state."  Cit- 
ing Providence  Bank  v.  Billings,  4 
Pet.  514  (1830);  Wilmington  R.  R.  v. 
Reid,  13  Wall  204  (1871);  Philadel- 
pliia  &  W.  R.  R.  V.  State,  10  How.  376 
(1850).  But  a  clear  exemption  of  the 
shares  of  stock  is  a  contract  whicli  is 
protected  by  the  United  States  con- 
stitution. State  V.  Baltimore,  etc. 
R  R,  48  Md.  49  (1877).  A  charter 
provision,  however,  that  a  certain 
tax  shall  be  paid  by  the  corporation 
does  not  prevent  a  subsequent  chango 
in  that  tax.  Delaware  Railroad  Tax, 
18  WalL  200  (1873).  And  an  exemp- 
tion by  the  state  has  been  held  not 
to  exempt  the  shares  from  taxation 
by  a  municipality.  Gordon  v.  Mayor, 
etc.,  5  GiU  (Md.),  231  (1847). 


1059 


§  5G8.]  TAXATION   OF    STOCK    AND    C0KP0KATI0N3.       [CH,  XXXIV. 


of  the  shares  of  stock  from  taxation  exempts  also,  by  implica- 
tion, the  corporate  franchises,  capital  stock,  and  tangible  prop- 
erty from  any  tax.^  "Where  the  charter  compels  a  corporation 
to  pay  an  annual  tax  on  each  share  of  stock  "  in  lieu  of  all 
other  taxes,"  the  shareholders  themselves  cannot  bo  taxed  on 
their  stock.'^  Such  an  exemption,  however,  does  not  prevtnit 
the  state  from  levying  a  tax  on  the  capital  stock,'  and  such  an 
exemption  is  lost  by  a  judicial  sale  of  the  franchises  of  the  com- 
pany.* A  statute  conferring  upon  a  new  corporation  "all  the 
rights  and  privileges  "  of  a  former  corporation  does  not  confer 
such  an  exemption.*  Kor  does  such  exemption  continue  where 
the  charter  is  so  amended  as  to  change  an  insurance  company 
into  a  banking  company.*  ]>Hor  is  such  an  exemption  good 
where,  after  the  granting  of  a  charter,  but  before  the  first  or- 
ganization meeting,  a  new  constitution  is  adopted  by  the  state 


1  In  State  v.  Bank  of  Commerce,  53 
Fed.  Rep.  735  (1892),  it  is  hell  that  a 
provision  imposing  a  tax  ou  each 
share  of  stock,  "  wliich  shall  be  in  lieu 
of  all  other  taxes,"  exempts  the  prop- 
erty of  the  company  as  well  as  the 
stock  from  fui'ther  taxation.  Scot- 
land County  V.  Missoui'i,  etc.  R'y, 
65  Mo.  123  (1877),  the  court  saying: 
"  It  is  clear  that  a  tax  on  the  prop- 
erty represented  by  the  stock  is  sub- 
stantially a  tax  on  the  stock."  See 
also  County  Com'rs  v.  Annapolis,  etc. 
R  R,  47  Md.  592  (1877),  where  the 
court  said:  "  It  is  settled  by  repeated 
decisions  of  this  court,  which  we  are 
not  disposed  to  disturb,  that  the  ex- 
emption of  the  shares  of  the  capital 
stock  operates  as  an  exeiuption  of 
the  property  of  the  corporation,  or  so 
much  of  it  as  the  corporation  is  fairly 
authorized  to  hold  for  the  proper  ex- 
ercise of  its  franchises ;  and  this  upon 
the  principle  that  the  shares  of  the 
stock  in  the  hands  of  the  sharehold- 
ers represent  the  property  held  by  the 
corporation;"  Cape  Fear  Bank  v.  Ed- 
wards, 5  Ired.  L.  (N.  C.)  516  (1845), 
where  the  charter  said:  "The  said 
bank  shall  not  be  liable  to  any  fur- 
ther tax;"  ]Mayor,  etc.  v.  Baltimore 


&  O.  R  R,  6  Gill  CMd.),  288(1848);  Tax 
Cases,  13  G.  &  J.  (Md.)  117  (1841); 
Gordon  v.  Mayor,  etc.,  5  Gill  (Md.),  231 
(1847).  In  Wilmington,  etc.  R  R  v. 
Reid,  64  N.  C.  226  (187U).  however,  it 
was  held  that  an  exemption  of  shares 
of  stock  does  not  exempt  the  corpo- 
rate franchise  from  taxation.  Ral- 
eigh, etc.  R  R  f .  Reid,  64  N.  C.  155 
(1870).  And  in  State  v.  Petway,  2 
Jones,  Eq.  (N.  C.)  396  (1856),  it  was 
held  that  a  charter  provision  that 
the  shares  of  stock  should  be  taxed  a 
certain  amount  did  not  prevent  a  tax 
on  dividends. 

2  Bank  of  Commerce  v.  Tennessee, 
161  U.  S.  134  (1896).  On  a  rehearing 
the  decision  in  this  case  was  modi- 
fied so  as  to  allow  a  recovery  against 
holders  of  new  stock,  but  not  as 
against  holders  of  old  stock.  Bank 
of  Commerce  v.  Tennessee,  163  U.  S. 
416  (1896). 

3  Shelby  County  v.  Union,  etc.  Bank, 
161  U.  S.  149  (1896). 

*  Mercantile  Bank  v.  Tennessee,  161 
U.  S.  161  (1896). 

5  Phoenix  F.  &  M.  Ins.  Co.  v.  Ten- 
nessee, 161  U.  S.  174  (1896). 

<»  Memphis  City  Bank  v.  Tennessee, 
161  U.  S.  186  (1896). 


lOGO 


0:i.  XXXIV.]       TAXATION    OF    STOCK   AND    COKPORATIONS.  [§  569. 

forbidding  such  exemptions.^  An  exemption  of  stock  does  not 
exempt  the  property  of  the  corporation  where  the  charter 
provides  against  such  latter  exemption.^  Exemptions  have 
no  effect  and  are  of  no  avail  beyond  the  boundaries  of  the  state 
o-ranting  them;  and  accordingly  a  non-resident  stockholder, 
Avho  is  taxed  on  his  stock  in  the  state  where  he  resides,  cannot 
defeat  that  tax  by  reason  of  exemptions  enjoyed  within  the 
state  creating  the  corporation.' 

B.    TAXATION   OF   NATIONAL-BANK    STOCK. 

§  5G9.  General  rules.— Itis  one  of  the  established  principles 
of  constitutional  law  in  this  country  that  the  instruments  of 
government  by  the  United  States  shall  not  be  taxed  by  any 
state,  and  also  that  those  of  a  state  shall  not  be  taxed  by  the 
United  States.  Accordingly,  the  bonds  issued  by  the  United 
States  government  cannot  be  taxed  by  any  state.*  So,  also, 
when  the  old  United  States  Bank  was  in  existence,  it  was  held 
that  neither  the  bank  nor  its  capital  stock  could  be  taxed  by  a 
state.  But  it  was  also  held  that,  inasmuch  as  the  interest  of 
the  stocldiolders  in  the  bank  was  different  from  the  franchises, 
property,  capital  stock,  and  the  United  States  bonds  held  by 
the  bank,  such  interest  of  the  shareholder  could  be  taxed  by  a 
state,  and  that  such  taxation  would  be  constitutional  and  legal.* 
The  same  rules  apply  to  the  present  national  banks.  A  state 
tax  on  the  capital  stock  of  the  bank  is  illegal  and  void.«    But 

>  Planters'  Ins.  Co.  v.  Tennessee,  IGl  316,  436  (1819);  Bulow  v.  Charleston, 

U.  S.  193  (1896).  1  Nott  &  M.  (S.  C.)  527  (1819).    See 

2  Central  R.  R.  etc  Co.  v.  Wright,  also  Berney  v.  Tax  Collector,  2  BaUey 
164  U.  S.  327  (1896).  (S.  C),  654  (1831);  National  Bank  v. 

3  Appeal  Tax  Court  v.  Patterson,  50  Commonwealth,  9  Wall  353  (1869), 
Md.  354  (1878);  Appeal  Tax  Court  v.  per  JliUer,  J. 

Gill,  50  Md.  377  (1878).    See  also  Rail-  "First  Nat.  Bank  v.  Douglas  County, 

road  Co.  v.  Pennsylvania,  15  WalL  300  3  Dill., 298  (1873) ;  S.  C,  9  Fed.  Cas.  100; 

n3~o)^  Collins  V.  Chicago,  4  Biss.  472  (1867); 

« Cooley,  Taxation  (2d  ed.),  84,  85.  S.  G,  6  Fed.  Cas.  118;  Salt  Lake,  etc. 

Formerly    government  bonds  were  Bank  v.  Golding,  2  Utah,  1  (1876); 

called  stock  both  in  England  and  in  JIayor,  etc.  v.  First  Nat.  Bank,  59  Ga. 

tliis  country.  That  use  of  the  term,  648  (1877);  Bradley  v.  People,  4  WalL 
however,  has  become  practically  ob-  •  459(1866);  Bank  of  Commerce  u.  New 

solete.    See  Bank  of  Commerce  v.  York  City,  2  Black,  620  (1862),  revera- 

New  York,  2  Black,  620(1862);  Wes-  ing  People  v.  Com'rs  of  Taxes,  23 

ton  V.  Charleston,  2  Peters,  449  (1829).  N.  Y.  192  (1861);  S.  C,  32  Barb.  509, 

» McCulloch  V.  Marj'land,  4  Wheat,  and  declaring  iinconstitutional  tho 

1001 


§  509.]  TAXATION   OF    STOCK    AND    CORPORATIONS.       [CH.  XXXIY. 


a  tax  on  its  real  estate  or  on  its  shares  of  stock  is  upheld  as 
legal  and  enforceable.^  This  is  the  law,  althougli  a  large  part 
or  all  of  the  bank's  capital  stock  is  invested  in  United  States 
bonds.2  The  authority  of  a  state  to  tax  shares  of  stock  in  na- 
tional banks  is  expressly  conferred  by  the  statutes  of  the  United 
States  which  create  and  regulate  these  banks.'    The  only  ques- 

New  York  statutes  under  which  the    59  — 1867],  practically  modified  the 


national  banks  were  taxed.  Now 
York  has  been  exceedingly  unfortu- 
nate in  its  ofTorts  to  tax  national 
banks.  After  the  decision  in  Bank  of 
Commerce  v.  New  York  City,  2  Black, 
620  (1S62),  came  Bank  Tax  Case,  2 
Wall  200  (18G4),  declaring  unconsti- 
tutional the  New  York  statute  of 
April  29,  1863,  for  the  taxation  of 
national  banks,  the  tax  still  being 
on  the  capital  stock.  Next  came 
Van  Allen  v.  Assessors,  3  Wall.  573 
(1865)  (reversing  Utica  v.  Churchill, 
33  N.  Y.  161  —  1865.  See  also  First 
Nat.  Bank  v.  Fancher,  48  N.  Y.  521  — 
1872),  declaring  unconstitutional  the 
New  York  statute  of  March  9,  1865, 
taxing  the  shareholders  in  national 
banks,  because  the  act  did  not  pre- 
scribe expressly  that  the  tax  should 
be  no  greater  than  the  tax  on  other 
shares  of  stock,  and  because  taxes 
in  New  York  on  other  corporations 
were  not  on  shares  of  stock,  but  on 
the  capital  stock.  New  York  then 
passed  the  act  of  April  23,  1866, 
which  was  sustained  in  People  v. 
Com'rs,  4  WaU.  244  (1866).  Still  later 
came  the  case  of  People  v.  Weaver, 
100  U.  S.  539  (1879),  reversing  07  N.  Y. 
516,  overruling  People  v.  Dolan,  36 
N.  Y.  59  (1867),  and  declaring  void 
the  New  York  tax  of  national-bank 
stock,  for  the  reason  that  the  New 
York  court  of  appeals  construed  the 
New  York  taxation  statute  to  allow 
persons  taxed  on  ordinary  securities 
a  deduction  for  debts,  while  a  similar 
deduction  was  not  allowed  to  stock- 
holders in  banks,  state  or  national. 
Supervisors  v.  Stanley,  105  U.  S.  305 
(1881)  [see  People  v.  Dolan,  36  N.  Y. 


preceding  case,  however,  by  holding 
that  a  stockholder  who  owed  no 
debts  could  not  comjjlain,  and  that 
those  who  did  owe  debts  were  en- 
titled, not  to  a  release  from  tiio  tax 
alto;Tether,  but  only  to  the  extent  of 
what  tlie  state  ought  to  have  allowed 
as  a  deduction.  Tlie  last  case  in  New 
York  was  decided  by  Judge  Wallace 
in  November,  1886.  States  cannot 
tax  national-bank  currency.  Home 
V.  Green,  52  Miss.  452  (1870).  Cf. 
Ruffin  V.  Orange  County  Com'rs,  69 
N.  C.  498  (1873);  Lilly  r.  Cumberland 
County  Com  rs,  69  N.  C.  300  (1873); 
Com'rs  I'.  Elston,  32  Ind.  27  (1869). 

1  Austin  V.  Boston,  96  Mass.  359 
(1867);  First  Nat.  Bank  v.  Douglas 
County,  3  Dill.  330  (1874);  S.  C,  9  Fed. 
Cas.  84,  upholding  the  Nebraska  stat- 
ute herein  of  Feb.  27,  1873;  Stetson 
V.  Bangor,  56  Me.  274  (1868). 

2  Van  Allen  v.  Assessors,  3  Walk 
573  (1865);  People  v.  Com'rs,  4  Walk 
244  (1866).  See  also  Home  Ins.  Co.  v. 
New  York,  119  U.  S.  129  (1886).  In 
taxing  the  stock  no  reduction  is  al- 
lowed for  bonds  held  by  the  corpo- 
ration. Home  Ins.  Co.  v.  Board  of 
Assessors,  42  La.  Ann.  1131  (1890); 
Parker  v.  Sun  Ins.  Co.,  42  La.  Aim. 
1172  (1890). 

3  U.  S.  Rev.  Stat.,  §  5219  (taken  from 
act  of  June  3,  1864,  as  amended  by 
act  of  Feb.  10,  1868).  The  case  of 
People  V.  Weaver,  100  U.  S.  539,  543 
(1879),  says  that  the  effect  of  the  act 
of  congress,  as  regards  the  taxation 
of  national  banks,  is  that  congress 
says  to  the  states:  '•  You  may  tax  the 
real  estate  of  the  banks  as  other  real 
estate  is  taxed,  and  you  may  tax  the 


1002 


C:i.  XXXIV.]       TAXATION    OF    STOCK   AND    CORPOEATIONS.  [§  570. 

tions  of  importance  that  are  still  unsettled  turn  upon  the  mean- 
ing and  application  of  that  statute;  and,  accordingly,  the  law 
is  "stated  most  clearly  when  it  is  connected  with  the  various 
provisions  of  these  statutes. 

§  570.  Flace  in  wliicli  shares  of  national-lanli  stocic  may  le 
taxed.—  The  Eevised  Statutes  of  the  United  States  expressly 
declare  that  non-resident  stockholders  in  a  national  bank  are 
to  be  taxed  at  the  place  where  the  bank  is  located.^  Under 
this  statute  a  non-resident  of  the  state  within  which  the  bank 
is  situated  can  be  taxed  on  his  stock  only  where  the  bank  is 
located.2  -pi^e  state  where  he  resides  cannot  also  tax  him  on 
such  stock.  As  regards  residents  of  the  state  within  which  the 
bank  is  located,  the  state  itself  determines  where  the  tax  is  to 
be  levied."  If  the  state  statute  requires  that  the  whole  tax  shall 
be  paid  in  the  city,  county,  or  town  where  the  bank  is  located, 
even  though  some  of  the  stockholders  reside  in  other  counties 
or  cities,  the  statute  must  be  obeyed.*   Generally,  however,  the 


shares  of  the  l>ank  as  the  personal 
property  of  the  owner  to  the  same 
extent  you  tax  other  moneyed  capi- 
tal invested  in  your  state.  It  was 
conceived  that  by  this  qualification 
t)f  the  power  of  taxation  equality 
would  be  secured  and  injvistice  pre- 
vented." "Wasson  r.  Indianapolis  Nat. 
Bank,  107  Ind.  206  (1860).  New  shares 
cannot  be  taxed  imtil  the  increase 
has  been  approved  by  the  comptroller 
of  the  currency.  Charleston  v.  Peo- 
ple's Nat.  Bank,  5  S.  C.  103  (1873). 

1  Such  was  the  effect  of  the  amend- 
ment of  1866.  Previoxis  to  that  time 
there  was  controversy  herein  as  to 
the  meaning  of  the  act  of  1863.  See 
Austin  V.  Boston,  96  Mass.  359  (1867). 

2  See  :McIver  v.  Robinson,  53  Ala. 
456  (1875);  Williams  v.  Weaver,  75 
N.  Y.  30  (1878);  Kyle  v.  Fayetteville, 
75  N.  C.  445  (1876);  National  Bank  v. 
Commonwealth,  9  Wall  353  (1869); 
Lionberger  v.  Rouse,  9  Wall  408 
(1869). 

3  Austin  V.  Aldermen,  7  WalL  694 
(1886).  The  tax  may  be  levied  on 
resident  stockholders  in  the  city, 
county,  or  town  where  they  reside. 


Austin  V.  Boston,  96  Mass.  359  (1867). 
And  the  cashier  of  the  bank  may 
be  required  by  statute  to  send  to 
the  clerks  of  the  various  towns  the 
names  of  such  stockholders  as  reside 
in  those  towns.   Waite  v.  Dowley,  94 
U.  S.  527  (1876).    As  to  the  taxation 
of  national-bank  stock  in  Iowa,  see 
First  Nat.  Bank  v.  Albia;  52  N.  W. 
Rep.  334  (1892).   As  to  the  assessment 
of  bank  stock  in  West  Virginia,  see 
Bank  of  Bramwell  v.  Mercer  County 
Court,  36  W.  Va.  341   (1892).     Con- 
cerning the    taxation    of    national- 
bank  stock  in  Nevada,  see  First  Nat. 
Bank  v.  Kreig,  21  Nev.  404  (1893). 
National-bank    stock    in    Delaware 
may  be  taxed  by  the  state.    First 
Nat.  Bank  v.  Herbert,  44  Fed.  Rep.  158 
(1890*).    As  to  taxation  of  bank  stock 
in  Washington,  see  First  Nat.  Bank 
V.  Hungate,  62  Fed.  Rep.  548  {\%M). 

<  National  Bank  v.  Commonwealth, 
9  Wall.  353  (1869);  Tappan  v.  Mer- 
chants' Nat.  Bank,  19  Wall.  490  (1873) ; 
Provident  Inst.  v.  Boston,  101  Mass. 
575  (1809);  McLaughlin  v.  Chadwell, 
7  Heisk.  (Tenu.)  389  (1872).  Craft  v. 
Tuttle,  27  Ind.  332  (1866),  holds  that 


1063 


§571.] 


TAXATION    OF    STOCK    AND    CORPORATIONS.       [cil.  XXXIY. 


statute  requires  that  stockholders  residing  in  tlie^  state  shall  be 
taxed  at  their  place  of  residence  on  stock  owned  by  them  in  a 
national  bank  within  that  state.*  If  the  statute  is  silent  herein, 
then  the  state  statutes  regulating  the  taxation  of  stockholders 
in  other  corporations  are  to  apply  to  stockholders  in  national 
banlvs  situated  within  the  state.  A  state  statute  may  require 
a  national  bank  to  pay  a  tax  on  the  stock  of  non-resrdent  as 
well  as  of  resident  stockholders  in  the  bank.^  The  statute  may 
require  the  bank  to  retain  from  dividends  the  tax  on  the  shares 
of  stock,  such  tax  being  determined  by  the  amount  of  divi- 
dends.' The  collection  of  a  tax  on  national-bank  stock  may  bo 
enforced  by  the  same  procedure  through  which  taxes  on  other 
personal  property  are  collected.* 

§  571.  The  tax  must  not  he  greater  than  that  imposed  on  other 
^^  moneyed  capitaV—  The  most  dillicult,  unsettled,  and  litigated 
questions  connected  with  the  taxation  of  shares  of  stock  in  na- 
tional banks  arise  from  the  meaning  and  application  of  that 
provision  of  the  statutes  of  the  United  States  requiring  that  the 
taxation  of  national-bank  shares  of  stock  shall  not  be  at  a  hie  her 


if  a  municipality  has  no  power  to 
tax  shares  in  state  banks,  it  cannot 
tax  national-bank  shares. 

iClapp  V.  Burlington,  43  Vt  579 
(1870).  See  Trustees  of  Eminence  v. 
Deposit  Bank,  12  Bush  (Ky.),  538 
(1877);  Farmers'  Nat.  Bank  v.  Cook, 
33  N.  J.  L.  347  (18G7).  Cf.  State  v. 
Hart,  31  N.  J.  L.  434  (18GG);  State  v. 
Haight,  31  JST.  J.  L.  399  (18G0)  — ob- 
jectionable and  unfortvmate  decis- 
ions in  all  respects.  The  decision  in 
Tenth  Ward  Nat.  Bank  v.  Newark, 
39  N.  J.  L.  380  (1877),  however,  placed 
New  Jersey  among  the  states  which 
levy  the  tax  in  the  most  approved 
manner,  residents  being  taxed  where 
they  reside,  non-residents  being  taxed 
at  the  domicile  of  the  corporation. 
See  also  Kyle  v.  Mayor,  etc.,  75  N.  C. 
445  (1876);  BueU  v.  Fayetteville 
Com'rs,  79  N.  C.  2G7  (1878);  Austin  v. 
Boston,  96  Mass.  359  (1867);  First  Nat. 
Bank  v.  Smith,  65  111.  44  (1872) ;  Baker 
V.  First  Nat.  Bank,  67  111.  297  (1873); 
Clapp  V.  Burlington,  42  Vt.  579  (1870); 


1064 


Howell  V.  Cassopolis,  35  Mich-  471 
(1877).  Cf.  Mintzer  v.  Montgomery 
County,  54  Pa.  St.  139  (1867).  For 
taxation  of  national-bank  stock  under 
the  Alabama  act,  see  Maguire  v. 
Board  of  Revenue,  71  Ala.  401  (1882). 

-  Merchants",  etc.  Bank  v.  Pennsyl- 
vania, 167  U.  S.  461  (1897). 

3  Central  Nat.  Bank  v.  U.  S.,  137 
U.  S.  355  (1890).  Cf.  First  Nat.  Bank 
V.  Richmond,  39  Fed,  Rep.  309  (1889). 
The  taxation  of  the  capital  stock  of 
a  national  bank  against  the  bank  ia 
solido  is  invalid.  It  may  be  collected 
from  the  bank,  but  should  be  assessed 
against  the  stockliolders.  Deductions 
should  also  be  allowed  when  allowed 
on  ot  her  similar  property.  Leot  i  Na  t . 
Bank  v.  Fisher,  45  Kan.  726  (1S91). 

*  Palmer  v.  McMahon,  133  U.  S.  660 
(1890).  A  tax  on  national-bank  stock, 
to  be  collected  in  the  first  instance 
from  the  bank,  cannot  be  collected 
from  the  receiver  of  the  bank,  tho^ 
ban  k  being  insolvent.  Boston  v.  Beal, 
51  Fed.  Rep.  30G  (1892). 


CH.  XXXIT.]      TAXATION    OF    STOCK   AND    COErOEATIOXS.  [§  571. 

rate  than  the  taxation  of  other  "moneyed  capital"  within  the 
state.  The  words  "  moneyed  capital "  have  been  construed  ta 
mean  "not  only  bonds,  stocks,  and  money  loaned, but  all  cred- 
its and  demands  of  every  character  in  favor  of  the  taxpayer." 
This  has  been  the  subject  of  much  controversy,  however;  and 
the  latest  decisions  go  very  far  in  upholding  the  tax,  if  substan- 
tial justice  has  been  done.^  Money  invested  in  railroads,  man- 
ufacturing, mining,  or  mortgages  is  not  "moneyed  capital" 
competing  with  national-bank  capital,  and  hence  a  tax^on  tho 
latter  need  not  be  at  the  same  rate  as  upon  the  f ormer." 


1  Wasson  v.  Indianapolis  Nat.  Bank, 
107  Ind.  206  (1886);  Boyer  v.  Boyer, 
113  U.  S.  689  (1884).    Shares  of  stock 
in  banks  are  other  moneyed  capital, 
but  shares  of  stock  in  other  corpora- 
tions are  not  necessarily  so.    "  Mon- 
eyed capital "  means  money  put  out 
by  way  of  loan,  discount,  etc.,  or  in- 
vested in  stocks  of  banks,  etc.,  which 
put  out  money  by  way  of  loan,  dis- 
count, etc.    Trust  companies  are  dif- 
ferent from  banks  herein.    Mercan- 
tile Bank  V.  New  York,  121  U.  S.  133 
(1887),  affirming  28  Fed.  Rep.  776.    A 
tax  on  national-bank  stock  is  legal 
although  stock  in  state  and  savings 
banks  is  not  taxed  directly,  but  the 
corporation  itself  is  taxed  in  another 
way.    Richards  v.  Rock  Rapids,  31 
Fed.  Rep.  505  (1887).    See  also  Hep- 
bum  V.  School  Directors,  23  WalL  480 
(1874).   Other  moneyed  capital  means 
capital  employed  in  banking  or  loan- 
ing, and  not  in  bvLsiness.    Talbott  v. 
Siher  Bow  Co.,  139  U.  S.  438  (1891). 

2  People  V.  Commissioners,  4  Wall. 
256  (1866);  Adams  v.  Nashville.  95 
U.  S.  19  (1877).  Re  McMahon,  102 
N.  Y.  176  (1886),  holds  that  shares  of 
stock  in  railroads,  manufacturing, 
and  other  corporations  are  not  "  mon- 
eyed capital  "  in  the  sense  in  wliich 
these  terms  are  used  in  the  act  of 
con"-ress.  See  also  First  Nat.  Bank 
V.  Waters,  19  Blatchf.  242  (1881). 
Provident  Inst.  v.  Boston,  101  Mass. 
575  (1869),  holds  that  the  comparison 
is  to  be  made  with  other  moneyed 


capital  in  the  same  town  or  citj 
where  the  tax  is  levied.     See  also 
People  V.  Moore,  1  Idaho,  504  (1873). 
Subject  to  this  rule  the  shares  of  na- 
tional banks  may  be  assessed  at  their 
value,  even  above  par.     Hepburn  v. 
School  Directors,  23  WalL  480  (1874); 
People  V.  Commissioners  of  Taxes,  94 
U.  S.  415  (1876);  S.  C,  67  N.  Y.  516 
(1870).  affirming  8  Hun,  536;  St.  Louis 
Nat.  Bank  v.  Papin,  4  Dili  29  (1876); 
S.  C,  21  Fed.  Cas.  203,  the  court  say- 
ing, also,  that   the    assessors    may 
ascei-tain   that  value  by  including 
"  all  reserve  funds,  profits,  earnings, 
and  other  values"  when  the  intent 
of  the  statute  is  to  base  the  tax 
"upon   an  inquiry,  iiiter  alia,  into- 
the  actual  value  of  the  property  of 
the  banks  so  far  as  this  imparts  or 
confers  a  value  upon  the  shares." 
A  stockholder  cannot  enjoin  the  tax 
vmless  he  first  pays  such  part  of  it  as 
he  admits   is  legal      Rosenberg  r. 
Weekes,67Tex.578(1887).    The  stock 
is  listed  against  the  stockholder,  not 
against  the  bank.  Miller  v.  First  Nat. 
Bank,  46  Ohio  St.  424  (1889).    The 
statute  may  authorize  taxation  for 
years  past.      State  v.  Simmons,  70 
Miss.  485  (1893). 

3  Aberdeen  Bank  v.  Chehalis 
County,  166  U.  S.  440  (1897).  "Mon- 
eyed capital  means  money  employed 
in  a  business  whose  object  is  to  make 
profit  by  investing  such  money  in  se- 
curities by  way  of  loan,  discount,  or 
otherwise,  which  from  time  to  time. 


1065 


§  571.]  TAXATION    OF    STOCK    AND    CORPORATIONS.       [CH.  XXXIV. 

The  metlioti  of  taxing  shares  of  stock  need  not  correspond  to 
that  followed  in  taxing  other  corporations  in  tlic  state.'  The 
material  point  is  that  national-bank  stock  must  not,  as  a  result, 
be  taxed  higher  than  other  moneyed  investments.  If  tliis  rule 
is  observed,  it  is  of  little  consequence  whether  the  tax  on  na- 
tional-bank stock  is  levied  and  assessed  in  the  same  way  as 
other  corporations  are  taxed. 

If  the  state  laws  allow  a  deduction  to  a  person  taxed  on  bonds, 
notes,  and  similar  [)roperty  for  debts  due  from  him  to  others,  a 
similar  deduction  must  bo  allowed  to  stockholders  taxed  on 
their  shares  in  a  national  bank.^    If  the  statute  does  not  allow  the 


in  the  course  of  business,  are  reduced 
again  to  money  and  re-invested." 
Mercantile  Nat.  Bank  v.  Shields,  59 
Fed.  Rep.  052  (1894). 

1  Davenport  Bank  v.  Davenport,  123 
U.  S.  83  (1887).  "  There  is  no  reason 
to  suppose  that  congress  cared  at  all 
about  the  mode  the  states  might 
adopt  for  the  collection  of  their  taxes. 
A  tax  imposed  on  the  capital  or  prop- 
erty of  a  corporation  falls  as  effect- 
ually on  the  capital  of  the  share- 
holder represented  by  his  shares  as 
does  a  tax  upon  tlie  shares  directly; 
and  although,  in  legal  discrimination, 
a  tax  upon  the  former  is  not  a  tax  upon 
the  latter,  practically  and  substan- 
tially taxation  of  the  capital  of  the 
corporation  is  taxation  of  the  capital 
of  the  shareholder."  A  tax  on  na- 
tional-bank stock  was  upheld,  though 
all  other  stock  except  bank  stock  was 
exempt,  the  tax  being  on  capital 
stock,  in  Mercantile  Nat.  Bank  v.  New 
York,  28  Fed.  Rep.  7TG-785  (1886), 
Wallace,  J.;  afiU-med,  121  U.  S.  138. 
The  mode  of  collection  need  not  be 
the  sama  The  state  may  compel  the 
bank  to  pay  the  tax.  National  Bank 
V.  Commonwealth,  9  "Wall.  353,  363 
(1869),  per  Miller,  J.  But  if  the  assess- 
ment is  illegal,  in  that  no  notice  and 
opportunity  is  given  to  the  share- 
holder to  appear  and  resist  the  tax, 
it  cannot  be  enforced.  Albany  City 
Nat.  Bank  v.  Maher,  20  Blatchf.  341 


(1882).  In  general,  cf.  Van  Allen  v. 
Assessoi-s,  3  "Wall.  573(1805);  Bradley 
V.  People,  4  Wall.  459  (1806);  Hubbard 
V.  Johnson  County,  23  Iowa,  130  (1867); 
People  V.  Assessors,  29  How.  Pr.  371 
(1865);  Wright  v.  Stelz,  27  Ind.  338 
(1866),  overruling  Wliitney  v.  Madi- 
son, 23  Ind.  331  (1864),  on  certain 
points;  Cooley,  Taxation  (2d  ed.),  390. 
Contra,  People  v.  Bradley,  39  111.  130 
(1866).  See  also  Frazer  v.  Siebern.  16 
Ohio  St.  614  (1866);  Smith  v.  First 
Nat.  Bank,  17  Midi.  479  (1869);  Van 
Slyke  V.  State,  23  Wis.  655  (1869);  Bag- 
nail  V.  State,  25  Wis.  1 12  (1869).  Where 
a  state  and  also  a  local  tax  are  levied 
on  shares  of  stock  in  a  state  bank, 
and  the  local  tax  is  declared  illegal, 
the  same  local  tax  is  illegal  as  re- 
gards shares  in  national  banks.  City 
Nat.  Bank  v.  Paducah,  2  Flip.  61 
(1877);  S.  C,  5  Fed.  Cas.  755. 

2Evansville  Bank  v.  Britton,  105 
U.  S.  332  (1881),  affirming  8  Fed.  Rep. 
867.  But  a  deduction  to  individuals 
for  United  States  bonds  held  by  thenx 
will  not  invalidate  a  tax  on  the  na- 
tional-bank stock  without  a  deduc- 
tion for  bonds  held  by  the  bank. 
Bressler  v.  Wayne  County,  25  Neb. 
468  (1889);  People  v.  Commissioners, 
4  Wall.  244  (1866);  First  Nat.  Bank  v. 
Ayers,  160  U.  S.  660  (1896).  In  Was- 
son  V.  Indianapolis  Nat.  Bank,  107 
Ind.  206  (1886),  the  court  held  that 
the  deduction  allowed  to  others  ia 


1066 


CH.  XXXIY.]       TAXATION    OF    STOCK:   AND    COKrOKATIONS.  [§  571. 


same  to  the  latter,  and  the  courts  of  the  state  refuse  to  allow 
the  deduction,  then  the  tax  is  illegal.  Such  was  the  result  of  a 
tax  in  New  York  on  national-bank  stock.^ 


fatal  to  a  tax  on  national-bank  shares 
without  that  deduction  only  when  it 
is  "material  and  serious;"  and  that 
that  depends  on  the  proportion  of 
moneyed  capital  which  is  allowed  the 
deduction  to  that  moneyed  capital 
which  is  not  allowed  it.  If  material, 
the  national-bank-share  tax  is  to  be 
allowed  a  similar  deduction.  Na- 
tional-bank stock  cannot  be  taxed  at 
a  hisher  valuation  on  its  actual  value 


than  other  moneyed  property  is  val- 
ued at.  Deductions  allowed  to  other 
moneyed  capital  must  also  be  allowed 
on  national-bank  stock.  Whitbeck 
V.  ]\Iercantile,  etc.  Bank,  127  U.  S. 
193  (1888).  A  stockholder  in  a  na- 
tional bank  is  entitled  to  the  same 
deductions  as  a  stockholder  in  a  state 
bank,  McHenry  v.  Downer,  116  Cal. 
20  (1897).  In  Ohio  the  debts  of  a 
stockliolder  in  a  national  bank  can- 


1  People  V.  Weaver,  100  U.  S.  539 
(1879).  Tlie  New  York  court  held 
that  "  the  effect  of  the  state  law  is  to 
permit  a  citizen  of  New  York,  who 
has  moneyed  capital  invested  otlier- 
wise  than  in  banks,  to  deduct  from 
that  capital  the  sum  of  all  his  debts, 
leaving  the  remainder  alone  subject 
to  taxation,  while  he  whose  money  is 
invested  in  shares  of  bank  stock  can 
make  no  such  deduction."  Tlie  su- 
preme court  of  tlie  United  States  de- 
clared the  tax  on  the  national-bank 
shares  to  be  invalid.  But  the  case  of 
Supervisors  v.  Stanley,  103  U.  S.  BOo, 
315  (18S1),  holds  that  the  tax  is  not 
void  absolutely.  A  deduction  allowed 
to  individuals  for  national  and  state 
securities,  but  not  allowed  on  na- 
tional-bank stock,  invalidates  a  tax 
on  the  latter.  Whitney  Nat.  Bank  v. 
Parker,  41  Fed.  Rep.  402  (1890).  If  the 
stockholder  owed  no  debts  he  is  not 
injured;  and  even  if  he  owes  debts  he 
cannot  defeat  the  tax  altogether,  but 
is  allowed  a  similar  deduction.  No 
discrimination  is  allowable,  although 
the  state  taxes  banks  and  nothing 
else.  Gorge's  Appeal,  79  Pa.  St.  149 
(1875).  No  discrimination,  though  a 
deduction  for  debts  is  allowed  to  those 
whose  property  consists  of  debts  due 
them;  but  no  deduction  otherwise. 
First  Nat.  Bank  v.  St.  Joseph,  46  Mich. 
526  (1881).    The  exemption  of  all  caj)- 


ital  which  is  wholly  invested  in  min- 
ing is  not  a  discrimination.  Silver 
Bow  County  v.  Davis,  6  Mont.  306 
(1887).  Exemption  from  taxation  of 
savings  banks,  municipal  bonds,  and 
shares  of  stock  in  all  foreign  and  do- 
mestic corporations  other  than  banks 
does  not  invalidate  a  tax  on  shares  of 
stock  in  national  banks.  Mercantile 
Bank  v.  New  York,  121 U.  S.  138  (1887); 
Newark,  etc.  Co.  v.  Newark,  121  U.  S. 
163  (1887);  Bank  of  Redemption  v. 
Boston,  125  U.  S.  60  (1888).  No  discrim- 
ination exists  in  taxation  of  national- 
bank  stock  in  territory  where  tlie 
shares  of  stock  in  corporations  pay- 
ing taxes  on  their  property  or  ca]> 
ital  stock  are  exempted  from  taxa- 
tion. Silver  Bow  County  v.  Davis,  6 
Mont.  306  (1887).  In  Nebraska  the 
owner  of  national-bank  stock,  in  list- 
ing his  shares  for  taxation,  is  not  en- 
titled to  deduct  his  bona  fide  indebt- 
•  edness  f  i-om  the  value  of  such  shares 
of  Stock,  The  decision  on  the  for- 
mer hearing  of  the  case,  reported  in 
25  Neb.  468,  is  overruled.  Bre^sler  v. 
Wayne  Coimty,  32  Neb.  834  (1891). 
National-bank  shares  in  ]\Iassachu- 
setts  are  taxed  at  their  actual  value, 
and  the  bank  may  petition  for  a  re- 
duction of  the  tax.  National  Bank 
of  Commerce  v.  New  Bedford,  155 
Mass.  313  (1892). 


1067 


571.] 


TAXATION    OF    STOCK    AND    COKPOKATIONS. 


[cii. 


XXXIV. 


A  refusal  to  allow  a  deduction  to  stockholders  in  national 
banks  similar  to  a  deduction  allowed  on  a  tax  levied  on  other 
"moneyed  capital"  was  held  to  be  a  discrimination  in  contra- 
vention of  the  statute.     Special  exemptions,  however,  of  cer- 

not  be  deducted  from  the  value  at    ing  ch.  34.1,  Laws  of  1883.     Cf.  City 


which  the  stock  i.s  taxed.  Niles  v. 
Shaw,  50  OliioSt.  370  (189:}).  In  Ohio 
no  deduction  for  tlie  debts  of  the 
stockholder  is  made  in  the  taxation 
of  national-banlv  stock.  Chapman  v. 
First  Nat.  Bank,  47  N.  R  Rep.  54 
(Ohio,  1897).  Deductions  allowed  gen- 
eral taxpayers  of  their  debts  from 
credits  taxed  against  tliem  give  to 
national-bank  stockholders  the  right 
to  a  similar  reduction  in  tl»e  taxation 
of  their  stock.  Non-resident  stock- 
holders are  entitled  to  the  same  de- 
ductions. Mercantile  Nat.  Bank  v. 
Sliields,  59  Fed.  Rep.  952  (1894). 

Where  a  tax  on  stock  is  not  illegal 
except  in  that  the  assessors  have  pro- 
ceeded in  a  wrong  manner,  the  court 
will  not  enjoin  its  collection  unless 
theplaintilf  stockholders  pay  in  such 
a  tax  as  would  have  been  legal.  Fra- 
zer  V.  Siebern,  16  Ohio  St.  014  (1866); 
Cummings  v.  Merchants'  Nat.  Bank, 
101  U.  S.  153  (1879);  Supervisors  v. 
Stanley,  105  U.  S.  305  (1881);  S.  C. 
sub  nom.  Stanley  v.  Supervisors,  121 
U.  S.  535  (1887),  holding  that  the 
stockholder  cannot  recover  back  tlie 
excess  of  tax  where  he  has  not  at- 
tempted to  have  the  tax  remedied; 
Hills  V.  Exchange  Bank,  105  U.  S. 
319  (1881),  reversing  National  Albany 
Exch.  Bank  v.  Wells,  5  Fed.  Rep.  248. 
In  consequence  of  this  escape  of  the 
stockholders  from  taxation,  a  special 
statute  was  passed  levying  a  back 
tax.  See  N.  Y.  Laws,  1883,  ch.  341. 
Such  a  statute  is  constitutional.  See 
McVeigh  v.  Loomis,  49  111.  318  (1868). 
The  legislatm-e  may  cure  any  defects 
in  the  levy  of  taxes  in  past  years, 
provided  such  defects  could  have 
been  so  modified  before  the  levy  was 
made.  Williams  v.  Supervisors  of 
Albany,  122  U.  S.  154  (1887),  sustain- 


Nat.  Bankr.  l'aducah,2Flip.61  (1877); 
S.  C,  5  Fed.  Cas.  755.  And  a  deduc- 
tion to  other  moneyed  corpoi-ation.s 
for  their  real  estate  must  be  alloweii 
in  taxing  national-bank  sliares.  Pol- 
lard r.  State,  65  Ala.  528  (1880).  over- 
ruling Mclver  v.  Robinson,  53,Ahu 
456  (1875),  and  Sumter  County  r.  Na- 
tional Bank,  62  Ala.  464  (1878).  In 
general,  see  also  Rugglcs  v.  P'ond  du 
Lac.  .53  Wis.  436  (1881);  Miller  v.  Ileil- 
bron,  58  Cal.  133  (1881);  St.  Louis  Nat. 
Bank  v.  Papin,  4  Dill.  29  (1870);  Cov- 
ington, etc.  Bank  v.  Covington,  21 
Fed.  Rep.  484  (1884).  A  deduction  for 
debts,  if  allowed  to  persons  taxed 
generally,  must  be  allowed  national- 
bank  stockholders  who  are  taxed  on 
their  stock.  McAden  v.  Mecklenburg 
County,  97  N.  C.  355  (1887).  Deduc- 
tions are  to  be  allowed  the  national- 
bank  stockholder  for  debts  due  from 
him  to  others  where  the  state  statute 
permits  its  citizens  to  deduct  their 
debts  from  the  valuation  of  their 
personal  property.  Richards  v.  Rock 
Rapids.  31  Fed.  Rep.  505  1 1887) ;  Peavey 
V.  Greenfield,  64  N.  H,  284  (1887).  As 
regards  deductions  for  siirphis  funds 
which  are  already  taxed,  see  Straf- 
ford Nat.  Bank  v.  Dover,  58  N.  H.  316 
(1878).  Cf.  North  W^ard,  etc.  Bank  v. 
Newark,  39  N.  J.  L.  380  (1877);  First 
Nat.  Bank  v.  Peterborough,  56  N.  H. 
38  (1875).  As  regards  its  realty,  see 
Rice  County  Com'rs  v.  Citizens'  Nat. 
Bank,  23  Minn.  280  (1877).  In  Indiana 
the  national-bank  stockholder  may 
recover  back  such  part  of  the  tax  as 
should  have  been  deducted  by  reason 
of  his  indebtedness.  Indianapolis  v. 
Vajen,  111  Ind.  240(1887);  Exchange 
Nat.  Bank  v.  Miller,  19  Fed.  Rep.  372 
(1884). 


1068 


CH.  XXXIV.]      TAXATION   OF   STOCK   A^   COEPOKATIONS.  [§  571. 

tain  stocks  or  other  forms  of  "  moneyed  capital "  do  not  require 
that  a  similar  exemption  should  be  made  on  national-bank 

An-ain,  the  national  bank  act  cannot  be  evaded  by  an  unfair 
asses°  ment  of  the  shares  m  national  banks  as  compared  with  the 
assessment  of  other  moneyed  capital.  It  is  a  well-known  fact 
and  an  understood  matter  in  nearly  all  localities  that  no  kinds 
of  property  are  valued  at  their  actual  selling  worth  m  making 
the  valuation  for  taxation  purposes.  Consequently,  if  other 
moneved  capital  is  valued  m  the  assessment  rolls  at  a  certain 
proportion  of  the  actual  value,  and  national-bank  stock  at  a 
higher  proportion,  the  tax  is  illegal  and  cannot  be  collected. 

iThus,  a  special  contract  exemp- 
tion of  a  few  stiite  bonds  from  taxa- 
tion will  not  exempt  the  national 
bonds.    Lionberger  v.  Rouse,  9  Wall 
468  (1869);  Hepburn  v.  School  Direct- 
ors, 23  WalL  -180  (1874),  where  an  ex- 
emption  of  mortgages,  judgments, 
and  contracts  to  sell  land  were  im- 
material herein.    See  also  Adams  v. 
NashviUe,  95  U.  S.  19  (1877);  Super- 
visors r.  Stanley,  105  U.  S.  305,  317 
(1881);  Re  McMahon,  102  N.  Y.  176 
(1886);  McLoughlin  v.   Chadwell,  7 
Heisk.  (Tenn.)  389  (1872);    Boyer  v. 
Boyer,  113  U.  S.  689  (1885);  Everitt's 
Appeal,  71  Pa.  St.  216  (1872);  Albany, 
etc.  Bank  v.  Maher,  19  Blatchf.  17o 
(1882).    See  also  Richmond  r.  Scott, 
48  Ind-  568  (1874);  Mercantile  Nat. 
Rank  r.  New  York,  28  Fed-  Rep.  776, 
785  (1886). 

2  Pelton  V.  National  Bank.  101  U.  b. 
143  (1879),  the  covirt  saying  that  "any 
system  of  assessment  of  taxes  which 
exacts  from  the  owner  of  the  shares 
of  a  national  bank  a  larger  sum  m 
proportion  to  their  actual  value  than 
it  does  from  the  owner  of  other  mon- 
eyed capital  valued  in  Uke  manner 
does  tax  them  at  a  greater  rate  withm 
the  meaning  of  the  act  of  congress." 
Where,  however,  the  assessors  assess 
ordinary  securities  at  three-fifths  of 
their  actual  value,  and  assess  bank 
stock  at  its  full  actual  value,  and 


such  method  of  unequal  assessments 
is  contrary  to  the  constitution  of  the 
state,  the  court  will  relieve  the  stock- 
holders only  upon  payment  by  them 
of  such  a  tax  as  would  have  been 
legal    Cummings  v.  Merchants'  Nat. 
Bank,  101  U.  S.  153  (1879):  Supervis- 
ors V.  Stanley,  105  U.  S.  305  (1881). 
When  the  national-bank  stock  is  as- 
sessed too  low,  the  fact  tliat  another 
bank  is  assessed  still  lower  will  not 
invaUdate  the  tax  against  the  for- 
mer.   People  V.  Assessors,  2  Hun,  583 
(1874).    In  First  Nat.  Bank  v.  Treas- 
urer, 25  Fed.  Rep.  749  (1885),  where 
ordinary  moneyed  capital  was   as- 
sessed at  six-tenths  of  its  actual  value, 
while  sliares  in  national  banks  were 
assessed  at  a  higher  proportion  of 
the  real  value,  the  collection  thereof 
was  enjoined  upon  the  complainant 
paying  the  tax  admitted  to  be  due. 
As  to  the   pleadings,  see  National 
Bank  V.  Kimball,  103  U.  S.  732  (1880). 
Lower  valuation  of  other  property 
ha^  been    held    to   be    immaterial. 
Wagoner  v.  Loomis,  37  Ohio  St.  571 
(1881).    As  regards  taxation  of  na- 
tional banks,  a  castom  of  assessing 
property  at  fifty  per  cent  of  its  value 
is  not  proved  by  a  few  examples. 
Engelke  v.  Sclilenker.  75  Tex.   559 
(1890).    If,  as  a  matter  of  fact,  per- 
sonal property  and  capital  of  indi- 
\nduals    escape  taxation,  and  little 


10C9 


§  572.]  TAXATION    OF    STOCK    AND    CORPORATIONS.       [cil.  XXXIV. 


§  572.  The  haul:  m(nj  hr'uig  suit  to  nstraln  ilhgal  tax  on  iti 
stockJioIders. —  'JMutc  has  been  some  doubt  as  to  whether  a  na- 
tional bank  could  bring  suit  to  restrain  an  iUegal  tax  on  its 
stockholders.  Ordinarily  a  corporation  cannot  do  so.  Each 
stockholder  must  i)rotect  his  own  interests.  But  where,  as  in 
the  case  of  national  banks,  the  tax  is  paid  Ijy  the  bank  its«.'lf, 
and  collected  by  it  from  its  stockholders,  if  the  latter  refuse  to 
pay  the  bank  or  recognize  its  payment  as  legal,  many  suits 
would  result.  Accordingly,  in  order  to  avoid  a  inultiplieity  of 
suits,  it  is  now  well  established  that  the  bank  itself  may  file  a 
bill  in  equity  to  prevent  and  enjoin  tlic  collection  of  an  illegal 
tax  on  its  stockholders.'  A  suit  to  declare  invalid  a  tax  levied 
on  national-bank  stock  must  be  in  equity.' 


effort  is  made  to  tax  such  capital, 
then  a  tax  on  national-l)aiik  stock 
cannot  be  enforced.  If  siicli  stock 
is  assessed  at  two-thirds  of  its  actual 
vaUie,  anil  otlier  i)crsonal  jiroperty  at 
one-lialf  their  value,  tlie  assessment 
is  illegal.  First  Nat  Bank  v.  Lind- 
saj',  45  Fed.  Rep.  619  (1891). 

1  Quoted  and  approved  in  Knopf  v. 
First  Nat.  Bank,  173  111.  331  (1S98); 
City  Nat.  Bank  v.  Paducali,  3  Flip. 
CI  (1877);  S.  C,  5  Fed.  Cas.  755,  where 
the  court  said:  "The  bank  is  so  far 
the  ti-ustee  of  the  stockholders  and 
the  oiistodian  of  the  dividends  that 
it  is  entitled  to  maintain  the  bill. 
It  might  be  subjected  to  great  an- 
noyance by  stockholders  who  denied 
the  legality  of  the  tax,  and  gave 
the  bank  notice  that  it  would  pay 
at  the  peril  of  being  sued  by  them. 
It  is  certainly  no  hardship  to  permit 
the  whole  question  to  be  litigated  in 
a  single  action."  This  case  holds  also 
that  an  injunction  against  the  col- 
lection of  the  illegal  tax  will  be 
granted.  In  general,  see  also  Albany 
City  Nat.  Bank  v.  IVIaher,  20  Blatchf. 
341  (1882);  North  Ward  Nat.  Bank  v. 
Newark,  40  N.  J.  T,.  558  (1878).  Cf. 
Dows  V.  Chicago,  11  Walk  108  (1870); 
Tappan  v.  Merchants'  Nat.  Bank,  19 
Wall.  4!J0  (1873);  Pelton  v.  National 
Bank,  101  U.  S.  143  (1879);  Cummings 
V.  National  B.-.nk,  101  U.  S.  153  (1879). 

1070 


Contra,  First  Nat.  Bank  v.  Meredith, 

44  Mo.  500  (1879).  Sue  also  Union 
Nat.  Bank  v.  Chicago,  3  Biss.  82  (1871) ; 
S.  C,  24  Fed.  Cas.  015.  As  to  the  rule 
in  New  York,  see  People  v.  Wall 
Street  Bank,  39  Ilun.  525  (1886);  Peo- 
ple V.  Coleman,  41  Hun,  344  (1886). 
The  same  rule  does  not  apply  to  a 
corporation  which  brings  suit  to  pro- 
vent  the  levy  upon  and  sale  of  a  non- 
resident stockholder's  stocks  for  non- 
payment of  his  tax-  Waseca  Co. 
Bank  v.  ]\IcKeima,  32  Minn.  4G8  (1884). 
The  case  of  Farmers'  Nat.  Bank  v. 
Cook,  32  N.  J.  L.  347  (1867),  denies 
the  right  of  the  bank  to  bring  the 
action,  and  says:  "The  corporation 
is  not  the  agent  of  the  stockholders 
for  any  such  purix)se."  A  national 
bank  may  file  a  bill  to  restrain  the 
imposition  of  a  tax  on  stock,  the 
bank  having  to  pay  the  tax.  Whit- 
ney Nat.  Bank  v.  Parker,  41  Fed. 
Rep.  402  (1890).  But  the  injimction 
against  collection  of  the  tax  is 
granted  only  as  to  the  excess  of  tax. 
Whitney  Nat.  Bank  v.  Parker,  41  Fed. 
Rep.  402  (1890).  The  bank  cannot  file 
a  bill  in  the  federal  court  unless  the 
tax  involved  is  over  $2,000.  Sioux 
Falls  Nat.  Bank  v.  Swenson,  48  Fed. 
Rep.  621  (1892). 

2  Lindsay  v.  First  Nat  Bank,  156 
U.  S.  485  (1895). 


CH.  XXXIV.]       TAXATION    OF    STOCK   AND    COKPOKATIOXS.  [§  o'i2a. 


C.  OTHER   METHODS    OF   TAXING    COEPOEATIONS. 

§  572a.  General  principles. —  A  state  may  tax  corporations, 
and  the  rate  of  taxation  may  be  greater  or  less  than  or  equal 
to  the  rate  at  which  individuals  are  taxed.^  The  method  of  as- 
sessing taxes  upon  corporations  varies  in  the  different  states.* 
A  state  may  distribute  the  taxes  paid  by  a  railroad  on  its  roll- 
ing-stock and  personalty  among  the  counties  traversed  by  the 
railroad.' 

Where  a  company  is  really  located  in  a  city  and  does  all  its 
business  there,  but  its  articles  of  incorporation  state  its  princi- 
pal place  of  business  as  being  in  an  adjacent  town,  the  sole 
object  being  to  evade  taxation,  the  court  will  hold  that  for  tax- 
ation purposes  its  principal  place  of  business  is  in  such  city.* 


1  It  is  constitutional  to  tax  corpo- 
rations without  taxing  individuals. 
Singer  Mfg.  Co.  v.  Wright,  33  Fed. 
Rep.  121  (1887);  State  R.  K.  Tax  Cases, 
92  U.  S.  575  (1875).  Cf.  RaUroad  Tax 
Cases,  13  Fed.  Rep.  722(1882):  Santa 
Clara  Co.  v.  Railroad,  18  Fed.  Rep. 
385;  S.  C,  118  U.  S.  GOG  (1885).  A  tax 
on  i-ailroads  may  be  legal,  although 
the  assessment  is  for  eighty  per  cent 
of  the  value,  while  on  other  property 
in  the  state  the  assessment  is  sixty 
per  cent.  Chamberlain  v.  Walter,  GO 
Fed.  Rep.  788  (1S94). 

*  See  Part  VII,  infra.  A  tax  on  a 
gas  company  on  gross  receipts  and  on 
dividends  by  way  of  license  for  the 
right  to  act  as  a  corporation  is  not  a 
tax  upon  the  property  or  coriX)rate 
franchises,  but  is  a  license  fee.  Jer- 
sey City  Gas-Light  Co.  t'.  United  Gas, 
etc.  Co',  4G  Fed.  Rep.  2G4  (1891). 

»  Columbus  Southern  R'y  r.  Wright, 
151 U.  S.  470  (1894).  The  rolling-stock, 
choses  in  action,  etc.,  of  a  railroad 
have  their  situs  at  the  domicile  or 
place  of  business  of  the  company,  but 
the  legislature  may  change  this  sitvis 
for  purjioses  of  taxation.  Columbus 
Southern  R'y  v.  Wright,  151  U.  S.  470 
(1894). 

*  Milwaukee  Steamship  Co,  v.  Mil- 
waukee, 83  Wis.  590  (1892).    Wliere 

10 


the  actual  place  of  business  of  a  cor- 
poration is  at  one  place,  but  its  nom- 
inal place  of  business  is  fixed  else- 
where in  order  to  evade  taxation,  the 
actual  place  of  business  is  the  place 
where  the  company  will  be  taxed 
under  the  Michigan  statutes.  Detroit 
Transp.  Co.  v.  Board  of  Assessors,  91 
Midi.  382  (1892),  distinguishing  the 
New  York  cases.  See  also  Galveston, 
etc.  R'y  V.  Gonzales,  151  U.  S.  496 
(1894),  relative  to  domicile  and  resi- 
dence for  purposes  of  jmrisdiction  of 
the  federal  courts.  In  regard  to  a 
corporation  being  taxed  in  another 
place  in  the  state  from  the  place 
where  its  principal  office  is  located, 
see  also  lie  McLean,  66  Hun,  123 
(1892).  It  must  be  the  principal 
place  or  places  of  business  for  the 
purposes  of  taxation  and  service  of 
process;  and  in  New  York  under 
somewhat  similar  statutes  it  is  held 
that  the  certificate  is  conclusive  as 
to  this.  Western  Transp.  Co.  v.  Scheu, 
19  N.  Y.  408  (1859).  A  domestic  cor- 
poration will  not  be  allowed  to  deny 
that  it  has  a  place  of  business  in  the 
state.  Chapman  v.  Doray,  89  CaL  53 
(1891).  Generally,  the  statutes  pre- 
scribe that  a  corporation  shall  be 
taxed  wliere  its  principal  office  or 
place  of  business  is  located-    People 

n 


572a.]  TAXATION    OF    STOCK    AND    COKI'OKA  1  K -NS.       [cil.  XX.XIV. 


Where  the  capital  stock  is  invested  in  patunt-ri;^lits  it  cannot 
be  taxed  b}'  the  state.^  A  state  may  compel  corporations  to 
pay  taxes  for  years  past.- 

A  tax  on  the  capital  stock  based  upon  the  amount  of  divi- 
dend declared  cannot  be  evaded  by  distributing  profits  witliout 
declaring  a  dividend.  But  a  stock  dividen(i  does  not  come 
within  the  tax  statute.'    The  fact  that  a  company  has  declared 


V.  McLean,  17  Hun,  204  (1879);  Pelton 
V.  Northern  Transp.  Co.,  37  Ohio  St 
450  (1882);  Baltimore  v.  Baltimore, 
etc.  R'y,  57  Md.  31  (1881);  West- 
em  Transp.  Co.  v.  Stevens,  19  N.  Y. 
408  (1859);  Glaize  v.  South  Carolina 
R  R.,  1  Strobh.  (S.  C.)  70  (1840),  hold- 
ing that  a  coii)oration  may  have  a 
special  or  constnictive  residence  ex- 
tending to  the  territorial  limits  of 
the  jurisdiction  which  granted  its 
charter  for  purposes  of  taxation. 

1  Commonwealth  v.  "Westingliouse 
Electric,  etc.  Co.,  151  Pju  St.  205 
<1892).  In  Holt  v.  Indiana  Mfg.  Co., 
80  FecL  Rep.  1  (1897),  it  appears  that 
the  corporation  enjoined  state  offi- 
cials from  levj'ing  a  tax  on  capital 
stock  which  represented  patent-rights 
and  nothing  else.  The  capital  stock 
of  a  corporation  cannot  be  taxed  by 
a  state  where  it  has  been  issued  for 
the  right  to  make,  use,  or  license  cer- 
tain inventions  covered  by  patents, 
there  having  been  no  apparatus  or 
tangible  property  received  for  the 
stock.  This  is  on  the  principle  that 
a  patent-right  cannot  be  taxed  by  a 
state.  Commonwealth  v.  Philadel- 
*  phiaCo.,  157  Pa.  St.  527(1893).  Com- 
pare People  V.  Campbell,  138  N.  Y. 
543  (1893).  The  New  Jersey  annual 
tax  is  legal,  although  nearly  the  en- 
tire capital  stock  of  the  company 
was  issued  for  patents.  State  v.  State 
Board,  39  AtL  Rep.  638  (N.  J.,  1898). 
Where  the  stock  is  issued  in  payment 
for  the  exclusive  right  to  use  certain 
patented  articles  within  certain  ter- 
ritory, it  is  not  invested  in  patent- 
rights  so  as  to  be  exempt  from  taxa- 

lo: 


tion  by  reason  of  tlie  acts  of  congress. 
Commonwealth  v.  Central,  etc  TeL 
Co..  115  Pa.  St.  121  (1S91);  Common- 
wealth V.  Brush,  etc.  Co.,  145  Pa.  St. 
147(1891). 

''An  attempt  of  the  state  to  mako 
a  railroad  corporation  pay  $1,250,000 
back  taxas,  not  levied  under  an  al- 
leged mistaken  view  of  the  law  by 
former  state  officials,  failed  in  Com- 
monwealth V.  Pennsylvania  Co.,  145 
Pa.  St  200  (1892;.  Where  the  charter 
provides  for  "a  tax  not  exceeding 
twenty-five  cents  per  annum  per 
shai-e  on  each  share  of  the  capital 
stock  whenever  the  annual  profits 
thereof  shall  exceed  six  per  cent," 
the  legislature  may  compel  the  com- 
pany to  pay  such  tax,  and  to  pay  it 
for  twenty-five  years  i)ast,  during 
which  time  the  company  liad  evaded 
payment.  State  v.  Seaboard,  etc.  R. 
R.,  52  Fed.  Rep.  450  (1892).  See  g  572, 
supra, 

3  Lehigh,  etc.  Co.  v.  Commonwealth, 
55  Pa.  St  448  11867);  Commonwealth 
V.  Pittsburg,  etc.  R'y,  74  Pa.  St  83 
(1873).  See  State  v.  Franklin  Bank, 
10  Ohio.  91  (1840) ;  People  r.  Home  Ins. 
Co.,  92  N.  Y.  328  (1883).  Where  taxes 
are  based  upon  dividends,  the  tax 
must  be  paid,  even  though  a  dividend 
is  declared  nearly  equal  to  the  cap- 
ital stock,  it  being  shown  that  the 
value  of  the  stock  after  the  declara- 
tion of  the  dividend  was  practically 
par,  and  hence  that  the  dividend  was 
not  a  distribution  of  the  capital  stock. 
Commonwealth  r.  Western  Land,  etc. 
Co.,  150  Pa.  St  455  (1893).  Where  a 
company  has  in  its  treasury  stock  in 


CH.  XXXIV.]       TAXATION    OF    STOCK    AXD    COEPORATIONS.  [§  572(Z. 


a  dividend  does  not  show  that  the  capital  stock  has  a  value 
subject  to  taxation  under  the  New  York  statutes.^  A  corpora- 
tion claiming  that  it  is  taxed  too  much  cannot  enjoin  collection 
unless  it  offers  to  pay  the  amount  it  admits  to  be  due.^  The 
court  will,  under  the  Xew  Jersey  statute,  enjoin  a  corporation 
from  doing  business  if  it  does  not  pay  taxes  levied  upon  it.' 
A  purchaser  of  a  railroad  at  foreclosure  sale  cannot  revive  an 
action  begun  by  the  mortgagor  after  the  giving  of  the  mort- 
gage to  enjoin  the  collection  of  taxes.*  Where  taxes  are  based 
on  the  aggregate  value  of  all  the  shares  of  stock,  unissued  stock 
should  not  be  considered,  even  though  ten  per  cent  has  been 
paid  on  the  subscription  to  the  latter.* 


another  company,  and  distributes  it 
amung  its  stockholders,  tliis  is  a  divi- 
dend.   Allegheny  v.  Pittsburgh,  etc. 
R'y,  179  Pa.  St.  414  (1897).    Where  a 
consolidation  of  three  corporations  is 
made  by  increasing  the  capital  stock 
of  one,  and  issuing  the  increased  stock 
to  the  stockholders  of  all  three  cor- 
porations in  the  proportion  agreed 
upon,  this  is  not  a  stock  dividend, 
even  though  the  aggregate  capital 
stock  was  $400,000,  but  by  the  con- 
solidation is    $1,000,000.     Allegheny 
V.  Federal,  etc.  R'y,  179  Pa.  St.  424 
(1897).    "Where  a  company  leases  its 
property  to  another  comjxiny  at  a 
nominal  rental,  and  the  stockholders 
of  the  first  company  transfer  their 
stock  to  the  second  company  in  ex- 
change for  stock  of  the  latter,  no 
dividend  is  involved,  and  a  tax  on 
dividends    of  the   first    coqioration 
does  not  attach-     Allegheny  v.  Pitts- 
burgh, etc.  R'y,  179  Pa.  St  414  (1897). 
\Vhere  the  dividends  declared  dur- 
ing the  year  were  partly  earned  dur- 
ing ])rior  years,  the  latter  portion  are 
not  taxable  vmder  the  Pennsylvania 
statute  taxing  the  cajtital  stock  ac- 
cording to  the  dividends.     Common- . 
wealth  V.  Brush,  etc  Co.,  145  Pa.  St. 
147  (1891).    Where  all  the  shares  are 
reduced  in  par  value  from  .$00  to  $38, 
and  the  $12  difference  is  paid  to  the 
Btockholders  in  cash,  this  is  a  reduc- 
08  10 


tion  of  capital  stock  and  not  a  divi- 
dend, and  cannot  be  taxed  as  a  divi- 
dend. Commonwealth  v.  Central 
Transp.  Co.,  14.5  Pa,  St.  89  (1891).  A 
tax  upon  the  receipts  of  a  railroad  is 
not  a  tax  upon  dividends.  Com'rs, 
etc.  V.  Buckner,  48  Fed.  Rep.  533 
(1891).  A  dividend  declared  and  or- 
dered deposited  to  the  order  of  the 
stockholders,  and  so  held  until  the 
further  order  of  the  court,  is  legal, 
and  the  amount  cannot  be  taxed  as 
belonging  to  the  bank.  Pollard  v. 
First  Nat.  Bank,  47  Kan.  400  (1891). 
Profits  applied  to  betterments  are 
not  "dividends  earned"  within  the 
meaning  of  a  statute  imposing  taxa- 
tion. State  V.  Comptroller.  54  N.  J. 
L.  135  (1891).  See  also  §  534,  supra. 
'People  V.  Barker,  141  N.  Y.  251 
(1894). 

2  Smith  V.  Rude,  etc.  Co.,  131  Ind. 
150(1892).  See  also  §  572,  s?(pm.  An 
injimction  is  not  the  proper  remedy 
to  attack  a  tax  erroneously  laid  on 
the  capital  stock.  Jones  v.  Rushville 
Nat.  Gas  Co.,  135  Ind.  595  (1893). 

3  Ee  Electro-Pnevunatic  Transit  Co., 
51  N.  J.  Eq.  71  (1893). 

<  Keokuk,  etc.  IL  R.  v.  Scotland 
County,  152  U.  S.  318  (1894). 

5  Boston,    etc.   R.   R   u   Common- 

weallli,  157  Muss.  08  (1892).  The  whole 

capital  stock  may  be  taxed  under  a 

city  charter,  although  only  a  part  of 

73 


§  572(Z.]  TAXATION   OF    STOCK    AND    CORrOEATIONS.       [cn.  XXXIV. 


In  ascertaining  tlie  actual  value  of  capital  stock  for  taxation, 
the  price  at  which  the  stock  is  selling  is  not  taken  as  the  actual 
value  where  the  market  value  is  due  to  speculation  and  market 
influences.*  Eonds  of  domestic  corporations  held  by  non- 
residents are  not  taxable  by  the  states  creating  the  corpora- 
tions.^ A  statute  by  which  Pennsylvania  requires  a  Kew  York 
railroad  corporation  doing  business  in  Pennsylvania  to  pay  to 
the  latter  a  part  of  coupons  due  to  residents  of  Pennsylvania, 
such  coupons  being  by  their  terms  payable  in  New  Tork,  is 
void,'  A  railroad  cannot  be  taxed  to  aid  in  paying  a  munici- 
pal subscription  to  its  construction.*  The  franchise  to  build 
and  operate  a  street  railway  is  subject  to  taxation.  A  license 
fee  may  be  imposed  on  the  railway,  although,  under  its  fran- 
chise, it  is  also  bound  to  pay  other  taxes  annually.'    The  taxa- 

St.  119  (1882);  Stato  Treasurer  v.  Au- 
ditor-General, 46  Mich.  224  (1881); 
People  V.  Equitable,  etc.  Co.,  96  U.  S. 
387  (1884).  A  statute  making  a  for- 
eign corporation  liable  for  taxes  on 
interest  on  its  bonds  payable  in  New 
York  city  to  citizens  in  Pennsylvania 
is  imconstitutionaL  N.  Y.,  L.  E.  etc. 
R.  R  u  Pennsylvania,  153  U.  S.  G28 
(1894),  rev'g  150  Pa  St  245.  The  Penn- 
sylvania system  of  taxing  against 
corporations  all  bonds  issued  by  them 
and  owned  by  citizens  of  the  state, 
and  compelling  the  corporation  to 
pay  the  tax  and  deduct  it  from  the 
interest  on  the  bonds,  is  constitu- 
tional Bell's  Gap  R.  R  v.  Pennsyl- 
vania, 134  U.  S.  232  (1890). 

3  New  York,  etc.  R  R  r.  Pennsyl- 
vania, 153  U.  S.  628  (1894).  Where  a 
state,  by  charter  granted  to  a  rail- 
road company,  limits  the  taxation  to 
a  certain  amount,  it  cannot  aftei'- 
wards  compel  the  company  to  deduct 
from  coupons  due  on  bonds  owned 
by  residents  a  part  of  such  coxipons 
and  pay  that  part  to  the  state.  New 
York,  etc.  R.  R.  v.  Pennsylvania,  153 
U.  S.  628  (1894). 

*  Louisville,  etc.  R.  R.  v.  Common- 
wealth, 89  Ky.  581  (1890). 

5  New  Orleans,  etc.  Co,  v.  New  Or- 
leans, 143  U.  S.  192  (1892). 
•4 


it  has  been  paid  in,  Shelby  County, 
etc.  Co.  V.  Shelbyville  Trustees,  91 
Ky.  578  (1891). 

1  Commonwealth  v.  Philadelphia, 
etc.  R.  R,  145  Pa,  St.  74  (1891).  In 
Louisiana  the  corporation  may  sue 
to  reduce  or  annul  taxation  of  the 
shares  of  stock.  The  value  of  the 
stock  may  be  ascertained  from  vari- 
ous sources,  including  that  of  the 
stock  for  which  it  has  been  ex- 
changed. Planters',  etc.  Co.  v.  As- 
sessor, 41  La.  Ann.  1137  (1889).  Where 
all  the  stockholders  sell  their  stock 
at  a  certain  time,  the  price  received 
may  be  the  basis  for  the  taxation  of 
the  corporate  property.  Winnepiseo- 
gee,  etc,  Co,  v.  Gilford,  35  Atl.  Rep. 
945  (N.  H.,  1894). 

2  Railroad  Co.  v.  Jackson,  7  Walk 
262  (1868);  State  Tax  on  Foreign-held 
Bonds,  15  Wall  300  (1872);  Daven- 
port V.  Mississippi,  etc,  R  R,  12  Iowa, 
539  (1861);  Commonwealth  v.  Chesa- 
peake, etc.  R.  R,  27  Gratt.  344  (1876;; 
People  V.  Eastman,  25  Cal.  603  (1864), 
where  the  same  principle  was  applied 
between  counties  in  the  same  state. 
Contra,  Maltby  v.  Reading,  etc,  R  R, 
52  Pa.  St.  140  (1806).  As  to  the  rule 
where  part  of  the  capital  stock  is 
used  out  of  the  state,  see  Common- 
wealth V.  Standard  Oil  Co.,  101  Pa. 

lo: 


<3H.  XXXIT.]      TAXATION    OF    STOCK   A^^^    COEPORATIONS.  [§  5Y25. 

tion  of  unincorporated  associations  is  considered  elsewhere.* 
Where  a  railroad  company  of  one  state  is  consolidated  with 
companies  of  other  states,  the  consolidated  company  is  consid- 
ered, for  the  purposes  of  taxation,  to  be  a  corporation  of  each 
state  to  the  extent  that  its  property  is  in  that  state.  It  is  taxed 
in  the  state  on  the  capital  stock  of  the  company  which  it  al> 
sorbed.2  ^he  word  "  franchise  "  has  been  construed  to  mean 
the  entire  property,  tangible  and  intangible,  when  so  intended 

in  a  taxation  statute.' 

§  5  72  J.  IJxempt  ions  from  taxation.— A  stiite,  a  not  restricted 

by  its  constitution,  may  exempt  the  property  of  a  corporation 
from  taxation.  Such  an  exemption  constitutes  a  contract  be- 
tween the  state  and  the  corporation,  which  cannot  be  repealed 
or  changed  by  subsequent  legislation,  unless  the  right  to  alter 
or  repeal  it  has  been  reserved  by  the  state.*    Exemptions  from 


1  See  ch.  XXIX,  supra. 

2  Ohio,  etc.  R  R.  u  Weber,  96  III 
443  (1880);  Chicago,  etc.  R'y  v.  Au- 
ditor-General, 53  Mich.  79  (1884);  Rail- 
road Co.  V.  Vance,  96  U.  S.  4o0  (1877). 
In  this  case  a  railroad  coii>oration  of 
Indiana  which  had  been  recognized 
by  an  act  of  the  Illinois  legislature 
as  a  corporation  of  that  state  was 
held  for  taxes  upon  the  capital  and 
franchises  of  a  road  leased  by  it  in 
Illinois  and  assessed  to  the  lessor 
company,  but  charged  to  the  lessee 
company  and  to  be  collected  from  it. 
Quincy  R.  R.  Bridge  Co.  v.  Adams 
Cotmty,  88  lU.  615  (1878),  where  a 
bridge  company  originally  incorpo- 
rated by  two  states,  and  consolidated 
by  articles  which  were  confirmed  by 
the  legislature  of  one  of  them  (Illi- 
nois), was  held  to  be  a  corporation  of 
that  state  for  purposes  of  taxation. 
Qucere,  whether  the  formation  of  an 
interstate   railroad    corporation  by 
the  consolidation  of  separate  corpo- 
rations in  two  states  creates  a  new 
corporation.    An  incorporating  fee 
is  not  imposed  on  the  whole  consoli- 
dated capital  under  the  New  York 
statute.    People  v.  New  York,  etc. 
R.  R,  129  N.  Y.  474  (1892).    The  state 

10 


may  constitutionally  charge  a  large 
fee  as  a  condition  of  granting  a  char- 
ter. Edwards  v.  Denver,  etc.  R  R, 
13  Colo.  59  (1889). 

3  Adams  Express  Co.  v.  Kentucky, 
166  U.  S.  171  (1897). 

*  See  §  568,  supra.    An  exemption 
of  a  railroad  from  taxation,  except 
when  the  dividends  exceed  eight  per 
cent,  is  a  contract  protected  by  the 
federal  constitution.    Mobile  &  Ohio 
R  R  V.  Tennessee,  153  U.  S.  486  (1894). 
An  exemption  from  state  taxation 
is  a  contract  between  the  state  and 
the  corporation  which  cannot  be  im- 
paired by  a  subsequent  statute.   Such 
exemption,  however  will  not  be  ex- 
tended to  branch  lines  thereafter  con- 
structed.   "Wilmington,  etc.  R  R.  v. 
Alsbrook,  146  U.  S.  279  (1892).     See 
in  general,  Tomlinson  v.  Branch,  15 
WalL  460  (1872) ;  Home  of  the  Friend- 
less V.  Rowse,  8  WalL  430  (1869)  ;,Wn- 
mington  R  R  v.  Reid,  13  Wall.  264 
(1871);  Mobile,  etc.  R  R  u  Moseley, 
52  Miss.  127  (1876);  Jefferson  Bank  v. 
Skelley,  1  Black,  436  (1861),  where  the 
charter  provided  for  the  payment  of 
six  per  cent  of  the  bank's  profits  in 
lieu  of  taxes;  Livingston  Coimty  v. 
Hannibal,  etc.  R  R,  60  Mo.  516  (1875), 


§  5 72 J.]  TAXATION    OF    STOCK    AND    CORPORATIONS.       [cn.  XXXIV, 


taxation,  liowever,  arc  not  favored  by  the  courts,  and  arc  strictly 
limited  to  tlie  terms  of  the  exemption.     Moreover,  under  a  rcs- 

where,  however,  an  exemption  from 
county  taxes  was  belJ  not  to  include 
a  school  tax  which  originated  after 
the  cliarter  was  granted;  Hannibal, 
etc.  R  R.  V.  St.  Joseph,  39  Mo.  470 
(1867),  holding  that  an  exemption 
from  coimty  taxation  will  not  pro- 
vent  taxation  by  a  city.  A  contract 
between  the  state  and  a  railroad,  that 
the  latter  shall  pay  a  certain  tax  and 
no  more,  is  not  repcalablo  by  the 
state.  State  Board  r.  Jlorris.  etc.  R.  R., 
49  N.  J.  L.  193  (1886).  Thougli  a  cliar- 
ter may  be  repe;ilable,  yet  an  amend- 
ment giving  an  exemption  from  tax- 
ation may  be  irrepealable,  since  the 
latter  may  be  a  contract  and  not  a 
franchise.  State  Board  r.  Mon-is,  etc. 
R.  R,  49  N.  J.  L.  193  (1886).  A  bonus 
to  the  state  on  increase  of  capital 
stock  cannot  apply  to  previous  char- 
ters having  charter  right  to  increase. 
Commonwealth  v.  Erie,  etc.  Transp. 
Co.,  107  Pa.  St.  112  (1884);  Railroad 
Cos.  V.  Gaines,  97  U.  S.  698  (1878), 
holding  that  a  new  corporation  in- 
vested with  the  powers  and  privileges 
of,  and  subject  to  the  obligations  of 
the  charter  of,  another  corporation, 
does  not  take  an  exemption  from 
taxation.  To  same  effect,  Railroad 
Co.  V.  Corumissioners,  103  U.  S.  1 
(1880) ;  Dauphin,  etc.  R'y  v.  Kennerly, 
74  Ala.  583  (1883).  But  see  East  Ten- 
nessee, etc.  R  R.  V.  Pickerd,  24  Fed. 
Rep.  614  (1885);  Delaware  Railroad 
Tax,  18  Wall.  206  (1873);  Dartmouth 
College  V.  Woodward,  4  Wheat.  518 
(1819) ;  Providence  Bank  v.  Billings, 
4  Pet.  514  (1830);  Binghamton  Bridge, 
3  Wall.  51  (1865);  Humphreys  v.  Pe- 
gues,  16  Wall.  244  (1872);  Pacific  R.  R 
V.  Maguirg,  20  WaU.  36  (1873);  North 
Missom-i  R.  R  v.  Maguire,  20  Wall.  46 
(1873) ;  People  v.  Soldiers'  Home,  etc., 
95111.561  (1880);  University  v.  Peo- 
ple, 99  U.  S.  309  (1878),  holding  void 
a  statute  limiting  a  general  exemp- 

lo: 


tion  previously  conferred  to  property 
in  immediate  use  by  a  corporation; 
Farrington  v.  Tennessee,  95  U.  S.  679 
(1877);  Railway  Co.  v.  Philadelphia, 
101  U.  S.  528  (1870);  Hoge  v.  Railway 
Co.,  99  U.  S.   348  (1878)";    Dodgo  v. 
Wwlsey,  18  How.  331  (1855),  holding 
that  the  adoption  of  a  new  constitu- 
tion declaring  that  corporate  prop- 
erty shall  be  taxed  will  not  be  allowed 
to  impair  the  contract;  Mobile,  etc 
R.  R  V.  Kennerly,  74  Ala.  506  (18S3); 
Richmond  v.  Richmond,  etc.  R  R,  21 
Gratt  (Va.)  604  (1872),  holding  also 
that  an  exemption  of  coriwrate  prop- 
erty in  a  city  from  taxation,  which 
conflicts  with  the  charter  of  the  city 
previously  granted,  is  not  unconsti- 
tutional if  the  city  has  remaining 
ample  means  of  taxation  to  meet  it3 
needs;    Commonwealth    v.    Fayette 
R  R,  55  Pa.  St.  452  (1867),  liolding 
that,  where  power  to  alter  or  repeal 
the  exemijtion  is  reserved,  the  exer- 
cise of  the  power  is  no  impairment 
of  the  contract;  State  v.  Miller,  30 
N.  J.  L.  368  (1803),  hokling  that  the 
repeal  may  be  made  by  a  general  law ; 
State  V.  Commis-sioners  of  Taxation, 
37  N.  J.  L.  240  (1874),  holding  that, 
where   a   general   exemption  from 
taxation  is  granted  to  a  coi-poration 
without  reserving  the  power  to  alter 
or  repeal  it,  and  there  is  a  provision 
for  a  special  mode  of  assessing  its 
property,  it  may  consent  to  another 
mode  of  assessment  without  surren- 
dering or  altering  its  exemption  from 
general   taxation;    East    Tennessee, 
etc.  R  R  v.  Pickerd,  24  Fed.  Rep.  614 
(1885);   Temple  Grove  Seminary  v. 
Cramer,  98  N.  Y.  121  (1885),  holding 
that  an  incorporated  academy  does 
not  waive  or  forfeit  its  exemption 
from  taxation  by  reason  of  having 
leased  its  building  for  a  boarding- 
house  during  vacations;    Elizabeth- 
town,  etc.  R  R  V.  Elizabethtown,  13 
6 


CH.  XXXIV.]       TAXATION    OF    STOCK   AND   CORPOKATIONS.  [§  5725. 

ervation  of  power  to  alter,  amend,  or  repeal  the  charter,  the 
legislature  may  take  away  an  exemption  from  taxation.^ 


Bush  (Ky.),  233  (1876),  holdiBg  that 
an  exemption  of  railroad  property 
from  taxation  precludes  any  imposi- 
tion of  taxes  by  the  state,  whether 
for  state  or  local  purposes.  In  Mott 
V.  Pennsylvania  R.  R,  30  Pa,  St.  9 
(1858),  a  sale  of  a  railroad  and  canal 
by  the  state  on  terms  exempting  the 
vendee  from  future  taxes  was  en- 
joined. The  exemption  was  held  to 
be  unconstitutional  Covmty  Com'rs 
V.  Woodstock  Iron  Co.,  83  Ala.  151 
(188G),  holding  that  an  exemption  of 
private  corporations  from  taxation 
made  by  a  general  law  was  not  a  con- 
tract, but  only  a  legislative  bounty, 
subject  to  be  repealed- 

Tlie  act  by  which  the  exemption 
from  taxation  is  made  must  be  clear 
and  unequivocal;  the  intent  to  con- 
fer the  immunity  must  be  beyond 
reasonable  doubt    Ohio,  etc.  Tnast 
Ck).  V.  Debolt,  16  Uow.   416  (1853); 
Delaware  Railroad  Tax,  18  Wall  200 
(1873);  North  Missom-i  R  R.  v.  Ma- 
guire,  20  Wall  40  (1873);  Mobile,  eta 
R  R  r.  Kennedy,  74  Ala.  506  (1883), 
holding  that  a  reasonable  doubt  is  to 
be  construed  against  the  exemption; 
Dauphin,    etc.  R'y  v.  Kennerly,  74 
Ala.  583  (1883);  Richmond  v.  Rich- 
mond, eta  R  R,  21  Gratt.  (Va.)  604 
(1872).    An  exemption  of  a  corpora- 
tion from  taxation  upon  payment  of 
a  fixed  annual  tax  on  the  capital 
stock  is  not  voidable.    State  v.  But- 
ler, 86  Tenn.  614  (1888).    A  particular 
mode  of  taxation  may  be  changed 
under  the  reserved  right  to  amend 
the  charter.   Detroit  St.  R'ys  v.  Guth- 
ard,  51  Mich.  ISO  (1883).  See  also  Bank 
of  Republic  v.  Hamilton  County,  21 
111.  53  (1858);  Mayor,  etc.  v.  Twenty- 
third  Street  R  R,  113  N.  Y.  311  (1889). 
A  specific  rate  of  taxation  prescribed 
in  the  charter  raises  no  implication 
of  a  legislative  contract  to  impose  no 


further  bmrdens  by  way  of  taxation. 
Iron  City  Bank  v.  Pittsburgh,  37  Pa, 
St.  340  (1860).    A  constitutional  pro- 
hibition as  to  exemptions  from  taxar 
tion  does  not  apply  to  raih-oad  cor- 
porations, they  being   quasi-public. 
Yazoo,  etc.  R  R  v.  Levee  Com'rs,  37 
Fed.  Rep.  24  (1888).    A  charter  ex- 
emption from  all  taxation  upon  pay- 
ment of  a  certain  tax  is  legal    Frank- 
lin County  Court  v.  Deposit  Bank,  87 
Ky.  370  (1888).    An  exemption  from 
taxation  which  is  a  gift  may  be  re- 
pealed. Philadelphia  u  Pennsylvania 
Hospital,  134  Pa.  St.  171  (1890).    An 
exemption  from  taxation  may  be  re- 
pealed \mder  the  reserved  right  to 
amend,  etc.    Wagner,  etc.  Institute 
V.  Philadelphia,  133  Pa.  St.  612  (1890). 
An  exemption  from  all  other  taxa- 
tion-is  an  exemption  from  local  as 
well  as  state  taxation.     People  v. 
Coleman,  121  N.  Y.  542  (1890).    A  rail- 
road may  give  up  its  exemption  from 
state  taxation  and  still  retain  its  ex- 
emption from  coimty  taxation.  State 
V.  Hannibal,  etc.  R  R.,  101  Ma  136 
(1890).    A  railroad  that  is  divided  by 
the  legislature  with  the  consent  of 
the  stockholders  does  not  lose  its  ex- 
emptions.   Louisville,  etc.  R  R.  v. 
Commonwealth,  89  Ky.   531   (1890). 
An  exemption  from  taxation  is  not 
a  franchise.     Hence  quo  warranto 
does  not  lie  to  oust  the  corporation 
from  such  exemption.   International, 
etc.  R'y  V.  State,  75  Tex.  356  (1889). 
The  decision  of  the  state  court  that 
an  "exemption  does  not  apply  to  cer- 
tain property  is  not  an  impairment 
of  a  contract.    St.  Paul,  etc.  R'y  u 
Todd  County,  142  U.  S.  282  (1892). 
Where  a  contract  of  exemption  from 
taxation  between  a  state  and  a  water- 
works company  is  declared  vmcon- 
stitutional  by  the  highest  com-t  of 
the  state,  there  is  no  impairment  of 


iPearsaU  v.  Great  Northern  R'y,  101  U.  S.  646,  663  (1896). 
1077 


§  572Z'.]  TAXATION    OF    STOCK    AND    CORPORATIONS.       [CH.  XXXIV. 


"Where  a  corporation  whose  property  is  exempt  from  taxa- 
tion is  merged  into  or  consolidated  with  another,  the  question 
of  whether  the  exemption  from  taxation  passes  with  its  prop- 
erty to  the  lessee,  vendee,  or  consolidated  company  is  a  ques- 
tion which  turns  largely  on  the  words  granting  the  exemption.* 


the  contract  by  subsequent  legisla- 
tion which  assumcb  the  old  contract 
to  have  been  invalid.  New  Orleans 
V.  New  Orleans,  etc.  Works,  142  U.  S. 
79  (1891).  In  Citizens'  Bank  v.  Board 
of  Assessors,  54  Fed.  Rep.  73  (1893),  an 
exemption  from  taxation  was  held 
to  apply  to  extensions  of  the  original 
charter.  Although  the  charter  pro- 
vides that  the  real  and  personal  prop>- 
erty  of  tlie  company  shall  be  taxed 
the  same  as  tliat  of  individuals,  this 
does  not  exempt  the  capital  stock 
from  taxation.  State  v.  Simmons,  70 
Miss.  485  (1893).  An  exemption  from 
taxation  does  not  pass  to  a  company 
that  buys  out  the  company  which  is 
exempt.  Commonwealth  v.  Nash- 
viUe,  etc.  Co.,  93  Ky.  430  (1892).  An 
exemption  from  local  taxation  is  not 
an  exemption  from  state  taxation. 
Wilkes  Barre,  etc.  Bank  v.  Wilkes 
Barre,  148  Pa.  St.  601  (1892).  An  ex- 
emption from  taxation  does  not  ap- 
ply to  assessments  for  improvements. 
Illinois  Cent.  R  R.  u  Mattoon,  141 
ILL  32  (1892).  A  company  to  generate 
and  sell  electric  power  is  not  a  man- 
ufactiiring  company  as  regards  tax- 
ation. Commonwealth  v.  Northern, 
etc.  Co.,  145  Pa.  St.  105  (1891);  Com- 
monwealth V.  Brush,  etc.  Co.,  145  Pa, 
St.  147  (1891).  An  exemption  of  manu- 
factm-ing  corporations  from  taxation 
was  construed  to  exempt  merely  such 
of  their  property  as  was  invested  in 
manufacturing,  in  Commonwealth's 
Appeal,  129  Pa.  St.  346  (1889);  Com- 
monwealth V.  Mahoning  Rolling-Mill 
Co.,  129  Pa.  St.  360  (1889).  Where, 
subsequently  to  the  incorporation  of 
a  company,  a  general  act  reserves  to 
the  legislature  the  right  to  amend 
or  repeal  any  and  all  charters,  the 
legislature  may  repeal  any  amend- 


ments to  the  charter,  so  far  as  such 
amendments  are  passed  after  the 
general  act,  where  the  amendments 
do  not  expressly  waive  the  legisla- 
tive right  of  amendment  or  repeal. 
Amendment  sliould  be  worded  "sav- 
ing, whenever  that  pt)\\  r  was  ex- 
erted, all  rights  previously  vested." 
An  exemption  from  taxation  maybe 
repealed  under  the  reserved  power. 
(Approving  Tomlinson  v.  Jessup,  15 
Wall.  454—1872,  and  Railroad  Co.  v. 
Maine,  96  U.  S.  409—1877.)  Creditors 
stand  upon  the  same  footing  in  this 
respect.  Louisville  Water  Co.  v. 
Clark,  143  U.  S.  1  (1892).  A  contract 
of  a  lessee  to  pay  taxes  upon  the  real 
and  personal  property,  franchises, 
capital  stock,  or  gross  receipts  does 
not  bind  the  lessee  to  pay  taxes  on 
dividends.  Jersey  City  Gaslight  Co. 
V.  United  Gas  Imp.  Co.,  58  Fed.  Rep. 
323  (1893).  See  also,  on  this  subject^ 
§  501,  supra,  and  §  639.  infra. 

^  An  exemption  from  taxation  per- 
tains to  the  franchise  as  a  corpora- 
tion, and  does  not  pass  with  the  sale 
of  the  franchise  to  operate  the  road. 
Chesapeake,  etc.  R'y  v.  Miller,  114 
U.  S.  176  (1885);  Memphis  R  R.  v. 
Com'rs,  112  U.  S.  609  (1884);  Tomlin- 
son V.  Branch,  15  Wall.  460  (1872); 
Branch  v.  Charleston,  92  U.  S.  677 
(1875);  Central  R.  R  v.  Georgia,  93 
U.  S.  665  (1875),  reversing  S.  C,  54  Ga. 
401;  Chesapeake,  etc.  R  R  v.  Vir- 
ginia, 94  U.  S.  718  (1876);  Delaware 
Railroad  Tax,  18  Walk  206  (1873). 
See  also  cases  in  preceding  note. 
Where  by  statute  "  all  rights  "  of  a 
railway  are  to  pass  to  another,  an 
exemption  from  taxation  parses. 
Atlantic,  etc.  R  R.  v.  Allen,  15  Fla. 
637  (1876).  It  certainly  wiU  not  be 
extended  to  the  property  of  other 


1078 


CH.  XXXIV.]       TAXATION    OF    STOCK   AND    COKPOEATIONS.  [§  5725. 


"WTiere  a  consolidation  is  effected  after  the  adoption  of  con- 
stitutional provisions  prohibiting  the  legislature  from  exempt- 
ing the  property  of  corporations  from  taxation,  the  consolidated 
company  is  looked  upon  as  a  new  corporation,  which  is  not 
entitled  to  exemptions  from  taxation  possessed  by  the  compa- 
nies of  which  it  is  composed.^  Consolidation  being  a  dissolu- 
tion of  the  old  companies  destroys  an  exemption  of  one  of  them 
from  taxation.^ 

If  the  franchises  and  property  of  a  corporation  be  transferred 
by  a  sale  in  foreclosure,  an  exemption  from  taxation  does  not 
accompany  the  transfer.  The  exemption  is  a  personal  priv- 
ilege and  not  a  franchise.'  A  statute  exempting  the  property 
of  a  corporation  from  being  taxed  does  not  prevent  the  taxa- 


corporations  consolidated  with  it. 
Philadelpliia,  etc.  R.  R.  u.  Maryland, 
10  How.  376  (1850);  Chesapeake,  etc. 
R  R.  u  Virginia,  94  U.  S.  718  (1876); 
Delaware  Railroad  Tax,  18  Wall.  206 
(1873).  See  also  Wait,  Insolv.  Corp. 
381.  An  exemption  of  a  corporation 
may  not  exempt  also  its  timber  lands. 
Todd  County  r.  St  Paul,  etc.  R'y,  38 
Minn.  163  (1888).  An  exemption  of 
railroad  liinds  from  taxation  may 
pass  to  the  grantee  railroads  there- 
of and  of  the  franchises.  Stevens 
County  V.  St  Paul,  etc.  R'y,  36  ^Hnn. 
467  (1887).  Consolidation  in  Missouri 
destroys  exemption  from  taxation. 
Keokuk,  etc.  R  R  v.  County  Court, 
41  Fed-  Rep.  305  (1890).  A  consoli- 
dated company  under  tlie  Missouri 
statutes  relative  to  railroads  meeting 
at  the  state  line  is  a  new  corporation, 
and  the  old  one  is  dissolved.    An  ex- 


176  (1885).  Where  the  legislature 
ceded  to  a  company  to  be  formed 
"all  the  right,  interest,  and  privi- 
leges of  whatever  kind  "  of  a  defimct 
railroad  company,  it  was  held  that 
an  exemption  from  taxation  con- 
ferred on  the  old  company  was  not 
vested  in  the  new  one.  Railroad  Cob 
V.  Georgia,  98  U.  S.  359  (1878).  In 
this  case  the  restriction  upon  grant- 
ing exemptions  was  in  a  statute  in- 
stead of  a  constitutional  provision. 

2  Keokuk,  etc.  R  R.  v.  Missouri,  153 
U.  S.  301  (1894),  reviewing  the  cases 
on  this  subject  of  dissolution,  and 
holding  that  the  presumption  is  al- 
ways against  the  dissolution. 

3  Morgan  v.  Louisiana,  93  U.  S.  217 
(1876);  Louisville,  etc.  R  R  v.  Pal- 
mer, 109  U.  S.  224(1883);  Wilson  v. 
Gaines,  103  U.  S.  417  (1880),  where 
the  transfer  was  under  proceedings 


emption  from  taxation  of  the  old  cor-  to  enforce  a  statutoiy  lien  of  a  state; 

poration    is   thereby  lost.    State  v.  Arkansas  Midland  R  R.  v.  Berry,  44 

Keokuk,  etc.  R  R,  99  I\Io.  30  (1889).  Ark.  17  (1884).    See  also  Picard  v. 

Although  an  exemp^on  from  taxa-  East  Tennessee,  etc.  R  R.,  130  U.  S. 

tion  is  to  pass  to  a  consolidated  com-  637  (1889),  and  cases  mpra.    Where 

pany,  yet  this  is  a  gratuity  to  the  the  exemption  is  to  all  the  property 

new  company  and  may  be  repealed,  of  a  railroad  its  franchise  is  included. 


Wilmington,  etc.  R  R  v.  Alsbrook, 
110  N.  C.  137  (1892). 

1  Memphis,  etc.  R  R  r.  Berry,  112 
U.  S.  609  (1884);  St  Louis,  etc.  R  R 
V.  Berry,  113  U.  S.  465  (1885);  Chesa- 
peake, etc.  R  R  u  Miller,  114  U.  S. 

1079 


W.ljuington  R  R  v.  Reid,  13  WalL 
264  (1871).  As  to  whether  an  exemp- 
tion from  taxation  is  a  franchise  or 
privilege,  see  Keokuk,  etc.  R.  R  v. 
Missoui-i,  152  U.  S.  301,  311  (1894). 


§  572(?.]  TAXATION   OF   STOCK   AND   C0RP0EATI0N8.      [CH.  XXXIV. 


tion  of  land  held  bj  it  merely  for  convcmcnco  and  not  neces- 
sary to  its  operation.*  In  general,  an  exemption  from  taxation 
by  the  state  is  not  an  exemption  also  from  municipal  taxation 
for  local  purposes,'^  nor  from  assessments  for  improvements.' 

§  572g.  Taxation  of  foreign  corjwralions. —  Any  state  may  tax 
foreign  corporations  doing  business  within  its  borders.* 


1  State  V.  Commissionei-s,  23  N.  J.  L. 
510  (18o2);  State  v.  Collectors,  25  N. 
J.  L.  315  (1855).  In  these  cases  lands 
o%^Tiecl  by  a  railroad  and  occupied  by 
dwellings  for  employees,  car  and 
locomotive  works,  coal  mines,  etc., 
were  held  to  be  subject  to  taxation. 
See  also  Toll-bridge  Co.  v.  Osborn,  35 
Conn.  7  (1868),  where  lands  held  for 
wharves  by  a  bridge  company  by 
authority  of  law  were  held  taxable 
as  real  estate  —  a  provision  in  its 
charter  that  all  its  property  should 
be  considered  personal  property  and 
be  divided  into  shares  being  con- 
strued to  relate  to  the  property  of  the 
stockholders  as  represented  by  the 
shares;  Re  Swigert,  119  111.  83  (1886), 
holding  that  a  railroad  exemption 
did  not  exempt  its  elevator.  In  as- 
certaining, imder  the  New  Jersey 
taxation  statute,  whether  one-half  of 
the  capital  is  employed  in  the  state 
in  manufacturing,  the  capital  em- 
ployed in  disposing  of  the  manufact- 
ured product  in  the  state  is  included. 
Re  Consolidated  Electric  Storage  Co., 
26  Atl.  Rep.  983  (N.  J.,  1893).  For  cases 
passing  upon  the  exemption  of  manu- 
facturing corporations  from  taxation 
in  Pennsylvania,  see  Commonwealth 
V.  Keystone  Bridge  Co.,  156  Pa.  St. 
500  (1893);  Commonwealth  v.  J.  B. 
Lippincott  Co.,  156  Pa.  St.  513  (1893); 
Commonwealth  v.  Thackara  Mfg.  Co., 
156  Pa.  St.  510  (1893);  Commonwealth 
V.  Pottsville  Iron,  etc.  Co.,  157  Pa.  St. 
500  (1893);  Commonwealth  v.  Juniata 
Coke  Co.,  157  Pa.  St.  507  (1893);  Com- 
monwealth V.  National  Oil  Co.,  157 
Pa.  St.  516  (1893). 

2  Elizabethtown,  etc.  R.  R.  v.  Eliza- 
bethtown,  12  Bush  (Ky.),  233  (1876); 
Roosevelt  Hospital  v.  Mayor  of  New 


1080 


York,  84  N.  Y.  103  (1881),  where  real 
estate  t.-xemptod  from  state  taxation 
was  held  to  bo  subject  to  assessment 
by  a  city  for  the  constnaction  of  a 
sewer.  Cf.  Applegato  v.  Ernst,  3  Bush 
(Ky.),  618  (1868),  where  a  tax  by  a 
county  upon  a  railmad  to  oMaiu 
money  to  pay  a  county  subscription 
for  the  purpose  of  completing  the 
road  was  held  to  be  imlawfuL  See 
also  p.  1078,  n.  1,  sitjva. 

'  New  Jersey,  etc.  R.  R  v.  Jersey 
City,  42  N.  J.  L.  97  (1880). 

••Liverpool  Ins.  Co.  v.  Massachu- 
setts, 10  Wall  66  (1870);  S.  C,  Oliver 
V.  Liverpool,  etc.  Co.,  100  Mass.  531 
(1868).  Goods  in  New  York  for  sale, 
also  money  on  deposit  in  New  York, 
also  other  property  in  the  state,  form 
the  proper  basis  for  taxation  of  such 
part  of  the  capital  stock  of  foreign 
corporations  as  is  employed  in  the 
state.  Taxation  for  such  part  of  the 
capital  stock  as  sales  in  New  York 
bear  to  all  the  sales  is  unjust,  since 
many  sales  may  be  by  sample.  Peo- 
ple V.  Wemple,  133  N.  Y.  323  (1892). 
A  tax  on  foreign  manufacturing  cor- 
porations to  the  extent  of  the  busi- 
ness which  they  do  in  the  state  is 
constitutional  and  enforceable.  Peo- 
ple V.  Wemple,  131  N.  Y.  04  (1802). 
The  New  York  statute  taxing  foreign 
corporations  doing  business  in  the 
state  on  the  same  basis  as  domestic 
coi-porations  is  constitutional.  Horn 
Silver,  etc.  Co.  v.  New  York,  143  U.  S. 
305  (1892).  The  New  York  tax  upon 
the  bvisiness  of  all  foreign  and  do- 
mestic corporations  doing  business 
in  the  state  is  a  tax  on  the  right  to 
be  a  corporation  and  to  do  business, 
and  is  not  a  tax  upon  the  franchise, 
even  though  the  tax  is  measured  by 


CH.  XXXIT.]      TAXATION   OF    STOCK   AND    COKPOKATIONS.  [§  572g. 


A  state  may  impose  on  foreign  insm-ance  companies  a  tax 
equal  to  the  tax  levied  by  tlie  state  creating  the  foreign  corpo- 


the  dividends  declared.  The  tax  is 
legal  although  the  corporation  owns 
United  States  bonds.  Home  Ins.  Co. 
V.  New  York,  134  U.  S.  594  (1890). 
Where  foreign  corporations  are  re- 
quired to  report  stock,  bonds,  etc, 
owned  by  residents  for  taxation,  it 
need  report  only  such  as  its  books 
disclose,  and  is  not  to  be  held  liable 
further.  Commonwealth  v.  N.  Y.  etc. 
R  R.,  145  Pa.  St.  57  (1891).  Cf.  Com- 
monwealth V.  American,  etc.  Teleph. 
Co.,  129  Pa.  St.  217  (1889).  Foreign 
corporations  doing  business  in  New 
Jersey  are  subject  to  taxation.  State 
V.  Berry,  53  N.  J.  L,  308  (1890).  Where 
a  parent  corporation  of  Massachu- 
setts owns  stock  in  a  branch  corpo- 
ration of  New  York  and  collects 
royalties,  etc.,  from  the  latter,  the 
parent  corporation  is  not  subject  to 
taxation  in  New  York.  People  v. 
American,  eta  Teleph.  Co.,  117  N.  Y. 
241  (1889).  Debts  due  to  a  foreign 
corporation  from  residents  cannot  be 
taxed  in  Louisiana.  Barber,  etc.  Co.  v. 
New  Orleans,  41  La.  Ann.  1015  (1889). 
The  New  York  statute  levj'ing  a  tax 
on  foreign  corporations  doing  busi- 
ness in  the  state,  the  tax  being  upon 
"the  amoimt  of  capital  stock  em- 
ployed within  the  state,"  is  legal,  and 
a  New  Jersey  corporation  is  liable 
to  taxation  for  maintaining  a  sales 
agency  and  office  and  bank  account 
in  New  York  city,  even  though  its 
factories,  books  of  account,  etc.,  are 
in  other  states.  Southern  Cotton  OU 
Co.  V.  Wemple,  44  Fed.  Rep.  24  (1890). 
The  Pennsylvania  statute  impos- 
ing a  quarter  of  a  mill  license  tax  on 
the  capital  stock  of  foreign  corpora- 
tions having  an  office  in  the  state,  and 
prohibiting  such  offices  unless  the 
tax  is  paid,  the  act  applying  to  all  for- 
eign corporations  except  insurance 
companies,  is  constitutionaL  A  state 
may  exclude  or  impose  conditions 
upon  foreign  corporations  imless  they 


are  engaged  in  interstate  or  foreign 
commerce,  or  are  employed  by  the 
government.  Pembina  Min.  Co.  v. 
Pennsylvania,  125  U.  S.  181(1888); 
Blackstone  Mfg.  Co.  v.  Blackstone,  79 
Mass.  488  (1859);  State  v.  Lathrop,  10 
La.  Ann.  402  (1855);  State  v.  Fosdick, 
21  La.  Ann.  434  (18G9);  Tatem  v. 
Wright,  23  N.  J.  L.  429  (1853);  State 
V.  Western  Union  Tel.  Co.,  73  Me.  518 
(1882);  Commonwealth  v.  Western 
Union  TeL  Co.,  98  Pa.  St.  105  (1881); 
Norfolk,  etc.  R.  R.  v.  Commonwealth, 
114  Pa.  St.  256  (1886);  Commonwealth 
V.  Milton,  12  B.  Mon.  (Ky.)  212,  218 
(1851);  Boston  Loan  Co.u  Boston,  137 
Mass.  332  (1884);  Singer  Mfg.  Co.  v. 
County  Com'rs,  139  Mass.  266  (1885); 
Atty-Gen.  v.  Bay  State,  etc.  Co.,  99 
Mass.  148  (1868);  Commonwealth  v. 
Texas,  etc.  R.  R.,  98  Pa.  St.  90  (1881), 
holding,  however,  that  a  corporation 
created  by  the  United  States  con-» 
gress  is  not  a  foreign  corporation 
within  the  revenue  act  of  Pennsyl- 
vania; Commonwealths.  Gloucester, 
etc.  FeiTy  Co.,  98  Pa.  St.  105  (1881); 
People  V.  Equitable  Trust  Co.,  96 
N.  Y.  387  (1884),  holding  that  a  tax 
may  be  imposed  upon  the  business 
done  by  a  foreign  corporation  in  New 
York,  but  not  upon  its  property  in 
other  states,  nor  upon  its  franchise. 
A  foreign  corporation  doing  business 
in  and  taxed  in  New  York  is  not  en- 
titled to  a  deduction  for  its  debts. 
People  V.  Barker,  141  N.  Y.  118  (1894). 
Otherwise  as  to  domestic  corpora- 
tions. People  V.  Barker,  141  N.  Y.  196 
(1894).  Under  the  New  York  act,  in 
arriving  at  the  basis  of  taxation  of 
corporations,  the  commissioners  are 
bound  to  take  the  statements  under 
oath  of  the  corporate  officers,  except 
that  they  may  call  for  furtlier  in- 
formation. People  V.  Barker,  139  N.  Y. 
55  (1893).  A  foreign  corporation  is 
not  liable  to  taxation  in  New  York, 
where  its  business  is  conducted  in 


1031 


§  5Y2J.]         TAXATION   OF   STOCK   AND   CORrOEATIONS.       [CH.  XIIIV. 

ration  on  corporations  foreign  to  the  latter  state.'  "Where  a 
railroad  corporation  is  incorporated  by  the  United  States,  a 
state  cannot  tax  its  franchises ;  it  may  tax  the  tangible  prop- 
erty, but  not  the  franchise.'  Where  an  assessment  of  taxes 
against  a  railroad  company  has  been  affirmed  by  the  supremo 
court,  mandamus  may  bo  used  to  compel  payment  of  them,  if 
there  is  no  other  adequate  remedy.'  The  tax  lien  on  a  railroad 
may  by  delay  be  rendered  subordinate  to  a  mortgage.* 

§  572(7.  Taxation  must  not  interfere  with  interstate  com- 
merce.—  "  It  is  not  and  cannot  be  doubted  that  each  state  of 
the  Union  may  tax  all  property,  real  and  personal,  within  its 
borders,  belonging  to  persons  or  corporations,  although  em- 
ployed in  interstate  or  foreign  commerce,  provided  the  rights 
and  powers  of  the  national  government  are  not  interfered 


another  state,  and  all  the  parties  in- 
terested in  it  and  its  officers  reside 
in  another  state,  and  all  its  contracts 
made,  and  its  product  manufactured, 
sold,  and  delivered  in  another  state; 
and  where  it  transacts  none  of  its 
corporate  business  in  the  state,  but 
merely  has  an  office  there,  with  a  sal- 
aried agent,  as  a  convenient  place  to 
discuss  with  patrons  questions  pre- 
liminary to  the  making  of  contracts, 
the  contracts  themselves  being  exe- 
cuted out  of  the  state,  and  the  com- 
pany having  no  bank  account  in  the 
state.  People  v.  Campbell,  139  N.  Y.  68 
(1893).  For  the  New  York  act  which 
applies  to  foreign  corporations,  see 
Parker  Mills  v.  Commissioners,  23 
N.  Y.  242  (1861);  People  v.  Horn,  etc. 
Co.,  105  N.  Y.  76  (1887).  They  are  to 
be  taxed  where  their  principal  offices 
in  the  state  are  situated.  People  v. 
McLean,  17  Hun,  204  (1879).  A  cor- 
poration chartered  by  the  federal 
government  is  not  such  a  foreign  cor- 
poration as  is  obliged  to  pay  a  license 
fee  vmder  the  Pennsylvania  statutes. 
Commonwealth  v.  Texas,  etc.  R.  R,, 
98  Pa.  St.  90  (1881).  Unless  a  statute 
otherwise  provides,  a  lien  upon  cor- 
porate property  for  state  taxes  at- 
taches in  preference  to  pre-existing 
judgments  or  decrees;  it  has  been 


held  that  a  sale  under  a  judgment  or 
decree  will  not  avoid  such  a  lien. 
Osterburg  v.  Union  Trust  Co.,  93  U.  S. 
424  (1876).  In  New  York  it  is  held  tliat 
the  rolling  stock  of  a  railroad  is  sub- 
ject to  seizure  and  sale  for  taxes. 
Randall  v.  Ehvell,  52  N.  Y.  521  (1873). 
But  not  so  in  Kentucky.  Elizabeth- 
town,  etc.  R.  R.  V.  EUzabethtown,  12 
Bush  (Ky.),  233  (1876). 

1  Home  Ins.  So.  v.  Swigert,  104  111. 
653  (1882) ;  Phila.  Fire  Assoc,  v.  New 
York,  119  U.  S.  110  (1886. 

2  California  v.  Pacific  R.  R,  127  U.  S. 
1,  40  (1888).  A  county  ordinance  re- 
quiring a  railroad  chartered  by  the 
United  States  to  take  out  a  license  is 
void.  San  Benito  County  v.  South- 
ern Pac.  R  R.,  77  CaL  518  (1888). 

3  Person  v.  "Warren  R  R,  32  N.  J. 
L.  441  (1868);  Silverthom  v.  "VVarren 
R  R,  33  N.  J.  L.  173  (1868).  And  the 
party  making  return  to  an  alterna- 
tive mandamus  must  show  that  he 
has  complied  with  the  order  to  the 
extent  of  his  ability;  want  of  funds 
is  not  a  sufficient  return  where  it  is 
the  result  of  the  voluntary  act  of  the 
party. 

4  Cooper  V.  Corbin,  105  lU.  224  (1883) ; 
Parsons  v.  East,  etc.  Co.,  108  111.  380 
(1884). 


1082 


CH.  XXXIV.]      TAXATION    OF    STOCK   AND    COKPORATIONS.  [§  572d. 

T\-itli."  *    A  state  statute  taxing  a  corporation  having  interstate 
property  may  levy  the  tax  not  only  on  the  tangible  property 
within  the  state,  but  on  such  portion  of  the  earning  power  of 
the  property  as  the  property  in  the  state  bears  towards  the 
whole  property.     This  is  not  interfering  with  interstate  com- 
merce by  levying  a  tax  for  the  privilege  of  transacting  such 
commerce.^    A  state  through  which  a  railroad  runs  may  re- 
quire, upon  the  consolidation  of  the  company  with  companies 
in  other  states  so  as  to  make  an  interstate  railroad,  the  payment 
of  a  tax  on  the  whole  consolidated  capital  stock.''    But  a  state 
cannot  tax  corporations  so  as  to  interfere  with  interstate  com- 
merce.    The  Pennsylvania  license  fee  which  all  foreign  corpo- 
rations keeping  an  office  in  the  state  are  required  to  pay,  with 
a  few  exceptions,  is  unconstitutional  as  regards  a  foreign  rail- 
road corporation  which  owns  a  railroad  in  the  state,  such  rail- 
road being  part  of  an  interstate  system  of  railroads.*    But  a 
state  may  levy  a  tax  on  the  capital  stock  of  a  foreign  sleeping- 
car  company  which  runs  its  cars  through  the  state,  the  tax 
being  on  such  part  of  the  capital  stock  as  the  number  of  miles 
which  its  cars  run  in  the  state  bears  to  the  whole  number  of 
miles  over  which  its  cars  run  in  all  the  states.'' 

A  tax  on  interstate  telegraph  messages  is  unconstitutional.^ 
But  a  state  may  tax  a  foreign  telegraph  company  engaged  in 
interstate  telegraph  business,  the  tax  being  graded  according  to 
the  amount  and  value  of  the  company's  property  in  the  state 
measured  by  miles,  and  the  tax  being  in  place  of  taxes  levied 
directly  on  the  property.  Such  tax  is  a  franchise  tax.''  A  city, 
under  authority  of  a  statute,  may  compel  an  interstate  tele- 
graph company  to  pay  an  annual  license  of  $500  for  the  privi- 

1  Western  Union  TeL  Co.  v.  Tag-  capital  stock  of  a  foreign  telegraph 
gart,  163  U.  S.  1  (1896j.  company,  the    capital    stock  being 

2  Adams  Express  Co.  v.  Oliio  State  valued  at  the  aggregate  value  of  aU 
Auditor,  166  U.  S.  185  (1897).  its  shares  of  stock,  and  the  proportion 

»  Ashley  v.  Ryan,  153  U.  S.  436  (1894).  of  its  lines  within  the  state  to  those 

4  Norfolk,  etc.  R.  R.  v.  Penn,  136  outside  of  it  being  the  basis  of  tax- 

U  S  114  (1890)  ation.      Massachusetts   v.    "Western 

8  Pullman's  Car  Co.  v.  Penn,  141  Union  TeL  Co.,  141  U.  S.  40  (1890). 
U.  S.  18  (1891),  the  court  holding  that       «  Western  Union  TeL  Co.  v.  Alar 

a  tax  on  the  capital  stock  on  account  bama,  132  U.  S.  472  (1889). 
of  the  property  owned  is  a  tax  on  the        '  Postal  TeL  Cable  Co.  v.  Adams, 

property  itself.     A  similar  decision  155  U.  S.  688  (1895> 
was  made  concerning  a  tax  on  the 

1083 


§  572d.']  TAXATION   OF   STOCK   ANT)   CORPORATIONS.      [CH.  XXXIV. 


lege  of  doing  business  i-n  such  city.  This  is  a  tax,  and  is  not  a 
condition  or  restriction  on  the  privilege  of  doing  business  in 
the  state.^  A  state  cannot  prohibit  the  agents  of  foreign  ex- 
press companies  from  doing  business  in  the  state,  except  upon 
obtaining  a  license.  Such  a  law  is  an  interference  with  inter- 
state commerce.^  A  tax  may  be  levied  based  on  the  gross  re- 
ceipts, and,  if  the  road  is  but  partly  in  the  state,  on  a  proportion 
of  the  gross  receipts  determined  by  a  mode  prescribed  by  stat- 
ute,^ A  state  may  tax  a  railroad  on  business  that  passes  out 
of  the  state  into  anotlier  state  and  back  into  the  first  state 
again.*  Various  other  decisions  on  taxation  in  its  bearings 
upon  interstate  commerce  are  given  in  the  notes  below.' 


1  Postal  Tel.  Cable  Co.  v.  Cliarles- 
ton,  153  U.  S.  092  (189-4). 

2  Crutcher  v.  Kentucky,  141  U.  S. 
47  (1891). 

3  ]\Iaine  v.  Grand  Trunk,  etc.  R'y, 
143  U.  S.  217  (1891). 

4  Lehigh  Valley  R  R  v.  Penn,  145 
U.  S.  192  (1892). 

5  A  tax  on  sleeping-car  companies 
may  be  illegal  as  interfering  with  in- 
terstate commerce.  State  v.  Wood- 
ruff, etc.  Co.,  114  Ind.  155  (1888).  A 
state  tax  on  interstate  railroad  earn- 
ings is  unconstitutional.  Fargo  v. 
Michigan,  121  U.  S.  230  (1887);  Phila. 
etc.  Co.  V.  Pennsylvania,  122  U.  S. 
326  (1887);  Delaware,  etc.  Canal  Co. 
V.  Commonwealth,  17  AtL  Rep.  175 
(Pa.,  1888);  Northern  Pac.  R'y  u.  Ray- 
mond, 5  Dak.  356  (1888).  A  state  may 
tax  a  foreign  telegi-aph  company 
on  such  a  proportion  of  its  capital 
stock  as  its  lines  in  the  state  bear 
to  all  of  its  lines;  but  the  state  can- 
not enjoin  the  operation  of  the  tele- 
graph until  the  tax  is  paid.  Western 
Union  TeL  Co.  v.  Massachusetts,  125 
U.  S.  530  (1888);  Erie  R'y  v.  New 
Jersey,  81  N.  J.  L.  531  (1864),  holding 
that  a  state  tax  upon  foreign  coi*po- 
rations  transporting  passengers  and 
freight  through  the  state,  graduated 
by  the  number  of  passengers  and 
weight  of  the  goods,  is  in  violation  of 
that  clause  of  the  United  States  con- 


stitution giving  congi'css  the  right 
to  regulate  commerce  between  the 
states;  Indiana  v.  American  Exp.  Co., 
7  Diss.  227  (1876);  S.  G,  13  Fed.  Cas. 
21,  where  a  tax  upon  transportation 
through  a  state  was  held  to  be  an  in- 
terference with  interstate  commerce 
and  unconstitutional.  So  held  also 
of  a  tax  upon  locomotives,  cars,  etc., 
of  a  foreign  railroad  company  in 
Minot  V.  Philadelphia,  etc.  R  R.,  3 
Abb.  (U.  S.)  323  (1870).  As  to  an  in- 
terstate bridge,  see  Anderson  v.  Chi- 
cago, etc.  R.  R,  117  111  26  (1886). 
Pullman  cars  operated  wholly  within 
the  state  may  be  taxed  as  a  privilege. 
Gibson  County  v:  Pullman,  etc.  Co., 
42  Fed.  Rep.  572  (1890).  A  foreign 
corporation's  rolling-stock  used  in 
interstate  commerce  is  not  taxable 
by  the  state.  Bain  v.  Richmond,  etc. 
R  R,  105  N.  C.  363  (1890).  Interstate 
express  companies  may  be  taxed  on 
the  business  which  they  do  within 
the  state.  Pacific  Exp.  Co.  v.  Seibert, 
44  Fed.  Rep.  310  (1890).  As  to  tele- 
graph companies,  see  also  Western 
Union  TeL  Co.  v.  Lieb,  76  111.  173 
(1875);  Western  Union  TeL  Co.  v. 
Mayer,  28  Ohio  St.  521  (1876).  A  fee 
required  of  foreign  corporations  be- 
fore doing  business  in  the  state  is 
unconstitutional  as  an  interference 
with  interstate  commerce.  Coit  v. 
Sutton,  102  Mich.  324  (1894).    An  ex- 


1084 


OH.  XXXIV.]       TAXATION    OF   STOCK   AND   COBPOKATIONS.  [§  572^. 

§  572^.  Inlieritance  tax. —  During  the  past  ten  years  tlie 
various  states  of  the  Union,  in  their  eager  search  for  new  modes 
and  subjects  of  taxation  in  order  to  meet  the  lavish  expendi- 
tures and  reckless  financing  of  state  and  municipal  govern- 
ments, have  found  a  rich  source  of  income  in  an  inheritance 
tax  levied  upon  and  paj^able  from  the  wealth  of  the  dead.  In- 
deed, so  fruitful  and  easy  is  this  mode  of  taxation,  it  is  being 
adopted  throughout  tlie  Union  and  will  soon  become  almost 
universal.  Pennsylvania  led  the  way  some  sixty  years  ago.^ 
The  New  York  tax  on  inheritances,  in  addition  to  its  sweeping 
application  to  all  manner  of  inheritances,  attaches  to  shares  of 
stock  held  by  residents  in  foreign  corporations.^  But  the  fact 
that  a  non-resident's  certificates  of  stock  in  foreign  corporations 
are  in  ^ew  York  state  does  not  render  them  subject  to  taxation 
in  that  state.'  The  IN'ew  York  inheritance  tax  applies  to  stock 
in  domestic  corporations  although  held  by  non-residents  at  the 
place  of  their  residence,  but  does  not  apply  to  bonds  issued  by 
domestic  corporations  and  held  by  non-residents  at  the  place 
of  their  residence.*  This  statute  covers  bonds  owned  by  a  non- 
resident, but  kept  in  a  safe-deposit  vault  in  Xew  York,  except- 
ing United  States  bonds.  The  statute  also  covers  certificates 
of  stock  of  domestic  corporations  owned  by  non-residents,  but 
deposited  in  New  York.*^     The  war  revenue  act  of  congress  of 

press  company  may  be  taxed  on  its  the  number  of  miles  within  the  state 
gi-oss  receipts,  although  it  pays  a  part  bears  to  the  whole  number  of  miles 
thereof  to  a  railroad,  and  the  railroad  of  the  road,  even  though  the  roUing- 
is  taxed  again  on  the  sama  A  stat-  stock  is  used  in  interstate  traffic, 
ute  against  double  taxation  does  not  Board  of  Assessors  v.  Pullman's  Pal- 
apply  to  this.  Commonwealth  v.  U.  S.  ace  Car  Co.,  60  Fed.  Rep.  37  (1894). 
Express  Co.,  157  Pa.  St.  579  (1893).  i  See  the  brief  yet  comprehensive 
The  New  Jersey  annual  tax  of  one-  and  clear  statement  of  the  history  of 
tenth  of  one  per  cent  of  the  capital  inheritance  taxation  statutes  in  Ma- 
stock  is  not  vmconstitutional  as  in-  goun  v.  Illinois  T.  &  Sav.  Bank,  170 
terfering  with  interstate  commerce,  U.  S.  283  (1898),  upholding  the  Illinois 
even  as  affecting  a  bridge  company  statute  on  this  subject;  although  the 
which  operates  a  bridge  connecting  tax  in  that  state  varies  according  to 
two  states.  Limaberville,  etc.  Co.  v.  the  size  of  the  estate,  and  in  case  it 
State  Board  of  Assessors,  55  N.  J.  L.  is  over  $50,000  the  tax  is  six  per  cent. 
529  (1893).  An  express  company  may  2  j^q  Merriam,  141  N.  Y.  479  (1894). 
be  compelled  to  pay  a  license  fee  ^  Re  James,  144  N.  Y.  6  (1894);  Re 
wherever  it  does  bvisiness.  Osborne  v.  Whiting,  150  N.  Y.  27  (1896). 
State,  33  Fla.  162  (1894).  A  state  may  *  Re  Bronson,  150  N.  Y.  1  (1896). 
tax  the  roUing-stock  of  a  foreign  5  Re  Whiting,  150  N.  Y.  27  (189G). 
corporation  in  the  proportion  which 

1085 


572<?.]  TAXATION    OF    STOCK    AND    COEPOEATIONS.       [CH,  XXXIT. 


1898  imposes  an  inheritance  tax  on  all  estates  of  personal  prop- 
erty exceeding  ten  thousand  dollars  in  value.'  Where  an  Eng- 
lish company  allows  the  American  executor  of  the  estate  of  a 
deceased  American  stockholder  to  transfer  the  stock  to  himself 
as  executor  on  the,  company's  books  without  paying  the  Eng- 
lish succession  tax,  the  company  is  liable  to  the  English  gov- 
ernment for  such  tax.  The  court  held  that  such  is  the  law, 
although  the  statutes  do  not  expressly  render  the  company 
liable  for  the  tax.'^  In  England  an  income  tax  is  collected.'  In 
this  country  such  a  tax  might  legally  be  levied  by  a  state,  but 
cannot  be  imposed  by  the  federal  government.* 


1  If  the  personal-property  estate  is 
more  than  $10,000  and  not  more  than 
$25,000,  the  tax  is  seventy-five  cents 
on  each  hundred  dollars  if  the  prop- 
erty goes  to  a  descendant,  ancestor, 
brother,  or  sister;  $1.50  on  each  hun- 
dred dollars  if  the  property  goes  to 
a  descendant  of  a  brother  or  sister; 
$3  on  each  hundred  if  the  property 
goes  to  a  brother  or  sister  of  the  dece- 
dent's father  or  mother,  or  a  descend- 
ant of  such  brother  or  sister;  $4  on 
every  hundred  if  the  property  goes 
to  a  brother  or  sister  of  the  decedent's 
grandfather  or  grandmother,  or  a  de- 
scendant of  such  brother  or  sister; 
and  $5  on  every  hvmdred  where  the 
property  goes  to  any  other  relative 
or  to  a  stranger  in  blood  or  to  a  cor- 
poration. Where,  however,  the  hus- 
band or  wife  of  the  deceased  person 
takes  property,  by  legacy  or  will  or 
by  consent,  no  inheritance  tax  under 
this  act  shall  be  levied.  If  such  es- 
tate is  more  than  $25,000  and  not  over 
$100,000,  the  tax  shall  be  one  and  one- 
half  times  the  rates  specified  above 
in  each  case;  if  the  estate  is  over 
$100,000  and  not  over  $500,000,  the 
above  rates  shall  be  double;  if  over 
$500,000  but  not  over  $1,000,000,  the 
rate  shall  be  two  and  one-half  times 
as  great;  and  if  the  estate  is  over 
$1,000,000  the  rate  shall  be  three 
times  as  great.  The  tax  applies  to 
personal  proj^erty  transferred  prior  to 
the  death  of  the  owner  with  the  in- 


tent that  it  sliall  vest  upon  his  death. 
Tlie  tax  does  not  apply  to  real  estate. 

2  Attorney-General  v.  New  York, 
etc.  Co.,  78  L.  T.  Rep.  61  (1897).  In 
this  case  the  court,  in  holding  that 
an  English  corporation  was  Liable  for 
an  inheritance  tax  on  shares  of  stock 
which  it  had  allowed  to  be  trans- 
ferred on  its  books  by  American  ex- 
ecutors of  the  estate  of  a  deceased 
American  owning  such  stock,  said: 
"  The  American  will,  as  regards  tliese 
EngUsh  assets,  had  no  validity  wliat- 
ever  in  this  country,  nor  had  the 
American  executors  any  right  under 
it  to  receive  the  testator's  assets 
here.  Until  they  had  taken  out  rep- 
resentation to  their  testator  in  this 
countiy,  they  were  pure  strangers  to 
the  EngUsh  assets.  This  American 
will,  to  the  knowledge  of  all  parties, 
was  never  to  come  into  operation  as 
a  will  in  this  country;  the  American 
executors  were  never  to  become  ex- 
ecutors in  this  country,  it  being  the 
express  intention  of  all  parties  that 
they  should  not." 

3  Where  there  is  a  parent  company 
with  minor  companies  abroad,  and 
dividends  are  paid  abroad  to  stock- 
holders there  without  the  money 
going  to  England,  the  English  in- 
come tax  does  not  apply  to  such 
moneys.  Bartholomew  Brewing  Co. 
V.  Wyatt,  [1893]  2  Q.  B.  499. 

*  Pollock  V.  Farmers'  L.  &  T.  Co., 
158  U.  S.  601  (1895);  S.  C,  157  U.  S.  429. 


1086 


CHAPTER  XXXY. 


FORMS  OF  ACTIONS   AND  MEASURE   OF  DAMAGES  "VVHERE  A 
STOCKHOLDER  HAS  BEEN  DEPRIVED  OF  HIS  STOCK. 


573.  Pleading  and  practice  in  ac- 
tions relative  to  stock. 
574  Assumpsit. 

575.  Trespass  on  the  case. 

576.  Trover. 

577.  Detinue  and  replevin. 

578.  Money  had  and  received. 

579.  Bill  in  equity. 

580.  Pleading  under  the  codes. 

581.  Measiire  of  damacces.    (a)  The 

iirst  rule  —  Value  _  how 
shown  when  there  is  no 
market  value. 


582.  (b)  The  second  rule. 

583.  (c)  The  third  rule. 

584.  Interest,  dividends,  and  accre- 

tions. 

585.  Nominal  damages. 

686.  Damages  for  failure  to  com- 
plete a  purchase  of  stock  or 
for  fraud  inducing  a  pur- 
chase of  stock. 

587.  In  actions  between  stock- 
brokers and  their  custom- 


§  573.  Pleading  and  practice  in  actions  relative  to  stoclc. — 
When  an  owner  of  stock  who  is  out  of  possession  brings  an  ac- 
tion for  its  recovery,  or  for  the  recovery  of  the  certificate,  or 
for  damages  for  the  detention  or  conversion  of  either  the  stock 
or  the  certificate,  it  is  important  to  determine  what  action  will 
lie,  in  what  court  the  action  is  to  be  prosecuted,  and  what  is 
the  measure  of  damages.  Similar  questions  arise  when  suits 
are  brought  for  breach  of  contract  to  sulDscribe  for  stock,  or  of 
contracts  to  sell  and  convey  stock.  There  are  certain  well- 
settled  rules  as  to  the  form  of  the  action  in  these  cases  which 
are  deduced  from  the  older  common-law  pleading  and  practice. 
These  rules,  even  in  the  code  states,  where  forms  of  action  are 
little  regarded,  and  where  the  old  actions  have  been  abolished 
in  name,  are  still  at  least  partially  applicable.  Some  knowl- 
edge, therefore,  of  the  procedure  at  common  law  in  stock  cases 
is  necessary.^ 

§  574.  Assumi}sit. —  An  action  of  assumpsit,  or  indebitatus 
assumpsit  at  common  law,  lies  against  a  corporation  for  un- 
justly refusing  to  register  a  transfer,  or  for  refusing  to  issue  a 
certificate  to  one  entitled  to  it.^    So,  also,  assumpsit  lies  for 

1  On  this  subject  the  author  refers,    phen's  Pleadings  (1894),—  especially 
for  more  particular  information,  to    chapter  IL 
the  excellent  work,   Andrews'   Ste-        2  Rex  v.  Bank  of  England,  2  Doug. 

1087 


§  575.] 


ACTIONS    AND    MEASURE    OF    DAMAGES.  [cn.  XXXV. 


brcacli  of  contract  to  return  borrowed  bank  stock  on  demand,^ 
But  mandamus  is  not  a  proper  remedy  in  tliese  cases,  and  it 
will  not  lie  to  compel  a  corporation  to  transfer.-  The  form  of 
a  complaint  or  declaration  in  an  action  by  a  pledgor  against  a 
pledgee  for  the  conversion  of  the  stock  held  in  pledge  may  bo 
in  tort  or  in  assumpsit,  but  not  in  both.'  A  corporation  may 
sue  in  assumpsit  its  treasurer  who  has  illegally  issued  excessive 
stock  and  converted  the  proceeds  to  his  own  use.* 

§  575.  Tr€S2)ass  on  the  case. —  An  action  of  trespass  on  the 
case  may  be  brought  against  the  corporation  for  a  denial  to  a 
stockholder  of  a  certificate  of  stock,'  and  an  action  on  the  case 
lies  for  a  conversion  of  shares  of  stock.'    The  appropriate  rem- 

524  (1780);  Kortright  v.  Buffalo  Com-.   148  (1859);  S.  C,  2  L.  Can.  Jur.  291 


mercial  Bank,  20  Wend  91  (1838); 
Arnold  v.  Suffolk  Bank,  27  Barb.  424 
(1857);  Wyman  v.  American  Powder 
Co.,  62  Mass.  168  (1851);  Sargent  v. 
Franklin  Ins.  Co.,  25  Mass.  90  (1829); 
Hayden  v.  Middlesex  Turnp.  Co.,  10 
Mass.  397  (1813);  Pinkerton  v.  Man- 
chester, etc.  R  R,  42  N.  H.  424(1861); 
HiU  V.  Pine  River  Bank,  45  N.  H.  300 
(1864).  Cf.  Foster  v.  Essex  Bank,  17 
Mass.  479  (1821);  Eastern  R  R  v. 
Benedict,  76  Mass.  212  (1857).  As- 
smnpsit  does  not  lie  against  a  corpo- 
ration for  refvisal  to  register  a  trans- 
fer of  stock.  Action  on  the  case  is 
the  remedy.  Telford,  etc.  Co.  v.  Ger- 
hab,  13  AtL  Rep.  90  (Pa.,  1888). 

^McKenney  v.  Haines,  63  Me.  74 
(1873). 

2  See  §  390,  supra. 

3  Stevens  v.  Hurlbut  Bank,  31  Conn. 
146  (1862).    See  also  §  475,  siq^ra. 

4  Rutland  R  R  v.  Haven,  62  Vt. 
39  (1889). 

5  Bank  of  Ireland  v.  Evans's  Char- 
ities, 5  H.  L.  Cas.  389  (1855);  Rex  v. 
Bank  of  England,  2  Doug.  524  (1780); 
Davis  V.  Bank  of  England,  2  Bing. 
393  (1824);  Coles  v.  Bank  of  England, 
10  Ad.  &  E.  437  (1839);  Gray  v.  Port- 
land Bank,  3  Mass.  364,  381  (1807); 
North  America  Building  Assoc,  v. 
Sutton,  35  Pa.  St.  463  (1860) ;  Webster 
V.  Grand  Trunk  R'y,  3  L.  Can.  Jiir. 


(construing  the  judicatm-e  act,  13 
Vict.,  cap.  38,  §  87);  Protection  Life 
Ins.  Co.  V.  Osgood,  93  IlL  69  (1879); 
Baker  v.  Wasson,  53  Tex.  150  (1880); 
Smith  V.  Poor,  40  Me.  415  (1855); 
Catchpole  v.  Ambergate,  etc.  R'y,  1 
EL  &  B.  Ill  (1852);  Daly  v.  Thomp. 
son,  10  K  &  W.  309  (1842).  Cf.  Swan 
V.  North  British,  etc.  Co.,  7  H.  «&  N. 
603  (1862);  Kortright  v.  Buffalo  Com- 
mercial Bank,  20  Wend.  91  (1838). 
For  an  action  of  tort  with  a  coimt  in 
contract  for  refusal  to  transfer,  see 
Bond  V.  Mount  Hope  Iron  Co.,  99 
Mass.  505  (1868). 

6  Daggett  V.  Davis,  53  Mich.  35 
(1884);  Bank  of  America  v.  McNeil, 
10  Bush  (Ky.),  54  (1873);  Parsons  v. 
Martin,  77  Mass.  Ill  (1858);  Nabring 
V.  Bank  of  Mobile,  58  Ala.  204  (1877). 
A  complaint  which,  after  stating  that 
shares  of  stock  had  been  pledged  to 
defendant,  avers  that  "  defendant,  in 
consideration  of  the  premises,  then 
and  there  undertook  and  promised 
to  plaintiff  "  to  hold  the  stock  only 
as  pledgee,  but  that,  in  violation  of 
its  promise,  defendant  sold  and  con- 
verted the  stock  to  its  own  use,  with- 
out giving  plaintiff  notice  of  the  sale, 
and  in  which  plaintiff  seeks  to  re- 
cover as  damages  the  full  value  of 
the  shares  alleged  to  have  been  con- 
verted, though  informal,  is  good  as  a 


1088 


•CH.  XXXT.]  ACTIONS   AXD   ilEASUKE   OF   DAMAGES. 


[§  576. 


edy  of  a  purchaser  against  a  corporation  for  refusal  to  register 
a  transfer  to  himself  is  an  action  on  the  case,  wherein  the  meas- 
ure of  damages  is  the  value  at  the  time  of  refusal  to  transfer.* 
A  transferee's  action  upon  the  case  for  damages,  instead  of  in 
trover  for  conversion,  against  the  corporation  for  refusal  to 
register  the  transfer,  entitles  him  to  nominal  damages  only,  un- 
less he  proves  special  damage.^  A  count  in  case  may  be  joined 
with  one  in  trover.''  Trover  and  case  lie  against  a  tax  collector 
for  selling  bank  stock  for  an  illegal  tax.* 

§  576.  Trover.—  It  is  a  very  generally  accepted  rule  that 
trover  will  lie  for  the  conversion  of  shares  of  stock.*    This  is 


complaint  in  case.  Sharpe  v.  Bir- 
mingham Nat.  Bank,  87  Ala.  644 
<1888).  This  case  discussed  also  tlie 
difference  between  assumpsit  and 
case  in  such  an  action. 

1  German  Union,  etc.  Assoc,  v. 
Sendmeyer,  50  Pa.  St.  67  (1865);  Mor- 
gan V.  Bank  of  North  America,  8 


nomah  Street  R'y.  13  Oreg.  271  (1885); 
S.  C,  22  Am.  &  Eng.  R.  R.  Cas.  27. 
Cf.  Atkins  v.  Gamble,  42  Cal.  86,  100 
(1871);  Maryland  F.  Ins.  Co.  v.  Dal- 
rymple,  25  Md.  242, 267  (1866).  Trover 
and  arrest  lie  for  conversion  of  cer- 
tificates of  stock.  Barry  v.  Calder, 
48  Hun,  449  (1888).    The  action  for 


Sere.  &  R  (Pa.)  73  (1822);  Presbyte-    conversion    lies,  even    thougii    tne 


rian  Cong.  v.  Carlisle  Bank,  5  Pa.  St 
345  (1847). 

2  McLean  v.  Charles  Wright  Med. 
Co.,  96  Midi-  479  (1893).  See  also 
|5  585,  infra. 

s  Nabring  v.  Bank  of  Mobile,  58  Ala. 
204  (1877). 

*  Sprague  v.  Fletcher,  37  AtL  Rep. 
239  (Vt,  1896). 

5A)Tes  V.  French,  41  Conn.  142 
(1874);  Payne  v.  Elliot,  54  Cat  339 


plaintiff  uses  the  term  "shares  of 
stock  "  and  "  certificates  of  stock  " 
interchangeably.  Godfrey  v.  Pell,  49 
N.  Y.  Super.  Ct.  226  (1883).  A  party 
whose  stock  has  been  converted  may 
sue  for  damages  instead  of  following 
the  stock.  Moore  v.  Baker,  4  Ind. 
App.  115  (1892).  For  the  allegations 
in  an  action  for  the  conversion  of  a 
bond,  see  Saratoga,  etc.  Co.  v.  Hazard, 
55  Hun,  251  (1889) ;  aff'd,  121  N.  Y.  677. 


(1880)-  Kulm  V.  McAllister,  1  Utah,    Where  defendant   purchased  stock 
273  (1875)-  S.  C.  mh  nom.  McAllister    for  the  plaintiff  and  accounted  there- 


r.  Kuhn,  96  U.  S.  87  (1877);  Bank  of 
America  v.  ISIcNeil,  10  Bush  (Ky.), 
54  (1873);  Boylan  v.  Huguet,  8  Nev. 
345  (1873);  Morton  v.  Preston,  18 
Mich.  60  (1869);  Jarvis  v.  Rogers,  15 
Mass.  389  (1819)  — a  case  where  tro- 
ver was  held  to  lie  for  the  value  of 


for,  but  refused  to  account  for  divi- 
dends received  while  he  held  the 
stock,  the  defendant  is  guilty  of  con- 
version. Shaughnessy  v.  Chase,  7  N.  Y. 
St.  Rep.  293  (1887).  There  are  many 
cases  in  the  lower  courts  of  New  York 
on  this  subject.    A  refusal  to  return 


ver  was  iieiu  i-"  "c  ^v/i   .-^v^ —     -  -  . 

Mississippi    scrip,   representing  one    pledge  after  payment  is  a  conven^ion^ 
hundred  and  fifty  thousand  acres  of    See  Roberts  ^^  ^^^del^  52  N.  Y.  644 


hind.  Anderson  v.  Nicholas,  28  N.  Y. 
<)00  (1864);  Freeman  v.  Harwood,  49 
Me.  195  (1859);  Connor  v.  Hillier,  11 
Ricli.  L.  (S.  C.)  193  (1857);  Sturges  v. 
Keith,  57  IlL  451  (1870);  Budd  v.  Mult- 


(1873);  S.  C,  15  Abb.  Pr.  (N.  S.)  177. 
As  to  arrest  for  conversion,  replevin 
thereby  being  waived,  see  Chappel  v. 
Skinner,  6  How.  Pr.  338  (1851);  Per- 
son V.  Civer,  29  How.  Pr.  432  (1865), 


69 


1089 


§  ^TG.] 


ACTIONS    AND   MEASURE    OF   DAMAGES.  [cil.  XXXV. 


the  favorite  remedy  when  the  shareholder  has  been  unjustly 
deprived  of  his  stock ;  and  it  is  nowhere  denied,  except  in  Penn- 
sylvania,^ that  this  form  of  action  is  proper.  But  even  there, 
for  the  conversion  of  a  certificate  of  stock,  trover  will  lie.* 
For  the  maintenance  of  the  action  of  trover  there  must  be  title 
in  the  plaintiff  to  the  subject  of  the  action,  and  an  actual  con- 
version by  the  defendant.  If  either  of  these  elements  is  want- 
ing the  action  will  not  lie.  Thus,  trover  will  not  lie  for  the 
conversion  of  a  certificate  where  the  title  to  the  shares  is 
divested.' 

And,  upon  the  other  hand,  withholding  possession  of  a  cer- 
tificate of  stock  cannot  amount  to  a  conversion  of  the  stock 
itself  so  long  as  the  certificate  is  not  indorsed;  but  it  may 


rev'g  28  How.  Pr.  139;  Niver  t».  Niver, 
43  Barb.  411  (1864);  Dubois  v.  Thomp- 
son, 1  Daly,  309  (18G3);  Cousland  v. 
Davis,  4  Bosw.  619  (1839).  As  to  conver- 
sion of  railway  shares  in  a  foreign 
country,  see  Northern  R'y  v.  Carpen- 
tier,  13  How.  Pr.  222  (1856).  In  Butts  v. 
Burnett,  6  Abb.  Pr.  (N.  S.)  302  (1869), 
involving  the  arrest  of  a  broker  who 
had  sold  the  pledge  before  the  note 
was  due,  the  court  said:  "It  is  veiy 
questionable,  I  tliink,  whether  a  de- 
mand after  default  in  payment  of  the 
debt  for  which  property  is  pledged 
as  security  will  render  a  refusal  to 
deliver  the  pledged  property  a  tor- 
tious conversion  of  it.  No  doubt  the 
pledgor  can  redeem  upon  a  tender  of 
the  debt,  or  he  may  recover  the  dif- 
ference between  the  value  of  the 
pledge  and  the  debt.  But  to  lay  the 
foundation  for  an  action  for  conver- 
sion, I  am  of  opinion  that  an  offer 
and  demand  must  be  made  on  the 
day,  and  is  not  sufficient  if  made  after 
the  day  on  which  the  debt  has  be- 
come payable." 

1  Sewall  V.  Lancaster  Bank,  17  S.  & 
R.  (Pa.)  285  (1828);  Neiler  u  Kelley, 
69  Pa.  St.  403  (1871). 

2Biddle  v.  Bayard,  13  Pa,  St.  150 
(1850);  Neiler  v.  Kelley,  69  Pa.  St.  403 
(1871);  Sewall  v.  Lancaster  Bank,  17 


Serg.  &  R.  (Pa.)  285  (1828).  Cf.  AuU  v. 
Colket,  2  AY.  N.  Cas.  322  (1875).  So 
in  Michigan.  Daggett  v.  Davis,  53 
Mich,  35  (1884).  In  trover  the  goods 
ought  to  be  set  out  with  some  degree 
of  certainty  of  description ;  but  the 
same  cei'tainty  is  not  required  as  in 
detinue  and  replevin,  damages  being 
recovered  in  trover,  the  very  articles 
in  detinue  and  replevin,  Neiler  v. 
Kelley,  69  Pa.  St,  403  (1871), 

3  Broadbent  v.  Farley,  12  C.  B.  (N.  S.) 
214  (1862;.  Trover  does  not  lie  against 
a  person  to  whom  stock  is  given  to 
sell  and  use  the  proceeds  to  start  in 
business.  Borland  v.  Stokes,  120  Pa- 
st. 278  (1888).  Where  several  share- 
holders mutually  agree  to  contribute 
a  number  of  shares  each,  to  be  sold 
for  the  benefit  of  the  corporation,  one 
of  them  cannot,  after  the  rest  have 
contributed  their  proportion,  refuse 
to  allow  his  shares  to  be  sold  as 
agreed ;  and  if  the  corporation  takes 
them  under  the  agi-eement  and  sells 
them,  he  cannot  have  an  action  of 
trover.  Conrad  v.  La  Rue,  52  Mich.  83 
(1883).  In  trover  for  a  certificate  of 
stock,  the  acceptance  by  the  plaintiff 
of  the  certificate  ends  the  suit,  and 
nothing  further  can  be  recovered. 
Collins  V.  Lowry,  78  Wis.  329  (1890). 


1090 


CH.  XXXV.]  ACTIONS   AND   MEASURE   OF   DAMAGES. 


[§  576. 


amount  to  a  techmcal  conversion  of  the  certificate.^  A  trans- 
fer of  a  certificate  of  stock  in  the  usual  form  may  constitute  a 
transfer  of  the  right  to  bring  suit  for  the  conversion  of  such 
stock.2  It  is  well  established  that  a  refusal  of  a  corporation  to 
reo-ister  a  transfer  in  the  name  of  one  entitled  to  the  stock  is  a 
conversion  of  the  shares.'*  In  I^ew  York  a  transferee  may  try 
his  right  to  registry  in  an  action  for  dividends,'*  but  not  after 
commencing  an  action  for  conversion.'  Where  the  corpora- 
tion has  been  held  liable  for  conversion,  it  cannot  then  tender 
the  stock  back  to  the  stockholder  and  avoid  the  payment  of 
the  damages.'  A  failure  or  refusal  by  the  corporation  to  issue  a 
certificate  to  an  original  subscriber,  when  by  the  terms  of  the 
contract  of  subscription  it  ought  to  be  issued,  may  be  treated 
as  a  conversion.'  So,  also,  a  failure  to  deliver  stock  according 
to  a  contract  for  delivery,^  or  to  return  borrowed  stock  on  de- 


1  Daggett  V.  Davis,  53  Mich.  35 
(1884).  Cf.  INIorton  t',  Preston,  18 
Mich.  60  (18G9).  Where  an  adminis- 
trator sells  stock  pledged  to  the  de- 
ceased in  his  life-time  as  security  for 
a  loan  of  money,  and  receives  the  pro- 
ceeds and  properly  accounts  to  the 
estate,  this  is  not  a  conversion  of  the 
shares,  and  the  pledgor  cannot  have 
an  action  of  trover.  If  any  action 
lies  it  is  for  money  had  and  received. 
Von  Schmidt  v.  Bourn,  50  CaL  616 
(1875).  For  an  example  of  an  insuf- 
ficient complaint  in  trover  for  shares, 
in  that  there  was  no  sufficient  aver- 
ment of  a  conversion  or  of  facts  from 
which  a  conversion  might  be  in- 
ferred, see  Edwards  v.  Sonoma  "Valley 
Bank,  59  CaL  136  (1881);  and  see  also 
Cumnock  v.  Newburyport  Sav.  Inst., 
142  Mass.  343  (1880). 

2Malianey  v.  Walsh,  16  N.  T.  App. 
Div.  601  (1897). 

3  Allen  V.  American  Building,  etc. 
Assoc,  49  Minn.  544  (1892);  North 
America  Building  Assoc,  v.  Sutton, 
35  Pa.  St.  463  (1860);  West  Branch, 
eta  Canal  Co.'s  Appeal,  81*  Pa.  St. 
19  (1870);  Baltimore,  etc.  R'y  v.  Sew- 
ell,  35  Md.  238  (1871);  McMurrich  v. 
Bond  Head  Harbor  Co.,  9  U.  C.  Q.  B. 


333  (1852).  Trover  lies  against  a  cor- 
poration at  the  instance  of  a  i)ur- 
chaser  of  certificates  of  stock  for  re- 
fusal to  transfer  the  stock  on  the 
books  of  the  company.  Ralston  v. 
Bank  of  California,  112  Cal.  208  (1896). 
But  see  New  London  Nat.  Bank  v. 
Lake  Shore,  etc.  R'y,  21  Ohio  St.  221, 
232  (1871).  The  corporation  may  in- 
terplead in  certain  cases.  See  §  387, 
supra.  In  suing  for  damages  for  con- 
version against  the  corporation  for 
depriving  a  person  of  his  stock,  the 
latter  need  not  tender  the  certificates. 
Carpenter  v.  American  Bldg.  etc. 
Assoc,  54  Minn.  403  (1893). 

4  Robinson  v.  National  Bank  of 
New  Beme,  95  N.  Y.  637  (1884). 

5  Hughes  V.  Vermont  Copper  Min, 
Cc.  72  N.  Y.  207  (1878). 

6  Carpenter  v.  American  Bldg.  etc. 
Assoc,  54  Minn.  403  (1893). 

7  See  §  61,  mipra. 

8  Huntingdon,  etc.  Coal  Co.  v.  Eng- 
lish, 86  Pa.  St.  247  (1878);  North  v. 
Phillips,  89  Pa.  St.  250  (1879);  Noonan 
V.  Hsley,  17  Wis.  314  (1863) ;  Pinkerton 
V.  Manchester,  etc.  R.  R.,  42  N.  H. 
424  (1861).  Trover  lies  against  a 
vendor  for  the  conversion  of  stock, 
even  though  the  certificate  was  not 


1091 


§  577.]  ACTIONS   AND   MEASUEE    OF   DAMAGES.  [CH.  XXXV. 

mand,  or  at  the  time  wlien  by  agreement  it  ought  to  be  returned, 
and  an  unauthorized  sale  of  stock  by  a  pledgee  in  viohition  of 
the  terms  of  the  contract  of  baihncnt,-  or  by  a  broker  in  viola- 
tion of  his  contract,'  are  examples  of  conversion  of  stock, 
Where  an  agent  writes  the  stockholder's  name  on  the  back  of 
the  certificate  of  stock,  and  disposes  of  it  without  authority,  he 
is  guilty  of  conversion  and  may  be  arrested.*  The  right  to  ar- 
rest depends  largely,  of  course,  on  the  statutes  of  the  state 
wherein  suit  is  brought.'  In  Oregon  it  is  said  that  any  inter- 
ference subversive  of  the  right  of  the  owner  of  stock  to  enjoy 
and  control  it  is  a  conversion.'  Trover  will  not  lie  by  a  trustee, 
on  stock  which  stands  in  the  name  of  the  cestui  que  trusty  against 
a  porson  taking  title  from  a  co-trustee.  A  suit  in  equity  is  the 
proper  remedy.'  "Where  a  certificate  of  stock  is  supposed  to  bo 
bm'ned,  but  is  afterwards  found,  a  conversion  for  refusal  to  de- 
liver dates  from  the  time  when  it  is  found.^  Proof  of  demand 
is  necessary  in  order  to  support  the  action  of  trover,  where  the 
defendant  came  into  lawful  possession  of  the  stock  and  had  an 
interest  in  it.^ 

§  577.  Detinue  and  replevin. —  The  common-law  action  of 
detinue  will  lie  for  the  recovery  of  a  certificate  of  stock  unlaw- 

transferred.    Mahaney  v.  "Walsh,  IG  the  action  of  pledgor  may  be  in  tort 

N.  Y.  App.  Div.  601  (1897).  or  contract.    International  Bank  v. 

1  McKenney  v.  Haines,  G3  Ma  74  Monteath,  39  N.  Y.  297  (1868).  Con- 
(1873);  Fosdick  v.  Greene,  27  Ohio  version  lies  for  an  unauthorized  sale 
St.  484  (1875);  Forrest  v.  El  was,  4  of  stock  and  also  for  dividends 
Ves.  Jr.  493  (1799).  Where  a  person  received  thereon.  Shaughnessy  v. 
loans  stock  to  another  to  borrow  Chase,  7  N.  Y.  St.  Rep.  293  (1887). 
money  upon,  conversion  does  not  lie  3  gee  ch.  XXV,  supra;  Sadler  v. 
for  a  failure  to  return  the  stock.  Lee,  G  Beav.  324  (1843). 
Barrowcliflfe  v.  Cummins,  66  Hun,  1  4  Reigner  v.  Spang,  5  N.  Y.  App. 
(1892).    Where  bonds  are  loaned  to  Div.  237  (1896). 

use  temporarily  upon  an  agreement  »  See  §  457,  supra. 

to  return  them  when  called  for,  and  ^Budd  v.  Multnomah  Street  R'y,  13 

the  member  of  the  firm  to  whom  Oreg.  271  (1885). 

they  are  delivered  uses  them  for  his  "Onondaga,  etc.   Co.  v.  Price,  87 

own    pm-poses,  he    converts   them.  N.  Y.  543  (1883);  S.  C,  in  a  court  of 

Birdsall  v.  Davenport,  43  Hun,  553  equity,  as  White  v.  Price,  39  Hmi,  394 

(1887).  (18S6);  aflf'd,  108  N.  Y.  G61  (1888). 

2  Maryland  F.  Ins.  Co.  v.  Dalrymple,  » :McDonald  v.  Mackinnon,  104  Midi- 
25  Md.  243,   367  (1866);  Freeman  v.  428  (1895  >. 

Harwood,  49  Me.  195  (1859);  Fisher  v.        »  Moynahan  v.  Prentiss,  51  Pac.  Rep. 
Brown,  104  IMass.  359  (1870).    For  re-    94  (Colo.,  1897). 
fusal  of  pledgee  to  retm-n  property, 

1093 


on.  XXXV.]        ACTIONS    AXD    MEASUKE    OF    DAMAGES.       [§§  57S,  57D. 


fully  detained.^  In  tliis  action  tlie  judgment  is  conditional, 
either  to  restore  the  thing  detained,  or  pay  the  value  and  dam- 
ages for  the  detention.  The  more  modern  action  of  replevin 
or  its  equivalent  will  doubtless  lie  for  the  recovery  of  a  certifi- 
cate, as  for  any  other  tangible  personal  property. 

§  578.  Money  had  and  received. —  A  pledgor  whose  stock  has 
been  AvrongfuUy  sold  by  the  pledgee,  in  violation  of  the  con- 
tract of  bailment,  may  have  an  action  against  the  pledgee  for 
money  had  and  received.^ 

§  579.  Bill  in  equity. —  A  bill  in  equity  may  be  maintained 
by  a  hona  fide  purchaser  of  stock  against  the  corporation  to 
compel  a  transfer  of  the  stock  upon  the  corporate  books.'  A 
bill  in  equity  may  be  filed  also  to  relieve  a  stockholder  from 
an  unauthorized  forfeiture ;  *  to  rescind  a  subscription  obtained 
by  fraud ; '  to  compel  a  specific  performance  of  an  agreement 
to  sell  stock ;  ®  to  remedy  a  purchase,  sale,  or  transfer  of  stock 
induced  by  fraud;'  and  to  redeem  stock  held  in  pledge.^  A 
preliminary  injunction  against  transferring  stock  is  also  fre- 
quently granted.*    A  bill  in  equity  is  the  proper  i:emedy  to 

of  the  stock  need  not  be  alleged  with 
any  particular  definiteness.  Herrlich 
V.  McDonald,  80  Cal.  460  (1889).  Where 
a  coi'poration  repudiates  a  pledge  of 
stock  made  by  its  treasurer,  it  can- 
not sue  the  pledgee  for  the  money 
received  by  the  pledgee  upon  a  sale 
of  the  stock  by  the  latter.  Holden  v. 
IMetropolitan  Nat.  Bank,  151  Mass.  113 
(1890). 
3  See  §  391,  supra, 
*  See  §  134,  stipra. 
5  See  ^§  155, 156,  suprcu 
^  See  ^  338,  supra. 

7  See  §  356,  supra. 

8  See  §  475,  supra. 

9  Heck  V.  Bulkley,  1  S.  W.  Rep.  613 
(Tenn.,  1886),  holding  also  that  a 
violation  of  the  injunction  is  a  bar 
to  damages  upon  a  dissolution  of  it. 
The  preliminary  injunction,  being 
an  equitable  remedj',  is  not  granted  if 
only  legal  relief  is  souglit  by  the 
action.  See  McHenry  v.  Jewett,  90 
N.  Y.  58  (1882).  A  principal  wlio  is 
suing  an  agent  to  obtain  shares  of 


1  Williams  v.  Peel  River,  etc.  Co., 
55  L.  T.  Rep.  689  (1886);  Williams  v. 
Archer,  5  C.  B.  318  (1847),  where  it 
was  held  that  detinue  lay  to  recover 
two  hundred  and  fifty  scrip  certifi- 
cates; Peters  v.  Heyward,  Cro.  Jac. 
G82  (1624),  where  detinue  was  al- 
lowed for  a  bond  detained.  As  to 
replevin  in  cepit  for  bonds  wrong- 
fully received  in  pledge  from  a 
pledgee,  see  Tliompson  v.  St.  Nicholas 
Nat.  Bank,  113  N.  Y.  325  (1889).  Con- 
cerning  the  nature  of  stock  and  a 
certificate  of  stock,  and  as  to  whether 
trover  or  replevin  will  lie,  see  1  Uni- 
versity Law  Rev.  218  (1894). 

-Von  Schmidt  v.  Bourn,  50  CaL 
616  (1875);  llavsh  v.  Keating,  1  Bing. 
N.  C.  198  (1834).  Cf.  Jones  v.  Brinley, 
1  East,  1  (1800);  Rex  v.  St.  John  Mad- 
dermarkct,  6  East,  182  (1805).  In  an 
old  case  a  contrary  rule  is  laid  down. 
Nightingal  v.  Devisme,  5  Burr.  2589 
(1770).  In  a  suit  for  profits  received 
by  defendant  as  agent  for  plaintiff  in 
buying  and  selling  stock,  the  value 


1093 


§  580.] 


ACTIONS    AND   MEASUEE    OF    DAMAGES. 


[on. 


XX.W. 


obtain  possession  of  shares  of  stock.^  In  a  suit  by  a  claimant 
of  stock  to  obtain  the  stock  from  another  person,  the  corpora- 
tion is  a  proper  but  not  a  necessary  party .^  A  suit  by  the  pur- 
chaser of  a  certificate  of  stock  to  compel  delivery  may  be  brought 
at  the  place  where  the  certificate  is,  and  absent  defendants  may 
be  served  by  publication.' 

§  580.  Pleading  tinder  the  codes. —  In  general,  a  pleading 
under  the  code  is  not  a  safe  pleading,  unless  it  conforms  sub- 
stantially to  the  rules  of  pleading  at  common  law.  Some  ver- 
biage may  bo  omitted,  but  the  relief  granted  by  the  various 
common-law  actions  cannot  be  obtained  even  under  the  code 
without  the  necessary  averments  entitling  the  plaintiff  to  that 
relief.  It  is  the  allegation  of  the  facts,  and  not  the  method  of 
alleging  them,  that  constitutes  a  suUicient  pleading  under  the 
code.* 


stock  may  enjoin  the  agent  from 
transferring  the  same  pendente  lite, 
Chedworth  v.  Edwards,  8  Ves.  Jr.  46 
(1802).  Where  a  proposed  consolida- 
tion is  attacked  by  a  stockholder,  a 
preliminary  injunction,  granted  so 
as  not  to  render  useless  the  whole 
suit  in  case  it  is  successful,  will  not 
be  distiirbed  by  the  court  of  appeals. 
Young  V.  Eondout,  etc.  Co.,  129  N.  Y. 
57  (1891). 

1  This  rule  of  law  has  frequently 
been  applied  in  actions  by  a  pledgor 
to  obtain  from  a  pledgee  the  stock 
which  has  been  pledged.  The  rule 
itself  is  well  established.  White  v. 
Price,  39  Hun,  394  (1886);  aff'd,  108 
N.  Y.  661;  Hasbrouck  v.  Vander- 
voort,  4  Sandf.  74  (1850);  Bryson  v. 
Rayner,  25  Md.  424  (1866);  Conyng- 
ham's  Appeal,  57  Pa.  St.  474  (1868); 
Koons  V.  First  Nat.  Bank,  89  Ind.  178 
(1883),  Where  a  stockholder  trans- 
fers the  certificate  on  the  back  to  a 
person,  and  leaves  it  in  his  own  safe- 
deposit  box,  and  writes  a  letter  to 
such  person  directing  him  to  dis- 
tribute it  among  a  list  of  charitable 
corporations,  but  no  list  is  attached, 
the  latter  takes  no  title,  and  tlie  ex- 
ecutors may  compel  him  to  transfer 


the  certificate  to  them.    Bliss  v.  Fos- 
dick,  76  Hun,  508  (1894). 

2  Williamson  v.  Krohn,  66  Fed.  Rep. 
655  (1895);  Jolmson  v.  Kirhy,  65  Cal. 
483  (1884).  Cf.  Rogers  v.  Van  Nort- 
wick,  45  Fed.  Rep.  513  (1891).  And 
see  §g  338, 361  and  §  3,  mpra. 

3  Ryan  v.  Seaboard,  etc.  R  R.,  83 
Fed.  Rep.  889  (1897).  See  also  ca.ses 
in  S  361,  S7ipra. 

*  Burrall  v.  Bush  wick  R.  R.,  75  N. 
Y.  211  (1878).  Cf.  Tockerson  v.  Chapin, 
52  N.  Y.  Super.  Ct.  16  (1885).  In  Ne- 
vada there  is  a  statutory  action  of 
claim  and  delivery.  Bercich  v.  Marye, 
9  Nev.  312  (1874).  See  Webster  v. 
Grand  Trunk  R'y,  3  L.  Can.  Jur.  148 
(1859);  S.  C,  2  L.  Can.  Jur.  291,  for  a 
construction  of  that  provision  of  the 
judicature  act  (13  Vict.,  c.  38,  §  87) 
which  governs  actions  of  this  nature 
in  the  Canadian  provinces.  In  Kuhn 
V.  McAllister,  1  Utah,  273  (1875),  it  is 
held  that  the  language  used  in  the 
pleadings  in  these  actions  is  not  ma- 
terial, or  that  the  language  is  that  of 
one  form  of  action  or  another,  or  of 
no  form,  but  that  the  question  is 
whether  the  facts  entitle  the  plaint- 
iff to  recover.  A  declaration  in  an 
action  for  the  wrongful  conversion. 


1094 


€H.  XXXV.]  ACTIONS   AND   MEASUEE    OF   DAMAGES. 


[§  581. 


§  5S1.  The  measure  of  damages  —  («)  The  first  rule — Value 
hoiv  sliown  ivlien  there  is  no  marliet  value. —  Great  difficulty 
has  been  experienced  in  determining  what  shall  be  the  meas- 
ure of  damages  for  the  conversion  of  stock.  As  the  manner 
and  conditions  of  the  conversion  vary,  so  also  will  the  measure 
of  damages  vary  from  nominal  damages  to  the  highest  value 
of  the  stock  with  dividends  and  interest,  and  also  any  special 
damages  which  the  plaintiff  can  establish.  In  general,  the 
com-ts  incline  to  the  rule  that  the  true  measure  of  damages  is 
the  value-  of  the  stock  at  the  time  of  the  conversion,^  or  a  rea- 
sonable time  after.'^    B}^  the  phrase  "  the  value  of  the  stock  "  is 


of  the  shares  of  the  capital  stock  of 
a  corporation  is  sufficient  for  the  pur- 
poses of  pleading  if  it  states  the  ulti- 
mate facts  to  be  proven.  The  cir- 
cumstances which  tend  to  prove 
those  facts  may  be  used  for  the  pur- 
ix)se  of  evidence,  but  they  liave  no 
place  in  the  pleadings.  McAllister 
V.  Kuhn,  96  U.  S.  87  (1877),  affirming 
Kulm  V.  McAllister,  1  Utah,  273  (1875). 
As  to  a  misjoinder  of  causes  of  ac- 
tion under  the  California  code,  where 
the  plaintiff  sues  to  recover  certain 
stock,  see  Johnson  v.  Kirby,  65  CaL 
483  (1881).  Upon  the  question  of 
what  is,  in  New  York,  a  sufficient 
pleading  in  an  action  to  compel  de- 
livery of  stock,  see  Burrall  v.  Bush- 
wick  R  R,  75  N.  Y.  211  (1878).  See 
also  2  Chitty,  Pleadings,  p.  618;  Low- 
ell, Transfers,  §  11. 

1  Be  Bahia,  etc.  R'y,  L.  R.  3  Q.  B. 
684  (1868);  Williams  v.  Archer,  5  C.  B. 
318  (1847);  Tempest  v.  Kilner,  3  C.  B. 
249  (1846);  Shaw  v.  Holland,  15  M.  & 
W.  136  (1846);  Pott  v.  Flather,  5  RiiL 
&  Can.  Cas.  85  (1847);  Davidson  v. 
TuUooh,  6  Jur.  (N.  S.)  543  (1860) ;  Wells 
V.  Abernethy,  5  Conn.  222  (1824); 
O'Meara  v.  North  American  !Min.  Co., 
2  Nev.  112  (1866);  Ormsby  v.  Vermont 
Copper  Min.  Co.,  56  N.  Y.  623  (1874); 
Pinkerton  v.  Manchester,  etc.  R  R., 
42  N.  H.  424  (1861);  McKenney  v. 
Haines,  63  Me.  74  (1873);  Sturges  v. 
Keith,  57'IIL  451  (1870);  Noonan  v. 


Ilsley,  17  Wis.  314  (1863) ;  Bull  v.  Doug- 
las, 4  Munf.  (Va.)  303  (1814);  Endera 
V.  Board  of  Public  Works,  1  Gratt. 
(Va.)  364  (1845);  White  v.  Salisbury, 
33  Mo.  150  (1862);  Connor  v.  Hillier,  11 
Ricli.  L.  (S.  C.)  193  (1857) ;  Eastern  R  R 
V.  Benedict,  76  ]\Iass.  212  (1857);  Boy- 
Ian  V.  Huguet,  8  Nev.  345  (1873);  Ber- 
cich  V.  Marye,  9  Nev.  312  (1874);  Sar- 
gent V.  Franklin  Ins.  Co.,  25  Mass.  90 
(1829);  Fisher  v.  Bro\\m,  104  Mass.  259 
(1870);  Wyman  v.  American  Powder 
Co.,  62  Mass.  168  (1851);  North  v.  Pliil- 
lips,  89  Pa.  St.  250  (1879);  Huntingdon, 
etc.  Coal  Co.  v.  English,  86  Pa.  St.  247 
(1878);  Neiler  v.  Kelley,  69  Pa.  St.  403 
(1871);  Randall  v.  Albany  City  Nat. 
Bank,  1  N.  Y.  St.  Rep.  592  (1886); 
Douglas  V.  Merceles,  25  N.  J.  Eq.  144 
(1874*.  See  also  Eicholz  v.  Fox,  13 
Phila.  (Pa.)  382  (1878);  Larrabee  v. 
Badger,  45  IlL  440  (1867);  Barned  v. 
Hamilton,  3  Railw.  &  Can.  Cas.  624 
(1841).  Cf.  Moody  v.  Caulk,  14  Fla. 
50  (1872);  Orange,  etc.  R.  R  v.  Ful- 
vey,  17  Gratt.  (Va.)  366  (1807);  Jeffer- 
son V.  Hale,  31  Ark.  286  (1876);  Third 
Nat.  Bank  v.  Boyd,  44  Md.  47  (1875); 
Tliomas  v.  Sternheimer,  29  Md  268 
(1868). 

2  Colt  V.  Owens,  90  N.  Y.  368  (1882); 
Baker  v.  Drake,  53  N.  Y.  211  (1873); 
S.  C,  66  N.  Y.  513  (1876):  Grviman  v. 
Smith,  81  N.  Y.  25  (1880);  Douglas  v. 
Merceles,  25  N.  J.  Eq.  144  (1874); 
Brewster  v.  Van  Liew,  119  ILL  554 


1035 


§  581.] 


ACTIONS    AND    MEASURE    OF    DAMAGES.  [cil.  XXXV. 


usually  to  be  understood  the  market  value.^  The  fact  tliat  the 
shares  of  stock  have  no  known  market  value  will  not  prevent 
recovery,  where  the  actual  value  is  ascertainable,  in  an  action  ta 
recover  damages.  The  value  may  be  proven  by  showing  the 
value  of  the  property  and  business  of  the  corporation  as  com- 
pared with  the  liabilities.*   The  question  of  what  was  the  market 


(1886);  Budd  v.  Multnomah  Street  R'y, 
15  Oreg.  413  (1887).  Upon  what  is 
reasonable  time  herein  in  transac- 
tions on  the  stock  exchanges,  see 
Stewart  v.  Cauty, 8  M. &  W.  IGO  (1841); 
Field  V.  Leleun,  G  Uui-L  &  N.  G17 
(18G1). 

1  By  the  "  market  value  of  stock  " 
is  meant  the  actual  price  at  which  it 
is  commonly  sold-  That  price  may 
be  fixed  by  sales  of  the  stock  in 
market  at  or  about  a  given  time.  If 
no  sales  can  be  shown  on  the  precise 
day,  recourse  may  be  had  to  sales 
before  or  after  the  day,  and  for  that 
inquiry  a  reasonable  range  in  point 
of  time  is  allowable.  Douglas  v.  Mer- 
celes,  25  N.  J.  Eq.  144  (1874).  Cf. 
Stewart  v.  Cauty,  8  M.  &  W.  IGO  (1841) ; 
Sturges  V.  Keith,  57  III  451  (1870); 
Seymour  v.  Ives,  46  Conn.  109  (1878). 
The  measure  of  damages  for  non- 
delivery of  stock  at  a  certain  date  is 
presumptively  the  par  valua  The 
defendant  is  obliged  to  prove  differ- 
ently if  this  price  is  incorrect.  Har- 
ris's Appeal,  12  AtL  Eep.  743  (Pa., 
1888).  If  there  is  no  market  value  of 
stock,  proof  of  a  few  sales  is  com- 
petent. Brown  v.  Lavvton,  6  N.  Y. 
Supp.  137  (1889). 

2  The  value  of  stock  may  be  ascer- 
tained by  comparing  the  corporate 
assets  with  the  liabilities.  Nelson  v. 
First  Nat.  Bank,  69  Fed.  Rep.  798 
(1895).  The  value  of  stock  may  be 
shown  "  by  proof  of  the  value  of  the 
property  and  business  of  the  corpo- 
ration, its  good-will,  and  dividend- 
earning  capacity."  State  v.  Carpen- 
ter, 51  Ohio  St.  83  (1894).  The  value 
of  the  stock  may  be  determined 
"from    all    the   facts   and    circum- 


stances of  the  case."  McCloy  v.  Cox, 
12  Ind.  App.  27  (1895).  "  In  the  al> 
sence  of  better  evidence,  the  market 
value  of  all  the  property  of  tlie  cor- 
poration may  be  shown,  with  tha 
view  to  arriving  at  the  proportional 
value  of  the  shares  in  controversy."^ 
Hewitt  V.  Steele,  118  Mo.  463  (1893). 
Wliere  there  is  no  market  value^ 
value  may  be  shown  by  past  divi- 
dends, the  value  of  the  corporate 
assets,  and  the  price  of  individual 
sales  not  unucr  compulsion.  If  there 
is  no  market  value,  it  is  presume' I 
to  be  worth  par.  Brinkerhoff-Farris, 
etc.  Co.  V.  Home  Lumber  Co.,  IIS^ 
Mo.  447  (1893).  The  value  of  stock 
may  be  shown  by  its  dividend-pay- 
ing qualities.  Greer  v.  Lafayette 
County  Bank,  128  Mo.  559  (1895).  The 
actual  value  of  the  tangible  jDroperty 
of  the  corporation  cannot  be  resorted 
to,  to  ascertain  the  value  of  the  stock, 
if  there  is  any  better  evidence  of  the 
value  of  the  stock.  State  v.  Sattley, 
131  Mo.  464  (1895).  Where  stock  lias 
no  market  value  its  actual  value  may 
be  shown,  and  proof  may  be  given  of 
the  value  of  the  corjiorate  assets  and 
dividends  paid,  and  the  character 
and  permanency  of  the  business,  and 
the  control  of  the  stock,  and  other 
circmii stances.  A  sale  of  a  single 
share  of  stock  which  carries  the  con- 
trol does  not  fix  the  market  value, 
but  a  sale  two  years  prior  may  be 
shown.  If  there  is  no  evidence  the 
par  value  is  presumed  to  be  the  ac- 
tual value.  Moffitt  v.  Hereford,  133 
Mo.  513  (1896).  The  value  of  the  stock 
four  years  afterwards,  without  a 
showing  as  to  the  relative  condition 
of  the  company  on  the  two  dates,  i» 


1096 


CH.  X5XV.]  ACTIONS    A]ST)   MEASUEE    OF   DAMAGES. 


[§  5S1. 


value  at  the  time  of  tlie  conversion  is  generally  a  question  for 
the  jury ;  ^  and  it  may  be  shown  by  tables  of  prices  current  pub- 


not  admissible.  Jones  v.  Ellis,  68  Vt. 
544  (1896).  The  fact  that  there  is  no 
market  value  for  stock  does  not  show- 
that  the  stock  is  without  valua 
Pabst,  etc.  Co.  v.  Montana,  etc.  Co.,  48 
Pac  Rep.  234  (Mont.,  1897).  The  value 
may  be  proved  by  other  sales.  Kuhn 
V.  McKay,  49  Pac.  Rep.  473  (Wyo., 
1897).  In  ascertaining  the  value  of 
stock  in  a  corporation  owTiing  vmde- 
veloped  property,  where  the  stock  has 
no  market  value,  particular  sales, 
prices,  and  options  on  the  stock  may 
be  shown.  Moynahan  v.  Prentiss,  51 
Pac.  Rep.  94  (Colo.,  1897).  In  ascer- 
taining the  value  of  stock  for  the 
purposes  of  taxation,  the  amount  paid 
in  on  tlie  stock  may  be  taken  as  the 
value  if  there  have  been  no  sales  of 
*.he  stock,  and  if  there  is  no  other 
evidence  as  to  its  value.  Common- 
wealth V.  People'^,  etc.  Co.,  39  AtL  Rep. 
43  (Pa.,  1898).  "  In  actions  for  con- 
version of  personal  property,  such  as 
these  shares  are,  the  damages  are  not 
limited  to  the  market  value  of  the 
stock.  Its  actual  value,  to  be  deter- 
mined under  all  the  circumstances, 
such  as  the  dividend-making  capac- 
ity, the  good-will,  etc.,  is  the  measm-e 
of  damages."  Freon  v.  Carriage  Co., 
42  Ohio  St  30,  38  (1884).  In  Hitch- 
cock V.  McElrath,  72  Cal.  565  (1887), 
the  court  allowed  evidence  to  be 
given  showing  the  market  value  of  all 
the  property  of  the  cor[)oration,  there 
being  no  other  method  of  ascertain- 
ing tlie  value  of  the  stock.  See  also 
McGuffey  v.  Humes.  85  Tenn.  26 
(1886).  The  value  of  stock  may  be 
shown  by  showing  the  value  of  the 
property  of  the  corporation,  the 
amount  of  capital  stock,  and  the 
amount  of  debts.  It  may  be  shown, 
also,  by  proving  how  much  could  be 
borrowed  on  tlie  stock  at  the  place 
where  the  company's  headquarters 
were.    Smith  v.  Traders'  Nat.  Bank, 


82  Tex.  368  (1891).  See  also  Simpkina 
V.  Low,  54  N.  Y.  179  (1873).  Where  a 
vendor  of  stock  in  a  corporation 
which  has  a  franchise,  but  nothing 
else,  is  entitled  to  two  thousand 
shares  of  full-paid  stock  at  a  later 
date,  according  to  the  contract  of 
sale,  his  measure  of  damages  for 
failure  of  the  vendee  to  deliver  the 
two  thousand  shares  is  nominal  dam- 
ages, where  there  was  no  market  or 
actual  value  for  the  stock.  Barnes  v. 
Brown,  130  N.  Y.  372  (1892).  The 
value  of  stock  may  be  shown  by  the 
value  of  its  assets,  where  there  is  no 
known  market  value.  Redding  v. 
Godwin,  44  Minn.  355  (1890).  The 
president  and  managing  agent  ren- 
ders his  corporation  liable  for  a  bonus 
of  stock  in  another  corporation  wliich 
he  gives  secretly  and  corruptly  to 
the  agent  of  the  latter  corporation  in 
order  to  get  a  contract  for  the  foiiner 
corporation.  Grand  Rapids,  etc.  Co. 
V.  Cincinnati,  etc.  Co.,  45  Fed.  Rep. 
671  (1891),  holding  the  former  corpo- 
ration liable  for  the  par  value  of  the 
stock,  inasmuch  as  it  was  the  origi- 
nal issue  of  that  stock.  Not  the 
nominal  but  the  true  value  of  the 
shares  is  what  the  plaintiff  is  entitled 
to  recover.  Bull  v.  Douglas,  4  Mimf. 
(Va.)  303  (1814);  Enders  v.  Board  of 
Public  Works,  1  Gi-att.  (Va.)  364  (1845). 
Where  a  railroad  is  sold  to  be  paid 
for  in  bonds,  a  failure  to  deliver  the 
bonds  enables  the  vendor  to  recover 
their  par  value  from  the  vendee. 
Texas  Western  R'y  v.  Gentiy,  6{> 
Tex,  625  (1888). 

1 1  Sedgw.  Damages  (7th  ed.)j  585, 
and  cases  cited;  Dos  Passos,  Stock- 
brokers, 801.  See  Cameron  v.  Durk- 
heim,  55  N.  Y.  425  (1874);  Fowler  v. 
New  York  Gold  Excli.  Bank,  67  N.  Y. 
138  (1876);  Harris  v.  Tumbridge,  8-3 
N.  Y.  92  (1880),  and  notes  supra. 
Where  there  is  no  evidence  that  the 


1097 


§  5S1.] 


ACTIONS    AND    MEASDKE    OF   DAMAGES.  [CU.  XiXV. 


lislicd  in  tlie  newspapers  or  otherwise  at  the  time  of  the  con- 
version, and  these  may  be  read  in  evidence.^ 

A  conversion  arises  at  the  time  when  the  stockholder,  beinor 
entitled  to  the  immediate  possession  or  delivery  of  the  stock  or 
the  certificate,  makes  a  demand  for  it  which  is  refused.  Ac- 
cordingly, where  a  demand  has  been  made  and  refused,  the 
measure  of  damages  is  the  value  of  stock  on  the  day  of  the 
demand  and  refusal.^ 


stock  is  worthless,  the  question  of 
value  should  be  submitted  to  the 
jury;  the  rule  of  damages  in  a  case 
for  fraud  as  to  representations  as  to 
the  value  of  the  stock  being  tlie  differ- 
ence between  the  value  of  the  stock 
as  represented,  and  what  it  was  in 
fact  worth.  IMaxted  v.  Fowler,  94 
Mich.  lOG  (1802). 

1  Cliquot's  Champagne,  3  "Wall  114 
(18Go);  Whelan  v.  Lynch,  GO  N.  Y. 
4G9  (1875).  A  price-current  or  market 
report  is  admissible  in  certain  cases 
to  prove  the  fluctuations  and  value 
of  stock.  Seligman  v.  Rogers,  113 
Mo.  G43  (1893). 

'-  So  when  stock  held  as  collateral 
is  improperly  sold  by  the  pledgee,  the 
value  on  the  day  when  the  pledgor 
pays  his  debt  and  demands  his  stock 
is  to  be  taken.  Fisher  v.  Brown,  104 
Mass.  259  (1870).  In  Freeman  v.  Har- 
wood,  49  Me.  195  (1859),  shares  of  stock 
standing  in  the  name  of  the  defend- 
ant as  collateral  security  for  a  debt 
which  had  been  paid  were  sold  for 
non-payment  of  an  assessment  and 
bought  by  defendant.  It  was  held 
that  the  defendant  was  liable  in 
trover  for  the  value  of  the  shares  at 
the  time  of  the  sale,  with  interest, 
and  all  dividends  received  thereon, 
deducting  the  amount  of  the  assess- 
ment and  the  expenses  of  the  sale. 


valua  Again,  where  the  corporation 
wrongfully  refuses  to  register  a  trans- 
fer and  to  issue  a  certificate,  the  meas- 
ure of  damages  is  the  value  of  the 
stock  on  tlie  day  when  tlie  transfer 
was  demanded  and  refused.  Wynian 
V.  American  Powder  Co.,  G2  Mass. 
1G8  (1851);  Eastern  R.  R.  v.  Benedict, 
7G  Mass.  212  (1857) ;  West  Branch,  etc. 
Canal  Co.'s  Appeal,  81*  Pa.  St.  19 
(1870);  Baltimore  R'y  v.  Sewell,  35 
Md.  238  (1871);  McMurrich  v.  Bond 
Head  Harbor  Co.,  9  Up.  Can.  Q.  B. 
333  (1852),  where  it  is  said  tliat  while 
the  rule  as  announced  above  is  the 
proper  one,  yet,  when  the  jury  allows 
a  larger  sum,  the  question  of  the 
measure  of  damages  not  having  been 
pressed  at  the  argument,  the  court 
will  not  reduce  the  verdict.  So  also 
where  there  is  a  failure  to  return 
borrowed  stock  on  demand,  or  ac- 
cording to  the  terms  of  the  bailment, 
the  value  on  the  day  of  demand,  or 
on  the  day  when  the  stock  ought  by 
contract  to  have  been  returned,  is 
the  measure  of  damages.  McKenney 
V.  Haines,  63  Me.  74  (1873;;  Fosdick 
V.  Greene,  27  Ohio  St.  484  (1875);  Day 
V.  Perkins,  2  Sandf.  Ch.  359  (1845). 
Cf.  Cortelyou  v.  Lansing,  2  Caines' 
Cas.  200  (1805);  West  v.  Wentworth, 
3  Cow.  82(1824);  Clark  v.  Pinney,  7 
Cow.  681  (1827);  Wilson  v.  Mathews, 


In  Sturges  v.  Keith,  57  111.  451  (1870),  24  Barb.  295  (1857) ;  2  Sedgwick,  Dam- 
it  is  held  that  where  the  demand  and  ages  (7th  ed.),  141,  365,  n.  In  an  old 
refusal  constitute  the  conversion,  or  case,  where  borrowed  stock  was  not 
afford  presumptive  evidence  of  it,  retm-ned,  the  plaintiff  was  allowed 
the  date  of  such  demand  and  refusal  to  recover  the  value  at  the  time  of 
is  the  proper  time  for  estimating  the  the  transfer  to  the  borrower,  no  ao- 

1098 


CH.  XXXV.]  ACTIONS    AND   MEASURE    OF   DAMAGES. 


[§  582. 


Where  the  pledgee  of  stock  wrongfully  sells  it,  the  injured 
party  may  recover  the  highest  market  price  between  the  time 
of  notice  of  sale  and  a  reasonable  tune  within  which  he  might 
have  bought  the  stock  elsewhere.^ 

The  l^ew  York  court  of  appeals,  after  many  variations,  has 
settled  on  the  rule  that  "  in  the  absence  of  special  circumstances, 
in  an  action  for  conversion  of  personal  property  as  well  as  one 
for  failure  to  deliver  it  in  performance  of  a  contract,  where  con- 
sideration has  been  received,  the  value  of  the  property  at  the 
time  of  such  conversion  or  default,  with  interest,  is  the  meas- 
ure of  compensation."  - 

§  582.  (Jb)  The  second  rule.—  In  another  line  of  cases  the  true 
measure  of  damages  in  these  actions  is  said  to  be  the  value  of 
the  stock  on  the  day  of  the  trial.'    In  an  English  case  it  is  said 


count  being  taken  of  an  increase  in 
value.    Forrest  v.  Elwes,  4  Ves.  Jr. 
493  (1709).    See    also  McKenney  v. 
Haines,  63   Me.    74  (1873).    In   :Mo- 
Arthiir   v.    Seaforth,   2    Taunt.   258 
(1810),  it  was  held  that,  upon  the  fail- 
Tire  to  replace  stock,  the  measure  of 
damages  was  the  price  on  the  day  of 
such  failure  or  the  price  on  the  day 
of   the    trial,  at    plaintiffs   option. 
Upon  a  failure  to  deliver  stock  ac- 
cording to  contract  or  on  demand, 
the  value  at  the  time  of  the  demand 
is  the  value  to  be  taken.    Noonan  v. 
Ilsley,  17  Wis.  314  (1863);  Pinkerton 
V.  Manchester,  etc.  E.  R.,42  N.  H.  424 
(1861);  North  v.  PhiUips,  89  Pa.  St. 
250  (1879);  Huntingdon,  etc.  Coal  Co. 
r.  English,  86  Pa.  St.  247  (1878).     Cf. 
Pott  V.  Flather,  5  Raihv.  &  Can.  Cas. 
85    (1847);    Earned    v.   Hamilton,    2 
Ptailvv.  &  Can.  Cas.  624  (1841);  Shaw 
V.  Holland,  15  Mees.  &  W.  136  (1846); 
Tempest  v.  Kilner,  2  C.  B.  300  (1845); 
S.  C,  3  C.  B.  249  (1840);  Gainsford  v. 
Carroll,  2  Barn.  &  C.  624  (1824).    Wil- 
liams  V.  Peel  River,  etc.  Co.,  55  L.  T. 
Rep.  689  (1886),  holds  that  suit  for 
damages  for  wrongful  detention  lies 
against  a  party  who  has  wrongfully 
obtained  possession  of  stock,  and  that 
the  measure  of  damages,  where  the 


defendant  afterwards  abandons  his 
claim,  is  the  intervening  fall  in  the 
value  of  the  stock.  Bankers  of  trust- 
ees wrongfully  sold  out  stock  and 
applied  the  proceeds  to  their  own 
purposes.  The  measure  of  their  lia- 
bility is  the  amount  paid  in  replac- 
ing the  stock.  Sadler  v.  Lee,  6  Beav. 
324  (1843).  As  to  damages  in  cases 
of  trust,  see  Story's  Eq.  (13th  ed.), 
§§  1263, 1264. 

1  Wright  V.  Bank  of  Metropolis,  110 
N.  Y.  237  (1888) ;  Galigher  v.  Jones, 
129  U.  S.  193  (1889),  the  court  saying 
in  the  latter  decision  that  the  meas- 
ure of  damages  is  "  the  highest  inter- 
mediate value  of  the  stock  between 
the  time  of  its  conversion  and  a  rea- 
sonable time  after  the  owner  has  re- 
ceived notice  of  it  to  enable  him  to 
replace  the  stock."  For  an  illegal 
sale  the  pledgor  may  recover  the 
"higiiest  price  which  his  stock 
reached  within  a  reasonable  time 
after  its  illegal  sale  by  defendants." 
Smith  V.  Savin,  141  N.  Y.  315  (1894), 
where  five  weeks  were  held  to  be 
reasonable,  the  pledgor  not  having 
discovered  the  sale  for  some  time. 

^Barnes  v.  Brown,  130  N.  Y.  873 
(1892). 

3  Owen  V.  Routh,  14  C.  B.  327  (1854); 


1099 


§  583.] 


ACTIONS    AND    MEASURE    OF   DAMAGES.  [CU.  XXXV. 


that  this  is  a  sound  rule  in  the  ordinary  cases  of  conversion  of 
stock,  but  that  in  cases  of  failure  to  deliver  stock  the  true  uieas- 
ure  of  damages  is  the  value  when  the  demand  is  made  and  re- 
fused.^ This  second  rule  has  found  little  favor,  and  there  is 
believed  to  be  no  sound  reason  for  its  adoption. 

§  583.  (c)  The  third  rule. —  It  has  been  held  in  still  another 
class  of  decisions  that  the  measure  of  damages  for  the  conver- 
sion of  stock  is  the  highest  nuirket  value  of  the  stock  between 
the  date  of  the  conversion  and  the  day  of  the  trial.  This  is  the 
rule  in  California  in  some  cases.'  So,  also,  in  South  Carolina,' 
Georgia ;  *  and  it  was  formerly  the  rule  in  New  York '  and 


Shepherd  v.  Johnson,  2  East,  211 
(1802);  Bercich  v.  Marye,  9  Nev.  313 
(1874).  Cf.  Williams  v.  Archer,  5 
C.  B.  318  (1847);  and  see  Wilson  v. 
Little,  2  N.  Y.  443, 450  (1849),  wherein 
there  is  a  quere  as  to  whether  this 
may  not  be  the  better  rule.  In  Fowle 
V.  Ward,  113  Mass.  548  (1873),  it  is 
held  that  the  measure  of  damages  is 
the  value  of  the  stock  upon  the  day 
when  the  bill  in  equity  is  filed,  it 
being  an  equitable  action  by  a  pledgor 
against  a  pledgee.  The  measure  of 
damages  may  be  the  price  at  which 
the  defendant  sold  the  securities,  if 
already  sold,  and,  if  not  sold,  then  the 
amount  of  depreciation  in  value  since 
plaintiff  demanded  them,  together 
with  intervening  dividends.  Sim- 
mons V.  London  Joint  Stock  Bank, 
[1891]  1  Cli.  270. 

1  Shaw  V.  Holland,  15  M.  &  W.  136, 
145  (1846). 

2Cal.  Code,  §  3336,  is  as  follows: 
"  The  detriment  caused  by  the  wrong- 
ful conversion  of  personal  property 
is  presumed  to  be:  1.  The  value  of 
the  property  at  the  time  of  the  con- 
version, with  the  interest  from  that 
time;  or,  where  the  action  has  been 
prosecuted  with  reasonable  diligence, 
the  highest  market  value  of  the 
property  at  any  time  between  the 
conversion  and  the  verdict,  without 
interest,  at  the  option  of  the  injured 
party."    This  is  held  to  apply  to  the 


conversion  of  the  shares  of  stock. 
Fromm  t.  Sierra  Nevada,  etc.  Co.,  (31 
Cat  629  (1882);  Dent  v.  Holbrook,  54 
Cat  145  (1880).  Cf.  Thompson  v.  To- 
land,  48  CaL  99  (1874).  The  court.s 
have  held  that  this  ^ction  of  the 
code  applies  to  the  conversion  of 
shares  of  stock,  but  they  have  not 
worked  out  a  very  consistent  rule  on 
the  subject.  In  Douglass  v.  Kraft,  9 
CaL  563  (1867),  the  "highest  value" 
rule  is  adopted,  but  in  later  cases  the 
court  seems  to  incline  toward  the 
modern  New  York  rule.  Hamer  v. 
Hathaway,  33  Cal.  117  (1867);  Page  v. 
Fowler,  39  Cal.  412  (1870) ;  Dent  v.  Hol- 
brook, 54  CaL  145  (1880);  Tulley  v. 
Tranor,  53  Cal.  274  (1878);  Thompson 
V.  Toland,  48  CaL  99  (1874);  Fromm 
V.  Sierra  Nevada,  etc.  Co.,  61  CaL  629 
(1882). 

3  Kid  V.  Mitchell,  1  Nott  &  IL  (S.  C.) 
334  (1818). 

<  Central  R.  R.  etc.  Co.  v.  Atlantic, 
etc.  R.  R.,  50  Ga.  444  (1873).  For  fail- 
ure to  deliver  bonds  as  called  for  by 
a  contract,  the  vendee  may  recover 
the  highest  market  price  between  the 
date  of  the  breach  of  the  contract 
and  the  date  of  the  triaL  San  An- 
tonio, etc.  R'y  V.  Wilson,  4  Tex.  Civ. 
App.  178  (1893). 

5  Markham  v.  Jaudon,  41  N.  Y.  235 
(1869) ;  Romaine  v.  Van  Allen,  26  N.  Y. 
309  (1863).  In  an  action  to  recover 
damages  for  the  im.lawful  conversion 


1100 


€n. 


XXXV.] 


ACTIONS    AND    MEASURE   OF   DAMAGES. 


rS  5S3. 


Pennsylvania.*  The  courts  of  the  two  latter  states  have,  how- 
ever, in  later  cases  wholly  receded  from  this  position ;  and  in 
both  the  rule  is  now  established,  in  sach  actions,  that  the  meas- 
ure of  damages  is  not  the  highest  price  of  the  stock,  but  the 
value  at  the  date  of  the  conversion.^  Where  an  agent  conceals 
from  his  principal  the  amount  of  stock  received  by  the  agent 
for  property,  and  keeps  a  part  of  the  stock,  the  principal  may 
hold  him  liable  for  the  highest  market  value  of  the  stock 
reached  between  the  act  and  a  reasonable  time  after  discovery 
of  the  act  by  the  principal.^ 


of  grain,  the  rule  in  New  York  was 
held  to  be  the  higliest  price  up  to  the 
time  of  triaL  Lobdell  v.  Stowell,  51 
N.  Y.  70  (1872).  To  same  effect,  Kent 
V.  Ginter,  23  Ind.  1  (1864).  See  1 
Sedgwick,  Damages  (7th  ed.),  578,  and 
note  (a).  Cf.  Burt  v.  Dutcher,  34  N.  Y. 
493  (18GC);  Scott  v.  Rogers,  31  N.  Y. 
670  (1864);  Devlin  v.  Pike,  5  Daly 
(N.  Y),  85  (1874).  For  the  modern  rule 
in  New  York,  see  §  581,  supra. 

^  Bank  of  Montgomery  v.  Reese,  26 
Pa.  St  143  (1856);  Musgrave  v.  Beck- 
endorfl,  53  Pa.  St.  310  (1866);  Reiten- 
l.augh  V.  Ludwick,  31  Pa.  St.  131, 
141  (1858).  In  Pennsylvania,  where 
one  was  accountable  for  stock  as 
trustee,  and  converted  it,  he  was  held 
chargeable  with  the  liighest  market 
value,  Reitenbaugh  v.  Ludwick,  31 
Pa.  St.  131  (1858);  North  v.  PhiUips, 
89  Pa.  St  250  (1879).  Cf.  Sates  v. 
Wiles,  1  Handy  (Ohio),  532  (1855). 
Where,  upon  a  reorganization,  an  old 
stockholder  is  wrongfully  refused  his 
stock  in  the  new,  he  may  recover  the 
highest  market  price  of  the  same  up 
to  the  time  of  the  insolvency  of  the 
corporation.  Reading  Ti-ust  Co.  v. 
Reading  Ironworks,  137  Pa,  St.  282 
(1890). 

2  North  V.  Phillips,  89  Pa.  St  250 
(1879);  Huntingdon,  etc.  Coal  Co.  v. 
English,  86  Pa.  St  247  (1878);  Work 
V.  Bennett  70  Pa.  St  484  (1872); 
Neiler  v.  Kelley,  69  Pa.  St  403  (1871). 
Cf.  Wilson  V.  Whitaker,  49  Pa.  St  114 


(1865).  So  also  in  the  later  New  York 
cases.  Baker  v.  Drake,  53  N.  Y.  211 
(1873) ;  S.  C,  66  N.  Y.  518  (1876) ;  White 
V.  Smith,  54  N.  Y.  522  (1874);  Harris 
V.  Tumbridge,  83  N.  Y.  92  (1880);  Colt 
V.  Owens,  90  N.  Y  368  (1882);  Ran- 
dall V.  Albany  City  Nat  Bank,  1 N.  Y. 
St.  Rep.  592  (1886).  Cf  Suydam  v. 
Jenkins,  3  Sandf.  (N.  Y.)  614  (1850); 
Matthews  v.  Coe,  49  N.  Y.  57  (1872); 
Bryan  v.  Baldwin,  52  N.  Y.  232  (1873). 
Sec  also  Seymour  v.  Ives,  46  Conn. 
109  (1878);  McGuffey  v.  Humes,  85 
Tenn,  20  (1886).  It  is  now  held  in 
Pennsylvania  that  where  a  corpora- 
tion, through  innocent  mistake,  per- 
mits a  transfer  on  its  books  of  shares 
of  stock  under  a  forged  power  of  at- 
torney, the  owner's  measure  of  dam- 
ages is  the  vahie  of  the  stock  at  the 
time  of  the  transfer,  with  interest 
from  the  date  of  the  verdict,  and  not 
the  highest  price  reached  by  the  stock 
between  the  date  of  the  conversion 
and  the  time  of  bringing  suit,  with 
the  dividends  since  declared.  Penn- 
sylvania Co.  V.  Philadelphia,  etc.  R  R., 
153  Pa.  St  160  (1893). 

3McKinley  v.  Williams,  74  Fed. 
Rep.  94  (1896).  Where  a  person  holds 
land  for  himself  and  a  partner,  and 
transfers  the  same  to  a  corporation 
for  stock  and  conceals  all  the  facts 
from  his  partner,  the  latter  may  re- 
cover the  value  of  his  share  of  the 
stock,  and  the  measure  of  the  value 
is  the  higliest  value  between  the  day 


1101 


§  5S4.] 


ACTIONS    AND    MEASUliE    OF    DAilAGES.  [CH.  XXXV 


§  584.  Interests,  dividends,  and  special  damages. —  It  is  set- 
tled law  that,  in  additioQ  to  the  value  of  the  stock  at  the  date 
of  conversion,  the  plaintiff  may  recover  legal  interest  upon  such 
valuation  from  tlie  date  of  the  conversion  to  the  day  of  tho 
trial.  It  follows  as  of  course  that,  if  the  plaintiff  has  been 
damaered  in  an  ascertained  sum,  he  mav,  in  an  action  for  dam- 
ages,  recover  not  only  that  sum,  but  interest  thereon  for  the 
time  during  which  he  has  been  -wrongfully  deprived  of  his  stock.* 
In  addition  to  interest  the  plaintiff  may  recover  also  all  accre- 
tions to  the  property  made  during  the  time  when  he  was 
deprived  of  it.  He  is  therefore  entitled  to  judgment  for  all 
dividends  paid  upon  tho  stock  between  the  date  of  the  conver- 
sion and  the  day  of  the  trial.''    The  reason  why  the  plaintiff 


of  receiving  the  stock  and  the  day 
when  the  plaintiff  received  notice 
thereof.  ]\Iorris  v.  Wood,  35  S.  W. 
Rep.  1013  (Tenn.,  189G). 

1 0'Meara  v.  North  American  Min. 
Ca,  2  Nev.  112  (18G6);  Boyian  v. 
Huguet,  8  Nev.  345  (1873);  Fisher  v. 
Brown,  104  ]Mass.  259  (1870);  Sargent 
V.  Franklin  Ins.  Co.,  25  Mass.  90  (1829); 
Seymour  v.  Ives,  46  Conn.  109  (1878); 
McKenney  v.  Haines,  03  Ma  74  (1873); 
Freeman  v.  Harwood,  49  Me.  195 
(1859);  Ormsby  v.  Vermont  Copper 
Min.  Co.,  56  N.  Y.  623  (1874);  White 
V.  Smitli,  54  N.  Y.  522  (1874);  Sturges 
V.  Keith,  57  III  451  (1870);  Baltimore, 
etc.  R'y  V.  Sewell,  35  Md.  238,  257 
(1871);  Pinkerton  v.  Manchester,  etc 
R.  R.,  42  N.  H.  424  (1S61);  North  v. 
Phillips,  89  Pa.  St.  250  (1878);  Himt- 
ingdon,  etc.  Coal  Co.  v.  English,  80 
Pa.  St.  247  (1878);  North  America 
Building  Assoc,  v.  Sutton,  35  Pa.  St. 
463  (1860);  Noonan  v.  Ilsley,  17  Wis. 
314  (1863);  Forrest  v.  Elwes,  4  Ves. 
Jr.  492  (1799);  Be  Bahia,  etc.  R'y, 
L.  R  3  Q.  B.  584  (1868);  Blji;h  v.  Car- 
penter, L.  R.  2  Eq.  501  (1866);  McMur- 
rich  V.  Bond  Head  Harbor  Co.,  9  Up. 
Can.  Q.  B.  333  (1852).  In  the  Civil 
Code  of  California,  §  3336,  interest  in 
these  cases  is  expressly  provided. for. 
Fronim  v.  Sierra  Nevada,  etc.  Co.,  61 
CaL  629  (1882);  2  Sedgwick,  Damages 


(7th  ed.),  391.  The  measure  of  dam- 
ages is  the  market  value  at  the  time 
of  conversion,  witli  interest.  Darling 
V.  Potts,  118  Mo.  500  (1893).  For  re- 
fusal of  the  corporation  to  deliver 
stock  which  the  pdaiutiff  bought  of 
it,  the  measure  of  damages  is  the 
value  at  the  time  of  such  refusal, 
with  interest.  Salt,  etc.  Co.  v.  Hickey, 
36  Pac.  Rep.  171  (Ariz.,  1894).  Where 
the  measure  of  damages  is  based 
upon  the  market  value  of  stock,  in- 
terest may  be  added.  Kuhn  v.  McKay, 
51  Pac.  Rep.  205  (Wyo.,  1897). 

2  Bull  V.  Douglas,  4  Mvmf;  (Va.) 
303  (1814);  Baltimore,  etc.  Ry  v. 
Sewell,  35  Md.  238  (1871);  Bercich  v. 
Marye,  9  Nev.  312  (1874);  Bank  of 
Montgomery  v.  Reese,  26  Pa.  St.  143 
(1856).  Cf.  Boston,  etc.  R  R.  v.  Rich- 
ardson,  135  Mass.  473,  477  (1883). 
Where  a  broker,  a  gratuitous  bailee 
of  corporate  stock,  deUvers  the  same 
to  the  company  without  autiiority, 
and  the  stock  is  converted  to  the  use 
of  the  company,  the  bailee  is  liable 
for  its  value,  irrespective  of  what  liis 
intentions  were  in  the  premises.  I  n 
such  case  the  bailor  may  recover  tlie 
value  of  the  stock  at  the  time  of  con- 
version, with  all  dividends  paid  froin 
the  time  of  delivery,  together  with 
interest  on  the  value  of  the  stock 
from  date  of  conversion,  and  on  the 


1103 


en.  XXXV.]  ACTIONS    AXD    MEASURE    OF   DAMAGES. 


[§  585. 


recovers  dividends  in  addition  to  tlie  value  of  the  stock  and  in- 
terest is  that  often  the  dividends  involved  were  earned,  wholly 
or  in  part,  before  the  conversion,  but  that  such  net  earnings 
were  distributed  by  dividends  declared  after  the  conversion, 
and  that  the  market  value,  at  the  time  of  the  conversion,  does 
not  always  represent  fully  the  undistributed  profits.  The  plaint- 
iff may  also  recover  any  special  damages  which  legitimately 
arise  out  of  matters  in  existence  at  the  date  of  conversion,  and 
which  he  has  sustained  by  reason  of  the  detention  of  his  stock.* 
§  585.  Nominal  damages. — In  certain  cases,  where  the  plaint- 
iff has  been  guilty  of  laches,  or  where  the  stock  is  of  no  actual 
value,  or  where  the  stock  could,  for  a  reasonable  time  after  the 
conversion,  have  been  purchased  in  the  market  for  the  same  or 
a  lower  price,  or  in  any  other  case  where  the  plaintiff  has  suf- 
fered only  a  technical  conversion  without  any  actual  pecuniary 
loss,  only  nominal  damages  can  be  recovered.^  Thus,  the 
measure  of  dama^^es  for  the  conversion  of  a  mere  certificate  of 


dividends  from  date  of  respective 
payments.  Hubbell  v.  Blandy,  87 
Mich.  20'J  (1891).  AVhere  several  years 
elapse  between  the  commencement 
of  the  suit  and  tlie  trial,  the  case  not 
having  been  prosecuted  with  reason- 
able diligence,  the  value  at  the  time 
of  the  conversion,  with  interest,  is  the 
measure  of  damages.  Dividends  are 
not  to  be  added  vmless  a  separate  de- 
mand for  them  is  alleged  and  a  sep- 
arate cause  of  action  therefor  set 
forth.  Ralston  v.  Bank  of  California, 
112  Cal.  208  (1890).  In  an  action  for 
the  conversion  of  stock  the  measure 
of  damages  is  the  highest  interme- 
diate value  between  the  time  of  con- 
version and  a  reasonable  time  after 
the  owner  has  received  notice  of  the 
conversion  to  enable  him  to  replace 
the  stock.  Dividends  accruing  after 
the  conversion  are  not  added,  nor  in- 
terest on  such  dividends.  Citizens', 
etc  R.  R  V.  Bobbins,  144  Ind.  G71 
(189G). 

^Boylan  v.  Huguet,  8  Nev.  345 
(1873) ;  2  Sedgwick,  Damages  (7th  ed.), 
391;  Bodley  v.  Reynolds,  8  Q.  B.  779 
(1810);  Davis  v.  Oswell,  7  Car.  &  P. 

110 


804  (1837).     Cf.  Seymour  v.  Ives,  46 
Conn.  109  (1878). 

2  Tims,  where  a  borrower  of  shares 
fails  to  return  them  until  after  the 
corporation  is  dissolved,  the  lender 
having  made  no  demand  during  the 
existence  of  the  company,  the  meas- 
ui-e  of  damages,  in  an  action  to  re- 
cover the  shares,  ^viQ  be  the  market 
value  of  them  at  the  time  the  cause 
of  action  accrued ;  that  is,  at  the  time 
of  demand.  And  if  at  that  time  the 
stock  is  worthless,  only  nominal  dam- 
ages are  recoverable.  Fosdick  v, 
Greene,  27  Ohio  St.  484  (1875).  See 
Cameron  v.  Durkheim,  55  N.  Y.  425 
(1874);  Hope  v.  Lawrence,  50  Barb. 
258  (1867).  In  an  action  by  a  vendee 
on  a  contract  for  the  sale  of  specific 
stock,  which,  without  the  knowledge 
of  the  vendor,  had  already  been  sold 
to  another  by  his  agent,  the  plaintiff 
can  recover  only  nominal  damages, 
Wilson  V.  Whitaker,  49  Pa.  St.  114 
(1865);  Skinner  v.  City  of  London, 
etc.  Corp.,  L.  R  14  Q.  B.  D.  882  (1885). 
See  Fowler  v.  Ncav  York  Gold  Exclu 
Bank,  67  N.  Y.  138  (1876).  A  trans- 
feree's action  upon  the  case  for  dam- 


§  58G.] 


ACTIONS    AND    MEASURE    OF    DAMAGES.  [CH.  XXXV. 


stock  cannot  be  placed  at  the  value  of  the  shares  themselves 
■which  the  certificate  represents,  if  the  ownership  of  the  shares 
is  not  affected.^ 

§  58G.  Damacjcs  for  failure  to  complete  a  purchase  of  stock 
and  for  fraud  inducing  a  purchase  of  s  tod: — The  measure  of 
damages  for  the  failure  of  a  purchaser  of  stock  to  complete  his 
contract  is  considered  elsewhere.^  The  measure  of  damages 
for  fraud  inducing  the  purchase  of  stock  "  is  the  difference  be- 
tween the  value  of  the  stock  at  the  time  it  was  purchased  and 
the  price  paid  for  it." '    At  common  law  an  action  to  recover 


ages,  instead  of  in  trover  for  con- 
Tei-sion,  against  the  corporation  for 
refusal  to  register  the  transfer,  en- 
titles him  to  nominal  damages  only, 
unless  he  proves  special  damage.  Mc- 
Lean r.  Charles  Wright  Med.  Co.,  96 
Mich.  479  (1893). 

'Daggett  V.  Davies,  53  Mich.  35 
<1884),  by  Cooley,  C.  J. 

2  See  §  336,  supra. 

'  Redding  v.  Godwin,  44  Minn.  355 
(1890).  In  an  action  for  damages  for 
fraud  inducing  the  plaintiff  to  pur- 
chase stock,  the  measure  of  damages 
is  ".not  the  difference  between  the 
contract  price  and  the  reasonable 
market  value  if  the  property  had 
been  as  represented  to  be,  even  if  the 
stock  had  been  worth  the  price  paid 
for  it;  nor,  if  the  stock  were  worth- 
less, could  the  plaintiff  have  recov- 
ered the  value  it  woidd  have  had  if 
the  property  had  been  equal  to  .the 
representations.  What  the  plaintiff 
might  have  gained  is  not  the  ques- 
tion, but  what  he  had  lost  by  being 
deceived  into  the  purchase."  The 
defendant  "  was  boimd  to  make  good 
the  loss  sustained,  such  as  the  moneys 
the  plaintiff  had  paid  out  and  inter- 
est, and  any  other  outlay  legitimately 
atti-ibutable  to  defendant's  fraudu- 
lent conduct;  but  this  liability  did 
not  include  the  expected  fruits  of  an 
unrealized  speculation."  Smith  v. 
Bolles,  132  U.  S.  125  (1889).  The  true 
measure  of  the  damages  suffered  by 


one  who  is  fraudulently  induced  to 
make  a  contract  of  sale,  purchase,  or 
exchange  of  property  is  the  differ- 
ence between  the  actual  value  of 
that  which  he  parts  with  and  the 
actual  value  of  that  which  he  re- 
ceives under  the  contract.  Rocke- 
feller V.  Merritt,  76  Fed.  Rep.  909 
(1890).  In  Smith  v.  Duffy,  57  N.  J.  L. 
679  (1895),  the  measure  of  damages 
for  fraud  in  the  sale  of  stock  was 
held  to  be  the  actual  loss  suffered  by 
the  vendee,  in-cspective  of  the  market 
price  of  the  stock.  The  measure  of 
damages  for  fraud  in  the  sale  of  stock 
is  the  difference  between  the  real 
value  of  the  stock  at  the  time  of  sale 
and  what  the  value  would  have  been 
had  the  representations  been  true. 
The  market  value  may  be  shown  as 
bearing  upon  the  real  value.  Warner 
V.  Benjamm,  89  Wis.  290  (1895);  Titus 
V.  Poole,  73  Hun,  383  (1893).  A  per- 
son who  piu-chases  bank  stock  from 
the  bank  itself  may  hold  the  bank 
liable  for  damages,  where  the  public 
statement  of  the  bank  which  he  re- 
lied on  in  purchasing  was  falsa  The 
measiu-e  of  damages  is  the  difference 
between  the  value  of  the  stock  if  the 
statement  had  been  true  and  its  act- 
ual value.  Exchange  Bank  v.  Gaits- 
kill,  37  S.  W.  Rep.  IGO  (Ky.,  1896).  As  to 
the  measure  of  damages  in  an  action 
against  a  broker  for  fraud  inducing 
the  plaintiff  to  invest  in  "Grant  and 
Ward  "  securities,  see  James  v.  Work, 


1104 


CH. 


XXXV.] 


ACTIONS   AND    MEASUKE    OF   DAMAGES. 


[§  587. 


back  the  whole  of  the  purchase-money  upon  a  rescission  for 
fraud  is  virtually  a  suit  for  money  had  and  received.^ 

§  587.  Damages  in  actions  'between  stoch-hrolcers  and  their 
customers. — This  subject  is  considered  elsewhere.' 


70  Hun,  296  (1893).  The  measure  of 
damages  in  an  action  by  a  vendee 
for  fraud  in  tbe  sale  of  stock  is  the 
difference  between  the  selling  price 
and  the  real  value  at  the  time  of  the 
sale.  High  v.  Berret,  148  Pa.  St  261 
(1892).  In  an  action  for  damages  for 
deceit  inducing  the  plaintiff  to  pur- 
chase stock,  the  measure  of  damages 
is  "a  sum  of  money  equal  to  the  dif- 
ference between  the  value  of  the 
property  as  it  was  in  fact  and  the 
value  as  it  would  have  been  if  the  rep- 
resentations had  been  true."  In  this 
kind  of  action  no  tender  of  the  stock 
is  necessary  or  proper.  Testimony 
as  to  the  value  of  the  property  of  the 
corporation  and  of  a  sale  of  stock  by 
a  witness  is  admissible.  Vail  v.  Rey- 
nolds, 118  N.  Y.  297  (1890).  As  to  the 
measure  of  damages  where  worthless 
stock  is  sold  for  land  and  fraudulent 
m^isrepresentations  are  made  and  the 


company  fails,  see  Titus  v.  Poole,  60 
Hvm,  1  (1891).  Where  one  has  been 
induced  by  fraudulent  misrepresen- 
tations to  buy  or  subscribe  for  shares 
of  stock,  the  measure  of  damages,  in 
an  action  against  the  vendor,  is  the 
difference  between  the  value  of  the 
stock  as  represented  and  the  actual 
valua  Miller  v.  Barber,  66  N.  Y.  558, 
568  (1876);  HubbeU  v.  Meigs,  50  N.  Y. 
480,  491  (1872).  And  where  one  with 
intent  to  cheat  and  defraud  induces 
another,  by  false  and  fraudulent  rep- 
resentations, to  purchase  shares  for 
value  which  he  knows  to  be  worth- 
less, he  is  liable  for  the  damages  sus- 
tained, whether  the  piirchase  was 
made  from  him  or  from  another  at  his 
instanca  Hubbell  v.  Meigs,  50  N.  Y. 
480  (1872);  28  N.  Y.  App.  Div.  1  (1898). 

1  Gassett  v.  Glazier,  165  Mass.  473 
(1896). 

2  See  §g  460,  461,  supra. 


70 


1103 


CHAPTER  XXXYI. 

STOCKHOLDERS'  MEETINGS  —  CALLS,  TBIE,  PLACE,  AND  CLASSES 

OF  MEETINGS. 


ory. 
ofi 


589.  The  place  of  meeting  of  stock- 


§  588,  Introductoi 
"^lie  place  o 
holders  must  be  within  the 
state  creating  the  corpora- 
tion. 
590, 591.  First    meeting    under   a 
special  charter. 

592.  Meetings  of  directors — Place — 

Notice  —  Action     without 
meeting  —  Quorum. 

593.  By  whom  and  when  meetings 

are  to  be   called  —  Manda- 
mus—  Fraud  in  the  calL 

594.  When  the  stockholders  are  en- 

titled to  notice  of  corporate 
meetings. 


§  595.  The  essential  elements  of  a  no- 
tice of  a  meeting  are  time, 
place,  and  businesa 
590.  Service  of  the  notice. 

597.  Notice  must  be  served  a  rea- 

sonable   time    before    the 
met'tiug. 

598.  The  division  of  meetings  into 

ordinary  and  extraordinary. 

599.  Waiver  of  notica 

600.  Notice  is  presumed  to  have 

been  regularly  given. 
COl.  Adjourned  meetings. 


§  588.  Introductory. —  The  stockholders  of  a  corporation 
constitute  the  origin,  existence,  and  continuance  of  the  corpo- 
ration itself.  They  elect  its  officers,  control  its  general  policy, 
and  within  the  charter  limits  may  prolong  or  dissolve  its  exist- 
ence at  their  pleasure.  All  these  vital  powers  of  the  stock- 
holders can  be  exercised  by  them  only  in  corporate  meetings, 
duly  convened  and  properly  organized  for  the  transaction  of 
business.  Accordingly,  the  method  of  calling  together  a  cor- 
porate meeting,  the  time  and  place  of  that  meeting,  the  notice 
to  be  given  to  the  stockholders,  and  the  various  incidents  rela- 
tive to  a  proper  convening  of  the  members  of  the  corporation, 
are  of  great  importance.  They  constitute  the  subject  of  this 
chapter. 

§  589.  The  'place  of  meeting  of  stoclcJiolders  must  he  within 
the  state  creating  the  corporation. —  The  first  and  most  general 
rule  as  to  the  place  where  stockholders  may  hold  corporate 
meetings  is  that  the  place  of  meeting  should  be  within  the 
boundaries  of  the  state  which  created  the  corporation.  Through 
its  agents,  of  course,  the  corporation  may  make  contracts,  carry 
on  business,  sue  and  be  sued,  and  buy  and  sell  property  in  an- 
other state.  ^ 

iSee  chs.  XIII,  §§  237-240,  mpra,  and  XLI,  §§  696-700,  infra. 
1106 


en.  XXXVI.]  STOCKHOLDEES'  MEETINGS CALLS. 


[§  589. 


But  there  is  a  difference  of  opinion  as  to  the  effect  of  busi- 
ness transacted  at  a  stockholders'  meeting  held  beyond  the 
borders  of  the  state  creating  the  corporation.  Upon  the  one 
hand,  it  is  held  that  all  the  acts  and  proceedings  of  such  a 
meeting  are  tv holly  invalid  and  void;  that  the  corporation  is 
not  bound  thereby,  and  that  the  meeting  is  as  though  it  had 
never  been.' 

But  it  is  the  sounder  view  to  regard  the  votes  and  proceed- 
ings at  such  a  meeting  as  voidable  rather  than  void.  The  cor- 
poration itself  cannot  allege  that  such  proceedings  are  void. 
It  is  estopped  from  so  doing.^    So  also  are  the  stockholders 


1  Craig  Silver  Co.  v.  Smith,  163  Masa 
262  (1895).  Directors  elected  at  a 
stockholders'  meeting  held  out  of  the 
state,  and  to  which  all  did  not  agree, 
are  not  directors.  The  old  board 
holds  over.  Hodgson  v.  Duluth,  etc. 
R  R.,  46  Minn.  454(1891);  Miller  v. 
Ewer,  27  Me.  509  (1847),  where  a  mort- 
gage executed  by  the  authority  of  di- 
rectors who  were  elected  at  the  organ- 
ization meeting  of  corporators  held 
outside  of  the  state  which  granted 
the  charter  was  declared  void-  Cited 
and  followed  in  Freeman  v.  Machias 
Water,  etc.,  38  Ma  343  (1854),  where 
a  forfeiture  of  stock  was  declared 
illegal;  Ormsby  v.  Vermont  Copper 
Min.  Co.,  56  N.  Y.  623  (1874),  where 
it  was  held  that  a  forfeiture  of  stock 
by  authority  of  a  by-law  adopted  by 
stockholders  of  a  Vermont  corpora- 
tion at  a  meeting  held  in  New  York 
was  not  valid;  Mitchell  v.  Vermont 
Copper  Min.  Co.,  40  N.  Y.  Super.  Ct. 
406  (1876);  aflfVl,  67  N.  Y.  280;  Smith 
V.  Silver  Valley  Min.  Co.,  64  Md.  85 
<1885),  the  organization  being  held 
out  of  the  state;  Camp  v.  Bj^rne,  41 
Mo.  525  (1867),  to  the  same  effect.  In 
Copp  r.  Lamb.  13  Me.  312  (1835),  thirty 
years'  user  was  held  to  have  cured 
any  defect.  A  Virginia  corporation 
cannot  be  organized  by  an  organiza- 
tion meeting  in  New  York.  Nor  can 
the  charter  be  assigned  by  a  blank 
assignment  after  an  organization  in 


1107 


Virginia.  The  assignment  must  be 
of  the  stock.  The  corporation  is 
neither  de  facto  nor  de  jure.  Suits 
against  it  fail  Welch  v.  Old  Domin- 
ion, etc.  R'y,  10  N.  Y.  Supp.  174  (1890). 
Stockholders'  meetings  held  out  of 
the  state  are  voidable  if  not  void,  and 
at  the  instance  of  minority  stock- 
holders may  be  good  ground  for  an 
injunction.  Jones  v.  Pearl  Min.  Co., 
20  Colo.  417  (1894).  Where  a  charter 
is  taken  out  in  one  state  and  the  or- 
ganization meetings  are  held  in  an- 
other state,  the  presumption  is  that 
no  corporation  is  organized;  and  im- 
less  proof  is  given  that  tlie  statutes 
of  the  first-named  state  authorized 
the  holding  of  the  organization  meet- 
ing in  another  state,  the  stockholders 
are  liable  as  partners.  Duke  v.  Tay- 
lor, 37  Fla.  64  (1896).  Where  parties 
take  out  a  charter  in  Tennessee,  but, 
instead  of  holding  their  organization 
meetings  in  Tennessee,  hold  them  in 
Florida,  where  they  do  all  their  busi- 
ness, they  are  liable  in  Florida  as 
partners.  Taylor  v.  Branham,  35  Fla. 
297  (1895).  The  dicta  in  this  decision 
as  to  the  liability  of  stockholders  gen- 
erally in  foreign  corporations  doing 
business  in  Florida  are  startUng,  to 
say  the  least. 

^  Heath  v.  Silverthom  Lead  Min. 
etc.  Co.,  39  Wis.  146  (1875),  holding  that 
the  corporation  may  be  estopped  to 
deny  the  validity  of  acts  done  outside 


§  589.] 


STOCKHOLDEIiS    MEETINGS  —  CALLS. 


[cn. 


XXXYI. 


who  participate  in  the  meeting.^  As  to  the  creditors  of  the  cor- 
poration the  authorities  differ.^  If  the  corporation  has  been  in- 
corporated in  two  or  more  states,  it  is  lawful  to  hold  meetings 
of  the  stockholders  in  either  state.'  And  proceedings  at  a  meet- 


the  state,  when  the  riglits  of  third 
parties  intei-vene,  even  thou;:;h  that 
meetinp:  was  the  organization  meet- 
ing. Tlie  legislature  may  validate 
tlie  acts  passed  at  such  a  meeting. 
Graham  v.  Boston,  etc.  R.  R.,  118  U.  S. 
IGl.  178  (1886),  air'g  S.  C,  14  Fed.  Rep. 
753  (1883).  Cf.  Grenada  Co.  v.  Brog- 
.  den,  112  U.  S.  201  (1884),  and  the  var 
rious  cases  of  municipal  subscrip- 
tions, ch.  VI,  g  94,  n.,  siijyra. 

1  A  uonafide  holder  of  a  note  given 
by  a  stockliolder  in  payment  of  his 
subscription  may  enforce  it,  even 
though  tlie  organization  and  all  other 
meetings  of  the  company  were  held 
out  of  the  state.  Camp  v.  Byrne,  41 
Mo.  525  (1867).  In  Ohio.  etc.  R  R  v. 
McPherson,  35  Mo.  13  (1804),  the  char- 
ter declared  the  directors  to  be  the 
corporation.  They  met  out  of  the 
state  and  organized  and  made  a  call 
on  subscriptions.  The  court  upheld 
the  call.  But  the  mere  neglect  on 
the  part  of  a  shareholder,  who  did 
not  attend  a  meeting  of  tliis  kind,  or 
a  mere  failure  to  take  affirmative  ac- 
tion for  a  period  of  time  short  of  that 
prescribed  by  the  statute  of  limita- 
tions, will  not  deprive  that  share- 
holder of  his  right  to  attack  the  pro- 
ceedings as  irregular  and  in  fraud  of 
his  rights.  Ormsby  v.  Vermont  Coj)- 
per  Min.  Co.,  56  N.  Y.  623  (1874).  A 
stockholders'  meeting  held  outside 
of  the  state  cannot  be  attacked  by 
those  who  participate  in  it  or  receive 
the  benefits  of  it.  A  statute  against 
holding  elections  out  of  the  state 
does  not  prevent  stockholders'  meet- 
ings for  other  purposes.  Handley  v. 
Stutz,  139  U.  S.  417  (1891).  An  in- 
crease of  capital  stock  which  is  voted 
at  a  stockholders'  meeting  held  out 
of  the  state  is  valid  if  all  the  stock- 
holders   assent.     "No   valid   objec- 


tion can  be  made  to  a  stockholders' 
meeting  held  in  a  foreign  jurisdic- 
tion, provided  all  the  shareholders 
give  their  consent  to  such  meeting 
or  ratify  its  action."  Handley  v. 
Stutz,  41  Fed.  Rep.  531  (1890).  By- 
laws enacted  by  a  board  of  directora 
of  a  Texas  corporation  at  a  meeting 
of  stockliolders  held  in  Paris  are  void, 
and  a  stockliolder  may  disregard 
them,  although  he  was  represented 
by  proxy  at  the  meeting.  The  direct- 
ors are  not  even  de  facto.  Franco- 
Texan  Land  Co.  v.  Laigle.  59  Tex.  339 
(1883).  A  special  charter  must  be  ac- 
cepted before  the  corporation  exists, 
and  such  acceptance  cannot  be  at  a 
meeting  held  out  of  the  state.  Hence 
a  bill  by  a  stockholder  to  set  aside  a 
forfeiture  of  his  stock  was  dismissed 
by  the  court.  Smith  v.  Silver,  etc. 
Co.,  64  Md.  85  (1885).  A  stockholders' 
meeting  out  of  the  state  is  "  irregu- 
lar, if  not  void."  Mack  v.  De  Barde- 
leben,  etc.  Co.,  90  Ala.  396  (1890). 

2  Where  a  meeting  of  stockholders 
other  than  the  first  organization 
meeting  is  held  out  of  tlie  state,  and 
directors  are  elected,  tlie  acts  of  those 
directors  cannot  be  attacked  by  cor- 
porate creditors  on  the  ground  that 
the  election  was  illegal.  Wright  v. 
Lee,  2  S.  D.  596  (1892).  For  cases  to 
the  contrary  see  notes  supra.  Where 
a  person  takes  title  to  land  for  a  cor- 
poration to  be  formed,  and  thereafter 
he  joins  in  the  formation  of  the  cor- 
poration, he  cannot  defend  an  action 
against  the  corporation  to  obtain 
title  by  setting  up  that  its  organiza- 
tion meetings  were  held  outside  of 
the  state.  Tuckaseegee,  etc.  Co.  v. 
Goodhue,  24  S.  E.  Rep.  797  (N.  C, 
1896). 

3  Graham  v.  Boston,  etc.  R  R,  118 
U.    S.    161    (1886;;    Covington,    etc. 


1103 


CH.  XXXVI.]  stockholders'  meetings CALLS.       [§§  590,  591. 


ing  in  any  one  of  tlie  states  are  valid  in  respect  to  tlie  property 
of  the  corporation  in  all  of  them,  without  a  repetition  of  the 
meeting  in  any  other  of  those  states.^ 

§§  590,  591.  First  meeting  under  a  special  charter.— 'Where 
an  act  incorporates  three  specified  persons  and  their  "asso- 
ciates," those  three  alone  organize  the  company  and  are  enti- 
tled to  subscribe  the  capital  stock  or  to  aUow  others  to  subscribe.^ 

Statutory  provisions  as  to  notice  of  the  first  meeting  are 
directory.  They  need  not  be  observed  if  the  stockholders  ac- 
quiesce.' 

Where  several  persons,  their  associates  and  successors,  are 
declared  to  be  a  corporation,  one  of  them  with  new  parties  may 
meet,  organize,  and  adopt  by-laws,  without  the  capital  being 
first  subscribed  and  without  the  others  if  they  do  not  object.* 
As  to  an  over-subscription  for  stock,  the  rules  that  govern  the 
subject  arc  considered  elsewhere.*  The  survivors  of  those  who 
by  special  act  are  made  a  corporation  may  call  the  first  meet- 

Briilge  Co.  v.  Mayer,  31  Ohio  St  317    the  directors  held  their  meeting  and 


(1877).  See  also  Ohio,  etc.  R'y Z^-  Peo- 
ple, 123  IlL  407  (1888);  and  ch.  LIII, 
§  910,  infra. 
1  Same  cases. 

2Lechmere  Bank  v.  Boynton,  65 
Mass.  3G9  (1853>  See  also  p.  452,  note; 
also  p.  1111,  note  5.  The  grant  of  cor- 
porate powers  to  one  person  and  his 
associates  and  successors  does  not  re- 
quire of  such  person  that  he  should 
take  associates  before  the  act  would 
take  effect,  or  corporate  powers  be 
exercised,  but  confers  upon  him  alone 
the  powers  of  the  corporation,  and 
his  acts  within  the  grant  of  powers 
become  the  acts  of  the  corporation. 
Penobscot  Boom  Corp.  v.  Lamson,  16 
Me.  224  (18o9 ).  Where  a  special  char- 
ter named  the  incorporators  and  com- 
missioners, and  the  notice  called  for 
by  the  charter  of  the  opening  of  the 
books  of  subscription  was  given,  and 
all  incorporators  attended  the  meet- 
ing and  verbally  subscribed  for  stock, 
and  gave  checks  to  apply  on  the  same, 
and  a  meeting  of  the  stockholders 
■was  held  and  directors  elected,  and 


elected  officers,  and  annual  meetings 
were  held  thereafter  for  five  years, 
when  the  company  was  practically 
abandoned,  and  the  checks  were 
never  used, —  all  this  amounted  to  a 
legal  organization  of  the  corporation. 
Moreover,  the  corporation  itself  ex- 
isted by  the  charter  itself,  without 
action  on  the  part  of  the  incorpora- 
tors. A  company  thus  organized  may 
enjoin  from  exercising  its  franchises 
a  subsequent  attempted  organization 
of  tlie  company  made  sixteen  years 
thereafter,  the  subsequent  organiza- 
tion having  been  made  by  part  only 
of  the  incoriDorators.  Tlie  incorpora- 
tors cease  to  have  any  powers  after 
the-first  organization  meeting.  The 
remedy  may  be  in  equity,  and  need 
not  be  in  quo  warranto.  Union 
Water  Co.  v.  Kean,  52  N.  J.  Eq.  Ill 
(1893). 

3  Braintree,  etc.  Co.  v.  Braintree,  146 
Mass.  482  (1881). 

4McGinty  v.  Athol,  etc.  Co.,  155 
Mass.  183  (1892). 

5  See  §§  57, 58,  supra. 


1109 


§g  'j02,  503.]     stockholders'  meetings  —  calls.         [en,  xxxvi. 

ing  many  years  after  the  act  was  passed,  and  may  open  books 
for  subscription  to  the  stock.'  But  where  a  company  is  char- 
tered in  ISGO,  and  does  not  organize  until  1884,  an  exemption 
from  taxation  contained  in  the  charter  is  lost  by  reason  of  a  consti- 
tutional provision  enacted  in  18T0  forbidding  such  exemptions.'* 

§  592.  Directors'  meetings. —  The  various  questions  connected 
with  directors'  meetings,  the  place  where  such  meetings  may 
be  held,  the  notice  that  is  required,  the  question  of  whether  the 
directors  may  act  without  meeting,  and  the  requirements  as  to 
a  quorum,  are  discussed  elsewhere.^ 

§  593.  By  whom  meetings  are  to  he  called  —  Mandamus  — 
Fraud  in  the  call. —  Where  the  time  and  place  of  a  meeting 
and  the  business  to  be  transacted  at  that  meeting  are  not  so 
fixed  by  charter  or  otherwise  that  the  stockholders  are  bound 
to  take  notice  of  them,  it  is  necessary  that  the  meeting  be  called 
in  accordance  with  the  bj^-laws  or  by  the  highest  existing  cor- 
porate authority.* 

In  the  absence  of  any  special  authority  to  any  particular  per- 
son to  call  meetings,  it  has  been  held  that  the  general  agent  of 
the  corporation  may  make  the  call,*  but  that  the  secretary  can- 
not.®   The  president  and  secretary  have  no  power  to  call  a 

1  Marmora,  etc.  Co.  v.  Murney,  1  right  to  vote."  In  Johnston  v.  Jones, 
C.  P.  Eep.  (Can.)  29  (1850).  23  N.  J.  Eq.  216  (1872),  the  charter 

2  Planters'  Ins.  Co.  v.  Tennessee,  161  provided  for  annual  elections,  but  no 
U.  S.  193  (189G).  by-laws  had  been  made  fixing  the 

3  See  §  713a,  infra.  time.    The  authority  to  call  an  elec- 
*  Evans  v.  Osgood,  18  Me.  213  (1841),    tion  being  in  the  directors,  it  was 

holding  that,  where  a  proprietors'  held  not  suflScient  for  a  majority  of 
meeting  could  be  called  "  by  a  peti-  these  to  sign  the  notice  without  stat- 
tion  signed  by  twelve  of  them  at  ing  that  it  was  given  by  order  of 
least,"  it  was  not  a  legal  call  if  eleven  the  board,  and  without  designating 
signed,  although  they  owned  twelve  themselves  as  directors.  See  also 
shares;  Congregational  Soc.  of  Beth-  Stevens  v.  Eden  Meeting-house  Soc, 
any  v.  Sperry,  10  Conn.  200  (1834) ;  State  12  Vt.  688  (1839),  holding  that  notices 
V.  Pettineli,  10  Nev.  141  (1875),  where  of  meetings  could  not  be  proved  by 
the  by-laws  of  a  corporation  provided  parol  where  there  was  a  by-law  re- 
that  meetings  of  the  stockholders  quiring  the  clerk  to  post  written  no- 
should  be  called  by  the  trustees,  and  tice. 

it  was  held  that  any  other  mode  of  5  Stebbins  v.  Merritt,  64  Mass.  27 

calling,  such  as  by  the  president,  was  (1852). 

insufficient.    Angell  &  Ames,  Corp.,  6  xhe  secretary  and  a  person  hold- 

§  491,  to  the  effect  that  "  want  of  au-  ing  proxies  on  stock  owned  by  the 

thority  may  be  waived  by  the  pres-  state  cannot  call  a  meeting  to  elect 

ence  and  consent  of  all  who  have  a  officers;  nor  can  a  statute  order  an 

1110 


en.  XXXVI.]  STOCKHOLDEES'  MEETINGS CALLS. 


[§  593. 


stockliolclers'  meeting.'  The  board  of  directors  may  always 
call  a  meeting  of  the  stockholders.^  Although  a  meeting  of 
the  board  of  directors  at  which  a  quorum  is  not  present  calls 
a  stockholders'  meeting,  and  the  stockholders'  meeting  takes  ac- 
tion, yet  where  no  stockholders  object  until  six  months  there- 
after the  court  will  not  interfere.^  And  even  though,  on  account 
of  vacancies  in  the  board  of  directors,  it  cannot  act,  yet  the  re- 
maining directors  may  call  a  stockholders'  meeting  to  hold  an 
election.* 

Statutory  provisions  as  to  who  shall  call  the  meeting,  whether 
it  be  the  first  and  organization  meeting,  or  a  subsequent  one, 
may  be  waived  by  unanimous  consent  of  the  incorporators  or 
stockholders.* 


election  in  a  brief  tima  Cassell  v. 
Lexington,  etc.  Co.,  9  S.  W.  Rep.  503, 
701  (Ky.,  18S8). 

1  Dusenbety  v.  Looker,  67  N.  W. 
Rep.  986  (Mich.,  1896). 

2  Cassell  V.  Lexington,  etc.  Co.,  9 
S.  W.  Rep.  502,  701  (Ky.,  1888).  The 
board  of  directors  may  fix  the  time 
if  the  charter  or  by-laws  do  not.  Com- 
monwealth V.  Smith,  45  Pa.  St.  59 
(1863). 

3  Southern,  etc.  Bank  v.  Rider,  73 
L.  T.  Rep  374  (1895). 

*  Toronto,  etc.  Co.  v.  Blake,  2  Ont. 
Rep.  (Can.)  175  (1882).  Cf.  n.  2,  p.  1495. 

6  See  §  234,  notes,  supra,  also  §g  590, 
599,  infra.  Although  the  charter  pre- 
scribes that  the  commissioners  who 
receive  the  subscriptions  shall  call 
the  first  meeting  by  publishing  a  no- 
tice, yet  this  call  may  be  waived,  and 
the  stockholders  may  meet  and  or- 
ganize witliout  a  call,  if  all  assent. 
Judah  V.  American,  etc.  Ins.  Co.,  4 
Ind.  333  (1853) ;  Chamberlain  v.  Raines- 
ville,  etc.  R  R,  15  Ohio  St.  225  (1864), 
where  the  statute  provided  that,  as 
soon  as  ten  per  cent  on  the  capital 
stock  should  be  subscribed,  the  per- 
sons named  in  tlie  certificate  of  in- 
corporation, or  any  three  of  them, 
might  give  notice  of  an  election  of 
directors.  It  was  held  simply  direct- 
ory, and  not  indispensable  to  an  elec- 


tion, that  the  notice  be  so  given.  In 
Newcomb  v.  Reed,  94  Mass.  362  (1866), 
the  court  declared  the  purpose  of 
such  statutes  to  be  to  avoid  such  dif- 
ficulty as  would  arise  where  two 
parties  should  attempt  to  organize 
separately  tmder  the  same  charter. 
It  was  there  held  that  persons  elected 
officers  at  a  meeting  held  in  variance 
with  such  statutory  direction  were 
directors  nevertheless,  and  were  sub- 
ject to  the  statute  liability  for  cor- 
porate debts.  Where  three  persons 
are  appointed  to  make  a  call,  and 
one  of  them  calls  the  meeting  of  in- 
corporation, the  other  two  making 
no  objection,  the  organization  of  the 
company  at  the  meeting  so  called 
is  valid.  "Walworth  v.  Brackett,  98 
Mass.  98  (1867);  Hardenburgh  v. 
Farmers',  etc.  Bank,  3  N.  J,  Eq.  68 
(1834),  holding  that  if  the  call  for  the 
meeting  to  elect  the  first  directors  be 
signed  by  the  commissioners  author- 
ized to  make  the  call  individually, 
and  not  by  virtue  of  a  formal  order 
of  the  commissioners,  or  if  their 
names  be  signed  to  such  a  call  Toy  the 
secretary  without  objection  by  them, 
these  irregularities  will  not  affect 
the  validity  of  the  proceedings  at  the 
meeting.  Although  the  charter  runs 
to  certain  persons,  and  associates  and 
assigns,  they  need  not  have  associates 


1111 


§  593.] 


stockholders'  meetings  —  CALLS.  [CH,  XXXVI. 


If,  upon  the  organization  of  a  corporation,  a  majority  of  the 
subscribers  refuse  to  proceed  in  calling  a  meeting,  the  minoritv 
may  call  it,  and  bind  the  corporation.* 

Where  the  statute  requires  due  notice  to  be  given,  it  need  not 
be  given  by  any  particular  person  nor  in  any  particular  form.' 
A  charter  provision  or  by-law  authorizing  the  calling  of  a 
meeting  in  a  certain  way  does  not  necessarily  prevent  the  meet- 
ing being  called  in  a  different  way ;  but  unless  waived  the  rule 
is  otherwise,  where  the  charter  or  by-law  is  peremptory.'  The 
president  and  cashier  of  a  bank  have  no  authority  to  call  a 
stockholders'  meeting,  where  the  charter  provides  that  stock- 
holders' meetings  may  be  called  by  the  board  of  directors  or 
any  three  stockholders.*  The  officers  or  agents  of  a  corpora- 
tion whose  duty  it  is  to  call  meetings  may,  in  case  they  neglect 
or  refuse  to  issue  the  call,  be  compelled  by  mandamus  to  call  a 
meeting  at  the  instance  of  a  shareholder  who  is  injured  by 
reason  of  their  failure.*  Courts  have  no  power  to  call  corpo- 
rate meetings  except  by  mandamus." 


or  assigns.    Hughes  v.  Parker,  20  N. 
H.  58  (1849). 

1  Busey  v.  Hooper,  35  Md.  15  (1871). 

2  West  Koshkonong  Cong.  v.  Otte- 
sen,  80  Wis.  63  (1891). 

3  Where  a  by-law  provides  that  spe- 
cial meetings  may  be  called  by  the 
president,  or  in  his  absence  by  the 
secretary,  on  application  made  by 
ten  members  in  writing,  the  directors 
may  call  a  special  meeting  without 
such  an  application.  Citizens'  Mut. 
F.  Ins.  Co.  V.  Sortwell,  90  Mass.  217 
(1864).  But  where  a  by-law  author- 
izes the  trustees  to  call  a  meeting,  a 


by-law;  and  when  so  prescribed,  pro- 
vided the  by-law  is  reasonable,  calls 
made  in  that  way  are  valid,  even 
though  the  charter  said  that  three 
stoclcholders  might  call  a  meeting. 
Taylor  v.  Griswold,  14  N.  J.  L.  223 
(1834). 

*  Matthews  v.  Columbia  Nat.  Bank, 
79  Fed.  Rep.  558  (1897). 

8  People  V.  Cummings,  72  N.  Y.  433 
(1878);  State  v.  Wright,  10  Nev.  167 
(1875);  People  v.  Governors  of  Albany 
Hospital,  61  Barb.  397  (1871) ;  McNeely 
V.  Woodruff,  13  N.  J.  L.  353  (1833): 
Regina  v.  Aldliam,  etc.  Ins.  Soc,  6 


meeting  called  by  the  president  is    Eng.  L.  &  Eq.  365  (1851).    A  manda- 


irregular.  State  v.  Pettineli,  10  Nev. 
141  (1875).  When  the  by-laws  re- 
quire a  call  to  be  posted  in  writing, 
a  call  by  parol  is  insuflScient.  Ste- 
vens V.  Eden  Meeting-house  Soc,  13 
Vt.  688  (1839).  The  maimer  of  mak- 
ing the  call  may  be  prescribed  by 


mus  to  compel  the  calling  of  a  meet- 
ing of  the  stockholders  to  elect 
directors  should  be  against  the  board 
of  directors  and  not  against  the  presi- 
dent and  secretary.  Dusenbury  v. 
Looker,  67  N.  W.  Rep.  986  (Mich., 
1896).    Mandamus  Hes  to  compel  the 


6  The  fact  that  foreclosure  proceed-    meeting  to  hold  an  election.    Taylor 
ings  are  pending  and  a  receiver  is  in    v.  Philadelphia,  etc.  R.  R,,  7  Fed.  Rep. 
possession  does  not  give  the  court    381  (1881). 
jurisdiction  to  call  a  stockholders' 

1113 


CH.  XXXVI.]  stockholders'  meetings CALLS. 


[§59^ 


If  there  is  any  fraud  in  the  calling  of  the  meeting,  the  pro- 
ceeclino-s  of  the  meeting  may  be  attacked  in  the  courts.  The 
fraud  may  consist  in  concealing  the  notice,^  or  in  changing  the 
time  of  the  meeting,^  or  in  misstating  the  business.'  In  gen- 
eral, a  court  of  equity  wiU  restrain  the  directors  from  fixing 
the  time  for  an  annual  meeting  at  a  date  when  many  members 
are  in  the  country,  the  purpose  being  to  prevent  them  from  ex- 


ercising their  right  to  vote.^ 

calling   of   a   special    stockholders' 
meeting  in  accordance  with  the  by- 
laws.   Bassett  v.  Atwater,  Go  Conn. 
355  (1895).    The  court  will  not  order 
the  directors  to  call  a  meeting  for 
business  other  than  an  election  when 
they  or  a  certain  proportion  of  the 
stockholders  may  call  it.  MacDougall 
V.  Gardiner,  L.  R.  10  Ch.  App.  606 
(1875).    In  Goulding  v.  Clark,  34  N.  H. 
148  (1856),  it  is  held  that,  where  there 
is  no  officer  competent  to  call  a  meet- 
ing, there  is  no  way  of  convening  ex- 
cept by  a  reoi-ganization  of  the  com- 
pany or  a    published   notice   given 
under  the  statutes.     All  the  stock- 
holders, of  course,  could  convene  and 
thereby    waive   notice.     See    §  599, 
infra.    The   proper  oflScer  may  be 
commanded  by  mandamus  to  send 
out  notices  of  the  annual  election. 
People  V.  Hart,  11  N.  Y.  Supp.  670 
(1890);  People  v.  Hart, UN.  Y.  Supp. 
673  (1890).    Mandamus  lies  to  com- 
pel a  meeting  of  vestrymen.     Peo- 
ple  V.  Winans,   9   N.  Y.  Supp.  249 
(1890).    "Where  those  who  have  the 
right  to  call  a  meeting  of  the  share- 
holders refuse  to  exercise  that  right, 
for  the  express  purpose  of  preventing 
the  shareholders  from  duly  assem- 
bling, the  court  will,  if  necessary,  in- 
terfere to  protect  the  shareholders 
against  an  abuse  of  power  on  the  part 
of  those  entrusted  with  the  manage- 
ment of  the  affairs  of  the  company. 
Foss  V.  Harbottle,  2  Hare,  461  (1843); 
Isle  of  Wight  R  Co.  v.  Tahourdin, 
L.  R.  25  Ch.  D.  320  (1883).    Mandamus 
lies  to  compel  the  annual  election  of 


the  entire  body  of  directors  or  trust- 
ees. Commonwealth  v.  Keim,  33 
Leg.  Int.  32  (1881);  People  v.  Fair- 
bury,  51  III  149  (1869).  Dictum  that 
mandamus  lies  to  compel  election. 
Re  Union  Ins.  Co.,  22  Wend.  591  (1840). 

1  See  §  596,  infra. 

2  In  a  stockholder's  suit  to  enjoin  a 
consolidation  the  co\irt  will  consider 
the  legality  of  an  election,  the  time  of 
holding  which  was  illegally  changed 
by  the  board  of  directors.  Nathan  v. 
Tompkins,  82  Ala.  437  (1886). 

3  If  directors  convene  a  meeting  to 
pass  resolutions  favorable  to  them- 
selves on  questions  in  which  the  in- 
terests of  the  directors  are  opposed 
to  those  of  the  shareholders,  by  a  cir- 
cular  which  is  misleading,  and  which 
contains  statements  calculated  to  ob- 
tain proxies  in  their  favor  without 
giving  the  shareholders  the  informa- 
tion necessary  to  enable  them  to  form 
a  just  judgment  as  to  who  are  the 
proper  persons  to  whom  to  entrust 
their  votes,  the  court  will  grant  an 
injvmction  to  restrain  the  holding  of 
the  meeting  or  to  restrain  the  direct- 
ors from  laying  such  resolutions  be- 
fore the  meeting.  Jackson  v.  Muuster 
Bank,  13  L.  R.  Ir.  118  (1884). 

4  Cannon  v.  Trask,  L.  R.  20  Eq.  669 
(1875).  A  majority  of  the  board  of 
directors  cannot  lengthen  their  term 
of  office  by  shortening  the  time  of  the 
annual  meeting  of  the  stockholders, 
in  violation  of  the  stockholders'  by- 
laws, so  that  the  election  is  held  wlien 
they  control  the  stock.  'Nathan  v. 
Tompkins,  82  Ala.  437  (1886). 


1113 


§  594.] 


stockholders'  meetings CALLS.  [cn.  XXXVI. 


§  594.  When  the  stocMohJers  are  entitled  to  notice  of  corim- 
rate  meetings.—  If  the  time  and  place  at  whicli  a  corporate 
meeting  is  to  be  held  and  the  business  to  be  transacted  are  dis- 
tinctly fixed  in  the  charter  or  by  a  by-law,  this  is  of  itself  suffi- 
cient notice  to  all  the  stockholders,  and  no  further  call  or 
notice  of  that  meeting  is  necessary,  unless  the  charter  or  by-laws 
require  it.'  But  a  by-law  which  fixes  the  day  of  meeting  with- 
out also  fixing  the  hour  is  insufficient  as  a  notice  of  the  meet- 
ing.2  And  it  is  a  general  and  settled  rule  of  law  that  notice, 
in  some  way  or  other,  must  be  given  to  every  person  entitled 
to  be  present  at  a  corporate  meeting.'  When,  therefore,  no 
sufficient  notice  is  given  by  charter  or  statute  or  by-law,  each 
stockholder  is  entitled  to  an  express  notice  of  every  corporate 
meeting.*    No  usage  can  operate  to  excuse  a  failure  to  give 


1  Warner  v.  Mower,  11  Vt.  385,  393 
(1839);  State  v.  Bonnell,  35  Ohio  St. 
10,  15  (1878).  If  the  charter  or  by- 
laws of  a  corporation  fix  the  time 
and  place  at  which  regular  meetings 
shall  be  held,  this  is  itself  svifficient 
notice  to  stockJiolders,  and  no  fxir- 
ther  notice  is  necessary.  Morrill  v. 
Little  Falls  Mfg.  Co.,  53  Minn.  371 
(1893).  As  to  whether  notice  is  neces- 
sary of  the  annual  meeting,  where 
the  corporation  has  long  been  de- 
funct, see  Morrill  v.  Little  Falls  Mfg. 
Co.,  60  Minn.  405  (1895). 

2  The  fact  that  one  of  the  by-laws 
of  the  corporation  fixes  the  day  upon 
which  the  annual  meeting  of  the 
corporation  shall  be  held  is  not  of 
itself  a  sufficient  notice  of  the  hour 
and  place  at  which  the  meeting  is  to 
be  held.  There  must  be  an  express 
notice  of  the  hour  and  place  of  meet- 
ing. Otherwise,  imless  all  the  stock- 
holders are  present  and  consent, 
either  in  person  or  by  proxy,  the 
meeting  cannot  legally  be  held.  San 
Buenaventura,  etc.  Co.  v.  Vassault, 
50  Cal.  534  (1875).  Though  the  by- 
laws of  a  corporation  fix  the  date  of 
the  annual  meeting,  that  of  itself 
will  not  be  notice  of  the  meeting. 
Notice  must  be  given  of  the  place  of 


1114 


the  meeting;  and  a  provision  of  the 
charter  for  the  calling  of  all  meet- 
ings is  a  mandatory  provision,  ai> 
plicable  alike  to  general  and  special 
meetings.  U.  S.  v.  McKelden,  11  Mac- 
Arthur  &  M.  162  (D.  C,  1879). 

'  "  To  support  the  validity  of  cor- 
porate acts,  each  member  must  be 
actually  summoned."  Angell  & 
Ames,  Corp.,  §  493.  A  member  who 
is  expelled  at  a  meeting  of  which  he 
had  no  notice  may  cause  the  proceed- 
ings to  be  set  aside.  Medical,  etc. 
Soc.  V.  Weatherly,  75  Ala.  248  (1883). 
"Due  notice  of  the  time  and  place 
of  a  coi-porate  meeting  is,  by  the  Eng- 
lish law,  essential  to  its  validity,  or 
its  power  to  do  any  act  which  shall 
bind  the  corporation."  Dillon,  Mun. 
Corp.,  §  200. 

4  Stow  V.  Wyse,  7  Conn.  214  (1828), 
the  coiirt  saying,  in  a  dictum:  "If 
no  particvilar  mode  of  notifying  the 
stockholders  be  provided,  either  in 
the  charter  or  in  any  by-law,  yet 
personal  notice  might  be  given ;  and 
this,  in  such  case,  would  be  indis- 
pensable." Wiggin  V.  Freewill  Baj)- 
tist  Church,  49  Mass.  301  (1844),  a  dic- 
tum: Jackson  v.  Hampden,  20  Me. 
37  (1841);  Rex  v.  Langhorn,  4  Ad.  & 
El.  538  (1836);  S.  C,  6  Nev.  &  M.  203 


en.  XXXVI.]  STOCKHOLDEKS'  MEETINGS  — CALLS.  [§  ^^'>- 

such  a  notice.!  These  rules  are  based  on  the  necessity  of  pro- 
tecting the  rights  of  stockholders,  and  especially  of  the  minor- 
ity. A  stockholder  who  takes  part  in  a  meeting  cannot  raise 
the  objection  that  other  stockholders  were  not  notified  of  the 

meeting.^ 

§  595.  The  essential  elements  of  a  notice  of  a  meeting  are  timey 
place,  and  husiness.-The  contents  of  the  notice  depend  upon 
the  character  of  the  meeting.     There  are  three  matters  con- 
cerning every  corporate  meeting  of  which  the  members  are 
entitled  to  notice,  namely:  the  time,  the  place,  and  the  busi- 
ness proposed  to  be  transacted.     Some  or  all  of  these  may  be 
known  to  him  by  virtue  of  a  charter  provision  or  a  by-law  or 
a  statute.    But  if  any  one  of  them  is  not  known  in  that  way, 
the  stockholders  are  entitled  to  an  actual  notice  thereof.     Ac- 
cordino-ly,  it  is  the  rule  that,  in  the  absence  of  other  valid 
notice,°the  call  must  specify  the  time  and  place  of  meeting  and 
the  business  to  be  considered.     Although  the  time  of  a  meetmg 
is  fixed  by  charter,  nevertheless  the  meeting  may  be  held  at  a 
subsequent  time  and  be  valid.'    The  precise  hour  at  which  the 
meetino-  is  to  be  held  must  be  stated  in  the  notice." 

In  n-cneral,  the  notice  need  not  specify  the  business  to  be 
consid'ered  where  the  meeting  is  one  prescribed  by  charter,  or 
where  the  business  is  prescribed  by  charter  or  statute  or  by-law, 
and  no  other  business  is  to  be  transacted.^    But  if  the  meet- 

(1S36);  Smyth  v.  Darley,  2  H.  L.  Cas.  »  People  v  Cummings.  72  N^ ^33 
789  am),  the  last  four  cases  being  (1878);  Hughes  v.  Parker,  20  N.  H.  58 
municipal  corporation  cases.  See  (1849).  Elections  need  not  be  held 
Xstebbins  uMerritt.  64  Mass.  27  on  the  day  fixed  by  the  by-Iawa 
(1852),  where  a  meeting  called  by  a  They  may  be  held  at  any  subsequent 
general  agent  in  the  absence  of  a  time.  Beardsleyu  Johnson  121  N.Y 
f^tute  or  by-law  was  upheld  though  224  (1890);  S.  C,  1  N.  Y.  Supp.  603 
one  member  was  mentally  incapable  (1888^  ^^^^^^^^^^^^^  ,,,.  Co.  ..  Vas- 
of  receiving  notice.  ^'^'^  _ 

iWi--in  V.  Freewill  Baptist  sault.-oO  CaL  o34  (18.o). 
Church,°  49  Mass.  301  (1844);  Rex  v.  *  Notice  need  not  be  g^^f  ^f  sp^ 
HiU  4  Barn  «fe  C  426(1825),  where  cial  business  to  be  transacted  at  the 
an  a'ncient  Custom  of  callinga  meet-  regiUar  annual  -meting  of  the  stock 
in^  for  an  election  of  burgesses  by  holders.  Chicago,  etc.  Ry  v.  Union 
rinj^g  a  b  iTwas  held  not  to  be  Pac.Il'y,47Fed.  Rep.  15(1891);  Sami. 
y  ■     T     .-^^  son  V.  Bowdoinham  Steam-mill  Co., 

^^^N^\':mrBurckhardt,  47  Pac.  30  Me.  78  (1854),  holding  that  the  no- 
Rep  788  (Orec^..  1897).  See  also  §599,  tice  of  the  annual  meetmg  need  not 
Kep.  -S»  (ure„.,  loj-;  a  ^^^^  ^^^  ^^^^^^  ^^^  ^^  ^^ 

■^  1115 


§  595.] 


STOCKHOLDEKS'  MEETINGS CALLS.  [CH.  XXXVT. 


ing  is  to  be  held  at  a  time  not  provided  by  the  charter,  the  call 
must  specify  particularly  the  time  and  also  the  business  ;>  and 
the  better  rule  is  that,  where  unusual  business  is  to  be  trans- 
acted, even  at  a  regular  meeting,  the  notice  of  that  meeting 
should  state  the  unusual  business.^    Thus,  at  a  meeting  called 


elected,  even  though  the  by-laws  re- 
quire the  notice  to  state  the  business ; 
Warner  v.  Mower,  11  Vt.  385  (1839), 
where  a  provision  of  the  by-laws  re- 
lating to  notices  was  considered  as 
not  affecting  those  for  stated  meet- 
ings, and  holding  that  a  notice  of 
a  stated  annual  meeting  need  not 
specify  the  business  to  be  transacted, 
there  being  nothing  in  the  by-laws 
limiting  or  specifying  the  business. 
It  is  believed,  however,  that  the 
rights  of  stockliolders  will  be  best 
preserved  by  requiring  notice  to  be 
given  of  any  extraordinary  business 
that  may  come  before  an  annual 
meeting. 

1  Re  Bridport  Old  Brewery  Co.,  L.  R. 
2  Ch.  191  (ISCG);  Re  Silkstone  Fall 
Colliery  Co.,  L.  R.  1  Ch.  D.  38  (1875). 
Cf.  Wright's  Case,  L.  R  12  Eq.  335,  n., 
345,  n.  (1868);  Tuttle  v.  Michigan  Air 
Line,  35  Mich.  247  (1877),  holding  that 
at  common  law  all  notices  of  meet- 
ings for  special  or  exceptional  pur- 
poses were  required  to  state  the  ob- 
ject of  the  call.  Citing  Ang.  &  A. 
Corp.,  §  492.  A  meeting  to  organize 
and  elect  directors  is  invalid  where 
no  notice  of  the  business  is  given. 
Re  London,  etc.  Co.,  L.  R.  31  Ch.  D. 
223  (1885);  Shelby  R.  R.  etc.  v.  Louis- 
ville, etc.  R.  R.,  12  Bush  (Ky.),  62 
(1876),  in  which  a  sale  of  a  railroad 
was  set  aside  because  authorized  at 
a  meeting  of  stockholders  called  by 
a  notice  not  sufficient  in  point  of 
time,  and  defective  in  not  stating  the 
object  of  the  meeting;  Zabriskie  v. 
Cleveland,  etc.  R.  R.,  23  How.  381, 
400  (1859),  holding  that,  though  the 
notice  was  insufficient,  yet  one  who 
was  represented  by  proxy  cannot  ob- 
ject, especially  where  he  delayed  a 


1116 


long  time  in  complaining.  A  notice 
of  a  meeting  of  a  benevolent  society 
called  to  dissolve  must  state  the  ob- 
ject of  the  meeting.  St.  Mary's,  etc. 
Assoc.  V.  Lynch,  64  N.  H.  213  (1887). 
A  resolution  passed  at  an  extraordi- 
nary meeting,  upon  a  matter  for  the 
consideration  of  which  it  was  not 
avowedly  called,  or  which  was  not 
specified  in  the  notice  convening  the 
meeting,  is  altogether  inoperative. 
Imp.  Bank  of  China  v.  Bank  of  Hin- 
dustan, L.  R  6  Eq.  91  (1868);  Anglo- 
Calif  ornian  Gold  i\Iin.  Co.  V.  Lewis,  6 
H.  &  N.  174  (18G0);  Stearic  Acid  Co., 
9  Jur.  (N.  S.)  1066  (1863).  Notice  of  a 
meeting  to  consider  the  giving  of  a 
mortgage  is  sufficient  to  enable  the 
meeting  to  authorize  a  mortgage. 
Evans  v.  Boston  Heating  Co.,  157 
Mass.  37  (1892).  One  and  the  same 
meeting  may  be  both  ordinary  and 
extraordinary;  ordinary  for  the  pur- 
pose of  transacting  the  usual  business 
of  the  company,  and  extraordinary 
for  the  transaction  of  some  particu- 
lar business  of  which  special  notice 
may  have  been  given.  See  Cutbill  v. 
Kingdom,  1  Exch.  494  (1847);  Graham 
V.  Van  Diemen's  Land  Co.,  1  R  &  N. 
541  (1856). 

2  The  annual  meeting  cannot  vote 
an  increase  of  the  capital  stock  un- 
less special  notice  of  that  business 
has  been  given,  even  though  the  by- 
laws provide  that  any  business  may 
be  transacted  at  the  annual  meeting 
without  special  notice;  the  statute, 
however,  prescribing  that  an  increase 
of  capital  stock  may  be  at  "  any  meet- 
ing called  for  the  purpose."  Jones 
V.  Concord,  etc.  R.  R,  38  Atl.  Rep.  120 
(N.  H.,  1892).  By  custom  any  busi- 
ness may  be  transacted  at  the  an- 


en.  XXXVI.]  STOCKHOLDEES'  MEETINGS CALLS. 


[§  595. 


to  alter  the  by-laws  and  transact  other  business,  an  election 
cannot  lawfully  be  held.^  'Nor  can  an  assessment  be  levied  at 
a  special  meeting  when  the  stockholders  were  not  duly  notified 
that  that  matter  would  come  up  for  consideration.^  A  notice 
of  a  meeting  to  increase  stock  need  not  specify  what  the  money 
is  to  be  used  for.^  Where  a  special  meeting  is  called  to  rescind 
the  by-laws  and  adopt  others  in  their  place,  the  notice  of  the 
meeting-  may  state  that  a  copy  of  the  proposed  by-laws  can  be 
inspected  at  the  company's  office  and  will  be  submitted  at  the 
meeting.''  At  a  special  meeting  which  has  been  called  for  a 
particular  purpose,  only  the  business  specified  in  the  call  can 
lawfully  be  transacted.^  The  transaction,  however,  of  business 
other  than  that  for  which  the  meeting  was  called  will  not  in- 
validate the  entire  proceedings  at  that  meeting.  There  is  only 
an  invalidity  ^ro  tanto.^ 

The  notice  of  the  business  to  be  transacted  must  "  be  a  fair 
notice,  intelligible  to  the  minds  of  ordinary  men.  .  .  .  The 
court  does  not  scrutinize  these  notices  with  a  view  to  excessive 
criticism  to  find  out  defects,  but  it  looks  at  them  fairly." ' 

nual  meeting  without  special  notice    &  J.  408, 413  (1857);  Re  Irrigation  Co. 

-  of  France,  L.  R.  6  Ch.  176  (1871).  But 
it  is  held  that  at  a  special  meeting, 
all  the  members  being  present  and 
consenting,  business  other  than  that 
specified  in  the  call  may  lawfully  be 
transacted.  Rex  v.  Theodorick,  8 
East,  543  (1807). 

7  Henderson  v.  Bank  of  Australasia, 
63  L.  T.  Rep.  8G9  (1890);  South  School 
District  v.  Blakeslee,  13  Conn.  227 
(1839).  A  notice  that  in  case  certain 
things  happen  a  meeting  will  be  held 
is  not  good.  It  is  conditional  and  not 
absolute.  Alexander  uSimpson,  L.  R. 
43  Ch.  D.  139  (1889).  Where  one  com- 
pany buys  out  another,  the  former 
may  agree  to  pay  a  certain  sum  to 


thereof  being  given,  but  any  specific 
restriction  as  to  any  particular  busi- 
ness modifies  such  rule.  Mutual  F. 
Ins.  Co.  V.  Farquhar,  39  AtL  Rep.  527 
(Md.,  1898). 

1  People's  Ins.  Co.  v.  Westcott,  80 
Mass.  410  (18G0).  Nor  an  amotion 
made.  Rex  v.  Liverpool,  2  Burr.  723 
(1759);  Rex  v.  Doncaster,  2  Burr.  738 
(1759). 

2  Atlantic  De  Laine  Co.  v.  Mason,  5 
R.  L  463  (1858). 

3  Jones  V.  Concord,  etc.  R.  R.,  30 
AtL  Rep.  614  (N.  H.,  1892). 

<  Young  V.  South  African,  etc. 
Synd.,  [1896]  2  Ch.  268.  Although  a 
notice  of  a  corporate  meeting,  and 


proxies  given  for  a  corporate  meet-    the  directors  and  secretaiy  of  the 


ing,  add  to  the  name  of  the  corpora- 
tion the  place  where  it  is  located, 
this  is  immateriaL  Langan  v.  Franck- 
lyn,  20  N.  Y.  Supp.  404  (1892). 

5  Warner  v.  Mower,  11  Vt.  385 
(1839). 

<iRe  British  Sugar  Ref.  Co.,  3  Kay 


latter  "as  compensation  for  loss  of 
office."  This  agreement  is  legal  if 
the  stockholders  of  the  selling  com- 
pany ratify  the  same.  The  notice  of 
a  meeting  of  the  stockholders,  how- 
ever, to  ratify  such  an  agreement 
must  specify  such  payment,  in  addi- 


1117 


§  50G.] 


STOCKHOLDEES'  MEETINGS CALLS.  [CH.  XXXVI. 


§  59G.  Service  of  the  notice. —  If  tlie  particular  form  of  the 
notice  or  the  manner  in  which  it  shall  be  served  is  prescribed 
by  charter  or  by-law  or  by  statute,  the  notice  must  be  given 
in  that  manner,  unless  notice  is  waived  by  unanimous  con- 
sent; otherwise  all  the  proceedings  of  the  meeting  are  invalid.^ 
Under  a  statute  requiring  "  fourteen  days'  public  notice  at  the 
least  ...  by  advertisement,"  it  has  been  held  that  fourteen 
clear  days'  notice  must  be  given.^  The  Xew  York  statutes,  on 
the  contrary,  exclude  the  day  of  publication  and  include  the 
day  of  the  event.'    In  the  absence  of  an  express  provision  as  to 


tion  to  stating  that  the  object  of  the 
meeting  is  to  ratify  the  agreement 
generally.  A  circular  subsequently 
sent  to  the  stockholders  referring  to 
the  payment  to  the  directors  and  sec- 
retary is  not  sufficient,  even  though 
it  was  sent  before  the  meeting  was 
held,  Kaye  v.  Croydon,  etc.  Co.,  78 
L.  T.  Rep.  237  (1S98). 

1  Shelby  R  R  u  Louisville,  etc.  R 
R.,  13  Bush  (Ky.),  62  (187G),  where  there 
was  no  such  publication  as  was  re- 
quired by  statute,  and  there  was  no 
waiver ;  Tuttle  v.  Michigan  Air  Li  ne,  35 
Mich.  247  (1877),  where  a  consolidated 
company  sued  a  subscriber  to  stock 
in  one  of  the  old  companies,  and  he 
defeated  the  action  by  showing  that 
the  statutory  notice  of  the  proposed 
consolidation  had  not  been  given; 
Reilly  u  Oglebay,  25  W.  Va.  36  (1881), 
where  a  notice  by  the  secretary,  when 
the  statute  required  it  to  be  given  by 
the  hoard  of  directors  or  by  stock- 
holders holding  one-tenth  of  the  capi- 
tal, was  held  insufficient,  although  it 
was  shown  that  he  had  the  authority 
from  stockholders  holding  the  re- 
quired amount  of  stock;  Stevens  v. 
Eden  Meeting-house  Soc,  13  Vt  688 
(1839),  holding  that,  where  a  by-law 
required  notice  to  be  posted,  parol 
proof  of  such  posting  was  incompe- 
tent unless  the  written  notice  was 
shown  to  have  been  lost;  Swansea 
Dock  Co.  V.  Levien,  20  L.  J.  (Exch.)  447 
(1851),  where  a  notice  was  held  bad 


because  the  statute  declared  it  should 
be  printed  in  a  newspaper  circulating 
in  the  district  of  the  principal  place 
of  business,  while  in  tliis  case  there 
was  no  proof  that  the  paper  selected 
ever  circulated  thera  Hence  the  re- 
moval of  directors  at  such  a  meeting 
was  illegal  Swansea  Dock  Co.  v. 
Levien,  20  L.  J.  (Exch.)  447  (1851).  As 
to  waiver,  see  §  599,  infra. 

2  Re  Railway  Sleepers  Supply  Co., 
L.  R  39  Ch.  D.  204  (1885),  holding 
that  where  by  statute  a  second  meet- 
ing to  confirm  the  action  of  a  first 
meeting  must  be  held  "  at  an  interval 
of  not  less  than  fourteen  days,"  both 
of  the  days  on  which  the  meetings 
were  held  must  be  excluded;  Reg. 
V.  Aberdare  Canal  Co.,  14  Q.  B.  854 
(1850),  holding  that  where  notice 
must  be  published  "  at  least  sixteen 
days  before  such  meeting"  in  con- 
demnation proceedings,  a  notice  pub- 
lished January  27th  for  a  meeting 
February  12th  was  insufficient;  Reg. 
V.  Shropshire  Justices,  8  Ad.  &  E.  173 
(1838),  not  a  corporation  case,  but 
holding  that  notice  of  appeal  to  be 
"  fourteen  days  at  least "  before  the 
opening  day  must  be  fourteen  days 
exclusive  of  the  day  of  serving  notice 
and  of  the  day  of  the  event.  To  same 
effect,  Norton  v.  Salisbury  Town 
Clerk,  4  C.  B.  32  (1846). 

3L.  1892,  ch.  677,  §  27;  Code  Civ. 
Proc,  §  787. 


1118 


CH.  XXXYL]  STOCKHOLDEKS'  meetings  —  CALLS  [§597. 

the  manner  of  serving  a  notice  of  a  meeting,  it  is  the  common- 
law  rule  that  each  member  of  the  corporation  is  entitled  to  no- 
tice, either  personal  or  by  writing,  which  he  receives.^  The 
physical  or  mental  incapacity  of  one  of  the  stockholders  will 
not  excuse  a  failure  to  give  him  notice  of  a  meeting;  but  it  is 
very  clear  that  the  meeting  may  lawfully  convene  and  trans- 
act business,  although  one  of  the  members  is  incapable,  by  rea- 
son of  imbecility,  of  recei^-ing  the  notice.^  The  absence  of  a 
stockholder  from  home  does  not  excuse  a  failure  to  leave  the 
notice.'  And  where  one  of  the  stockholders  dies  after  notice 
of  a  meeting,  but  before  the  meeting  convenes,  and  no  admin- 
istrator is  appointed  in  time  to  act  at  that  meeting,  there  is  on 
this  account  no  ground  to  impeach  the  regularity  of  the  meet- 
ing.* It  has  been  held  that  a  pledgee  of  shares  is  not  entitled 
to  a  notice  of  corporate  meetings  if  the  pledgor  receives  notice.' 
Where  stock  is  owTied  by  a  firm,  notice  to  one  of  the  firm  is 
sufficient.^  If  the  notice  is  fraudulently  concealed  from  the 
owner  of  a  majority  of  the  stock,  even  where  the  notice  is  pub- 
lished in  accordance  with  the  statute,  the  election  \\^11  be  set 
aside.  ^ 

§  597.  Notice  must  le  served  a  reasonable  time  lefore  the 
ffieeting.—  The  notice  must  be  served  upon  the  stockholders  a 

1  Notice  to  non-residents  by  letter  ing  irregular  or  invalid.  Members 
was  upheld  in  Stebbins  v.  Merritt,  64  of  English  joint-stock  companies  re- 
Mass.  27  (1852).  For  dicta  to  the  ef-  siding  abroad  are  not  entitled  to  any 
feet  that  the  notice  must  be  personal,  notice  of  corporate  meetings.  Ex 
see  Tuttle  v.  Michigan  Air  Line,  35  parte  Union  Hill  Silver  Co.,  22  L.  T. 
Mich.   247  (1877);   Stow  v.  Wyse,  7  Rep.  400  (1870). 

Conn.    214    (1828).    See    also   §592,  *  Freeman's  Nat  Bank  u  Smith,  13 

supra,  as  to  the  kind  of  notice  re-  Blatchf.  220  (1875);  S.  C,  9  Fed.  Cas. 

quired  of  directors'  meetings,  and  760. 

§  594,  supra,  and  notes.  SMcDaniels  v.  Flower  Brook  Mfg. 

^  2  stebbins  V.  Merritt,  64  Mass.  27  "  Co.,  22  Vt.  274  (1850). 

^g50)_  6  Kenton  Furnace  Co.  v.  McAlpin, 

3  Jackson  v.  Hampden,  20  Me.  37  5  Fed. -Rep.  737,  747  (18S0). 
(1841).  In  Porter  v.  Robinson,  30  '  Where,  in  addition  to  in-egulari- 
Hun,  209  (1883),  it  is  held  that  notice  ties,  the  notice  of  the  election  at  a 
need  not  be  given  to  a  member  of  a  deferred  day,  which  is  published  in 
board  of  school  trustees,  the  board  accordance  with  the  charter,  is  con- 
being  a  body  corporate,  who  is  ab-  cealed  from  the  leading  stockholder, 
sent  from  the  state  and  caimot  at-  the  court  will  set  the  election  aside, 
tend  the  meeting,  and  that  a  failure  Johnston  v.  Jones,  23  N.  J.  Eq.  216 
to  notify  such  a  member  will  not  (1872). 
render  the  proceedings  at  the  meet- 

1119 


■§  598,  599.]        STOCKHOLDEKS'  MEETINGS CALLS.  [CU.  XXXVI. 


reasonable  or  customary  time  before  the  day  of  the  meeting.^ 
Where  by  statute  it  is  provided  that  thirty  days'  notice  shall 
be  given  of  certain  corporate  meetings,  that  length  of  time  ap- 
plies to  notices  of  other  meetings  of  the  same  corporation.' 

§  598.  The  division  of  meetings  into  ordinary  and  extraor- 
dinary.—  Corporate  meetings  of  stockholders  are  frequently 
divided,  both  by  the  judges  and  the  text-writers,  into  two 
classes  —  the  first  being  special  or  extraordinary,  and  the  sec- 
ond being  ordinary,  regular,  stated,  or  general.  By  reason  of 
this  attempt  at  classification  much  confusion  has  been  intro- 
duced into  the  law  without  any  corresponding  advantage.  The 
terms  employed  to  distinguish  the  various  kinds  of  meetings 
are  used  in  different  senses  by  different  writers,  so  that  it  is 
dilTicult  to  define  them  in  such  a  way  as  to  avoid  confusion.' 

§  599.  Waiver  of  notice. —  A  stockholder  may  expressly  or 
by  his  acts  waive  his  right  to  have  a  notice  of  a  corporate  meet- 
ing duly  served  upon  him.*    Although  a  stockholder  is  present 


1  Re  Long  Island  R.  R,  19  "Wend.  37 
(1837).  Cf.  Covert  v.  Rogers,  38  Mich. 
303  (1878),  where  a  similar  rule  is  de- 
clared as  to  notice  to  directors  of 
their  meetings.  Tlie  legislature  can- 
not unreasonably  shorten  the  time 
of  the  next  meeting.  Cassell  v.  Lex- 
ington, etc.  Co.,  9  S.  W,  Rep.  503  and 
701  (Ky.,  1888).  A  reorganization 
under  the  English  statute  will  not  be 
sustained  as  against  American  stock- 
holders, where  the  entire  business  of 
the  English  company  is  to  own  and 
work  American  mines,  and  the  by- 
laws of  the  company  provide  for  a 
longer  notice  than  is  specified  in  the 
English  statute.  The  notice  of  the 
meeting  to  reorganize  not  having 
reached  the  American  stockholders 
in  time  to  attend  the  meeting,  the 
American  courts  will  not  sustain 
the  reorganization.  Brown  v.  Re- 
publican, etc.  Mines,  55  Fed.  Rep.  7 
(1893). 

2  Shelby  R.  R.  v.  Louisville,  etc. 
R  R,  13  Bush  (Ky.),  63  (1876). 

3  For  instance,  in  England,  all  meet- 
ings of  stockliolders  are  called  "  gen- 

11 


eral "  meetings,  and  are  eitlier  "ordi- 
nary" {%.  e.,  regular)  or  "extraordi 
nary  "  (I  e.,  special).  In  England  tlie 
same  meeting  may  be  both  ordinary 
and  extraordinary.  See  Lindley  on 
Companies,  p.  308. 

*  The  acts  of  a  meeting  are  valid, 
thcrugh  held  without  notice,  if  aD  are 
present  or  subsequently  ratify  and 
approve  of  the  action.  Stutz  v.  Hand- 
ley,  41  Fed.  Rep.  531  (1890);  affirmed 
as  to  this  point,  but  reversed  as  to 
others,  in  Handley  v.  Stutz,  139  U.  S. 
417  (1891).  A  party  accepting  the 
benefit  of  a  contract  for  a  long  time 
cannot  repudiate  it  on  the  ground 
that  the  calls  for  the  meetings  of 
the  executive  committee  and  of  the 
stockholders  which  authorized  the 
contract  were  insufficient;  nor  can 
he  set  up  in  such  a  case  that  the  di- 
rectors had  not  authorized  the  con- 
tract. Union  Pac.  R'y  v.  Chicago, 
etc.  R'y,  51  Fed.  Rep.  309  (1893).  A 
stockholder  who  takes  part  in  a 
meeting  cannot  afterwards  object 
that  it  was  not  properly  called  Wein- 
burgh  V.  Union,  etc.  Co.,  37  AtL  Rep. 
30 


en.  XXXVI.]  STOCXHOLDEES'  MEETINGS CALLS. 


[§  599. 


at  a  meeting  at  whicli  an  increase  in  capital  stock  is  voted,  yet 
he  may  object  thereto  on  the  ground  that  special  notice  "was 
not  given  that  the  question  of  the  increase  would  be  voted  on 
at  that  meeting,  inasmuch  as  if  such  notice  had  been  given 
other  stockholders  might  have  attended  and  changed  the  result.^ 
Difficulty  as  to  waivers  has  been  encountered  where  by  statute 
or  by  charter  the  notice  must  be  published  or  must  be  given  a 
specified  length  of  time  before  the  meeting  is  held.  This  question 
arises  often  in  regard  to  the  fu^st  and  organization  meeting  of 
the  company,  or  in  regard  to  a  meeting  to  increase  the  capital 
stock,  or  to  issue  bonds,  or  to  give  a  mortgage,  or  to  effect  a 
consolidation.  The  rule,  however,  is  now  well  established  that 
such  statutory  notice  is  for  the  benefit  of  the  stockholders 
themselves,  and,  if  they  waive  it,  the  meeting  and  all  the  pro- 
ceedings are  as  valid  as  they  would  be  had  the  full  statutory 
notice  been  given.^ 


1026  (N.  J.,  1897).  Objections  to  the 
regularity  of  the  notice  which  was 
given  are  waived  if  all  are  present 
at  the  meeting  and  do  not  object  to 
such  irregularity.  Stebbins  i'.  ]\ler- 
ritt,  64  Mass.  27  (1852);  Eichardson  v. 
Vermont,  etc.,  44  Vt.  613  (1872),  hold- 
ing that  objections  to  the  proceed- 
ings of  a  meeting  called  by  a  notice 
which  did  not  state  what  its  object 
was  had  been  waived  by  a  ratifica- 
tion at  a  later  meeting;  Jones  v.  Mil- 
ton, etc.  Tm-np.,  7  Ini  547  (1856), 
where  the  stockholders  not  notified 
appeared  and  voted  by  proxy;  Ken- 
ton Furnace  Co.  v.  McAlpin,  5  Fed. 
Rep.  737  (1880).  See  also  §  606,  infra, 
"Where  several  persons,  their  associ- 
ates and  successors,  are  declared  to 
be  a  corporation,  one  of  them  with 
new  parties  may  meet,  organize, 
adopt  by-laws,  etc.,  without  the  capi- 
tal being  first  subscribed  and  vdth- 
out  the  others,  if  they  do  not  object. 
McGinty  v.  Athol,  etc.  Co.,  155  Mass. 
183  (1892).  Notice  may  be  waived. 
People  r.  Twaddell,  18  Hun,  427  (1879). 

1  Jones  V.  Concord,   etc.  R.  R.,  38 
AtL  Rep.  120  (N.  H.,  1892). 

2  A  provision  that  notice  must  be 


given  to  stockholders  thirty  days  be- 
fore they  vote  in  favor  of  a  mortgage 
may  be  waived  by  them,  and  a  waiver 
may  be  by  failure  to  object.  Bridge- 
poi-t  Electric,  etc.  Co.  v.  Meader,  73 
Fed.  Rep.  115  (1896).  Even  though 
the  statutory  notice  of  a  stockhold- 
ers' meeting  is  not  given,  a  mortgage 
authorized  by  the  board  of  directors 
elected  at  such  a  meeting  is  legal, 
where  the  corporation  receives  the 
benefit  therefrom,  without  any  stock- 
holder objecting.  Atlantic  Trust  Co. 
V.  The  Vigilancia,  73  Fed.  Rep.  453 
(1896).  Where  a  mortgage  is  approved 
by  the  representatives  of  all  the  stock 
except  two  shares,  it  is  good  as  an 
equitable  mortgage,  even  though  the 
meeting  of  stockholders  authorizing 
it  was  not  called  by  advertisement, 
as  required  by  statut  e.  Cent  ral  Trust 
Co.  V.  Bridges,  57  Fed.  Rep.  753  (1893). 
A  statutory  provision  that  a  certain 
notice  must  be  given  of  a  meeting  to 
authorize  a  mortgage  may  be  waived. 
Central  Trust  Co.  v.  Condon,  67  Fed, 
Rep.  84(1895).  Although  the  statutes 
of  Montana  require  that  a  mortgage 
may  be  given  only  after  a  stockhold- 
ers" meeting  convened  by  publication 


71 


1121 


500.] 


STOCKUOLDEKS'  MEETINGS CALLS.  [CU.  XXXVI. 


Participation  as  an  officer  in  issuing  the  call  is  a  waiver  by 
him  of  informalities  as  to  that  call;'  and  recognition  of  an 
agent  appointed  at  a  certain  meeting,  by  dealing  and  oiferinf'- 
to  deal  with  him  as  the  agent  of  the  company,  is  a  waiver  of 


of  notice,  etc.,  has  voted  it,  yet  all 
the  stockliolders,  by  voting  thei'efor, 
waive  the  required  notice,  and  no  one 
can  complain.  Tlie  mortgage  is  valid. 
Campbell  v.  Argenta,  etc.  Co.,  51  Fed. 
Eep.  1  (1892).  Although  the  constitu- 
tion provides  that  tliere  shall  be  sixty 
days'  notice  of  the  meeting  to  author- 
ize the  issue  of  bonds,  yet  wliere  all 
the  stockholders  assemble  and  au- 
thorize the  issue  without  any  notice, 
and  the  bonds  pass  into  bona  fide 
hands,  they  may  be  enforced.  The 
absence  of  a  nominal  stockholder 
whose  stock  is  really  owned  by  one 
of  those  present  is  immaterial.  Wood 
V.  Corry,  etc.  Co.,  44  Fed.  Rep.  146 
(1890).  A  constitutional  provision  in 
regard  to  notice  being  given  of  a 
meeting  for  increasing  tlie  stock  or 
bonds  of  a  corporation  is  for  the  bene- 
fit of  the  stockholders  and  may  be 
waived  by  them,  or  the  omission 
of  it  may  be  ratified  by  them.  Nel- 
son V.  Hubbard,  96  Ala.  238  (1892). 
The  voluntary  dissolution  of  a  com- 
pany under  the  statute,  but  without 
the  ten  days'  notice  required  by  tlie 
statute,  is  not  such  a  dissolution  as  to 
prevent  creditors  from  attaching  the 
property  of  the  company  as  though 
no  dissolution  had  been  had.  Cleve- 
land, etc.  Co.  V.  Taylor,  etc.  Co.,  54 
Fed.  Rep.  82  (1893).  But  the  dissolu- 
tion cannot  be  enjoined  by  creditors 
in  the  absence  of  fraud.  Cleveland, 
etc.  Co.  V.  Taylor,  etc.  Co.,  54  Fed. 
Rep.  85  (1893).  In  general,  see  Co- 
lumbia Nat.  Bank's  Appeal,  16  W.  N. 
Cas.  (Pa.)  357  (1885) ;  Manhattan  Hard- 


ware Co.  V.  Phalen,  128  Pa.  St.  110 
(1889);  Kenton  Furnace  Co.  v.  McAl- 
pin,  5  Fed.  Rep.  737  (1880),  where  no 
notice  was  given,  although  prescril  .ed 
by  tlie  charter  and  by-laws.  It  was 
held  to  have  been  waived  by  the 
presence  of  all  the  stockholders  at 
the  meeting  and  their  participation 
in  its  action ;  Re  British  Sugar  Ref. 
Co.,  3  Kay  &  J.  408  (1857).  where  it 
was  adjudged  that  a  shareholder  who 
had  received  a  circular  notice  of  the 
meeting  and  was  present  could  not 
question  the  legality  of  the  meeting 
on  the  ground  that  the  charter  re- 
quired, in  addition  to  the  circular, 
publication  in  a  newspaper,  wnicli 
was  not  made. 

A  person  who  takes  part  in  a  meet- 
ing cannot  object  that  it  was  held 
on  five  days'  notice  instead  of  four- 
teen, as  required  by  the  charter. 
Bucksport,  etc.  R.  R  v.  Buck,  68  Me. 
81  (1878);  Chamberlain  u  Painesville, 
etc.  R.  R.,  15  Ohio  St.  225  (1864).  A 
failui-e  to  give  the  statutory  notice 
of  the  first  meeting  is  immaterial 
where  all  but  one  stockholder  were 
present  and  he  afterwards  ratified 
all  that  was  done.  Babbitt  v.  East, 
etc.  Co.  (N.  J.,  1876);  Stew.  Dig., 
p.  208,  §  13.  To  same  effect,  §  234, 
note,  supra,  and  §  593,  supra;  also 
§  288,  supra.  A  stockholder  who 
knows  of  and  approves  of  a  proposed 
sale  of  a  railroad  by  a  stockholders' 
vote  as  allowed  by  statute  cannot 
have  the  sale  set  aside  on  the  ground 
that  he  was  not  notified  of  nor  pres- 
ent at  the  meeting  voting  such  sale, 


1  Bucksport,  etc.  R.  R.  v.  Buck,  68    ing   at   an    irregular   tnne    cannot 
Me.  81  (1878);  Schenectady,  etc.  Plank-    question  the  acts  of  such  meeting, 
road  Co.  V.  Thatcher,  11  N.  Y.  102    Christopher  v.  Noxon,  4  Ont.  Rep. 
(1854).    The  stockholder  who,  as  a  di-    (Can.)  673  (1883). 
rector,  votes  to  caU  the  annual  meet- 

1123 


CH.  XXXYI.]  STOCKHOLDEKS'  MEETINGS CALLS. 


[§  599. 


the  rio-lit  to  notice  of  that  meetino;.'  One  stockholder  cannot 
avail  himself  of  the  neglect  of  the  corporate  officers  to  give 
due  notice  to  another  stockholder  who  does  not  himself  com- 
plain.2  But  the  failure  of  a  stockholder  to  attend  the  stock- 
holders' meeting  is  not  a  waiver  of  his  right  to  object  to  the 
acts  of  the  meeting  as  ultra  vires,  even  though  the  notice  of 


but  he  must  be  paid  the  value  of  his 
stock.  Young  v.  Toledo,  etc.  R  R., 
76  Mich.  485  (1889).  The  constitu- 
tional provision  that  bonds  or  stock 
shall  not  be  increased  except  in  a 
certain  -way  does  not  apply  to  an 
original  issue  of  bonds.  Union,  etc. 
Co.  V.  Southern,  etc.  Co.,  51  Fed.  Rep. 
840  (1893).  Directors  elected  at  a 
meeting  called  on  thirteen  days'  no- 
tice instead  of  fourteen,  as  required 
by  statute,  may  make  calls,  where 
their  election  has  been  confirmed  by 
a  subsequent  annual  general  meet- 
ing. Briton,  etc.  Assoc,  v.  Jones,  61 
L.  T.  Rep.  384  (1889);  People  v.  Peck, 
11  Wend.  G04  (1831),  holding  that  a 
failure  to  comply  with  a  statutory 
requirement  regarding  notice  will 
not  affect  the  proceedings  of  a  meet- 
ing of  a  religious  corporation  where 
there  is  no  claim  that  every  voter 
was  not  present,  or  that  evil  resulted 
from  the  omission,  and  no  fraud  was 
involved.  If  all  parties  attended, 
they  thereby  admitted  notice.  See 
also  Stebbins  v.  Merritt,  64  jMass.  27 
(1852);  Rex  v.  Chetwynd,  7  Barn.  & 
C.  695  (1828),  where  the  election  of  a 
burgess  at  a  meeting  of  which  no 
notice  was  given  was  held  valid,  be- 
cause it  appeared  that  all  the  mem- 
bers of  the  electing  body  were  pres- 
ent; Rex  V.  Theodorick,  8  East,  543 
(1807).  Cf.  U.  S.  V.  McKelden,  11  Mac- 
Artliur  &  M.  1G2  (D.  C,  1879),  where 
it  was  held  that,  although  the  date  for 
the  annual  meeting  is  fixed  by  a  by- 
law, the  notice  by  publication  pro- 
vided for  by  the  charter  is  necessary. 
See  aXsoRe  Long  Island  R.  R.,  19  Weud. 
37  (1837),  in  which  it  was  said  in  a  dic- 
tum that  a  notice  regulated  by  stat- 

11 


ute  "of  course  cannot  be  modified 
or  dispensed  with."  If  all  the  incor- 
porators meet  and  organize,  a  statu- 
tory requirement  as  to  notice  is 
waived  and  is  not  necessaiy.  Ratifi- 
cation afterwards  by  one  who  was 
not  present  is  equally  sufficient.  Ben- 
bow  V.  Cook,  115  N.  C.  324  (1894). 

1  Bryant  v.  Goodnow,  23  Mass.  228 
(1837). 

2Nickum  v.  Burckhardt,  47  Pac. 
Rep.  788  (Oreg.,  1897);  Schenectady, 
etc.  Plank-road  Co.  v.  Thatcher,  11 
N.  Y.  103  (1854).  In  this  case  the 
court  said:  "The  court  rejected  tlie 
offer  of  the  defendant  to  prove  that 
no  notice  had  been  given  of  the  first 
election  of  directors.  I  think  this 
was  properly  rejected  on  the  ground 
that  the  defendant  could  not  avail 
himself  of  a  neglect  to  give  notice  to 
any  other  stockholder.  The  defend- 
ant himself  was  present  at  that 
meeting  and  voted,  and  was  elected 
a  director.  He  has  not  suffered  by 
an  omission  to  serve  notice,  and  he 
is  not  in  a  situation  to  object  as 
to  others."  A  stockholders'  meeting 
held  without  notice  or  call  cannot 
be  objected  to  by  those  who  partici- 
pate or  receive  the  benefits  of  it. 
Handley  v.  Stutz,  139  U.  S.  417  (1891). 
A  stookholder  who  takes  part  can- 
not object  that  another  stockholder 
had  no  notice.  Re  Union  Hill  Silver 
Co.,  22  L.  T.  Rep.  400  (1870);  Re  Brit- 
ish, etc.  Co.,  3  Kay  &  J.  408  (1857). 
A  party  who  did  not  attend  the 
meeting  cannot  object  that  the  in- 
spectors were  not  sworn.  Re  Mo- 
hawk «&  Hudson  R.  R.,  19  Wend.  135 
(1838).  See  also  §  620,  infra,  and 
§  594,  supra. 


§§  600,  601.]        STOCKHOLDEKS'  MEETINGS CALLS.  [CH.  XXXVI. 

the  meeting  stated  what  was  to  be  done.*  A  stockholder  in  a 
corporation  may  be  estopped  from  questioning  the  validity  of  a 
stockholders'  meeting  by  reason  of  his  participation  in  the  pro- 
ceedino-s  by  proxy,  where  his  agent  was  authorized  to  act  at 
lawful  meetings.'^  The  waiver  of  all  the  stockholders  is  essen- 
tial in  order  to  validate  an  election  held  at  a  meeting  not  prop 
erly  called.'  But  where  the  treasurer  has  acted  as  sucli  for 
several  months  without  objection,'notes  signed  by  the  treas- 
m'er  cannot  bo  repudiated  on  the  ground  that  his  election  was 
invalid  because  the  stockholders'  meeting  was  not  properly 
called.*     lie  is  a  de  facto  oflBcer.' 

§  GOO.  Notice  is  in'csximed  to  have  l)ccn  rcgidarhj  given. —  It 
is  a  presumption  of  law  that  proper  and  valid  notice  of  a  cor- 
porate meeting  has  been  duly  given  to  every  stockholder,  and 
that  the  meeting  itself  was  regularly  and  lawfully  held.  The 
burden  of  proof  is  therefore  upon  him  who  alleges  want  of  no- 
tice or  insufficiency  of  notice,  or  attacks  the  regularity  and 
validity  of  the  proceedings.' 

§  601.  Adjourned  meetings. —  An  adjourned  meeting  is  but 
a  continuation  of  the  meeting  which  has  been  adjourned ;  and 
when  that  meeting  was  regularly  called  and  convened  and  duly 
adjourned,  the  shareholders  may,  at  the  adjourned  meeting, 
consider  and  determine  any  corporate  business  that  might  law- 
fully have  been  transacted  at  the  original  meeting.' 

iMcFadden  v.  Leeka,  48  Ohio  St  attacking  the  legality  of  the  meeting 

513  (1891).  is  on  the  plaintiff.    See  also  §  606, 

2  Columbia  Nat.  Bank  v.  Matthews,  infra.  All  the  stockholders  are  pre- 
85  Fed-  Rep.  93-4  (1898).  sumed  to  have  had  notice  of  a  meeting 

3  State  V.  Pettineli,  10  Nev.  141  that  has  been  held.  Beard^ley  v. 
(1875).  Johnson,  121  N.  Y.  224  (1890).     Cf. 

*  Merchants'  Nat.  Bank  v.  Citizens'  "Wiggin  v.  Freewill,  etc  Chtirch,  49 

Gas  Light  Co.,  159  Mass.  505  (1893).  Mass.  301,  312  (1844). 
5  See  §  623,  infra.  7  Approved  in  State  v.  Cronan,  49 

sMcDaniels  v.  Flower  Brook  Mfg.  Pac.  Rep.  41  (Nev.,  1897);  Granger  v. 

Co.,  22  Vt.  274  (1850);  Porter  v.  Rob-  Grubb,  7  Phila.  350  (1870);  Farrar  v. 

inson,  30  Hun,  209(1883);  Sargent  u  Perley,  7  Me.  404  (1831);  Scadding 

Webster,  54  Mass.  497  (1847);  South  v.  Lorant,  3  H.  L.   Cas.  418  (1851). 

School,  etc.  V.  Blakeslie,  13  Conn.  227,  Cf.  People  v.  Batchellor,  22  N.  Y.  128 

235  ( 1839) ;  Lane  v.  Brainerd,  30  Conn.  (1860),  where  the  New  York  city  board 

565  (1862) ;  Pitts  v.  Temple,  2  Mass.  of  aldermen  appointed  a  day  for  the 

538  (1807) ;  "Wells  v.  Rodgers,  60  Mich,  election  of  a  city  officer.    At  a  subse- 

525  (1886),  holding  that  notice  is  pre-  quent  stated  meeting  this  resolution 

smned,  and  the  burden  of  proof  in  was  rescinded,  and  then  an  election 

1124 


on.  XXXVI.]        stockholders'  meetings  —  calls. 


[§  GOl. 


But  where  there  is  an  absence  of  good  faith,  and  an  adjourned 
meeting  is  held  in  such  a  way  as  to  prevent  certain  of  the 
stockholders  from  knowing  of  it,  the  proceedings  are  invalid.^ 
TVhere  the  original  meeting  was  duly  called  and  convened,  the 
stockholders  are  not  entitled  to  any  other  notice  of  the  ad- 
journed meeting  than  that  which  is  implied  in  the  adjourn- 
ment.2  But  nothing  can,  without  notice,  be  transacted  at  an 
adjourned  meeting  except  the  business  which  might  have  been 
transacted  at  the  first  meeting  if  a  quorum  had  been  present.' 


was  thereupon  held.  Ueld,  that  the 
election  was  void,  as  some  members 
were  absent  from  the  former  meet- 
ing and  had  no  notice  of  the  election. 
A  board  of  aldermen  cannot  elect  an 
assessor  and  then  at  an  adjourned 
meeting  reconsider  and  elect  some 
one  else.  State  v.  Phillips,  79  Me. 
506  (1887).  See  also  Hardenburgh  v. 
Farmers',  etc.  Bank,  3  N.  J.  Eq.  68 
(1834),  wliere  the  stockholders  at  the 
first  meeting  proceeded  to  an  elec- 
tion in  spite  of  an  adjournment  by 
the  commissioners,  and  the  election 
was  uplield.  A  meeting  adjom-ned 
for  want  of  a  quorum  may  at  the 
adjourned  meeting  proceed  to  busi- 
ness, if  a  quorum  is  present;  and  no 
notice  of  the  adjourned  meeting  is 
necessary  where  the  charter  or  by- 
laws provided  for  such  adjournment. 
Smith  V.  Law,  21  N.  Y.  296  (1860),  in- 
volving a  meeting  of  the  board  of 
directors. 

1  State  V.  Bonnell,  35  Ohio  St.  10 
(1878).    Where  an  election  is  held, 


after  many  adjournments,  and  a  mi- 
nority are  present  and  elect  directors, 
who  repudiate  a  contract  which  ex- 
ists with  the  holder  of  a  majority  of 
the  stock,  the  latter  being  ignorant 
of  the  intent  to  elect  officers,  equity 
will  enjoin  the  repudiation  of  the 
contract.  New  York,  etc.  Co.  v.  Par- 
rott,  36  Fed.  Rep.  463  (1888). 

2  Smith  V.  Law,  21  N.  Y.  296  (1860); 
Warner  v.  Mower,  11  Vt.  385  (1839). 
Cf.  U.  S.  V.  McKelden,  11  MacArthur 
&  K  162  (D.  C,  1879),  where  it  was 
held  that  the  proceedings  of  an  origi- 
nal meeting  being  invalid  by  reason 
of  insufficient  notice,  the  adjourned 
meetings  were  invalid  also,  they  be- 
ing merely  continuations  of  the  orig- 
inal. To  same  effect,  Wiggin  v.  Free- 
will, etc.  Church,  49  Mass.  301  (1844). 

3  Regina  v.  Grimshaw,  10  Q.  B.  747 
(1847).  No  business  can  be  done  at 
an  adjourned  meeting  that  could  not 
have  been  done  at  the  original  meet- 
ing. Christopher  v.  Noxon,  4  Ont. 
Rep.  (Can.)  672  (1883). 


1125 


CHAPTEE  XXXYII. 


ELECTIONS  AND  OTHER  CORPORATE  MEETINGa 


§  602.    Scope  of  the  subject. 

608.  Elections  are  to  be  by  the 
stockliolilers  and  may  be 
compelled   by  mandamus. 

604  The  meeting  must  be  held  at 
the  prescribed  hour,  wliich 
must  be  reasonable. 

605.  Inspectors  of  election  —  Con- 

ducting and  closing  elec- 
tions. 

606.  Conducting  and  closing  meet- 

ings generally  —  Irregular- 
ities and  informalities  — 
Minutes  of  meeting. 

607.  The  quorum  —  A  majoritj^  of 

the  stockholders  attending 
a  meeting  may  transact 
business. 

608.  The  majority  of  votes  cast 

shall  elect. 

609.  Is  every  share  of  stock  en- 

titled to  one  vote  ? 
609a.  Cumulative  voting. 

610.  Proxies. 

61 1.  The  transfer  book  as  evidence 

of  a  right  to  vote. 
613.    The  right  of  trustees,  pledg- 
ees, administrators,  etc.,  to 
vote. 

613.  The  corporation  cannot  vote 

upon  shares  of  its  own 
stock. 

614.  Issuing    stock   in    order   to 

carry  an  election. 

615.  Where  one  corporation  owns 

a  majority  of  the  stock  of  a 
rival  company,  may  it  vote 
the  stock  and  control  the 
latter  company  ? 

616.  Illegal   or    fraudulent   elec- 

tions—  The  remedy  of  in- 
jimction  against  elections 
and  against  voting  particu- 
lar stock. 


617.  Illegal    or    fraudulent   elec- 

tions— The  remedies  of  quo 
warranto  and  mandamus. 

618.  Illegal    or    fraudulent    elec- 

tions—  The  remedy  by  in- 
junction against  directors 
acting,  and  the  remedy  of 
a  suit  in  equity  where  the 
validity  of  the  election 
arises  incidentally. 

619.  Illegal   or    fraudulent    elec- 

tions —  Statutory  remedy 
by  petition  to  a  court  of 
equity. 

620.  Who  may  complain  of  an  ille- 

gal election  —  A  new  elec- 
tion is  not  granted  if  the 
result  will  be  the  same. 

631.  Restrictions  on  the  right  to 
vote. 

631a.  Restrictions  on  right  to  sell 
stock  and  contracts  against 
selling. 

631&.  "  Pools,"  "  corners,"  and  com- 
binations in-  stock. 

623.  Contracts  as  to  directors, 
elections,  voting,  and  con- 
t  r  o  1  —  Combinations  of 
stockholders  —  Voting 
trusts  and  pooling  agree- 
ments. 

623.  Who  may  be  a  director  or 
corporate  officer  ?  —  Quali- 
fication shares. 

634.  Acceptance  and  resignation 

of  office  and  failure  to  elect 
officers  —  Removal  of  di- 
rectors. 

635.  Stockholders  can  act  only  at 

corporate  meetings. 
626, 637.  Stockholders  cannot  carry 
on  the   business  or  enter 
into  contracts  for  the  cor- 
poration. 


§  602.  Scope  of  the  siibject — Tlie  business  which  the  stock- 
holders of  a  corporation  in  meeting  assembled  have  the  power 
to  transact  is  not  extensive,  but  it  is  of  great  importance.  They 
elect  the  directors,  pass  upon  amendments  to  the  charter,  de- 


nse 


CH.  XXXVII.]         ELECTIONS CORPOKATE    MEETINGS.  [§  G03. 

tennine  whether  any  increase  of  the  capital  stock  shall  bo 
made,  make  the  by-laws,  and  dissolve  or  continue  the  corpo- 
ration. These  constitute  the  chief  functions  of  a  stockholders' 
meetincr.  They  are  extraordinary  in  their  character,  and  al- 
though they  are  exercised  at  long  intervals  are  of  vital  im- 
portance. This  chapter  treats  of  the  business  which  may  be 
transacted  at  stockholders'  meetings  and  of  the  methods  of  its 
transaction. 

§  603.  Elections  are  to  le  hj  the  stocMolders,  and  may  le 
compelled  Jjij  mandamus.— At  common  law  the  directors  of  a 
corporation  are  to  be  elected  by  the  stockholders  in  corporate 
meeting  assembled.^  Generally  this  is  declared  to  be  the  law 
by  charter  or  statutory  provisions.  A  contract  and  by-law 
giving  a  voting  power  to  bondholders  at  corporate  elections  is 
Toid  as  against  public  policy  and  the  statutes,  where  the  stat- 
utes prescribe  that  the  directors  shall  be  elected  by  the  stock- 
holders and  shall  not  be  elected  in  any  other  manner.^  In 
most  corporations  the  president,  and  also  the  vice-president,  sec- 
retary, treasurer,  and  agents  of  the  corporation,  are  elected  or 
appointed,  not  by  the  stockholders,  but  by  the  directors.  All 
these  matters  are  generally  regulated  by  the  charter  or  a  stat- 
ute. 

At  common  law  mandamus  lies  to  compel  an  election  of  cor- 
porate officers.' 

All  corporations  for  profit  have  power  to  elect  a  board  of  di- 
rectors.* 

The  legislature  may  amend  the  charter  so  as  to  increase  the 

1  It  has  been  held  that  stockholders  the  statute  does  not  provide  for  thenu 

cannot  fill  vacancies  in  the  board  of  All  private  corporations  may  have 

directors  at  a  special  meeting,  when  directors.      Hurlbut  v.  Marshall,  63 

elections  can  only  be  at  annual  meet-.  Wis.  590  (1885).    "  The  power  inlieres 

ings.    ]\Ioses  v.  Tompkins,  84  Ala.  613  in  the  corporation  to  hold  an  elec- 

(1888).    The  soundness,  however,  of  tion,"  where  the  charter  or  statutes 

tliis  decision  may  well  be  doubted,  are  silent.  Wright  v.  Commonwealth, 

The  by-laws  may  and  generaUy  do  109  Pa.  St.  560  (1885).    "The  power  of 

give  tliis  power  to  the  directors.  And  electing  both  officers  and  members  is 

see  dictum  in  Re  Union  Ins.  Co.,  23  an  incident  to  every  corporation.    It 

Wend.  591  (1840).  is  not  necessary  that  such  a  power 

•^  Durkee  v.  People,  155  IlL  354  (1895).  should  be  expressly  conferred  by  the 

3  See  ^  593,  «tpra.  charter."    Commonwealth  u  Gill,  3 

*  A  bank  may  have  directors  though  Whart,  (Pa.)  228,  247  (1837). 

1127 


§  004.] 


ELECTIONS CORPORATE    MEETINGS. 


[cii. 


XXXVII. 


number  of  directors;*  but  it  cannot  deprive  the  members  of  the 
corporation  of  the  privilege  of  electing  its  directors.^ 

Although  the  corporation  is  not  a  going  concern,  neverthe- 
less it  may  have  an  election  of  directors.' 

§  004.  The  meeting  must  he  held  at  the  iJrescrihed  hour^  which 
onust  he  reasonahle. —  The  particular  time  at  which  corporate 
meetings  shall  be  held  is  often  prescribed  in  the  charter  or  a 
statute  or  in  the  by-laws  of  the  corporation.  When  not  so  pre- 
scribed it  is  fixed  by  the  officers  who  call  together  the  corpo- 
rate meeting.  But,  in  whatever  way  it  is  decided  upon,  the 
meeting  must  be  convened  at  the  time  decided  upon  or  within 
a  reasonable  time  thereafter.*  Accordingly,  if  the  meeting  is- 
convened  before  the  hour  at  which  it  is  called  and  business  is- 
transacted,  the  proceedings  will  be  invalid.* 


1  Mower  V.  Staples,  32  Minn.  284 
(1884).  See  also  Gray  v.  Coffin,  63 
Mass.  192  (1852);  Child  v.  Coffin,  17 
Mass.  64  (1820);  Langley  u  Little,  26 
Ma  162  (184G);  Payson  v.  Withers,  5 
Biss.  269  (1873);  S.  C,  19  Fed.  Cas.  29; 
Joy  V.  Jackson,  etc.  Co.,  11  Mich.  135 
(1863);  Lincoln,  etc.  Bank  v.  Richard- 
son, 1  Me.  79  (1820);  Greeneville,  etc. 
R  R  V.  Johnson,  8  Baxt.  (Tenn.)  332 
(1874);  Fall  River  Iron  Works  v.  Old 
Colony,  etc.  R  R,  87  Mass.  221  (1862). 
See  also  §§  499,  500,  supra. 

2  The  legislatiu-e  cannot  arbitrarily 
name  and  appoint  trustees  of  an  edu- 
cational corporation,  the  charter  pro- 
viding that  vacancies  shall  be  filled 
by  the  remaining  trustees.  Sheriff 
V.  Lowndes,  16  Md.  357  (1860).  It  can- 
not give  to  the  city  of  Louisville  the 
power  to  elect  the  trustees  of  the 
University  of  Louisville,  an  educa-' 
tional  corporation.  Louisville  v. 
President,  etc.,  15  B.  Mon.  (Ky.)  642 
(1855).  It  cannot  vest  the  govern- 
ment of  an  incorporated  academy  in 
a  new  board  of  trustees.  Norris  v. 
Trustees,  etc.,  7  Gill  &  J.  (Md.)  7 
(1834).  Under  the  reserved  power  to 
amend  or  repeal  a  charter,  the  legis- 
lature may  amend  the  charter  of  an 
agricultural  college  which  has  pri- 
vate stockholders,  but  to  which  the 


A  meeting  called 


state  contributes  funds,  so  that,  in- 
stead of  the  state  having  four  direct- 
ors out  of  eleven,  the  state  shall  have 
seven  out  of  twelve.  Jackson  v. 
Walsh,  75  Md.  304  (1892).  But  see 
Sage  V.  Billiard,  15  B.  Mon.  (Ky.)  340, 
357  (1854),  and  §§  500, 501,  notes,  siqva. 

SBeardsley  v.  Johnson,  121  K  Y. 
224  (1890). 

*  Where  a  meeting  was  held  by  a 
minority  of  the  stockholders  several 
hours  after  the  time  fixed  in  the  no- 
tice, and  an  adjournment  made  until 
the  following  day,  at  which  adjourned 
meeting,  without  the  knowledge  of 
the  other  members,  an  election  wa» 
held,  the  election  was  unfair  and  in- 
valid. State  V.  Bonnell,  35  Ohio  St. 
10  (1878).  But  a  delay  of  a  hour  and 
five  minutes  after  the  time  specified 
in  the  notice  is  not,  as  a  matter  of 
law,  an  unreasonable  delay  which 
will  vitiate  the  proceedings.  South 
School  District  v.  Blakeslee,  13  Conn. 
227,  235  (1839).  The  court  will  not 
sustain  an  election  where  the  major- 
ity were  given  to  understand  that 
the  election  -would  go  over  to  a  later 
hour  in  the  day,  even  though  no  for- 
mal adjournment  was  had.  State  u, 
Smalley,  7  Ohio  C.  C.  400  (1893). 

^  So,  where  a  meeting  was  called  for 
twelve  o'clock,  but  was  called  to  order 


1128 


CH.  XXXYII.]        ELECTIONS COKPOEATE   MEETINGS. 


[§  605. 


to  order  at  sun  time  and  then  postponed  to  standard  time,  be- 
fore any  proceedings  are  had,  is  legaL^ 

Frequently  the  particular  office  or  place  for  meeting  within 
the  state  is  specified  in  the  charter  or  by-laws  of  the  corpora- 
tion. In  that  event  a  meeting  held  at  a  different  place  will  be 
irregular,  and  the  proceedings  at  such  a  meeting  void  and  in- 
effectual, if  objected  to.^ 

§  605.  Imi)cctors  of  election—  Comlucting  and  closing  elec- 
tions.  Ordinarily  a  chairman  and  inspectors  of  election  are 

elected  or  appointed  by  the  stockholders.  The  presiding  offi- 
cer at  a  stockholders'  meeting  need  not  be  a  stockholder,'  and 
he  need  not  be  elected  with  any  particular  formality.* 

The  inspectors  of  election  need  not  be  stockholders.'*    If  in- 


and  organized  fifteen  minutes  before 
twelve,  it  vras  held  to  be  a  surprise 
and  a  fraud  upon  such  of  the  stock- 
holders as  were  not  actually  present 
at  that  ho\ir,  and  that  in  consequence 
the  proceedings  were  irregular  and 
void.    People  v.  Albany,  etc.  R.  R., 
55  Barb.  344  (18G9).    Where  commis- 
sioners, after  calling  a  meeting  of 
subscribers,  ordered  the  election  post- 
poned, but  the  subscribers  neverthe- 
less refused   to   postpone   and  pro- 
ceeded with  the  election,  the  election 
is  not  void,  unless,  in  the  opinion  of 
the  court,  a  postponement  was  clearly 
necessary.  Hardenburgh  v.  Farmers', 
etc.  Bank,  3  N.  J.  Eq.  68  (1834).  Qucere, 
in  this  case,  whether  the  election 
might  not  have  been  avoided  if  any 
considerable  number  of  the  share- 
holders were  deprived  of  their  elec- 
tion franchise  by  the  failure  to  post- 
pone.   See  also  g  605,  infra. 

1  Proctor,  etc.  Co.  v.  Finley,  33  S. 
W.  Rep.  188  (Ky.,  1895). 

2  Where  the  customary  place  of 
meeting  of  a  corporation  is  aban- 
doned, and  a  new  place  fixed  upon 
in  a  regular  and  lawful  manner,  a 
meeting  at  the  old  place  is  irregular, 
and  the  proceedings  at  such  a  meet- 
ing are  invalid.  Miller  v.  English,  21 
N.  J.  L.  317  (1848).  The  meeting  must 
be  held  at  the  usual  place.    Amer 


ican  Primitive  Soc.  v.  Pilling,  24  N. 
J.  L.  653  (1855).  Cf.  McDaniels  v. 
Flower  Brook  Mfg.  Co.,  22  Vt.  274 
(1850),  holding  that  a  meeting  at  a 
residence  is  good,  if  aU  assent,  even 
though  the  statute  requires  the  meet- 
ings to  be  at  the  covmting-room  of 
the  company. 

3  Stebbins  v.  Merritt,  64  Mass.  27 
(1852). 

*  Acquiescence  in  a  person's  assum- 
ing to  act  as  chairman  of  a  stock- 
holders' meeting  validates  his  acting 
as  such.  Re  Argus  Printing  Co.,  1 
N.  D.  434  (1891). 

5  People  V.  Albany,  etc.  R  R.,  55 
Barb.  344,  373  (1869).  Although  an 
inspector  is  required  by  by-law  to  be 
a  stockholder,  yet  the  election  of  one 
who  is  not  a  stockholder  is  voidable 
and  not  void.  People  v.  Albany,  etc. 
R.  R.,  55  Barb.  344,  373  (1869).  An 
inspector  may  be  a  candidate  for  di- 
rectorship. Ex  parte  Willcocks,  7 
Cow.  402  (1827).  A  stockholder  may 
be  an  inspector,  but  it  is  better  to 
have  an  outside  disinterested  person. 
Dickson  v.  l^IcMurray,  28  Grant's  Ch. 
Rep.  (Can.)  533  (1881).  Where  the 
scrutineers  or  inspectors  are  also  can- 
didates for  election  as  directors,  and 
they  pass  upon  an  instmment  which 
affects  the  right  to  vote  a  majority  of 
the  stock,  such  stock  being  iu  the 


1129 


§  605.]  ELECTIONS COEPOKATE    MEETINGS.         [CH.  XXXVII. 

specters  are  provided  for  by  the  charter,  and  tliey  do  not  act 
or  are  enjoined  from  acting,  the  stockliolders  may  appoint 
others  to  take  their  place.*  The  duties  of  the  inspectors  are  min- 
isterial and  not  judicial.  Their  discretion  and  powers  of  in- 
vestigation are  very  limited.^  The  exclusion  of  a  vote  at  an 
election  may  be  upheld  by  the  court  on  grounds  different  from 
those  given  at  the  election  itself.^ 

A  requirement  that  tl*e  election  shall  be  by  ballot  does  not 
invalidate  an  election  by  show  of  hand  if  no  one  objects.* 
AYhere  a  ballot  contains  the  names  of  both  candidates,  one  in 
print  and  one  in  writing,  it  is  defective  and  is  not  counted  for 
either  candidate.'  After  the  ballot  has  been  counted  and  an- 
nounced, it  is  too  late  to  permit  the  ballot  to  be  opened  to  re- 
ceive the  votes  of  any  who  have  not  voted.^ 

Where  no  time  is  specified  by  law  during  which  the  polls 
must  be  kept  open,  it  rests  within  the  sound  discretion  of  the 
inspectors  to  say  when  the  polls  shall  close.''  So  also  it  is  held 
that  holding  the  polls  open  after  the  hour  specified  in  the  no- 
tice for  them  to  close  will  not,  where  the  inspectors  exercise  a 
reasonable  discretion,  invalidate  an  election.* 

name  of  another  person,  but  they  Woelper,  3  Serg.  &  R.  (Pa.)  29  (1817). 

claiming  the  right  as  beneficial  own-  Inspectors  at  elections  having  once 

ers  to  vote  it,  their  decision  practi-  accepted  a  vote  and  declared  the  re- 

cally  controls  the  election,   and  if  suit  cannot  then  reject  it  and  declare 

they  decide  in  their  own  favor  tlie  a  different  result.    Hartt  v.  Harvey, 

court  will  set  the  election  aside.  Dick-  32  Barb.  55  (18G0). 

son  V.  MclMurray,  28  Grant "s  Ch.  Rep.  ^  Christopher  v.  Noxon,  4  Ont.  Rep. 

(Can.)  533  (1881).  (Can.)  672  (1883). 

1  People  V.  Albany,  etc.  R.  R.,  55  *  Christ  Church  v.  Pope,  74  Mass. 
Barb.  344,  357  (1869).  See  also  Re  140  (1857).  It  is  not  necessary  that 
Wheeler,  2  Abb.  Pr.  (N.  S.)  361  (1866).  the  voting  be  by  ballot,  even  though 
The  failure  of  the  inspector  so  ap-  the  statute  so  prescribes.  San  Joa- 
pointed  to  take  the  prescribed  oath  quin  Land,  etc.  Co.  v.  Beecher,  101 
will  not  invalidate  the  election.    Be  CaL  70  (1894). 

Mohawk,  etc.  R.  R.,   19  Wend.   135  »  People  v.  Pangbum,  3  N.  Y.  App. 

(1838);  i2e  Chenango,   etc.   Ins.   Co.,  Div.  456  (1896). 

19  Wend.  635  (1839).    Where  by  stat-  ^  Forsyth  v.  Brown,  2  Pa.  Dist.  765 

ute  an  election  is  to  have  "  inspect-  (1893). 

ors,"  one  inspector  is  insufficient.    Ee  "^  Re  Chenango  County  Ins.  Co.,  19 

Lighthall,  etc.  Co.,  47  Hun,  258  (1888) ;  Wend.  634  (1839). 

but  see  N.  Y.  L.  J.,  June  29, 1889.  «  Re  Mohawk  &  Hudson  R.  R.,  19 

2  See  §  611,  infra;  Re  Mohawk,  etc.  Wend.  135  (1838).  An  election  is  not 
R.  R.,  19  Wend.  135  (1838).  The  office  vitiated  by  the  fact  that  the  polls  are 
of  the  inspectors  is  ministerial  rather  kept  open  after  the  designated  hour 
than    judicial     Commonwealth    v.  and    votes    received.    Rudolph    v. 

1130 


en.  XXXVII.]         ELECTIONS COEPOEATE    MEETINGS. 


[§  606. 


§  606.  Conducting  and  closing  meetings  generally  —  Irregu- 
larities and  informalities  —  Minutes  of  meeting. —  The  form 
or  mode  of  conducting  an  election  is  in  general  not  material, 
provided  it  violates  no  positive  provision  of  the  charter  or  of  a 
statute  regulating  it,  is  orderly  and  in  good  faith,  and  is  con- 
ducted by  authorized  or  proper  persons.*  And  as  a  general 
rule  of  law,  where,  in  the  election  of  corporate  officers,  no  par- 
ticular mode  of  proceeding  is  prescribed  by  law,  if  the  wishes 
of  the  corporators  have  been  fairly  expressed,  and  the  election 
was  conducted  in  good  faith,  it  will  not  be  set  aside  on  account 
of  any  informality  in  the  manner  of  conducting  it.^ 

.Nevertheless,  although  it  is  a  general  rule  that,  in  the  trans- 
action of  the  ordinary  business  of  a  corporation,  no  particular 
formalities  are  necessarily  to  be  observed,  the  motions  must  be 
put  in  an  intelligible  way  and  then  voted  upon.^ 

The  parliamentary  usages  are  the  same  as  in  other  bodies, 
and  mere  irregularities  in  the  manner  of  conducting  the  busi- 
ness are  immaterial  if  the  sense  of  the  meeting  has  been  fairly 
€xpressed.* 


Southern,  etc.  League,  23  Abb.  N. 
Cas.  199  (1889);  Peoples  Albany, etc 
R.  R.,  55  Barb.  3U,  35G,  3G0  (18G9). 

1  Fox  V.  AUensville,  etc.  Tump.  Co., 
46  Ind.  31  (1874). 

2  Philips  V.  Wickham,  1  Paige,  590 
<1829). 

3  A  motion  must  be  plainly  and 
clearly  made,  separate  from  a  ram- 
bling speech,  before  the  chairman  can 
be  held  to  be  wrong  in  rejecting  it. 
Henderson  v.  Bank  of  Australasia,  63 
L.  T.  Rep.  869  (1890).  A  general  un- 
derstanding or  assent  or  want  of  dis- 
sent is  not  equivalent  to  a  question 
being  put  and  voted  upon.  The 
statement  by  a  minister  of  what  sal- 
ary he  wished  and  the  failure  of 
members  to  object  is  not  a  sufficient 
expression  of  the  meeting.  Landers 
V.  Frank,  etc.  Church,  114  N.  Y.  626 
(1889). 

*  Philips  V.  Wickham,  1  Paige,  590 
(1829);  Ee  Wheeler,  2  Abb.  Pr.  (N.  S.) 
361  '1866);  Downing  v.  Potts,  23  N.  J. 
L.  60  (1851),  in  which  it  was  held  that 


non-compliance  with  a  statute  requir- 
ing a  list  of  stockholders  entitled  to 
vote  to  be  made  out  ten  days  before  an 
election  will  not  of  itself  make  void 
an  election,  such  provision  being  only 
directory.  A  motion  may  be  put  by 
the  chairman,  although  it  has  neither 
been  made  nor  seconded.  Re  Hor- 
bury,  etc.  Co.,  L.  R.  11  Ch.  D.  109 
(1879).  Although  the  meeting  has 
voted  down  two  motions  to  make 
calls,  it  may  then  pass  another  motion 
for  a  larger  one.  Re  British,  etc.  Co., 
3  Kay  &  J.  408  (1857).  In  England, 
by  statute,  any  five  stockholders  may 
demand  a  polL  Re  Phoenix,  etc.  Co., 
48  L.-T.  Rep.  260  (1883);  Hurrell  & 
Hyde,  Directors  and  Officers,  78. 
Even  if,  on  a  poll  demanded  by  five 
members,  each  share  has  one  vote, 
yet  until  such  poll  is  demanded  vot- 
ing is  by  show  of  hands.  Re  Hor- 
bury,  etc.  Co.,  L.  R.  11  Ch.  D.  109 
(1879).  In  general,  see  also  Gorham 
V.  Campbell,  2  CaL  135  (1852);  Har- 
denburgh  v.  Farmers',  etc.  Bank,  3 


1131 


§  GOG.] 


ELECTIONS CORPOEATE    MEETINGS.         [cil.  XXXVII. 


After  tlie  meeting  is  organized  the  majority  cannot  withdraw 
and  organize  another  meeting.^  Where  a  part  of  the  stock- 
holders secede  from  the  meeting,  and  hold  another  on  the  pre- 
text of  disorder,  but  in  fact  by  reason  of  a  previously  devised 
plan,  the  election  by  the  seccders  is  not  legal.-  The  chairman 
cannot  adjourn  a  meeting  against  the  will  of  the  stockholders. 
The  stockliolders  may  proceed  to  hold  the  meeting  without  liim.' 

Although  the  chairman  declares  a  resolution  duly  carried,  yet 
the  court  may  review  his  decision.*  "Where  the  chairman  re- 
fuses to  poll  the  vote  and  declares  the  meeting  adjourned,  the 
courts  will  not  necessarily  interfere.*  If  any  fraud,  surprise,  or 
deceit  has  been  practiced  in  conducting  the  meeting  a  dilTcrent 
rule  prevails.*  There  should  be  applied  to  stockholders'  meet- 
ings the  rule  in  directors'  meetings  that  the  majority  cannot 
exclude  the  minority  from  being  heard,  by  delegating  power 
to  a  committee ;  and  "  even  if  the  minority  had  a  voice  given  to 
them,  still,  if  there  existed  a  combination  among  the  majority 
before  that  voice  was  heard,  to  overbear  it,"  the  acts  of  such  a 


N.  J.  Eq.  G8  (1834);  Peopb  v.  Peck, 
11  Wend.  COl  (1834X  See  also  §  GOo, 
supra.  In  State  v.  Petttneli,  10  Nev. 
141  (1875),  the  covirt  held  that  an 
election  was  illegal  where  there  was 
no  presiding  officer  and  no  inspect- 
ors. Although  the  notice  of  a  special 
stockholders'  meeting  states  that  the 
resolution  will  be  presented  and 
passed  upon,  to  give  to  each  share 
one  vote,  provided  such  share  has 
been  held  by  the  party  for  six  montlis 
prior  to  an  election,  an  amendment 
proposed  at  the  meeting  striking  out 
the  latter  part  of  the  resolution  must 
be  considered  and  put  to  vote  by  the 
chairman.  Henderson  v.  Bank  of 
Australasia,  L.  R.  45  Ch.  D.  330  (1890). 

1  Their  acts  are  void;  but  if  the 
statute  requires  a  majority  in  inter- 
est of  the  stock  to  elect,  the  election 
is  invalid.  Re  Argus  Printing  Co., 
1  N.  D.  434  (1891). 

2  Commonwealth  v.  Patterson,  158 
Pa.  St.  476  (1893). 

3  State  V.  Cronan,  49  Pac.  Rep.  41 
(Nev.,  1897).   If  the  president  illegally 


adjourns  the  meeting  and  exchides 
the  stockliolders  from  the  room,  they 
may  adjourn  to  another  room  and 
hold  the  meeting.  State  v.  Cronan, 
49  Pac.  Rep.  41  (Nev.,  1897). 

<Yoimg  V.  South  African,  etc. 
Synd.,  [1896]  2  Ch.  268. 

^Tlie  courts  will  not  interfere  al- 
though the  chairman  of  the  meeting 
refused  to  poll  the  vote  on  a  motion 
to  adjourn,  but  declared  the  meeting 
adjourned  on  a  viva  voce  vote  and 
left.  In  regard  to  the  right  to  be 
heard  the  court  said  the  court  would 
not  sustain  a  bill  "  for  the  purpose  of 
enabling  one  particular  member  of 
the  comjmny  to  have  an  opportunity 
of  expressing  his  opinions  viva  voce 
at  a  meeting  of  the  shareholders." 
MacDougall  v.  Gardiner,  L.  R.  1  Ch.  D. 
13  (1875). 

6  Johnston  v.  Jones,  23  N.  J.  Eq.  216 
(1872);  People  v.  Albany,  etc.  R,  R., 
55  Barb.  344  (1869);  State  v.  Pettineli, 
10  Nev.  141  (1875);  Commonwealth  v. 
Woelper,  3  Serg.  &  R.  (Pa.)  29  (1817), 
See  also  g§  596,  604,  605,  supra. 


1132 


CH.  XXXVII.]         ELECTIOXS COEPOEATE    MEETINGS. 


[§Go; 


body  would  be  illegal.^  The  right  to  object  to  an  informality 
may  be  waived,  and  a  failure  upon  the  part  of  those  members 
not  present  to  protest  promptly,  upon  learning  of  the  informal- 
ity, is  a  waiver.^  The  presumption  is  that  all  proceedings  were 
regular  and  lawful.^  The  minutes  of  a  meeting  duly  signed  are 
the  best  evidence  of  what  the  meeting  did.* 

§  607.  The  quorum — A  majority  of  the  stocMolders  attending 
a  meeting  mag  transact  business. —  The  right  of  the  majority  to 
rule  in  the  management  of  the  affairs  of  a  private  corporation 
is  fully  established.*   They  may  control  the  company's  business, 

1  Great  Western  R'y  v.  Rushout,  5 
De  G.  &  Sm.  290,  310  (18.j2). 

estate  V.  Lehre,  7  Rich.  L.  (S.  C.) 
234,  325  (18.J4);  Re  Mohawk,  etc.  R.  R., 
19  Wend.  135  (1838);  Rex  v.  Trevenen, 

2  B.  &  Aid.  339  (1819).  Shareholders 
^ho  receive  reports  of  what  takes 
place  at  meetings,  and  who  do  not 
object  to  wliat  is  being  done,  will  be 
considered  as  acquiescing  therein  if 
what  is  done  might  have  been  validly 
sanctioned  by  tliem  if  present;  but 
not  if  what  is  done  is  altogether  ille- 
gal, and  beyond  the  power  of  even  all 
the  shareholders.  See  Pha3nix  Life 
Ass.  Co.'s  Case,  2  J.  &  H.  441  (1862); 
Irvine  v.  Union  Bank  of  Australia. 
L.  R.  2  App.  Cas.  3GG  (1877).  Compare 
Evans  r.  Smallcombe,  L.  R.  3  H.  L. 
249  (1868);  Spackman  v.  Evans,  L.  R. 

3  H.  L.  171  (1868);  Houldsworth  v. 
Evans,  L.  R.  3  H.  L.  263  (1868);  Phos- 
phate of  Lime  Co.  v.  Green,  L.  R  7 
C.  P.  43  (1871).  See  also  g  607,  infra. 
A  ratification  by  the  stockliolders  of 
directors'  acts  cannot  be  made  by  a 
general  resolution  ratifying  "all  of 
tlie  acts  of  the  officers."  Farmers'  L. 
&  T.  Co.  V.  San  Diego,  etc.  St  R'y,  45 
Fed.  Rep.  518  (1891). 

SBlanchard  v.  Dow,  32  Me.  557 
(1851),  where  it  was  presumed  that 
the  election  was  by  ballot;  Ashta- 
bula, etQ.  R.  R.  V.  Smith,  15  Ohio  St. 
323  (1864),  where  it  was  presumed 
that  the  requisite  amount  of  stock 
was  subscribed  before  the  election 
took  placa  See  also  §^  599, 600,  supra. 


*  Harrison  v.  Morton,  83  Md.  456 
(1896).  See  also  §  714,  infra.  The 
failure  of  incorporators  or  stockhold- 
ers to  make  a  record  of  their  pro- 
ceedings at  that  time  does  not  in- 
validate their  actioru  Benbow  v. 
Cook,  20  S.  E.  Rep.  453  (N.  C,  1894). 
The  corporate  minutes  may  be  signed 
after  the  meeting  lias  been  held- 
Miles  V.  Baugh,  3  Q.  B.  845  (1842); 
Southampton,  etc.  Co.  v.  Richards,  1 
M.  &  Gr.  448  (1840);  Lindley,  Partn. 
551.  Concerning  the  mode  of  j^i'ov- 
ing  the  corporate  minutes,  see  §  714, 
infra. 

5  Durfee  v.  Old  Colony,  etc.  R  R., 
87  Mass.  230  (1862);  Covington  v.  Cov- 
ington, etc.  Bridge  Co.,  10  Bush  (Ky.), 
69, 76  (1873) ;  East  Tennessee,  etc.  R.  Pu 
V.  Gammon,  5  Sneed  (Term.),  567 
(1859);  McBride  v.  Porter,  17  Iowa, 
203  (1864);  Fatdds  v.  Yates,  57  111.  416 
(1870);  Leo  v.  Union  Pacific  R.  R.,  19 
Fed.  Rep.  283  (1884);  S.  C,  17  Fed. 
Rep.  273  (1883);  Barnes  v.  Brown,  80 
N.  Y.  527  (1880) ;  Gifi^ord  v.  New  Jersey 
R.  R,  10  N.  J.  Eq.  171  (1854);  Dudley 
V.  Kentucky  High  School,  9  Bush 
(Ky.),  576  (1873).  See  also  Livingstone 
V.  Lynch,  4  Johns.  Cli.  573  (1820j,  in 
which  Chancellor  Kent  clearly  states 
that  the  riglit  of  the  majority  to  rule 
is  one  of  the  chief  differences  be- 
tween a  corporation  and  a  partner- 
ship. The  majority  mle  at  common 
law.  Commonwealth  v.  Nickerson, 
10  Phila.  (Pa.)  55  (1875);  New  Orleans, 
etc.  R  R  V.  Harris,  27  Miss.  517,  537 


1133 


§  COT.] 


ELECTIONS  —  CORPORATE    MEETINGS.         [cil.  XXXVII. 


prescribe  its  general  policy,  make  themselves  its  agents,  and* 
take  reasonable  compensation  for  their  services.^  The  miiioii  t  y, 
however,  have  a  right  to  be  heard ;  and  it  is  the  duty  of  the 
majority  to  give  a  due  consideration  to  their  arguments  and 
•wishes  concerning  the  management  of  the  corporate  business.- 
The  question  has  arisen  whether  a  meeting  can  be  held  and 
business  transacted  when  a  majority  in  interest  of  the  stock- 
holders are  not  present.  But  the  law  is  clear  that  those  stock- 
holders who  attend  a  duly-called  stockholders'  meeting  may 
transact  the  business  of  that  meeting,  although  a  majority  in 
interest  or  in  number  of  the  stockholders  are  not  present.' 


(1854).  A  majority  of  the  stockholders 
control  the  policy  of  the  corporation, 
and  regulate  and  govern  the  lawful 
exercise  of  its  franchise  and  business, 
even  though  the  management  may 
not  seem  to  be  wise.  The  majority 
rule.  Wheeler  v.  Pullman  Iron,  etc, 
Co.,  143  IlL  197  (1892).  Wiiere  a  stat- 
ute requires  a  three-fourths  vote  in 
value  for  a  reorganization  of  a  com- 
pany, the  stock  not  voted  Is  not 
counted  to  make  up  the  three-fourths, 
even  though  the  trustees  who  repre- 
sent the  stock  refuse  to  assent  or 
dissent.  Re  Neath,  etc.  R'y,  [1892] 
1  Ch.  349.  Where  stockliolders  in  an 
apartment-house  corporation  are  en- 
titled to  rent  apartments  at  a  rental 
to  be  fixed  by  a  majority  vote  of  the 
stockholders,  an  increased  rental  so 
voted  is  legaL  The  by-laws  provid- 
ing for  such  a  vote  override  a  general 
statement  in  a  prospect  vis  to  the  con- 
trary, the  stockholders  knowing  of 
the  by-law.  Compton  v.  Chelsea,  128 
N.  Y.  537  (1891). 

1  Meeker  v.  Winthrop  Iron  Co.,  17 
Fed.  Rep.  48  (1883);  S.  C.  sub  nom. 
Winthrop  Iron  Co.  v.  Meeker,  109  U. 
S.  180  (1883).    See  also  §  662,  infra. 

2  But  see  MacDougall  v.  Gardiner, 
L.  R.  1  Ch.  D.  13  (1875). 

3  Those  of  the  stockholders  who 
attend  the  meeting  constitute  a 
quorum,  although  they  are  a  minor- 
ity.    Morrill  v.  Little  Falls  Mfg.  Co., 


53  ]Minn.  371  (1893);  Grangers  Grubb, 
7  Phila.  350  (1870);  Craig  v.  First,  etc. 
Church,  88  Pa.  St.  43  (1878),  where 
the  principle  is  elucidated  that  tliis 
is  the  rule  for  a  meeting  composed  of 
an  indefinite  number  of  persons,  like 
stockliolders,  but  that  where  a  defi- 
nite nimiber  is  involved,  as  in  a  board 
of  directors,  tlien  a  majority  must  be 
present.  Brown  v.  Pacific  Mail,  etc., 
5  Blatchf.  525  (1807);  S.  C,  4  Fed.  Cas. 
420;  Field  v.  Field,  9  Wend.  394  (1S32) ; 
Gowens  Appeal,  10  W.  N.  Cas.  8.'> 
(Pa.,  1880) ;  Madison  Ave.  Bapt.  Chm-ch 
V.  Oliver  St.  Bapt.  Chtirch,  5  Robt. 
(N.  Y.)  649  (1867J;  Everett  v.  Smith,  23 
Minn.  53  (1875).  As  to  the  rule  con- 
cerning directors,  see  -^  592,  supra.  It 
has  been  held  that  one  person  cannot 
constitute  a  quorum;  that  at  least 
two  members  are  necessary  to  make 
a  corporate  meeting.  Sharpe  v. 
Dawes,  46  L.  J.  (Q.  B.)  104  (1876).  In 
this  case  one  stockholder  "  met,"  did 
all  necessary  business, and  then  roted  ■ 
himself  a  vote  of  thanks.  In  Re 
Sanitary  Carbon  Co.,  12  W.  N.,  p.  223 
(1877),  where  one  stockholder,  having 
also  proxies  of  the  remaining  three 
stockholders,  held  a  meeting  "  voted 
himself  into  the  chair,  proposed  a 
resolution  to  wind  up  voluntarily, 
declared  the  resolution  passed,  and 
appointed  a  liquidator,"  the  court  re- 
luctantly followed  the  preceding  case 
and  declared  the  "  meeting  "  invalid. 


1134 


CH.  XXXVII.]        ELECTIONS COKPOKATE   MEETINGS.  [§  C07. 

Nevertheless,  vrliere  by  statute  the  quorum  is  to  be  a  majority 
of  the  stockholders,  this  means  a  majority  in  interest.^ 

Of  those  who  attend  the  stcckholders'  meeting  a  majority 
rule.  Their  acts  are  as  valid  as  though  they  constituted  a  ma- 
jority of  all  the  stockholders,  or  constituted  a  majority  at  a 
meeting  in  which  a  majority  of  the  stockholders  were  present.^ 
The  presumption  always  is  that  a  legal  majority  voted  for  any 
act  or  proceeding  that  appears  to  have  been  passed.^ 

Two  important  limitations  and  exceptions  to  the  above  prin- 
ciples are  to  be  borne  carefully  in  mind. 

First,  the  majority  cannot  bind  the  minority  to  submit  to  an 
act  by  the  corporation  where  such  act  is  beyond  the  express 
and  implied  powers  of  the  corporation  as  given  to  it  by  its 
charter.  Such  an  act  is  ultra  vires.  A  large  amount  of  litiga- 
tion has  arisen  from  the  attempt  of  the  majority  to  carry  out 
ultra  vires  acts.  The  minority  may  object,  and  even  a  single 
stockholder  may  have  the  ultra  vires  act  enjoined  or  set  aside.* 
The  failure  of  a  stockholder  to  attend  the  stockholders'  meet- 
ing is  not  a  waiver  of  his  right  to  object  to  the  acts  of  the 
meeting  as  ultra  vires,  even  though  the  notice  of  the  meeting 
stated  what  was  to  be  done.* 

The  second  exception  arises  where  the  legislature  amends  the 
charter  of  the  corporation,  and  the  majority  of  the  stockhold- 
ers attempt  to  accept  that  amendment  and  act  upon  it.  In  such 
a  case,  if  the  amendment  materially  changes  the  scope  and  pur- 
pose of  the  enterprise,  the  minority  may  object  and  may  pre- 
vent the  acceptance  of  the  amendment.^ 

The  question  of  how  far  the  majority  rule  when  that  major- 
ity are  interested  in  a  contract  which  the  corporation  has  made, 

1  Weinburgh  v.  Union,  etc.  Co.,  37  3  Citizens'  ]\Iutiipl,  etc.  Ins.  Co.  v. 
AtL  Kep.  1026  (N.  J.,  1897).  Sortwell,  90  Mass.  217  (18G4).  _ 

2  Austin  Min.  Co.  v.  Gemmel,  10  ^This  subject  is  fully  treated  m 
Ont  Rep.  (Can.)  696  (1886);  Columbia,  Part  IV,  tn/ra. 

etc.  Co.  V.  Meier,  39  Mo.  53  (1866),and  sMcFadden  v.  Leeka,  48  Ohio  St. 
same  cases  as  in  the  preceding  notes;  513  (1891).  Where  the  stockholders 
Gowen's  Appeal,  10  W.  N.  Cas.  85  consent  to  the  company  buying  proi> 
(1881).  Such  of  the  stockholders  as  erty  owned  by  one  of  the  directors,  a 
attend  a  duly  called  stockholders'  stockholder  who  was  present  and  did 
meeting  constitute  a  quorum,  and  a  not  object  cannot  complain  Stem- 
majority  of  that  quorum  control  the  way  r.  Steinway,  2  N.  Y.  App.  Div. 
meeting.  Re  Rapid,  etc.  Co.,  15  N.  Y.  301  (1896). 
App.  Div.  530  (1897).  «  See  ch.  XXVIII,  supra. 

1135 


§  G08.] 


ELECTIONS COKPOEATE    MEETINGS.         [ciI.  XXXVII. 


and  wliich  is  beinf^  passed  upon  by  a  stockholders'  meeting,  is 
considered  elsewhere.^ 

§  608.  The  majority  of  votes  cast  shall  elect. —  It  is  the  well- 
settled  rule  in  corporations  having  a  capital  stock  divided  into 
shares  that  a  majority  of  the  votes  cast  at  any  election  shall 
elect.-  And  this  majority,  moreover,  need  not  be  an  actual 
numerical  majority  of  all  the  votes  which  all  the  stockholders 
have,  but  only  a  majority  of  the  votes  cast.'  Accordingly,  a 
majority  of  the  votes  cast  will  elect,  even  though  a  majority  of 
the  shares  of  stock  are  not  voted  at  all,  and  even  though  the 
owners  are  present  at  the  meeting  and  refuse  to  vote.* 


1  See  cli.  XXXIX,  infra, 

2  People  V.  Albany,  etc.  R.  R,  55 
Barb.  3-44.  368  (18G9);  State  v.  Fagan, 
42  Conn.  32  (1875),  a  municipal  cor- 
poration casa    See  also  g  GOT,  supra, 

3  See  §  G07,  supra;  Craig  v.  First 
Pres.  Church,  88  Pa.  St.  42  (1878);  Re 
Union  Ins.  Co.,  23  Wend.  591  (1840), 
holding  also  that  a  plurality  elects. 
At  a  municipal  corporation  meeting 
only  those  who  vote  are  counted. 
Persons  not  voting  at  all  are  not 
counted.  Smith  v.  Proctor,  130  N.  Y. 
319  (1891).  In  regard  to  voting  in 
church  elections  in  New  York,  see 
People  V.  Keese,  27  Him,  483  (1882). 

4  Gowen's  Appeal,  10  W.  N.  Cas.  84 
(1881),  where  the  supreme  court  held 
that  "  those  who  voluntarily  absent 
themselves  from  a  meeting  duly 
called  for  an  election  must  recognize 
the  validity  of  the  election  regvdarly 
made  by  those  who  do  attend."  The 
question  was  whether  an  election 
held  by  a  meeting  of  railroad  stock- 
holders at  which  a  majority  of  all 
votes  was  not  cast  could  be  consid- 
ered valid.  State  v.  Green,  37  Ohio 
St.  227  (1881),  was  a  case  of  election 
of  clerk  by  a  city  council,  and  it  was 
held  tliat,  all  being  present  and  en- 
gaged in  holding  the  election,  half 
the  members  may  not  defeat  an  elec- 
tion by  refusing  to  vote  and  then  ob- 
jecting because  a  quorum  had  not 


voted.  Commonwealth  v.  Wicker- 
sham,  60  Pa.  St.  134  (1870),  was  tlie 
election  of  a  county  school  superin- 
tendent, which  was  required  to  be 
"  viva  voce  by  a  majority  of  the  whole 
number  of  directors  present."  A  per- 
son receiving  exactly  half  that  num- 
ber could  not  be  declared  elected, 
although  one  director  refused  to  vote 
on  the  last  ballot.  "He  remained, 
and  being  present  was  entitled  to  be 
counted."  "The  legal  intendment 
[of  his  action]  was  that  he  voted  for 
neither  or  for  the  minority  candi- 
date." But,  under  a  by-law  requir- 
ing a  majority  of  the  stock  to  be 
present,  it  has  been  held  that  the  ma- 
jority must  be  a  majority  of  the 
whole  stock,  and  not  merely  of  the 
stock  subscribed  for.  Ellsworth,  etc. 
Co.  V.  Faunce,  79  Ma  440  (1887).  If 
the  statute  requires  a  majority  of  the 
directors  to  elect  a  director  or  presi- 
dent, one  who  is  present  but  does  not 
vote  must  be  coim^ted.  People  v. 
Conklin,  7  Hun,  188  (1876).  See  also 
§  713a,  infra,  on  this  point.  Stock- 
holders may  vote  for  less  than  the 
whole  number  of  directors  to  be 
elected.  Vandenburgh  v.  Broadway 
R'y,  29  Hun,  349  (1883).  But  where 
a  meeting  was  called  to  elect  three 
directors  and  a  majority  of  the  stock- 
holders voted  for  five  directors,  only 
a  small  minority  voting  for  three,  the 


1136 


CH.  XXXVII.]        ELECTIONS COEPOEATE   MEETINGS. 


[§  609. 


Altliough  less  than  the  full  mimber  of  directors  to  be  elected 
receive  a  majority  or  plurality,  yet  those  receiving  such  ma- 
jority or  plurality  are  elected,  and  another  ballot  or  election 
may  be  had  to  elect  the  remainder.^ 

§  609.  Is  every  sliare  of  stock  entitled  to  one  vote?  —  At  com- 
mon law,  in  public  or  municipal  corporations,  each  qualified 
elector  has  one  vote,  and  only  one.  This  was  a  natural  rule, 
since  each  duly-qualified  citizen  voted  as  a  citizen  and  not  as 
the  holder  of  stock.  But  the  same  rule  should  not  apply  to 
private  corporations.  Stockholders  are  interested  not  equally, 
but  in  proportion  to  the  number  of  shares  held  by  them.  Nat- 
urally and  reasonably  each  share  should  be  entitled  to  one  vote. 
It  has  been  held,  however,  that  at  common  law  each  stock- 
holder had  but  one  vote,  irrespective  of  the  number  of  shares 
held  by  him.^  "Where  the  statutes  are  silent  on  the  subject,  a 
by-law  may  give  to  each  shareholder  one  vote  for  each  share 


latter  votes  were  held  the  only  valid 
ones,  and  the  three  voted  for  were 
declared  elected.  State  v.  Thomp- 
son, 27  Mo.  3G5,  369  (1858).  Where 
twenty-three  directors  are  to  be 
elected,  a  vote  electing  twenty-two 
is  effectual  to  elect  those  twenty- 
two.  Re  Union  Ins.  Co.,  22  Wend. 
591  (1840).  A  new  election  may  be 
held  to  elect  the  remaining  ona  Re 
Union  Ins.  Co.,  22  Wend.  591  (1840). 
This  case  holds  also  that  a  plurality 
is  sufficient  to  elect. 

1  Re  Union  Ins.  Co.,  22  Wend.  591 
(1840).  Less  than  the  fiill  board  may 
be  elected.  The  old  board  goes  out, 
however,  and  none  of  them  hold  over. 
People  V.  Fleming,  59  Hun,  518  (1891). 
Where  five  candidates  receive  a  plu- 
rality and  three  others  receive  a  less 
number,  but  the  latter  are  a  tie,  the 
board  being  seven,  the  five  are  duly 
elected  and  may  act  as  a  board,  even 
though  no  second  ballot  is  taken  to 
vote  off  the  tie.  Wright  v.  Common- 
wealth, 109  Pa.  St.  560  (1885).  Where 
at  an  election  four  persons  received 
the  necessary  votes,  they  will  be 
elected  directors,  although  the  whole 
number  of  directors  to  be  elected  is 


seven.  A  subsequent  election  cannot 
elect  the  whole  seven,  but  can  elect 
only  the  remaining  three.  Forsyth  v. 
Brown,  3  Pa.  Dist.  765  (1893).  See 
also  §  620,  infra. 

2  Taylor  v.  Griswold,  14  N.  J.  L.223 
(1834),  declaring  that  a  by-law  to  the 
contrary  is  void.  This  decision  in  the 
latter  respect  is  wrong,  and  in  the 
former  respect  is  unfortunate.  At 
common  law  stockholders  voted  by 
show  of  hands,  and  a  large  stock- 
holder had  no  greater  vote  than  a 
small  one.  Re  Horbury,  etc.  Co., 
L.  R.  11  Ch.  D.  109  (1879).  Stockhold- 
ers each  have  one  vote;  not  even  a 
special  provision  in  the  articles  filed 
imder  a  general  act  can  change  this 
rule.  Commonwealth  v.  Nickerson, 
10  Phila.  (Pa.)  55  (1873).  For  an  inter- 
esting statement  of  the  origin  of  the 
practice  of  giving  eacli  stockholder 
one  vote  only,  and  of  the  gradual 
changes  made  in  the  rule,  see  Har- 
vard Law  Rev.,  Nov.,  1888,  p.  156.  A 
by-law  may  limit  the  votes  of  a  per- 
son who  holds  stock  in  excess  of  ten 
shares.  Commonwealth  v.  Detwiller, 
131  Pa,  St.  614  (1890).  See  §  621, 
infra. 


72 


1137 


§  609a. j  ELECTIONS CORPORATE    MEETINGS.         [CH.  XXXVII. 

up  to  ten,  and  may  fix  the  proportion  of  votes  which  he  may 
cast  in  excess  of  that  number.^ 

Generally  the  charter  or  statutes  prescribe  that  each  share 
of  stock  shall  be  entitled  to  one  vote.'^  And  a  statutory  or 
charter  provision  to  this  effect  applies  not  only  to  elections,  but 
also  to  all  other  questions  that  may  come  before  the  stockhold- 
ers' meetings.^  An  election  to  be  held  by  a  "  majority  of  stock- 
holders "  means  a  majority  in  interest.*  A  stock  vote  need  not 
be  taken  unless  called  for.'  And  although  each  voter  is  given 
one  vote,  when  in  fact  each  share  of  stock  is  entitled  to  one 
vote,  yet  if  for  eight  months  the  stockholders  acquiesce  in  the 
election  the  court  will  not  by  mandamus  order  a  new  election.* 

§  609a.  Cumulative  voting. —  In  the  constitutions  of  several 
of  the  states  there  are  provisions  for  enabling  a  minority  in  in- 
terest of  the  stockholders  to  elect  a  minority  of  the  directors. 
This  is  effected  by  what  is  known  as  a  system  of  cumulative 
voting.  By  it  each  shareholder  is  entitled  to  as  many  votes  for 
directors  as  equal  the  number  of  shares  he  owns  multiplied  by 
the  number  of  directors  to  be  elected.  Thus,  if  there  are  six 
directors  to  be  elected,  a  stockholder  who  owns  one  hundred 
shares  may  poll  six  hundred  votes ;  and  these  votes  he  may  give 
entirely  to  one  or  two  or  more  of  the  six  candidates,  as  he  may 
see  fit.  In  this  way  any  minority  of  the  stockholders  exceed- 
ing one-sixth  part,  acting  together,  may  elect  one  member  of 
a  board  of  six  directors,  and  thus  secure  a  representation  in  that 
body.  A  larger  minority  might  secure  the  election  of  two 
members  of  such  a  board,  the  possibility  of  increasing  the  mi- 
nority representation  increasing  as  the  minority  increases,  with- 
out it  ever  becoming  possible  for  a  minority,  upon  a  full  vote,  to 

1  Commonwealth  v.  Detwiller,  131  least  long  acquiescence  therein  has 
Pa.  St.  614  (1890).  A  by-law  may  au-  that  effect.  Fredericks  v.  Pennsyl- 
thorize  one  vote  for  each  share  of  vania  Canal  Co.,  109  Pa.  St.  50  (1885). 
stock,  and  a  provision  to  this  effect  ^  ^g  Rochester,  etc.  Co.,  40  Hun,  172 
allows  such  vote  on  all  questions.  (1886),  construing  a  statute  whicli  is 
Proctor,  etc.  Co.  v.  Finley,  33  S.  W.  applicable  to  all  New  York  corpora- 
Rep.  188  (Ky.,  1895),  approving  the  tions. 

text  above.  *Wein burgh  v.  Union,  etc.  Co.,  37 

2  Hays  V.  Commonwealth,  82  Pa.  St.    Atl.  Rep.  1026  (N.  J.,  1897). 

518  (1876).    "Where,  by  statute,  two-        » Jones  v.  Concord,  etc.  R.  R.,  38 
thirds  of  the  stockholders  are  author-    Atl.  Rep.  120  (N.  H.,  1892), 
ized  to  do  an  act,  this  is  construed  to        ^  jie  Moore,  etc.  Co.,  14  Q.  B.  'Rei\ 
mean  two-thirds    of  the  stock  —  at    (Can.)  365  (1856). 

1138 


CH.  XXXVII.]        ELECTIONS COKPOKATE   MEETINGS. 


[§  609^. 


secure  more  than  its  equitable  proportion  of  the  representation. 
The  larger  the  number  of  directors  the  smaller  would  be  the 
minority  which  would  be  able  to  elect  one  member  of  the  board ; 
and  the  larger  the  minority  the  greater  the  representation  pos- 
sible to  be  secured.*  Constitutional  or  statutory  provisions 
which  are  designed  to  secure  such  a  minority  representation 
are  found  in  California,  Pennsylvania,  Illinois,  "West  Yirginia, 
Missouri,  ISTebraska,  Michigan,  Kansas,  Idaho,  Kentucky,  Mis- 
sissippi, Montana,  ISTorth  Dakota,  and  South  Dakota.'^  These 
provisions,  if  designed  to  be  retroactive,  have  been  held  uncon- 
stitutional and  void.  They  can  only  apply  to  corporations 
chartered  after  their  enactment.  So  far  as  they  concern  cor- 
porations chartered  before  the  adoption  of  such  a  constitutional 
provision  they  impair  the  obligation  of  the  contract  between 

1  Cumulative  voting  given  by  the 
constitution  is  an  absolute  right,  and 
does  not  require  notice  of  the  intent 
to  so  vote,  nor  any  by-laws,  to  give  it 
efficacy.  By  this  provision,  "  if  there 
are  six  directors  to  be  elected,  the 
single  shareholder  has  six  votes ;  and, 
contrary  to  the  old  rule,  he  may  cast 
these  six  votes  for  a  single  one  of  the 
candidates,  or  he  may  distribute 
them  to  two  or  more  of  such  candi- 
dates, as  he  may  think  proper.  He 
may  cast  two  ballots  for  each  of 
three  of  the  proposed  directors  — 
three  for  two,  or  two  for  one,  and  one 
each  for  four  others;  or  finally,  he 
may  cast  one  vote  for  each  of  the 
six  candidates."  Pierce  v.  Common- 
wealth, 104  Pa.  St.  150  (1883). 

2  See  Part  VII,  infra.  A  statutory 
provision  to  the  same  effect  prevails 
in  Michigan.  The  CaUfomia  provis- 
ion is  construed  in  Wright  v.  Central 
CaL  etc.  Co.,  67  CaL  533  (1885),  hold- 
ing that  this  constitutional  right  as 
to  voting  could  not  be  changed  by 
a  resolution  of  the  directors.  The 
Pennsylvania  provision  is  construed 
in  Wright  v.  Commonwealth,  109  Pa. 
St.  560  (1885),  holding  that  part  of 
the  directors  so  elected  by  a  plurality 
and  declared  elected  may  act,  al- 
though the  remaining  directors  are 

ii; 


not  elected  by  reason  of  the  vote  as 
to  them  being  a  tie.  See  also  Com- 
monwealth V.  Lintsman,  6  Pittsb. 
L.  J.  (N.  S.)  122  (1875).  The  Ohio  stat- 
ute prescribiag  that "  each  share  shall 
entitle  the  owner  to  as  many  votes 
as  there  are  directors  to  be  elected  " 
does  not  authorize  cumulative  vot- 
ing. State  V.  Stockley,  45  Ohio  St. 
304  (1887).  Where  cumulati  ve  voting 
prevails,  and  the  statutes  require 
three  directors  to  be  residents,  and 
all  the  votes  are  cumulated  on  non- 
residents excepting  thirty-two  which 
are  cast  for  tliree  residents,  the  three 
residents  are  elected,  and  the  remain- 
ing directors  are  those  of  the  non- 
residents who  received  the  highest 
number  of  votes.  Horton  v.  Wilder, 
48  Kan.  222  (1892).  In  Wright  v.  Cen- 
tral CaL  etc.  Co.,  67  CaL  532  (1885), 
the  court  said  that  this  provision 
conferred  "upon  the  individual  stock- 
holder, entitled  to  vote  at  an  election, 
the  right  to  cast  all  the  votes  which 
his  stock  represents,  multiplied  by 
the  number  of  directors  to  be  elected, 
for  a  single  candidate,  shoidd  he 
think  proper  to  do  so,  .  .  .  or  by  dis- 
tributing them,  upon  the  same  prin- 
ciple, among  as  many  candidates  for 
directors  as  he  sliall  thiak  fit." 


§  609a.] 


ELECTIONS  —  CORPORATE   MEETINGS.        [CH.  XXXVII. 


the  corporation,  tlie  stockholders,  and  the  state,  and  infringe 
the  vested  rights  of  the  stockhoklers.^  But,  under  its  reserved 
power  to  alter,  amend,  or  repeal  a  charter  the  legislature  may 
allow  cumulative  voting.^   A  statute  giving  the  right  to  cumu- 

1  State  V.  Greer,  78  Mo.  188  (1883); 
Hays  V.  Commonwealth,  83  Pa.  St. 
618  (1876);  Baker's  Appeal,  109  Pa. 
St.  461  (1885).  See  also,  on  this  sub- 
ject, oh.  XXVIII,  supra.  Upon  the 
question  of  the  constitutionality  of 
statutes  providing  for  minority  rep- 
resentation or  cumulative  voting  in 
the  election  of  public  officers,  a  mat- 
ter germane  to  the  present  subject, 
see  People  v.  Kenney,  9G  N.  Y.  294 
(1884);  People  v.  Crissey,  91  N.  Y.  616 
(1883);  State  v.  Constantine,  42  Ohio 
St.  437  ( 1 884).  In  Loewenthal  v.  Rub- 
ber Reclaiming  Co.,  52  N.  J.  Eq.  440 
(1894),  the  court  held  that  the  original 
by-laws  constituted  a  contract  be- 
tween the  stockholders,  and  that  a 
by-law  providing  for  cumulative  vot- 
ing could  not  be  repealed.  In  Michi- 
gan it  has  been  decided  that  a  statute 
providing  for  the  cumulative  plan  of 
voting  in  public  elections  is  imcon- 
stitutional.  Maynard  v.  Board,  etc., 
8*  Mich,  228  (1890). 

2  Attorney-General  v.  Looker,  69  N. 
W.  Hep.  929  (Mich.,  1897).  See  §  501, 
supra.  In  West  Virginia  it  is  held 
that  where  the  legislature  has  the 
right  to  amend  or  repeal  a  charter, 
the  statute  giving  the  right  to  cumu- 
late the  votes  applies  to  a  corpora- 
tion already  existing  as  well  as  later 
corporations.  Cross  v.  West  Virginia, 
etc.  R'y,  35  W.  Va.  174  (1891). 

Mr.  Simon  Sterne  (Cyclopedia  of 
Polit.  Sci.,  Polit.  Econ.,  and  U.  S. 
Hist.,  vol.  Ill,  p.  526)  says:  "The  se- 
verest blow,  however,  which  could  be 
dealt  to  corporate  mismanagement 
would  be  the  rigorous  introduction 
of  minority  representation  in  boards 
of  direction,  which  would  make  se- 
crecy of  management  as  against  the 
interest  of  shareholders  substantially 
impossible,  and  would  prevent  the 


possibility  of  the  recurrence  of  some 
of  the  worst  abuses  which  cliarac- 
terize  their  administration.  Sui)pose 
t\\'enty  directors  were  to  be  elected; 
the  reform  would  consist  in  allowing 
each  section  of  one-twentieth  of  the 
stockholding  interest  to  elect  one  di- 
rector by  accumulating  their  votes 
upon  a  single  name,  or  by  distributing 
their  votes  for  one  or  more,  as  they 
may  see  fit.  This  is  the  cumulative 
plan.  Another  is  the  preferential  or 
list  plan,  in  allowing  each  twentieth 
part  of  the  constituency  to  elect  one 
director  by  preferences  indicated  on 
a  ballot  in  the  order  of  the  names  as 
printed.  When  the  first  name  has  a 
quota  sufficient  to  elect  him  —  i.  e., 
one-twentieth  of  the  votes  cast  —  the 
ballot  is  counted  for  the  second  name, 
and  so  forth.  The  result  of  this  sys- 
tem of  minority  representation  would 
be  to  make  of  the  board  of  directors 
a  reduced  photograph  of  the  whole 
constituent  body,  and  make  it  impos- 
sible to  capture  an  organization  like 
a  railway  from  the  actual  owners 
thereof.  Any  one  of  the  numerous 
plans  suggested  for  securing  minor- 
ity representation,  if  applied  to  cor- 
porate management,  would  success- 
fully accomplish  that  result.  The 
objection  which  has  been  urged  to 
minority  representation  in  public 
representative  bodies  has  no  validity 
to  corporate  elections,  as  in  corpora- 
tions neither  localities  nor  persons 
are  supposed  to  be  represented,  but 
pecimiary  interests  only.  It  would 
better  secure  fair  representation  than 
does  the  English  system  of  dimin- 
ished value  of  votes  in  proportion  to 
stockholders'  interest  —  i,  e.,  one  vote 
for  every  share  up  to  ten,  an  addi- 
tional vote  for  every  five  others  be- 
yond the  first  ten,  and  one  vote  for 


1140 


CH.    XXXVII.]        ELECTIONS COKPOEATE   MEETINGS. 


[§  610. 


late  votes  does  not  apply  to  corporations  then  existing,  even 
though  such  corporations  accept  the  benefits  of  subsequent  stat- 
utes, such  statutes  not  imposing  any  conditions.^  It  is  to  be 
borne  in  mind  that  tricks  and  traps  may  be  devised  under 
this  plan  of  voting.^  And  where,  in  cumulating  votes,  the 
voter  spreads  his  votes  over  so  many  persons  that  none  of  those 
particular  persons  are  elected,  he  cannot  have  the  election  set 
aside  on  the  ground  that  by  cumulating  on  a  less  number  of 
persons  he  can  certainly  elect  them,  nor  on  the  ground  that 
there  was  an  oral  contract  as  to  who  should  be  elected.'  Where 
a  state  is  a  stockholder,  and  by  statute  is  entitled  to  a  certain 
vote  at  elections,  a  subsequent  statute  cannot  give  to  the  state 
a  larger  vote.^  Even  though  the  stockholders  are  entitled  to 
vote  on  the  cumulative  plan,  yet  they  are  not  obliged  to  do  so.* 
§  610.  Proxies. —  At  common  law  a  stockholder  has  no  right 
to  cast  his  vote  by  proxy.®  This  rule  was  evolved  from  the 
analogous  rule  go? erning  municipal  corporations,  which  re- 


every  ten  beyond  one  hundred  shares; 
or  the  classification  plan,  by  which 
only  a  few  directors  of  the  whole  re- 
tire each  year.  Minority  representa- 
tion would  give  permanency  in  man- 
agement, and  prevent  the  swamping 
of  the  mterest  of  the  smaller  share- 
holders." 

1  Smith  V.  Atchison,  etc.  R.  R,  64 
Fed.  Rep.  272  (1894):  Commonwealth 
V.  Butterworth,  IGO  Pa,  St.  55  (1894). 

-'Thvis,  suppose  there  are  1,000 
shares,  and  ten  directors  to  be  elected, 
and  one  pei-son  holds  600  shares. 
Clearly  he  should  be  able  to  elect  a 
majority  of  the  ten  directors.  Sup- 
pose he  votes  his  600  votes  for  six 
of  his  friends  (A,  B,  C,  D,  E,  and  F) 
and  for  four  of  the  minority  (G,  H,  I, 
and  J);  and  suppose  at  the  same  time 
the  400  shares  of  the  minority  are  cu- 
mvilated  on  three  other  parties  (K,  L, 
and  M),  with  ten  votes  for  the  four 
directors  mentioned  above  (G,  H,  I, 
and  J).  The  result  wUl  then  be  as 
follows: 

A,  B,  C,  D,  E,  and  F  have   600  votes  each 

G,  H,  I,  andj "      610     " 

K,L,andM "1,320     " 


In  other  words,  the  majority  of  votes 
do  not  elect.  Again,  suppose  the 
holder  of  the  600  shares  does  not  vote 
for  any  minority  candidate  at  all, 
but  casts  600  votes  for  each  of  his  six 
candidates,  A,  B,  C,  D,  E,  and  F. 
Even  then  he  may  lose  the  election. 
The  minority  400  may  cumulate  their 
4,000  votes  on  six  candidates,  and  give 
each  of  the  six  6663-  votes.  Under 
the  cumulative  system  the  majority, 
in  order  to  be  safe,  must  not  only  aban- 
don the  idea  of  electing  the  whole 
board,  but  must  cumulate  their  votes 
on  such  a  proportion  of  the  board  as 
their  stock  bears  to  the  whole  stock, 
and  must  not  cast  comijlimentary 
votes  for  representatives  of  the  mi- 
nority. 

3  Dulin  V.  Pacific,  etc.  Co.,  103  CaL 
357  (1894). 

4  Tucker  v.  Russell,  82  Fed.  Rep.-263 
(1897). 

5  Schmidt  v.  MitcheU,  41  S.  W.  Rep. 
929  (Ky.,  1897). 

6  Taylor  v.  Griswold,  14  N.  J.  L.  223 
(1834);  Pliilips  v.  Wickliam,  1  Paige, 
590  (1829) ;  Bro^vn  v.  Commonwealth, 
8  Grant  (Pa,),  209  (1856),  where  the 


1141 


§  CIO.] 


ELECTIONS COEPOKATE    MEETINGS.         [CH.  XXXVII. 


quires  all  votes  to  be  given  in  person.  The  right  to  vote  by 
proxy  is  often  given  by  the  charter  itself.  Even  if  not  so  given 
the  right  may  be  created  by  by-law.^  Where  the  statutes  give 
the  right  to  vote  by  proxy,  the  by-laws  of  the  corporation  can- 
not restrict  that  right  by  providing  that  only  stockholders  shall 
act  as  proxies.'^ 

The  ordinary  proxy,  being  intended  to  be  for  an  election 
merely,  does  not  enable  the  proxy  to  vote  to  dissolve  the  cor- 
poration or  to  sell  the  entire  corporate  business  and  property, 
or  to  vote  upon  other  important  business,  unless  the  proxy 
Itself  in  general  or  special  terms  gives  tlie  proxy  the  power  to 
vote  on  such  questions.'    A  proxy  authorized  to  vote  at  a  cor- 


charter  allowed  only  those  present 
to  vote;  Craig  y.  First  Presbyterian 
Church,  88  Pa.  St.  42  (1878 1;  Com- 
monwealth V.  Bringhurst,  103  Pa.  St. 
134  (1883);  People  v.  Twaddell,  18 
Hun,  427,  430  (1879);  Re  Dean  and 
Chapter  of  Femes,  Davies,  116,  129 
(1608);  Attorney-General  v.  Scott,  1 
Vesey,  413  (1749);  Harben  v.  Phillips, 
L.  R  23  Ch.  D.  14,  22,  36  (1883). 
Where  the  statute  allows  citizens  to 
vote  by  proxy,  an  alien  is  not  within 
its  terms,  and  cannot  do  so.  Be  Bar- 
ker, 6  Wend.  509  (1830). 

1  Quoted  and  approved  in  Market 
Street  R'y  u  Hellman,  109  CaL  571 
(1895);  People  v.  Crossley,  69  IlL  195 
(1873);  Pliilips  v.  Wickham,  1  Paige, 
590,  598  (1829);  State  v.  Tudor,  5  Day 
(Conn.),  329  (1812);  2  Kent,  Comm., 
294,  295.  A  contrary  rule  is  laid 
down  in  New  Jersey.  Taylor  v.  Gris- 
wold,  14  N.  J.  L.  222  (1834).  Where 
the  charter  authorizes  voting  by 
proxy  at  elections  for  directors,  and 
also  empowers  directors  to  make 
by-laws  not  inconsistent  with  the 
laws  of  the  commonwealth,  a  by-law 
adopted  by  the  board  of  directors  al- 
lowing voting  by  proxy  at  all  stock 
elections  was  held  valid.  Wilson  v. 
Academy  of  Music,  43  Leg.  Int.  86 
(1886).  A  by-law  may  allow  voting 
by  proxy.  Commonwealth  v.  Dct- 
willer,  131  Pa.  St.  614  (1890).  A  corpo- 


ration as  a  stockholder  may  of  course 
give  a  proxy  where  proxies  are  al- 
lowed. Re  Indiana,  etc.  Co.,  L.  R.  26 
Ch.  D.  70  (1884). 

2  People's,  ^tc.  Bank  v.  San  Fran- 
cisco Super.  Ct.,  104  CaL  649  (1894). 
Where  the  statute  gives  a  right  to 
vote  by  proxy,  a  by-law  to  the  effect 
that  only  a  stockholder  can  act  as 
proxy  is  illegal  and  void.  Re  Light- 
liall,  etc.  Co.,  47  Hun,  258  (1888). 

3  Abbott  V.  American  Hard  Rubber 
Co.,  33  Barb.  578,  584  (1801);  Cumber- 
land Coal  Co.  V.  Sherman,  30  Barb. 
553,  577  (1859);  i2e  Wheeler,  2  Abb. 
Pr.  (N.  S.)  361  (1866),  where  the  proxy, 
being  authorized  to  vote  for  increas- 
ing the  stock,  voted  also  to  issue  the 
new  stock  in  exchange  for  the  stock 
of  another  company.  Jlarie  v.  Gar- 
rison, 13  Abb.  N.  Cas.  210,  235  (1883). 
Where  directors  are  authorized  by 
charter  to  vote  by  proxy,  the  proxy 
cannot  authorize  a  borrowing  of 
money  —  an  ultra  vires  and  void 
act  in  England.  Brown  v.  Byers,  16 
M.  &  W.  252  (1847).  A  proxy  to  vote 
is  not  a  proxy  to  demand  a  polL  Re 
Haven,  etc.  Co.,  L.  R  20  Ch.  D.  151 
(1881);  Regina  v.  Government,  etc. 
Co.,  L.  R.  3  Q.  B.  D.  442  (1878).  Seo 
also  Decatur  Bldg.  etc.  Co.  v.  Neal, 
97  Ala.  717  (1893).  A  proxy  for  an 
election  does  not  extend  to  an  elec- 
tion four  months  later,  the  first  eleo- 


1143 


CU.  XXXVII.]         ELECTIOXS  —  CORPOEATE    MEETINGS.  [§  610. 

porate  meeting  is  not  authorized  to  vote  to  discliarge  a  mort- 
gage which  secures  the  stockholder,  who  gave  the  proxy,  as  a 
creditor  of  the  corporation.^  A  proxy  authorizing  the  holder 
to  vote  "  in  the  same  manner  as  I  should  do  were  I  there  per- 
sonally present  "  estops  the  stockholder  giving  the  proxy  from 
questioning  the  call  of  the  meeting  or  the  regularity  of  an  in- 
crease of  stock  voted  for  at  such  meeting.^  A  written  proxy 
authorizing  the  proxy  to  vote  as  fully  as  a  stockholder  could 
were  he  personally  present  gives  the  proxy  the  right  to  vote 
on  the  question  of  adjournment  and  of  opening  the  ballots.' 
A  proxy  has  a  right  to  vote  on  a  viva  voce  vote  or  show  of 
liands.*  Where  a  vote  is  taken  by  show  of  hands  each  person 
is  entitled  to  only  one  vote,  even  though  as  a  proxy  he  repre- 
S2nts  several  persons,  and  a  person  who  is  a  proxy  only  may 
vote."  A  proxy  cannot  vote  when  the  owner  of  the  stock  is 
present  and  votes.'  In  England  proxies  deposited  abroad  have 
been  allowed  a  vote  by  telegraph.''  The  sale  of  proxies  is  for- 
bidden by  statute  in  New  York.^ 

Directors  may  be  enjoined  from  using  the  funds  of  the  com- 
pany to  obtain  proxies  for  themselves  or  their  nominees.' 

"Where  a  will  directs  that  of  three  executors  two  shall  give 
proxies  to  the  third  on  stock  owned  by  the  estate,  a  court  of 
equity  will  compel  the  two  to  give  the  proxies,  although  the 
third  intends  to  use  the  proxy  to  continue  himself  as  president, 
and  the  management  of  the  company  is  alleged  to  be  improvi- 
dent and  ruinous.'"  Where  there  are  several  executors,  and  only 
one  of  them  is  present  at  the  election,  he  may  cast  the  vote, 

tion  not  having  been  held,  the  proxy  ^In  iSe  English,  etc.  Bank,  [1893]  3 

being  by  a  director,  the  directors  Ch.  385,  the  court  allowed  foreign 

being  authorized  to  vote  as  directors  creditors  to  vote  abroad  by  proxy  de- 

by  proxy.    Howard  v.  Hull,  5  R'y  &  posited  abroad,  and  to  telegraph  such 

Corp.  L.  J.  255  (Eng.,  1888).  vote  to  the   home   meeting   on   a 

1  Moore  v.  Ensley,  20  S.  Kep.  744  scheme  of  reorganization,  holding 
(Ala.,  1896).  also  that  a  proxy  need  not  state  the 

2  Columbia  Nat.  Bank  v.  Matthews,  day  of  meeting. 

85  Fed.  Rep.  934  (1898).  8  See  Part  VII,  infra.    It  is  illegal 

3  Forsyth  v.  Brown,  2  Pa.  Dist.  765  for  a  stockholder  to  sell  his  right  to 
(1893).  vote.    Hafer  v.  New  York,  etc.  R.  R, 

<i?c'  Bidwell,  [1893]  1  Ch.  603.  14  Week.  L.  Bui.  68  (1885). 

*  Ernest  v.  Loma,  eta  Mines,  75  L.  T.  ^  Studdert  v.  Grosvenor,  L.  R.  33 
Rep.  317  (1896).  Ch.  D.  528  (1886). 

8  Commonwealth  v.  Patterson,  158  i"  This  case  was  affirmed  on  an  even 
Pa.  St  476  (1893).  division  of  the  court    Laflferty's  Es- 

1143 


§  610.] 


ELECTIONS COEPOEATE   MEETINGS.         [CIT.  XXXYII. 


even  though  a  proxy  has  been  given  by  another  of  the  exec- 
utors.^ 

A  proxy  should  be  in  writing,  but  it  need  not  be  in  any  par- 
ticular form;  it  need  not  be  acknowledged  or  proved,  but  it 
must  be  in  such  a  shape  as  reasonably  to  satisfy  tlie  inspectors 
of  election  of  its  genuineness  and  validity.'  And  to  this  end 
the  corporate  officers  may  insist  upon  reasonable  evidence  of 
the  regularity  and  genuineness  of  the  proxy  before  allowing  it 
to  be  voted.'    The  proxy  should  be  dated. 

Where  certificates  of  proxies  are  destroyed  after  use,  parol 
evidence  is  admissible  to  prove  their  former  existence  and  suf- 
ficiency.* 

A  stockholder  who  signs  a  form  of  proxy  in  blank,  and  hands 
it  over  to  another  to  be  used  in  the  ordinary  way,  impliedly  au- 
thorizes that  other  to  fill  up  the  blank  with  his  own  name.* 


tate,  154  Pa.  St.  430  (1893);  Tunis  v. 
HestonvQle,  etc.  R.  R.,  149  Pa.  St  70 

(1892). 

1  Schmidt  v.  Mitcliell,  41  S.  W.  Rep. 
939  (Ky.,  1897). 

^Re  St.  Lawrence  Steamboat  Co., 
44  N.  J.  L.  529  (1882);  Re  Indian,  etc. 
Co.,  L.  R  26  Ch.  D.  70  (1884).  No 
particular  form  of  words  is  neces- 
sary to  constitute  a  proxy.  Smith  v. 
San  Francisco,  etc.  R'y>  47  Pac.  Rep. 
583  (Cal.,  1897).  See  the  form  of 
proxy  in  Marie  v.  Garrison,  13  Abb. 
N.  Cas.  210,  284  (1883).  Proxies  need 
not  be  acknowledged,  proved,  or  wit- 
nessed. Re  Cecil,  36  How.  Pr.  477 
(1869).  A  proxy  need  not  state  the 
day  upon  which  the  election  is  to  be 
held.  Re  Townsend,  18  N.  Y.  Supp. 
905  (1893).  A  proxy  is  good  although 
the  date  when  it  is  given  is  left  blank 
and  has  not  been  filled  in.  Re  St. 
Lawrence  Steamboat  Co.,  44  N,  J.  L. 
539  (1883).  Where  one  gave  a  proxy 
to  vote  at  an  annual  election,  it  was 
held  privia  facie  evidence  that  he 
was  a  stockholder  just  before  such 
election.  Harger  v.  McCuUough,  3 
Denio,  119, 132  (1846).  A  proxy  which 
had  been  exercised  and  voted  upon 
for  many  years  without  renewal  was 


sustained  in  Monsseaux  v.  Urquhart, 
19  La,  Ann.  482  (1807).  Although  a 
notice  of  a  corporate  meeting,  and 
proxies  given  for  a  corjwrate  meet- 
ing, add  to  tlie  name  of  the  corpora- 
tion the  place  where  it  is  located, 
this  is  immaterial  Langan  v.  Fi-anck- 
lyn,  20  N.  Y.  Supp.  404  a892). 

^Re  St  Lawrence  Steamboat  Co., 
44  N.  J.  L.  529  (1882).  But  the  in- 
spectors have  no  right  to  refuse  a  vote 
by  proxy  or  to  assume  a  judicial 
power  to  try  its  genuineness,  if  it  is 
api)arently  executed  by  the  stock- 
holder and  is  re,c:ular  in  form.  Re 
Cecil,  36  How.  Pr.  477  ( 1869).  Neither 
the  stockliolder  nor  his  proxy  can  be 
compelled  by  a  by-law  to  take  an 
oath  that  the  former  is  the  owner  of 
the  stock.  People  v.  Tibbits,  4  Cow. 
358  (1835);  People  v.  Kip,  4  Cow.  383 
(1883).  The  by-laws  may  req\iire  the 
proxies  to  be  witnessed.  Harben  v. 
Phillips,  L.  R  23  Ch.  D.  14  (1882). 

*  Haywood  &  Pittsborough  P.  R. 
Co.  V.  Bryan,  6  Jones,  L.  (N.  C.)  83 
(1858). 

5  Ex  parte  Duce,  L.  R  13  Cli.  D. 
429  (1879);  Ex  parte  Lancaster,  L.  R 
5  Ch.  D.  911  (1877).  As  to  whether  a 
blank  proxy  may  be  filled  in  by  the 


1144 


CH.  XXXVII.]         ELECTIONS COEPOEATE   MEETIXGS. 


[§  cii. 


Although  a  proxy  contains  blanks  as  to  the  day  and  hour  of 
the  meeting,  yet  these  may  be  filled  in  by  the  party  using  the 
proxy,' 

A  proxy  is  always  revocable.  Even  when  by  its  terms  it  is 
made  "  irrevocable,"  the  law  allows  the  stockholder  to  revoke 
it.  •  Frequently  an  attempt  is  made  to  permanently  unite  the 
voting  power  of  several  stockholders  and  thus  control  the  cor- 
poration by  giving  irrevocable  proxies  to  specified  persons. 
But  the  law  allows  the  stockholder  to  revoke  the  proxy  at  any 
time.^ 

§  611.  Tlie  transfer  hoolc  as  evidence  of  a  riglit  to  vote. —  The 
question  who  is  entitled  to  vote  upon  a  particular  share  of 
stock  is,  as  a  general  rule,  answered  by  a  reference  to  the  cor- 
porate transfer  book.  He  who  is  there  registered  as  the  owner 
of  the  stock  is  entitled  to  vote  upon  it.''    It  is  not  necessary 


agent,  see  qucBre  in  Re  White  v.  New 
York,  etc,  Soc,  45  Hun,  580  (1887), 
citing  cases. 

>  Ernest  i'.  Loma,  eta  llines,  75  Lt 
T.  Rep.  317  (1896), 

2  Schmidt  v.  Mitchell,  41  S.  W.  Rep, 
9-29  (Ky.;  1897) ;  Woodruff  v.  Dubuque, 
etc.  R,  R,,  30  Fed.  Rep.  91  (1SS7),  In 
this  case  the  stock  certificates  were 
turned  over  to  trustees  to  transfer  to 
themselves,  with  power  to  vote,  hold, 
or  sell  the  same.  "  Tnxst "  certificates 
were  issued.  The  court  lield  that  at 
any  time  previous  to  an  actual  sale 
by  the  trustees  a  certificate-holder 
might  revoke  his  interest  in  the 
"trust "and  demand  back  his  part 
of  the  stock.  To  same  effect  and 
on  very  similar  facts,  see  Griffith  v. 
Jewett,  15  Week.  L.  Bull.  419  (1886); 
Vanderbilt  v.  Bennett.  2  R'y  &,  Corp. 
L,  J,  409  (Pa.,  1887),  Such  irrevoca- 
ble proxies  are  not  necessarily  void 
as  against  public  policy.  Brown  v. 
Pacific  Mail  Steamsliip  Co.,  5  Blatchf, 
525  1 1807);  S.  C„  4  Fed.  Cas.  420.  They 
simply  are  revocable.  A  proxy  given 
for  a  valuable  consideration  may 
nevertheless  be  revoked  if  it  is  about 
to  be  used  for  a  fraudulent  purpose. 
Reed  v.  Bank  of  Newburgh,  6  Paige, 


337  (1837).  An  agreement  not  to  re- 
voke a  power  which  from  its  nature 
or  by  law  is  revocable  is  not  binding. 
People  V.  Nash,  111  N.  Y.  310,  315 
(1888).  A  written  contract  not  to 
vote  by  proxy,  entered  into  by  cer- 
tain shareholders  mutually  for  the 
purpose  of  preventing  the  board  of 
directors  from  consummating  a  pro- 
posed sale  of  the  franchises  of  the 
corporation,  has  been  held  a  perni- 
cious and  imlawful  compact,  Fisher 
V.  Bush,  35  Hun,  641  (1885).  An  ir- 
revocable proxy  is  prohibited  by  stat- 
ute in  New  York.  It  may  be  revoked 
even  though  coupled  with  an  inter- 
est, in  this  case  being  to  a  pledgee. 
Re  Germicide  Co.,  65  Hun,  60(3(1892). 
A  proxy  for  five  years,  given  so  as  to 
iinite  enough  stock  to  control  the 
corporation,  the  holder  of  the  proxy 
agreeing  that  the  person  giving  the 
proxy  shall  have  an  oflSce  at  a  salary 
of  $2,500  a  year,  is  void.  At  the  in- 
stance of  the  latter  person  a  court  of 
equity  will  enjoin  voting  thereunder. 
Cone  V.  RusseU,  48  N.  J.  Eq.  208 
(1891). 

3  "  The  general  rule  is  that,  as  be- 
tween the  corporation  and  the  per- 
son offering  to  vote,  the  right  follows 


1145 


§  611.] 


ELECTIONS CORrORATE    MEETINGS.         [CH.  XXXVll, 


that  the  ovrner  of  stock  produce  his  certificate,  or  even  have  a 
certificate,  in  order  to  vote.*  Neither  will  indebtedness  for  tho 
subscription  price  prevent  the  stockholder  from  voting.'  So, 
also,  it  is  immaterial  that  the  person  in  whose  name  the  stock 
is  re<^istered  is  merely  the  nominal  holder,  and  that  another 


the  legal  title,  of  which  the  certifi- 
cates and  stock  books  are  the  prima 
facie  evidence.  By-laws  may  estab- 
lish a  different  rule,  and  there  may 
be  special  circumstances  to  change 
the  equities  as  to  individuals  or  even 
as  to  the  corporation."  Common- 
wealth V.  Dalzell.  153  Pa,  St.  217 
(1893).  Where  stock  is  transferable 
only  on  the  books  of  the  corporation, 
the  person  in  whose  name  the  stock 
stands  on  such  books  is  entitled  to 
vote  it,  and  the  books  of  the  com- 
pany are  conclusive  upon  the  ques- 
tion as  to  who  is  entitled  to  vote 
stock  legally  issued.  ]\Iorrill  v.  Lit- 
tle Falls  Mfg.  Co.,  53  Minn.  371  (1893). 
Ex  parte  Willcocks,  7  Cow.  403 
(1827),  stating,  however,  that  in  cer- 
tain cases,  like  that  of  stock  held  for 
the  corporation  itself,  a  different  rule 
prevails;  State  v.  Ferris,  42  Cona. 
560,  568  (1875),  sustaining  a  vote  by 
a  bankrupt,  the  court  saying:  ''The 
party  who  appears  to  be  the  owner 
by  the  books  of  the  corporation  has 
the  right  to  be  treated  as  a  stock- 
holder and  to  vote  on  whatever  stock 
stands  in  his  name;  "  Hoppin  v.  B;if- 
fum,  9  R.  I.  513  (1870),  the  court  say- 
ing: "  In  a  case  of  a  dispute  as  to  a 
right  to  vote,  the  books  of  the  corpo- 
ration are  the  prima  facie  evidence; 
at  any  rate,  the  corporation  cannot 


as  to  that.  State  v.  Cronan,  49  Pac. 
Rep.  41  (Nev.,  1897).  See  also  next 
section  for  various  cases  on  the  con- 
clusiveness of  the  transfer  book. 

1  Beckett  v.  Houston,  33  Ind.  393 
(1869). 

'■^Birmingham,  etc.  R'y  v.  Locke, 
1  Q.  B.  2.-,0  (1841);  Savage  v.  Ball,  17 
N.  J.  Eq.  143  (1804);  American,  etc. 
Co.  V.  State  Board,  29  AtL  Rep.  100 
(N.  J.,  1894);  People  v.  Albany,  etc. 
R.  R.,  55  Barb.  344,  380  (1809);  Down- 
ing V.  Potts,  23  N.  J.  L.  60  (1851).  So 
lield  in  this  case,  even  though  the  sul>- 
scriber  had  paid  nothing  on  his  stock. 
In  General  Electric  Co.  v.  Wightman, 
3  N.  Y.  App.  Div.  118  (1890),-it  is  stated 
that  under  the  New  York  statutes 
subscribers  for  stock  are  not  entitled 
to  any  voice  in  the  management 
tmtil  the  stock  has  been  paid  up.  It 
has  been  held  in  ^laryland  that  a 
subscriber  to  the  increased  capital 
stock  of  a  company  is  not  entitled  to 
a  certificate  until  he  has  paid  for  tlie 
stock  in  full,  and  such  subscriber  is 
not  entitled  to  the  riglits  of  a  stock- 
holder until  he  has  paid  in  full.  The 
court  stated  that  such  stockliolders 
are  not  entitled  to  dividends  equally 
with  other  stockholders.  The  basis 
of  the  decision  was  the  dilference  be- 
tween original  stock  and  increased 
stock.    The  court  refused  to  compel 


be  required  to   decide   a   disputed    the  corporation  to  issue  a  certificate. 


right.  .  ,  .  Upon  any  other  rule  it 
could  never  be  known  who  were  en- 
titled to  vote  until  the  courts  had 
decided  the  dispute."  Allen  v.  HiU, 
16  Cal.  113  (1860);  Re  St.  Lawrence 
Steamboat  Co.,  44  N.  J.  L.  529  (1882). 
The  president  has  no  power  to  de- 
cide what  stock  should  be  allowed 
to  vote.    The  transfer  book  governs 


Baltimore,  etc.  R'y  v.  Hambleton,  77 
Md.  341  (1893).  Where  a  mortgage 
must  be  authorized  by  a  vote  of  two- 
thirds  in  value  of  the  stockholders 
this  means  a  stock  vote,  irrespective 
of  the  fact  that  some  of  the  stock  is 
only  partly  paid  up.  Purdom  v.  On- 
tario, etc.  Deb.  Co.,  23  Ont.  Rep.  (Can.) 
597  (1892). 


1146 


CIL  XXXVII.]         ELECTIONS COEPOEATE    MEETINGS. 


[§  cii. 


person  really  owns  the  stock.^  A  subscriber  upon  a  condition 
not  yet  performed  may  vote  upon  the  question  whether  that 
condition  shall  or  shall  not  be  performed.^  And  stock  issued 
for  construction,  the  work  not  having  been  performed,  may 
nevertheless  be  voted.' 

Persons  who  are  not  registered  stockholders  on  the  day  an 
election  is  held  cannot  vote,  though  they  were  stockholders  on 
the  day  the  election  should  have  been  held.*  The  corporation 
may  be  compelled  to  register  transfers  made  merely  for  the 
purpose  of  increasing  the  voting  power  of  the  stock,  there  being 
a  limit  to  the  number  of  votes  one  stockholder  may  cast.*  The 
holders  of  stock  issued  by  a  stock  dividend  are  entitled  to  vote.^ 

AVhere  the  corporation  keeps  a  stock-certificate  book  but  no 
transfer  book,  a  transfer  on  the  back  of  a  certificate,  which  is 
then  canceled  and  pasted  back  in  the  certificate  book,  and  a  new 
certificate  issued  to  the  transferee,  is  a  sufficient  transfer  to  con- 
stitute the  transferee  a  stockholder.''    Althouo^h  votes  are  chal- 


>  State  V.  Leete,  IG  Nev.  242  (1881), 
where  a  man  put  stock  in  the  name 
of  his  son  in  order  to  qualify  him  to 
serve  as  a  director.  Where  the  stat- 
ute prescribes  that  only  bona  fide 
stockholders  shall  vote,  a  stockholder 
of  record  who  is  really  a  dummy  for 
the  real  owner  in  order  to  enable  the 
latter  to  avoid  the  statutory  liability 
cannot  vote.  Smith  v.  San  Francisco, 
etc.  R'y,  47  Pac.  Rep.  583  (CaL,  1897). 
See  also  i?  612,  infra, 

2  Greenville,  etc.  R,  R.  r.  Coleman, 
5  Ricli.  L.  (S.  C.)  118,  13o  (18.j1). 

3  Savage  v.  Ball,  17  N.  J.  Eq.  142 
(18G4).  Where  a  sale  of  bonds  having 
a  voting  power  is  made  subject  to 
the  ratification  of  another  party,  the 
vendor  has  the  right  to  vote  such 
bonds  until  the  sale  is  so  ratified. 
State  V.  McDaniel,  22  Ohio  St.  354 
(1872).  Stock  issued  to  a  contractor 
for  money  to  be  paid  may  be  voted 
by  him,  at  least  to  the  extent  or  pro- 
portion of  such  part  of  his  liability 
as  he  has  fulfilled.  Price  v.  Holcomb, 
89  Iowa,  123  (1803). 

*  Johnston  v.  Jones,  23  N.  J.  Eq.  216, 
228  (1872). 

1147 


^Re  Stranton  Iron,  eta  Co.,  L.  R.  16 
Eq.  559  (1873);  Moflfatt  v.  Farquhar, 
L.  R  7  Ch.  D.  591  (1878).  See  also 
§  618,  infra.  But  where  valuable 
privileges  other  than  voting  attach 
to  stock,  a  nominal  transfer  to  obtain 
these  privileges  will  not  be  sustained 
as  regards  them.  Academy  of  Music's 
Appeal,  108  Pa.  St.  510  (1885),  where 
free  admission  to  a  theatre  was  given 
to  stockholders. 

6  Bailey  v.  Railroad  Co.,  22  Wall  604, 
637  (1874),  holding  a'  o  that  the  rule 
is  otherwise  as  regards  the  holders  of 
a  scrip  dividend,  where  the  scrip  was 
redeemable  by  the  company  in  cash 
or  convertible  into  stock. 

'  He  may  vote  at  elections,  and  an 
assignment  by  the  corporation  on  the 
direction  of  oflQcers  elected  by  such 
a  transferee  is  valid.  Such  a  transfer 
is  vaUd  also,  although  a  by-law  pro- 
vided that  before  selling  his  stock  a 
stockholder  must  offer  it  to  other 
stockholders  for  purchase.  American 
Nat.  Bank  v.  Oriental  I^Iills,  17  R  L 
551  (1891).    See  also  §  382,  supra. 


§  Cll.]  ELECTIONS  —  COEPOKATE    MEETINGS.         [CH.  XXXVII. 

lenged,  and  tlie  inspectors  call  for  the  stock  books,  and  sucli 
books  cannot  be  obtained,  yet  tliis  does  not  invalidate  the  elec- 
tion.^ If  the  stock  book  is  lost,  the  directors  may  substitute  a 
new  one,  filled  out  as  accurately  as  is  possible.'^  "Where  the 
corporation  has  kept  no  regular  stock  books,  and  the  secretary, 
by  order  of  the  directors,  prepares  a  stock  book,  getting  the  in- 
formation from  various  sources,  this  book  governs.'  "Where  the 
transfer  book  differs  from  the  stock  ledger  the  fonncr  governs.* 
A  by-law  authorizing  the  administration  of  an  oath  to  examine 
the  stockholders  as  to  their  title  is  illegal  and  void  where  the 
charter  re2:ulates  the  rifrht  to  vote.' 

There  are  some  exceptions,  however,  to  the  rule  that  the 
transfer  book  is  conclusive  on  the  question  of  who  is  entitled 
to  vote.  Thus,  the  inspectors  of  election  may  inquire  whether 
the  stock  which  is  about  to  be  voted  belongs  to  the  corpora- 
tion, and  if  it  docs  they  may  reject  the  vote.'  So,  also,  they 
may  allow  an  administrator  to  vote,  although  the  stock  stands 
in  the  name  of  the  deceased  person.'' 

In  some  courts  this  rule  is  carried  still  further,  and  it  is  held 
that  the  inspectors  of  election  may  allow  the  pledgor  to  vote, 
although  the  stock  stands  in  the  name  of  the  pledgee  on  the 
books  of  the  company;^  and  it  has  also  been  held  that  the  pur- 
chaser of  certificates  of  stock  may  vote  thereon,  although  the 
stock  stands  on  the  books  of  the  company  in  the  name  of  the 
vendor.'    It  has  been  held  in  Georgia  that  where  a  stockholder 

i  Re  Argus  Co.,  138  N.  Y.  557  (1893).  that  he  does  not  appear  as  owner 

2  Re  Scholiarie,  etc.  R.  R,  12  Abb.  upon    the    books    of   the    company 

Pr.  (N.S.)  394(1872).  should  not  exclude  him  from  the 

^Re  Election,  etc.  Grove  Cem.  Co.,  privilege  of  doing  so."    In  Illinois  it 

39  AtL  Rep.  1024  (N.  J.,  1898).  is  held  that  the  corporation  must  al- 

^Downrngu.  Potts,  23  N.  J.  L.  66  low  the  real  owner  of  the  stock  to 

(1851)'  vote,  whether  he  be  the  registered 

5  People  V.  Kip,  4  Cow.  382,  note  owner  or  not,  where  the  corporation 
(1822).  has  no  by-law  requiring  a  registry  of 

6  See  §  613.  infra.  transfers,  and  the  vendee  produces 

7  See  §  612.  infra.  his  certificate  of  stock  duly  trans- 

8  See  §  612,  infra.  fen-ed  on  the  back.   People  v.  Devin, 

9  In  the  case  of  Allen  u  Hill,  16  CaL  17  III  84  (1855).  In  a  stockholder's 
113  (1860),  the  court  said:  "  It  would  vote  ratifying  the  acts  of  directors,  a 
seem,- upon  principle,  that  the  real  stockholder  has  no  right  to  vote  stock 
owner  of  stock  should  be  entitled  to  which  he  has  transfeiTed  to  others, 
represent  it  at  the  meetings  of  the  even  thou-h  it  still  stands  in  his  name 
corporation,  and  that  the  mere  fact  on  the  books.     Graves  v.  Mono  Lake, 

1148 


en.  XXXVII.]         ELECTIONS COEPOKATE   MEETINGS. 


[§  Gil. 


has  sold  his  stock  and  delivered  the  certificates,  he  has  no  right 
to  give  a  proxy  on  the  stock  to  some  other  person,  even  though 
the  stock  still  stands  in  his  name,  and  the  giving  of  such  proxy 
may  constitute  a  tort  for  which  the  purchaser  of  the  stock  may 
sue  for  damages.^  The  vendor  and  vendee  of  stock  may  agree 
between  themselves  as  to  who  shall  vote  the  stock.  Where  the 
vendor  expressly  parts  with  the  right  to  vote  the  stock,  he  can- 
not, under  the  statutes  of  Pennsylvania,  vote  it,  even  though  he 
appears  as  a  stockholder  on  the  corporate  books.^ 

In  Xew  York,  by  statute,  the  corporate  transfer  book  is  made 
conclusive  upon  the  question  who  may  vote.'  There  are  vari- 
ous other  statutory  provisions  in  Xew  York  regulating  voting, 
and  provision  is  made  for  reviewing  elections.* 

•  Withamv.  Cohen,  28  S.  E.  Rep.  505 
(Ga.,  1897). 

2  Commonwealth  v.  Patterson,  158 
Pa.  St.  47G  (1893).  Under  the  Pennsyl- 
vania statute  of  1889,  allowing  any 
stockholder  in  writing  under  oath  to 
challenge  a  vote,  the  mere  challenge 
that  a  person  does  not  now  own  stock 
which  stands  in  his  name  on  the 
books  is  not  sufficient  to  exclude  his 
vote.  Some  proof  must  be  given. 
Commonwealth  v.  Dalzell,  1  Pa.  Dist. 
637  (1892).  The  registered  stock- 
holder may  vote  even  though  he  has 
transferred  his  certificates  to  another. 
Re  Argus  Printing  Co.,  1  N.  D.  434 
(1891). 

3  Vandenburgh  v.  Broadway  R'y,  29 
Hun,  348,  355  (1883);  Re  Long  Island 
R.  R.,  19  Wend.  37  (1837) ;  Re  Mohawk, 
etc.  R.  R.,  19  Wend.  135  (1838).  Under 
former  statutes,  the  registered  stock- 
holder was  entitled  to  vote  although 
he  had  assigned  his  certificate  of 
stock.  Schoharie  Valley  R.  R.  Case, 
12  Abb.  Pr.  (N.  S.)  394  (1S72). 

*  See  §  619,  infra.  Strong  v.  Smith, 
15  Hun,  222  (1878),  holding  that  the 
transfer  book  is  conclusive  upon  the 
inspectors,  but  that  the  court  has 
power  to  go  back  of  the  entries 
therein  and  inquire  whether,  as  for 
instance  in  this  case,  a  transfer  of 
shares  was  an   absolute    sale  or  a 


etc.  Ca,  81  CaL  303  (1889).  Wliere, 
however,  the  unregistered  transferee 
did  not  challenge  the  right  of  his 
transferrer  to  vote  and  did  not  claim 
the  riglit  to  vote,  but  attacked  the 
election  afterwards  by  quo  warranto, 
his  suit  failed.  People  v.  Robinson, 
64  CaL  373  (1883).  State  v.  Smith,  15 
Oreg.  98, 118  (1887),  contains  a  dictum 
that  the  purchaser  of  a  certificate  of 
stock  cannot  vote  on  the  stock  until  it 
has  been  transferred  into  his  nama 
Where  both  the  legal  and  equitable 
owners  of  stock  agree  as  to  how  stock 
shall  be  voted,  other  stockholders  can- 
not complain  that  the  vote  was  not 
cast  in  accordance  with  law.  State 
V.  Ferris,  42  Conn.  500  (1875).  where  a 
bankrupt  voted  stock  still  standing 
in  his  name.  State  v.  Pettineli,  10 
Nev.  141  (1875).  In  this  last  case  the 
registered  holder  had  transferred  the 
certificate,  but  obtained  it  again  and 
exhibited  it  at  the  meeting.  If  a 
vote  is  not  clmllenged,  an  objection 
to  it  afterwards  maj'  not  meet  with 
much  favor.  Re  Long  Island  R  R., 
19  Wend.  37,  44  (1837).  See  also  ^  020, 
infra.  The  vendor  of  stock  may 
give  the  vendee  a  proxy  to  vote  on 
the  stock  which  still  stands  in  the 
name  of  the  vendor  on  the  books. 
Stephenson  v.  Yokes,  27  Ont.  Rep. 
(Can.)  691  (1896). 


1149 


§  G12.] 


ELECTIONS CORrOKATE   MEETINGS.         [CH.  XXXVII. 


§  612.  The  riijht  of  trusUcs,  i)ltdyees^  administrators^  etc.,  to 
q)Qte, —  It  is  the  general  rule  that  a  person  holding  stock  as 
trustee  is  entitled  to  vote  upon  the  stock,  not  only  where  he  is 
duly  registered  as  a  holder  of  stock  in  trust,  but  also  where  he 
is  registered  absolutely  as  a  stockholder  upon  the  books  of  the 
corporation.'    If  the  trustees  disagree  as  to  how  the  stock  shall 

which  were  transferre<l  on  tlie  day 
of  election,  the  court  will  declare  the 
election  void.  Re  Vernon,  40  AtL 
Rep.  GO  (Del,  1898). 

1  Conant  v.  Millaudon,  5  La.  Ann. 
542  (1830);  Wilson  v.  Central  Bridge, 
9  R.  I.  .j'.iO  (1870);  Hoppiu  v.  Bulluin, 
9  R.  I.  513  (1870),  the  court  saying: 
"If  the  trust  was  of  such  a  nature 
that  the  tru.steo  has  the  control  and 
management  of  the  property,  and  is 
to  exercise  his  discretion  concerning 
it,  he  is  the  proper  person  to  repre- 
sent and  vote  upon  it.  And  the  cor- 
poration cannot  be  required  to  ex- 
amine into  the  nature  of  the  trast 
with  a  view  to  decide  as  to  the  right 
to  vote;"  Re  Barker,  6  Wend-  509 
(1831);  Re  Mohawk,  etc.  R.  R„  19 
Wend-  135  (1838);  Re  North  Shore, 
etc.  Ferry  Co.,  63  Barb.  550  (1872), 
holding  also  that  the  administrator 
of  the  trustee  may  vote  the  stock ; 
Pender  v.  Lushington,  L.  R  6  Ch.  D. 
70  (1877).  In  Clarke  v.  Central  R.  R., 
50  Fed.  Rep.  338  (1892),  it  was  held 
that  a  trust  company  has  no  power 
to  hold  as  trustee  and  vote  tlie  ma- 
jority of  the  stock  of  a  great  railroad 
system,  especially  where  it  is  also  the 
trustee  in  a  trust  deed  of  the  com- 
pany, the  coui-t  saying:  "There  are 
many  situations  in  which  stock  may 
be  so  placed  that  it  becomes  inequi- 
table or  illegal  for  it  to  be  voted. 
The  law  places  the  voting  power  of 
pledged  stock  in  the  pledgor  or  mort- 
gagor, even  where  there  is  no  ex- 
press stipulation  to  that  effect.  And 
where  the  pledgor  or  mortgagor  is 
disqualified  to  vote  the  stock,  the 
disqualification  extends  as  well  to 
the  pledgee  or  trustee.''  In  this  case, 


pledge,  and  thus  whether  the  trans- 
ferrer or  transferee  has  the  right  to 
vote  them;  citing  Ex  parte  Holmes, 
5  Cow.  426  (1826);  Re  Long  Island 
R.  R.,  19  Wend.  87  (1837);  and  see 
N.  Y.  L.  J.,  June  29,  1889.  Although 
only  stockholders  who  still  own  their 
stock  are  allowed  to  vote,  a  person 
who  has  given  an  option  on  his  stock 
is  nevertheless  entitled  to  vote  on  it 
Re  Newcomb,  18  N.  Y.  Supp.  16  (1891). 
In  New  York,  when  for  any  reason 
the  corporation  fails  to  hold  an  elec- 
tion at  the  stated  time  as  provided 
in  the  charter  or  by-laws,  and  the 
election  is  held  subsequently,  only 
those  stockholders  are  entitled  to 
vote  who-  were  qualified  electors  at 
the  time  when  the  election  ought  to 
have  been  held.  Vandenburgh  v. 
Broadway  R.  R.,  29  Hun,  348  (1888); 
People  V.  Tibbets,  4  Cow.  358  (1825). 
Where  the  statute  limits  the  votes 
to  stock  that  for  ten  days  has  been 
entered  on  the  stock  book,  a  stock- 
holder cannot  vote  who  mailed  a  cer- 
tificate for  transfer  the  day  before 
the  ten  days  began,  if  the  corporation 
did  not  receive  the  same  imtil  six 
days  thereafter.  The  object  of  the 
statute  is  to  enable  persons  to  ascer- 
tain during  the  ten  days  who  are  en- 
titled to  vota  Under  the  New  York 
statute  a  person  who  has  sold  his  cer- 
tificate of  stock  cannot  vota  Re 
Glen  Salt  Co.,  17  N.  Y.  App.  Div.  234 
(1897).  See  also  §  538,  supra,  as  to 
closing  the  books.  Where  a  statute 
forbids  the  voting  of  stock  which  has 
been  transfen-ed  within  twenty  days 
prior  to  an  election,  and  in  a  coi-po- 
ration  having  sixty  shares  of  stock 
thirty-two  shares  are  voted,  four  of 


1150 


CH.  XXXYII.]         ELECTIONS COEPOKATE    MEETII^GS.  [§  G12. 

be  voted,  the  courts  have  power  to  direct  thern.^  A  trustee  of 
stock  has  the  right  to  vote  thereon  even  for  a  consolidation, 
and  even  though  he  holds  it  for  another  corporation.-  A  trustee 
holding  stock  and  electing  himself  the  president  of  a  company 
and  recei\ang  a  salary  must  not  allow  his  personal  interest  in 
the  salary  to  conflict  with  his  duty  as  a  stockholder  to  favor 
the  sale  of  the  corporate  property  at  a  high  price.^  "Where  a 
mortgage  covers  shares  of  stock  and  the  trustee  has  the  voting 
power,  its  discretion  cannot  be  controlled  by  the  majority  of 
the  bondholders.*  A  mortgage  on  shares  of  stock  does  not  pre- 
vent the  corporation  controlled  by  such  stock  from  issuing  a 
mortgage  on  its  property ;  and  it  is  no  breach  of  trust  for  the 
trustee  of  the  first  mortgage  to  be  the  trustee  of  the  second 
mortgage  where  the  first  mortgage  does  not  prohibit  such  sec- 
ond mortgage,  the  stock,  by  the  terms  of  the  mortgage,  remain- 
ing in  the  name  of  the  mortgagor.' 

In  California  the  real  owner  of  stock  may  vote  on  it,  although 
it  stands  on  the  books  of  the  company  in  the  name  of  a  "  dummy  " 
as  "  trustee,"  ® 

A  pledgor  of  stock  is  entitled  to  vote  upon  it  in  all  cases 
where  the  stock  continues  to  stand  on  the  books  of  the  com- 
pany in  the  name  of  such  pledgor.^    And  even  where  the 

however,  on  the  final  hearing,  the  of  a  "  dummy,"  as  trustee,  cannot  be 
bill  was  dismissed.  See  62  Fed.  Rep.  voted  by  such  dummy,  the  real  o\\ti- 
328  (1894).  Even  though  a  statute  ers  (5f  the  stock  not  having  assented 
requires  that  certificates  running  to  thereto,  even  though  for  business 
trustees  shall  state  who  is  the  ceshii  reasons  they  did  not  wish  to  have 
que  trust,  yet  an  election  may  be  the  stock  issued  to  themselves.  Stew- 
legal  though  stock  is  voted  by  trust-  art  v.  Mahoney  Min.  Co.,  54  Cal.  149 
ees  and  such  stock  does  not  state  (1880);  Smith  v.  San  Francisco,  etc. 
who  is  the  real  owner.  State  v.  Cro-  R'y,  47  Pac.  Rep.  582  (CaL,  1897).  See 
nan,  49  Pac,  Rep.  41  (Nev.,  1897).  also  Ex  parte  Holmes,  5  Cow.  426 

'Wanneker  v.  Hitchcock,  38  Fed.  (1826);  American  Nat.  Bank  v.  Orien- 

Rep.  383  (1889).  tal  Mills,  17  R.  I.  551  (1891),  liolding 

2  ilarket  Street  R'y  v.  Hellman,  109  that  the  beneficial  owners  are  enti- 

Cal.  571  (1895).  tied  to  say  how  the  vote  shall  be  cast. 

'Elias  V.  Schwpyor.  13  N.  Y.  App.  In  the  last  case  the  stock  had  been 

Rep.  336  (1897)  ;  S.  C.  27  id.  69.  surrendered  and  new  certificates  is- 

*  Toler  V.  East  Tennessee,  etc.  R'y,  sued,  but  no  transfer  book  was  kept. 

67  Fed.  Rep.  1G8  (1894).  "  lie  Barker,  6  Wend.  509  (1831);  Ex 

»Gasquet  r.  Fidelity,  etc.  Co.,  75  jjjorfe  Willcocks,  7  Cow.  402  (1827); 

Fed.  Rep.  343(1896).  Re  Cecil,   36  How.   Pr.   477    (1869); 

•Undf'r  the  California  statute, stock  Scholfield  u  Union  Bank,  2  Cranch, 

placed  by  the  secretary  in  the  name  C.   C.   115  (1815);  Re  St.  Lawrence 

1151 


§  612.] 


ELECTIONS COKPOKATE    MEETINGS.         [CH.  XXXVII. 


pledgee  has  caused  the  stock  to  he  transferred  into  his  own 
name,  as  by  law  he  is  allowed  to  do,^  it  has  been  held  that  the 
pledgor  may  demand  the  right  to  vote  at  electiotis,  and  that 
upon  ■  i^roof  of  the  facts  the  inspectors  of  election  must  allow 
the  pledgor  to  vote  the  stock.'^ 

It  must  be  conceded,  however,  that  the  established  rule  is  to 
the  contrary.'  Nevertheless  the  pledgor  may  control  the  vote 
on  his  stock  if  he  desires  so  to  do.  In  many  of  the  states  there 
are  statutes  which  give  to  the  pledgor  the  right  to  vote  the 
stock.*  And  even  where  there  is  no  statute  to  protect  the 
pledgor's  right  to  vote,  the  courts  will  intervene.*    By  a  bill  in 


Steamboat  Co.,  44  N.  J.  L.  529,  540 
(1883),  a  dictum-  Although  the 
pledgor  of  stock  votes  the  stock  in 
favor  of  a  lease  of  the  corporate 
property  on  such  terms  that  no  divi- 
dends on  the  stock  are  possible,  yet 
in  the  absence  of  fraud  the  pledgee 
is  bound.  Gibson  v.  Richmond,  etc 
R.  R.,  37  Fed.  Rep.  743  (1889). 

1  See  §  460,  supra. 

2  In  Oregon  it  is  held  that  at  com- 
mon law  the  real  owner  of  stock  is 
entitled  to  vote  it,  even  though  it 
stands  on  the  corporate  books  in  the 
name  of  his  pledgee.  It  is  denied 
that  the  transfer  book  is  binding 
upon  the  inspectors  of  election,  and 
the  decisions  to  that  effect  in  New 
York  are  stated  to  be  based  on  the 
New  York  statutory  law.  State  v. 
Smith,  15  Oreg.  98  (1887).  See  also 
Allen  V.  Hill,  16  CaL  119  (I860},  to  sub- 
stantially the  same  effect.  It  has 
been  held  that  the  pledgee  of  stock 
is  not  even  entitled  to  notice  of  meet- 
ings. McDaniels  v.  Flower  Brook 
Mfg.  Co.,  22  Vt.  274  (1850). 

3  The  pledgor  and  pledgee  of  stock 
may  agree  between  themselves  as  to 
who  should  vote  the  stock.  If  there 
is  no  agreement,  the  riglit  to  vote 
should  follow  the  legal  title;  in  other 
words,  the  title  as  it  appears  on  the 
corporate  books.  Even  under  a  stat- 
ute authorizing  inspectors  of  elec- 
tion, upon  a  challenge,  to  determine 

11! 


whether  the  "pajrij  who  appears  to  be 
the  owner  is  really  the  owner,  the 
pledgee  is  entitled  to  vote  the  stock 
standing  in  his  name  where  there  is 
no  agreement  to  the  contrary.  Com- 
monwealth V.  Dalzell,  152  Pa.  St.  217 
(1893).  A  pledgee  into  whose  name 
the  stock  lias  been  transferred  may 
vote  it.  lie  is  a  "&ona^e"  stock- 
holder as  required  by  the  statute. 
The  pledgor  cannot  appear  at  the 
meeting  and  vote  the  stock.  Re 
Argus  Printing  Co.,  1 N.  D.  434  (1891). 
It  is  not  a  conversion  for  one  who 
holds  stock  as  pledgee  to  attend  cor- 
porate meetings  and  vote  upon  the 
stock.  Heath  v.  Silverthorn  Lead 
Min.  etc.  Co.,  39  Wis.  146  (1875). 

*  See  Part  VII,  infra.  Also  Strong 
V.  Smith,  15  Hun,  222  (1878).  Concern- 
ing a  similar  statute  in  Rhode  Island, 
see  Sayles  v.  Brown,  40  Fed.  Rep.  8 
(1889).  Under  the  Colorado  statutes 
an  owner  who  has  pledged  his  stock 
may  represent  the  stock  at  all  meet- 
ings of  the  stockholders  and  vote 
accordingly.  Miller  v.  Murray,  17 
Colo.  408  (1892). 

sScholfieldu  Union  Bank.  2  Cranch, 
C.  C.  115  (1815);  State  v.  Smith,  15 
Oreg.  98  (1887),  where  the  pledgor 
obtained  an  injunction  against  the 
pledgee  voting  the  stock,  and  the 
pledgor  was  allowed  by  the  inspect- 
ors to  vote. 


en.  XXXVII.]         ELECTIONS CORPOEATE    MEETINGS. 


L§  612. 


equity  tlie  pledgor  may  compel  the  pledgee  to  give  liim  a  proxy 
to  vote  the  stock.^  But  in  order  to  invoke  the  extraordinary 
powers  of  a  court  of  equity  in  this  respect,  the  pledgor  must 
show  that  the  interests  of  the  company  have  been  or  will  be 
prejudiced,  or  that  the  value  of  the  stock  has  been  or  will  be 
impaired,  and  that  the  intervention  of  the  court  is  necessary  to 
protect  the  pledgor's  rights.^  A  pledgor  may  enjoin  a  pledgee 
from  transferring  stock  into  his  name  for  the  purpose  of  con- 
trolling an  election,  which  otherwise  the  pledgor  would  con- 
trol, Avhere  the  statutes  of  the  state  provide  for  recording  of 
such  pledge  without  a  transfer  of  the  stock  itself.^  The  pledgee 
of  a  majority  of  the  corporate  stock,  who  by  voting  their  stock 
cause  men  of  their  choice  to  be  elected  directors,  are  not  liable 
for  the  misconduct  of  such  directors.* 

An  administrator  or  executor  may  vote  on  the  stock  of  the 
deceased  stockholder,  even  though  such  stock  has  not  been 
transferred  to  the  executor  or  administrator  on  the  books  of 
the  company.*    Stock  held  jointly  by  three  executors  cannot 


1  Vowell  V.  Thompson,  3  Cranch,  C. 
C.  428  (1829).  See  also  Hoppin  v.  Buf- 
fum,9  R.  L  513  (1870),  holding  tliat  al- 
though the  pledgor  may  by  a  bill  in 
equity  compel  the  pledgee,  in  whose 
name  the  stock  stands,  to  make  a  re- 
transfer  or  to  give  a  proxy  to  the 
pledgor,  yet  where  the  pledgor  for 
many  years  allows  the  pledgee  to 
vote  the  stock  and  claims  the  right 
at  an  election  only  after  the  ballots 
are  cast  and  are  being  coimted,  the 
court  will  not  set  the  election  aside. 

2McHenry  v.  Jewett,  90  N.  Y.  58 
(1882).  Where  the  owner  of  a  mar 
jority  of  the  stock  has  been  fraudu- 
lently deprived  of  her  stock  by  her 
pledgee,  who  has  thereby  deprived 
her  of  the  control  and  claims  the 
stock  as  liis  own,  the  court  will  en- 
join him  from  voting  the  stock  and 
will  appoint  a  receiver  of  such  stock 
pendente  lite,  Ayer  v.  Seymour,  5 
N.  Y.  Supp.  650  (Com.  PI.,  1889). 
Where  a  person  pledges  his  stock  as 
additional  security  to  a  corporate 
creditor  who  has  bonds  of  the  com- 
pany in  ]iledge  for  the  same  debt. 


such  pledge  of  bonds,  however,  being 
illegal,  the  pledgor  of  the  stock  can- 
not compel  the  creditor  to  resort  to 
the  bonds  first;  nor,  although  a  ficti- 
tious sale  of  the  stock  is  alleged,  can 
he  compel  the  transferee  of  the  stock 
to  return  the  stock  so  tliat  the  pledgor 
may  vote  it,  unless  the  pledgor  pays 
tlie  amount  due.  Hinckley  v.  Pfister, 
83  AVis.  64  (1892). 

'Spreckels  v.  Nevada  Bank,  113 
CaL  272  (1896). 

<  Higgins  V.  Lansingh,  154  IlL  301 
(1895).    See  also  §  468,  stipra. 

5  Quoted  and  approved  in  Schmidt 
V.  Mitchell,  41  S.  W.  Rep.  929  (Ky., 
1897 1 ;  Market  Street  R'y  v.  Hellman, 
109  CaL  571  (1895).  A  foreign  exec- 
utor may  vote  stock  beloiiging  to  the 
estate,  even  though  the  stock  stands 
in  the  name  of  the  deceased  stock- 
holder. Re  Cape  May,  etc.  Co.,  16 
Atl.  Rep.  191  (N.  J.,  1888);  Re  North 
Shore,  etc.  Feriy  Co.,  63  Barb.  556 
(1872),  holding  that  an  administrator 
may  vote  upon  stock  standing  in  the 
name  of  the  deceased  person,  even 
tliough  the  latter  held  the  stock  as 


73 


1153 


§  (Ui2.]  ELECTIONS CORPORATE    MEETINGS.         [CH.  XXXVII. 

be  voted  unless  they  all  agivo  ujK>n  the  vote.*  "Where  a  will 
gives  to  one  of  three  exeeutoi^s  the  }K>\verto  vote  the  stock,  and 
directs  the  other  two  executors  to  give  him  a  pivxy  to  that  ])ur- 
pose,  the  court  will  onler  the  proxy  to  be  given,  even  thouirh 
he  intends  to  vote  himself  into  otlice,  and  he  mav  not  be  a  iro^^xl 
manager.'  A  j^iirtner  may  vote  u|>on  stock  belonging  to  the 
firm  and  registereil  in  the  partnership  name.'  "Where  stock  is 
entered  in  the  corporate  books  in  the  name  of  a  pei-son  as  an 
officer  of  another  corporation,  the  successor  in  office  of  that 
person  may  vote  the  stock  without  a  transfer  on  the  cori>orate 
books.*  "Where  a  cor^K>ration  is  authorized  to  hohl  stock  in  an- 
other cor}x>ration  it  is  entitled  to  vote  such  stoi.'k.*  A  coriK»ra- 
tion  as  a  stockholder  mav  vote  its  stock  bv  an  ajzent.*  AVhea 
a  municipal  corjx^ration  is  a  stockholder  in  a  private  corpora- 
tion, it  is  entitleil  to  vote  u{>on  its  stock  in  the  s;une  way  as  any 
other  stockholder.'  The  fact  that  the  government  or  a  single 
pereon  owns  all  the  stock  of  a  company  does  not  put  an  end 
to  the  corjKM-ate  existence.'  Where  joint  owners  of  stock  dis- 
agree as  to  its  vote,  the  vote  is  to  be  rejected.' 

trustee.    In  a  prooeeiling  to  dissolve  but  is  regristered  in  the  name  of  tlie 

a  corjxiration  the  administrator  is  other  partner,  who  is  dead.     Allen  r. 

the  proper  representative  of  stock  Hill,  16  CaL  113  ^1860). 
owueii  by  the  estate,    Wolfe  r.  Un-        *  Farmers',  etc  Ca  r.  Cliicago,  etc. 

derwood.  97    Alii.   875  (1S93\     The  Ry.    27   Fe.L   Rep.   146,   156   (ISSO  ; 

administrator  and  not  the  heirs  at  Monsseaux  v.  Urquhart.  19  La.  Ami. 

law  have  the  right  to  voteL    Schoharie  4^2  (1S67).     Canfrti,  i?f  Mohawk,  etc. 

Valley  R.  R  Qise,  13  Abb^  Pr.  (X.  &)  R  R.  19  Wend.  1^3.  146  (1S3S),  holJ- 

3lH  V1S72).  ing  that  the  word  "  cashier  "  attaclied 

1  T\mis  r,  Hestonville.  etc,  R  R,  to  a  s; x^kholders  name  does  not  au- 
149  Pa.  St.  70  i,lS92l  Wliere  there  thorize  a  succeeding  cashier  to  vote 
are  but  two  stockholders  and  one  the  stock. 

dies,  and  his  administrator  takes  pes-  »  Daris  r.  U.  S.  etc.  Ca,  77  Md.  35 

session  of  tlie  corporate  property  as  (1S93).     Cy.  g  615.  infra. 

though  it  belonged  to  the  estate,  the  «  State  r.  Rohlffs,  19  AtL  Rep.  1099 

other  stockholder   may  have  a  re-  (N.  J..  1S90\ 

ceiver  appointed.    Ee  Belton,  47  La.  "See  ^  99,  supra.    Where  stock  in 

Ann.  1614  aS95X  a  raihxxid  is  owned  by  a  part  of  a 

2  Laffertys  Estate,  154  Pa.  St  430  coimty.  that  part  becomes  a  munici- 
(lS9b\  pality  for  the  purpose  of  owning  and 

»  Kenton  Furnace  R.  R  etc.  Ca  r.  voting  the  stock.    Hancock  t?.  Louis- 

McAlpin.  5  Fed.  Rep.  737  (ISSOX    In  ville,  etc,  R  R,  145  U.  &  409  (1892). 
California  he  may  vote  s\ich  stock        sxhe  United  States  government. 

where  the  stock  belongs  to  the  firm,  though  the  owner  of  aU  the  stock  of 

9  Re  Pioneer  Paper  Ca.  36  How.  Pr.  Ry.  1  Pa.  Dist  207  (1S92).  Cf.  S.  C, 
111  11S65);  Tunis  v.  Hestonville,  etc.     149  Pa.  St.  7a 

1154 


CH.  XXXVII.]        ELECTIONS COEPOEATE   MEETXirGS. 


yoi? 


A  receiver  who  is  in  possession  of  shares  of  stock  generally 
votes  snch  stock  without  his  right  to  do  so  being  questioned. 
Sometimes  the  court,  upon  appointing  a  receiver  of  stock,  ex- 
pressly authorizes  him  to  vote  the  stock,  and  sometimes  directa 
him  how  to  vote  it.* 

It  seems  that  a  stockholder  may  lease  his  stock.  He  may,  for 
a  certain  sum,  assign  to  another  all  dividends  during  the  speci- 
fied time,  and  give  to  the  lessee  the  right  to  vote  the  stock  dur- 
ing that  time.^ 

§  613.  The  corporation  cannot  vote  upon  aharen  of  its  own 
stock. —  Shares  of  stock  owned  by  the  corporation  itself  cannot 
be  voted  either  directly  by  the  corporate  oflBcers  or  indirectly 
by  a  trustee  of  the  corporation.  This  is  the  established  rule, 
whether  the  stock  is  registered  in  the  name  of  the  corpontion 
or  not.' 


a  canal  companv,  may  continue  as  a 
stockholder  and  keep  up  the  corpo- 
rate existence  by  allowing  the  direct- 
ors to  retain  one  share  each  aa  a 
qualification  share.  U.  S.  v.  Louis- 
ville, etc  Canal  Co,  4  DilL  601  (l^Zr, 
a  C,  26  Fed.  Caa.  1002.  See  also 
§  709,  infra. 

1 A  court  may  appoint  areceiTcrto 
hold  an  election,  etc,  where  the  en- 
tire interests  in  the  corporation,  in- 
cluding the  stock,  belong  to  parties 
who  have  been  defrauded.  King  r. 
Barnes,  51  Hun,  550  (1880;;  afTd,  113 
N.  Y.  655.  See  also  dictum  in  "Wan- 
neker  v.  Hitchcock,  .?8  Fed.  Kept  583 
(18S^>,  where  the  trustees  of  stock 
disagreed  as  to  voting;  People  r. 
Albany,  etc  R.  R.,  .>5  Barb.  ?A\,  371 
(I860),  where  a  receiver's  vote  was  set 
aside,  fraud  being  involved  and  the 
appointment  being  invalid;  Ameri- 
can Inv.  Ca  r.  Yost,  25  Abbi  X.  Caa. 
274  (1890,1,  where  a  receiver  of  stock 
was  instructed  how  to  vote,  the  ac- 
tion being  to  enforce  an  agreement 
to  place  ptock  in  the  hands  of  trust- 
ees ur  -  •  f  the  company 
andch.                       r  were  paid- 

»  Zachry  v.  Noian,  66  Fed.  Eep.  ^67 
(18d5). 


*Ex  jjarie  Holmes,  5  Cow.  429 
(li-^C)  :  3fcN'eely  v.  Woodruff,  15  X.  J. 
L.  Z^ji  1  ^53  ;  American  Ey  Frog  Ca 
r.  Haven,  101  3Ia35.  398  (1869,=:  Com- 
monwealth V.  Boston,  etc  B.  E.,  143 
JIass.  146  a«i^):  Stater. Smith, 48  Vt. 
266  a87C,;  Monsgeaux  v.  XJrquhart, 
19  La.  Ann.  4S2  aS67;;  U.  &  r.  Co- 
lumbian In".  Co..  2  Crunch,  C,  C.  266 
(1S^2V:  Xe-  Ins.  Co.  r. 

Phillips,  U:  ."'-^r^:-- 

oome  bonds  ent. :  i 

to  have  lost  tL-.  :.^..;      ...  j 

were  paid;  Brewster  r.  Hartley,  37 
CaL  15  <\'¥jl^:,  where  the  company  hs'l 
pledged  its  stock.  If  all  the  stock- 
holders consent,  the  stock  owne'l 
by  the  corporation  may  be  voted. 
Farwell  r.  HaogbUm,  etc  Works,  3 
Fed.  Eep.  66  (IgSW).  Where  a  mort- 
gage can  be  given  only  upon  the  vote 
of  the  stockholders,  stock  owcei  by 
the  oorporation  cannot  be  vote-l.  Yrit 
the  pledgee  of  soch  stock  from  the 
corporation  was  allowed  to  vote. 
Vail  r.  Hamilton,  85  X.  Y.  453  ' 
Directors  elected  by  vr<t<=^  uTior. 
owne"!  by  the  ^ 
gaily  electe«L    Z 

Wend.  98(182?.    W  .:e 

requires  the  vote  of  :  .  ':;  of  a 


1155 


014.] 


ELECTIONS COEPOEATE   MEETINGS.         [CH.  XXXVIT. 


"Where  tlie  directors,  just  before  the  election,  issue  or  sell 
stock  owned  by  the  corporation,  the  purpose  of  such  issue  or 
sale  being  to  control  the  election,  the  courts  will  interfere  at 
the  instance  of  other  stockholders  where  an  actual  fraud  is  in- 
volved.^ 

§  614.  Issuing  stoclc  in  order  to  carry  an  election. —  Where 
the  directors  cause  treasury  stock  to  be  sold  to  themselves  at  less 
than  its  real  value  and  for  the  purpose  of  carrying  an  election, 
the  court  will  set  the  sale  aside  as  fraudulent.-  In  a  proper 
case  the  court  will  enjoin  the  issue  of  the  new  stock.' 

But  an  election  is  valid  although  it  is  carried  by  treasury 
stock  of  the  corporation,  which  is  sold  by  the  directors  just  be- 
fore the  election  in  order  to  carry  the  election,  so  long  as  the 
sale  is  not  attacked  and  set  aside  for  fraud.*    "Where  the  stock 


certain  amount  of  the  stock,  only  the 
outstanding  stock  is  considered.  The 
unissued  stock  and  treasury  stock  are 
not  counted.  Market  Street  R'y  v. 
Hellinan,  109  Cal.  571  (1895). 

1  See  §  614,  infra,  on  this  subject. 

2  Hilles  V.  Parish,  14  N.  J.  Eq.  380 
(1863).  Where  the  stock  of  a  ceme- 
tery company  of  the  par  value  of  $50 
is  worth  but  $5,  the  directors  may 
issue  it  for  land  which  is  liable  to 
come  into  competition  with  tlie  com- 
pany, even  though  one  motive  of  the 
directors  is  thereby  to  control  an 
election.  "Wildes  v.  Rural,  etc.  Co., 
53  N.  J.  Eq.  425  (1896),  rev'g  32  AtL 
Rep.  676.  A  stockholder  who  was 
not  present  at  a  stockholders'  meet- 
ing is  not  bound  by  the  ratification 
by  such  meeting  of  the  issue  of  a 
large  amount  of  the  original  capital 
stock  to  the  directors  themselves, 
who  were  illegally  elected,  but  who 
thereby  acquire  control  of  the  com- 
pany. Morris  v.  Stevens,  36  AtL  Rep. 
151  (Pa.,  1897).  Where  de  facto  di- 
rectors, immediately  after  the  elec- 
tion, order  an  issue  of  a  large  amount 
of  the  original  unissued  capital  stock 
of  the  company,  and  most  of  it  is 
taken  by  one  of  their  number,  who 
thereby  acquires  a  majority  of  the 


stock  of  the  company,  and  subse- 
quently the  election  is  declared  ille- 
gal, sucli  directors  may  be  enjoined 
from  voting  the  stock  so  issued,  and, 
if  they  have  sold  it,  may  be  enjoined 
from  voting  other  stock  equal  in 
amount  to  tlie  stock  so  sold  by  them. 
The  existing  stockholders  are  en- 
titled to  subscribe  for  their  propor- 
tion of  the  unissued  original  capital 
stock.  Morris  v.  Stevens,  36  Atl  Rep. 
151  (Pa.,  1897).  See  also  post,  p.  1167, 
note  1. 

3  Tlie  court  will  enjoin  the  board 
of  directors  from  issuing  new  stock 
on  the  verge  of  an  election  and  for 
the  sole  pui-pose  of  carrying  that 
election,  where  the  directors  really 
represent  a  minority  of  the  stock, 
and  where  the  power  to  issue  the 
new  stock  is  very  doubtful.  Such 
an  injimction  was  granted  even 
though  the  charge  was  made  that 
the  complainant  was  interested  in 
rival  companies  and  was  exercising 
control  in  their  behalf.  Eraser  v. 
Whalley,  2  Hem.  &  M.  10  (1864). 

*  State  V.  Smith,  48  Vt.  266  (1876). 
In  the  case  of  Taylor  v.  I\Iiami  Ex- 
porting Co.,  6  Ohio,  176,  223  (1833).  a 
bill  by  a  stockholder  to  compel  a  per- 
son to  take  back  from  the  corpora- 


1156 


en.  XXXTII.]         ELECTIONS COEPORATE   MEETINGS. 


[§  G15. 


is  not  treasury  stock,  but  is  new  increased  capital  stock,  all  the 
existing  stockholders  have  a  right  to  subscribe  for  their  pro- 
portion of  the  new  stock,  and  may  protect  that  right  by  injunc- 
tion.^ A  court  of  equity  may  set  aside  an  election  of  direct- 
ors carried  by  a  trick,  whereby  an  irresponsible  person  was 
allowed  to  subscribe  for  a  large  amount  of  stock,  which  he  then 
voted,  nothing  being  paid  on  the  stock.  Such  a  suit  may  be 
brought  by  some  of  the  stoclvholders  in  behalf  of  all.^  It  is  of 
course  legal  to  purchase  stock  from  stockholders  in  order  to 
control  an  election.* 

§  615.  Where  one  corporation  owns  a  majority  of  the  stoclc 
of  a  rival  company,  may  it  vote  the  stoclc  and  control  the  latter 
company?  —  It  has  been  decided  in  several  cases  that  where 
one  corporation  owns  a  majority  of  the  stock  of  a  rival  com- 
pany, the  temptation  to  manage  the  latter  company  for  the 
benefit  of  the  former  company  will  be  so  great  that  a  minority 
stockholder  of  the  latter  company  may  enjoin  the  former  com- 
pany from  voting  the  stock.* 


tion  certain  stock  which  he  had  pur- 
cliased  of  it  just  before  the  election, 
and  liad  voted  at  the  election  and 
then  immediately  sold  again  to  the 
corporation,  failed.  The  vote  on 
these  shares,  however,  did  not  aifect 
the  result.  But  see  §§  65,  70,  286 
(notes),    supra,    and     §    653,    infra. 


one  to  the  other,  even  though  both 
companies  are  in  the  hands  of  a  re- 
ceiver. George  v.  Central  R.  R.  etc. 
Co.,  101  Ala.  607  (1894).  In  Memphis, 
etc.  R  R.  V.  Woods,  88  Ala.  630(1889), 
it  was  held  that  where  one  railroad 
company  has  acquired  a  majority  of 
the  stock  of  another  railroad  com- 


Where  the  stockholders  are  present    pany,  and  has  elected  the  board  of  di- 


and  no  one  objects  to  the  issue  of 
iinissued  stock  to  a  director  whereby 
he  acquires  control,  such  issue  is 
legal  Christopher  v.  Noxon,  4  Ont. 
Rep.  (Can.)  672  (1883). 

1  §  286,  supra. 

2  Davidson  i\  Grange,  4  Grant's  Ch. 
Rep.  (Can.)  377  (1854). 

3  Toronto,  etc.  Co.  v.  Blake,  2  Ont. 
Rep.  (Can.)  175  (1882). 

••  Where  one  railroad  company  ac- 
quires a  majority  of  the  stock  of  an- 
other having  so  substantially  similar 
a  field  of  operations  that  there  is  a 
necessary  conflict  of  interests  be- 
tween the  two,  the  former  may  be 
enjoined  from  voting  its  stock  on  the 
question  of  annulling  a  lease  from 


rectors,  and  oppressed  and  defrauded 
such  latter  company  by  buying 
unnecessary  rolling  stock,  making 
unnecessary  repairs  at  exorbitant 
charges,  unduly  apportioning  the 
earnings  as  between  the  two  roads, 
and  in  other  ways  increasing  its  own 
profits  at  the  expense  of  the  latter 
company,  a  minority  stockholder  in 
sucii  latter  company  may  enjoin  the 
former  company  from  voting  such 
stock  at  an  election.  A  request  to 
the  company  to  bring  the  action  was 
first  made  by  the  stockholder  who 
brought  the  suit.  A  transportation 
company  o%vning  a  majority  of  the 
stock  of  an  ice  company  may  be  en- 
joined from  voting  the  stock,  if  the 


1157 


§  615.] 


ELECTIONS COEPOEATE   MEETINGS.         [CH.  XXXVII. 


A  somewhat  similar  conclusion  was  reached  by  a  lower  court 
in  l^ew  York,^  but  a  later  decision  is  to  the  effect  that  a  court 
of  equity  has  no  power  to  restrain  a  railroad  corporation,  which 
has  legally  purchased  a  majority  of  the  stock  of  another  rail- 
road corporation,  "  from  voting  on  the  stock  so  purchased,  upon 
the  allegation  or  proof  that  it  intends  to  cause  a  board  of  di- 
rectors to  be  elected,  who,  by  their  action  or  non-action,  may 
injure  or  prejudice  the  interests  of  the  minority  stockholders 
of  the  corporation  whose  stock  has  been  so  purchased."  ^  Such 
also  is  the  law  in  New  Jersey.'    It  has  been  held  in  Ohio  that 


former  company  intends  to  purchase 
ice  from  the  latter  company,  but 
otherwise  no  such  injunction  will 
issue.  American,  etc.  Co.  v.  Linn,  93 
Ala.  610  (1890).  A  stockholder  in  one 
mining  and  manufacturing  company 
may  enjoin  another  rival  company 
from  voting  the  majority  of  stock  in 
the  former  company,  such  majority 
being  owned  by  the  latter  company. 
Mack  V.  De  Bardeleben,  etc.  Co.,  00 
Ala.  396  (1890).  Where  an  electric- 
light  company  purchases  a  majority 
of  the  stock  of  a  competing  electric- 
light  company  in  the  same  city,  and 
elects  the  board  of  directors,  and 
fraudulently  uses  its  power  to  make 
the  latter  subsei-vient  to  and  as  a 
feeder  to  the  former,  and  intends  to 
destroy  the  latter,  the  court,  at  the 
instance  of  a  minority  stockholder  of 
the  latter,  will  appoint  a  receiver  of 
the  company;  but  the  proof  of  such 
intent  must  be  clear.  The  fact  that 
the  directors  so  elected  are  stockhold- 
ers in  the  controlling  company  is  not 
sufficient.  Davis  v.  U.  S.  etc.  Co.,  77 
Md.  35  (1893).  It  is  illegal  for  an  Ohio 
corporation  to  purchase  a  majority 
of  the  stock  of  a  Tennessee  corpora- 
tion for  the  purpose  of  controlling 
the  latter,  even  though  they  are  en- 
gaged in  a  similar  business,  the  ob- 
ject being  to  form  a  monopoly. 
Hence  the  purchasing  company  can- 
not enforce  the  contract  as  to  certain 
things  which  were  to  be  done  by  the 


vendor  of  the  stock.  Buckeye,  etc. 
Co.  V.  Harvey,  20  S.  W.  Rej).  427  (Tenn., 
1892).  See  also  Alexander  v.  Searcy, 
81  Ga.  530  (1889).  A  stockliolder's 
suit  to  restrain  another  corporation 
from  voting  stock  in  his  corporation 
does  not  lie  where  such  other  corpo- 
ration is  not  made  a  party  defend- 
ant. Hollifield  V.  Wrightsville,  etc. 
R.  R,  27  S.  E.  Rep.  715  (Ga.,  1896). 

1  In  ]\Iilbank  v.  New  York,  etc.  R.  R., 
64  How.  Pr.  20  (1882),  the  court,  at  the 
instance  of  a  minority  stockliolder, 
enjoined  another  railroad  company 
from  voting  a  majority  of  the  stock 
in  his  company,  although  fraud  and 
partiality  in  the  management  for  the 
benefit  of  the  majority  stockholder 
was  a  fear  of  the  future  instead  of  a 
fact  in  the  past.  The  court  said:  "  It 
is  against  public  policy  to  have  or 
permit  one  corporation  to  embarrass 
and  control  another  and  perhaps 
competing  corporation  in  the  man- 
agement of  its  affairs,  as  may  be  done 
if  it  is  permitted  to  purchase  and  vote 
upon  the  stock." 

2  0elbermann  v.  New  York,  etc. 
R.  R.,  77  Hun,  332  (1894). 

3  A  stockholder  will  not  be  enjoined 
from  voting  on  the  ground  that  he  is 
not  a  bojia  fide  stockholder,  but  that 
his  stock  was  paid  for  by  rival  com- 
panies, and  that  he  intends  to  con- 
trol the  company  for  the  advantage 
of  those  companies.  Camden,  etc. 
R.  R.  V.  Elkins,  37  N.  J.  Eq.  273  (1883). 


1158 


CH.  XXXVII.]         ELECTIONS  —  COKPOBATE   MEETINGS.  [§  616. 

one  railroad  corporation  has  no  power  to  acquire  the  bonds  of 
another  railroad  corporation  in  order  to  control  the  elections 
of  the  latter,  such  bonds  ha^^ng  a  voting  power.^  Where  a 
railroad  company  acquires  control  of  the  bonds  and  stock  ot  a 
competing  company,  and  allows  a  foreclosure  to  take  place,  the 
minority  stockholders  may  defend  against  such  foreclosure  on 
the  ground  that  the  earnings  had  been  kept  down  and  also 

diverted.'^ 

The  reasonable  rule  would  seem  to  be  that  where  one  com- 
pany, having  no  power  to  purchase  the  stock  of  a  rival  com- 
pany'  illeo-ally  purchases  a  controlling  interest  m  such  stock, 
or  where  one  company,  having  legally  purchased  the  majority 
of  the  stock  of  a  rival  company,  has  managed  the  latter  com- 
pany fraudulently  in  its  own  interest,  a  court  of  ^q^^itj  ™1 
enioin  it  from  voting  the  stock  at  the  next  election.    But  if  the 
purchase  of  the  stock  was  legal  and  there  has  as  yet  been  no 
fraud  in  the  management,  such  an  injunction  will  not  be 
granted  *    An  individual  may  of  course  own  a  controlling  in- 
terest in  two  corporations,  although  they  compete  in  business. 
8  61C>    Ilh'(fal  or  fraudulent  elections  — The  remedy  of  in- 
junction against  elections  and  against  voting  particular  stock. 
A  court  of  equity  has  power  to  enjoin  the  holding  of  an  elec 
tion  by  a  corporation  during  the  pendency  of  a  smt. 

A  federal  court  has  held  that  where    the  stock  for  interstate  co°iine^«« 
tcoZrl^nVsorsanize^itoo^^na    purposes.  ^^  is  also  removable  where 

tselfbeingforbidden bylaw.  Clarke  to  own  such  stock.  South  Carolma 
.Central  R  R  etc..  50  Fed.  Rep.  338  ^.  Port  Royal,  etc.  Ry,  56  Fed.  Rep. 
/I  fiQo\     Tn  this  case,  however,  on  the    333  (lo Jo). 

<Vt.  63  Fed  Eep.  858  (1894).  etc.  B  y,  loO  N.  Y.  410  (18  JD). 

.  Stated' MoDaaiel  23  Ohio  St.  854.  =  See  §§  315-317,  s.,pra. 

868       ?3t     Where   the   state   has  '  On  this  subject  see  also  §  6,  mpra. 

h  J.ht  suit  to  forfeit  the  cha^rot  » See^^  0^1^  •-/-               ^ 

L':  a  ™!i:rT;:?L°Vo*  ZZ^  m  U.  am.  Chance,lor  Wal^ort,. 
that  a  majority  "  .^   „  ^^^ig  ^^^t  unquestionably  has 

TilnTf  ?hrst:  rbrartheTr:.!-  t.>e  power  to  present  their  election 
rS  com W  tl>e  cJse  may  be  re-  by  an  injunction  operatmg  upon  the 
roao  ^^I*  J'  i,  t,,3    commissioners,     restrammg     them 

Tt^f  c  mpany  s  an  insUument  of  from  acting  as  inspectors  of  the  elec. 
toter^trcommerce,  and  purchased    tion."    In  Haight  ..  Day,  1  Johns.  18 

1150 


§  616.] 


ELECTIONS COKPORATE    MEETINGS.         [cH.  XXXVIf . 


A  court  of  equity  may  enjoin  the  majority  stockholders  from 
holding  a  new  election,  even  though  they  claim  that  the  former 
election  was  invalid.^ 

A  court  of  equity  may  also  enjoin  the  voting  of  particular 

(1814),  Chancellor  Kent  dissolved  the 
injunction,  but  did  not  question 
the  power  of  tlie  court  to  j^rant  it. 
High  on  Injunctions,  §  1230,  says: 
"  While  the  propriety  of  equitable  in- 
terference by  injunction  witli  the 
election  of  officers  of  private  corpo- 
rations has  been  frequently  criticised, 
and  with  no  inconsiderable  show  of 
injustice,  the  jurisdiction  itself,  al- 
though sparingly  exercised,  is  too 
firmly  established  to  be  readily 
shaken  without  the  intervention  of 
legislative  authority.  The  jiu'isdic- 
tion  is,  however,  almost  entirely  of 
American  growth,  the  English  au- 
thorities affording  few  instances  of 
its  exercise."  A  court  of  eqiiity  has 
jurisdiction  on  a  bill  in  equity  to  en- 
join an  election,  although  the  stat- 
ute provides  for  a  summary  remedy 
by  application  to  the  court,  wliere 
the  relief  asked  for  by  the  bill  in- 
volves also  the  transfer  of  stock. 
Archer  v.  American,  etc.  Co.,  50  N.  J. 
Eq.  33  (1892). 

The  court  may  enjoin  the  company 
from  receiving  any  votes  at  an  elec- 
tion \mless  the  votes  of  the  plaintiff 
are  received.  Bro^vn  v.  Pacific  Mail, 
etc.  Co.,  5  Blatchf.  525  (1867);  S.  C,  4 
Fed.  Cas.  420.  In  the  latter  case 
Judge  Blatchf ord  said:  "As  to  the 
character  of  the  injimction  asked 
for,  it  is  laid  down  in  Judge  Red- 
field's  Treatise  on  the  Law  of  Rail- 
ways (vol  2,  sec.  221)  that  'it  has 
been  common  to  produce  a  positive 
effect  through  an  injimction  out  of 
chancery  by  means  of  a  prohibitory 
order,'  and  that  a  mandatory  order 
is,  in  courts  of  equity,  seldom  denied 
unless  the  remedy  at  law  is  perfectly 
adequate."  In  this  case  Judge  Blatch- 


ford  enjoined  the  election  inspectors 
from  holding  any  election  until  the 
further  order  of  the  court,  unless 
certain  persons  should  fir?t  be  per- 
mitted to  vote  certain  stock;  autl 
also  enjoined  certain  persons  from 
voting  any  stock  until  after  certain 
other  persons  had  been  afforded  an 
opportunity  to  vote  their  stock.  In 
Shelmerdine  v.  Welsh,'  47  Leg.  Int.  2ft 
(Phila.  Com.  PL,  January,  1890),  the 
court  did  not  deny  its  power  to  en- 
join the  election,  but  said:  "  The  case 
is  not  sufficiently  clear  to  warrant  a 
preliminary  injunction  that  wouM 
prevent  an  election  on  the  day  named 
in  the  charter,  and  might  cause  the 
irreparable  injury  which  such  reme- 
dies are  given  to  prevent."  If  the 
election  is  held  in  violation  of  an  in- 
junction, this  fact  will  be  considered 
in  quo  ivarranto  proceedings.  Peo- 
ple V.  Albany,  etc.  R.  R.,  55  Barb.  344, 
884  (1869).  The  injunction  generally 
runs  against  the  inspectors,  presi- 
dent, directors,  officers,  agents,  sei'v- 
ants,  etc.  Campbell  v.  Poultney,  6 
Gill  &  J.  (Md.)  44  (1834).  It  has  been 
held  tliat  an  injunction  permanently 
forbidding  the  holding  of  any  elec- 
tion whatever  is  an  interference  with 
the  management  of  corporate  affairs, 
to  which  the  comls  will  decline  to 
be  a  party;  and  such  an  injunction 
would,  if  granted,  be  void.  People 
V.  Albany,  etc.  R  R,  55  Barb.  344 
(1869),  holding  also  that  while  an  in- 
junction forbidding  inspectors  to 
hold  an  election  at  all,  or  to  receive 
and  count  the  votes  thereof,  is  en- 
tirely void,  since  a  court  of  equity 
has  no  power  to  restrain  permanently 
an  officer  of  a  corporation  from  per- 
forming the  ordinary  duties  of  his 


1  Chiera  v.  Brevoort,  97  Mich.  638  (1893). 
1160 


CH.  XXXVII.]        ELECTIONS COKPOKATE   MEETINGS. 


[§  616. 


stock.  In  order  to  obtain  such  an  injunction,  liOTvever,  the 
compLainant  must  show  that  the  defendant  intends  to  vote  the 
stock;  that  he  has  no  equitable  right  to  do  so;  that  the  effect 
of  the  vote  will  be  to  control  the  election ;  and  that  irreparable 
and  permanent  injury  will  come  to  the  corporation  or  to  the 
stockholders  unless  the  injunction  is  granted.^ 

Thus,  an  injunction  has  been  granted  where  there  was  a  con- 
spiracy'to  obtain,  on  the  eve  of  the  election,  an  injunction  against 
the  complainants  from  voting  their  stock  ;2  also  where  the  di- 

office  yet  they  may  be  enjoined  from  tion  was  pending  to  cancel  it.    Mc- 

holding  an  election  until  the  further  Henry  v.  Jewett,  90  N.  Y.  58  (1882), 

order  of  the  court,  or  from  receiving  where   the    preliminary  mjunction 

the  votes  of  certain  stockholders  until  was  denied,  inasmuch  as  the  com- 

the  votes  of  others  are  deposited.    But  plaint  showed  no  equitable  cause  of 

an  injunction  may  be  granted  stay-  action.    Where  the  owner  of  a  ma- 


ing  an  election.  Scholfield  v.  Union 
Bank,  2  Crunch,  C.  C.  115  (1815);  S.  C, 
21  Fed.  Cas.  723,  where  the  inspectors 
denied  the  right  of  pledgors  to  vote. 
If  directors  convene  a  meeting,  to 
pass  resolutions  favorable  to  them- 
selves on  questions  in  which  the  in 


jority  of  the  stock  has  been  fraudu- 
lently deprived  of  her  stock  by  her 
pledgee,  who  has  thereby  deprived 
her  of  the  control  and  claims  th& 
stock  as  his  own,  the  court  will  en- 
join him  from  voting  the  stock  and 
will  appoint  a  receiver  of  such  stock 


terests  of  the  directors  are  opposed    pendente  hte.^   Ayer  v   Seymour    & 


to  those  of  the  shareholders,  by  a  cir 
cular  which  is  misleading,  and  which 
contains  statements  calculated  to  ob- 
tain proxies  in  tlieir  favor  without 
giving  the  shareholders  the  informa- 
tion necessary  to    enable  them  to 
form  a  just  judgment  as  to  who  are 
the  proper  persons  to  whom  to  en- 
trust their  votes,  the  court  will  grant 
an  injunction  to  restrain  the  holding 
of  the  meeting,  and  to  restrain  the  di- 
rectors from  laying  such  resolutions 
before  the  meeting.    Jackson  v.  Mun- 
ster  Bank,  13  L.  R.  Ir.  118  (1884).    For 
other  instances  in  which  a  court  of 
equity  interfered,  see  §  593,  supra, 
and  §  G18,  infra. 

1  Reed  v.  Jones,  6  Wis.  680  (1858), 
holding 

tion  against  a  stockholder  voting 
his  stock  cannot  be  granted  on  the 
ground  that  he  had  no  title  to  the 
land  which  he  conveyed  in  payment 
of  the  stock.  The  stock  had  not  been 
canceled  by  the  company,  and  no  ac- 


N.  Y.  Supp.  G50  (Com.  PL,  1889).  An 
injunction  against  a  stockholder's 
voting  certain  stock  is  not  an  injtmc- 
tion  to  "  suspend  the  general  and  or- 
dinary business  of  a  corporation." 
Reed  v.  Jones,  6  Wis.  680  (1858).  An 
election  is  not  such  business.  Reed 
V.  Jones,  6  Wis.  680  (1858). 

2  Brown  v.  Pacific  Mail,  etc.  Co.,  & 
Blatchf.  525  (1867);  S.  C,  4  Fed.  Cas. 
420,  in  which  the  allegation  was 
that  the  defendants  contemplated, 
through  improper  means,  to  obtam 
an  injunction  preventing  plaintiffs, 
who  were  large  stockholders  in  a 
corporation,  from  voting  at  an  ap- 
proaching election,  and  that  de- 
fendants were  improperly  obtaininf 


that  a  preliminary  injunc-    proxies  from  other  stockholders  m 


order  to  control  the  election  for  their 
private  purposes.  The  complainant 
alleged  that  defendants  intended  to 
obtain  control  for  the  benefit  of  rival 
companies,  and  intended  fraudu- 
lently to  prevent  the  complainants 


1161 


§  616.]  ELECTIONS COKPOKATE    MEETINGS.         [CH.  XXXVII. 

rectors  propose  to  postpone  the  election  in  order  to  prolong 
their  term  of  office ; '  also  where  a  stockholder  has  transferred 
part  of  his  stock  in  order  to  increase  the  voting  power  of  the 
stock,  the  charter  limiting  the  number  of  votes  one  stockholder 
may  cast;^  also  wliere  a  majority  of  stock  is  owned  by  a  com- 
peting company  which  has  acquired  control  for  the  purpose  of 
diverting  business  to  itself;^  also  where  "trustees,"  who  are 
mere  agents,  refuse  to  transfer  the  stock  to  their  principals  or 
to  give  proxies.* 

Where  the  owner  of  a  majority  of  the  stock  sells  it,  the  pur- 
chase price  being  only  paid  in  part,  and  retains  the  stock  in  his 
name  until  the  full  price  is  paid,  he  cannot  be  compelled  to 
deliver  the  stock  or  to  refrain  from  oustinir  the  vendee  from 
the  presidency  of  the  corporation,  where  the  vendee  fails  to 
meet  the  other  payments,  even  though  the  vendee  has  pro- 
ceeded to  improve  the  property.' 

Equity  has  jm-isdiction  to  compel  the  transfer  of  stock  as 
between  parties.  Hence  where  stock  is  issued  in  payment  for 
property,  and  the  party  to  whom  the  certificate  is  issued  re- 
fuses to  divide  it  among  the  owners  of  the  property,  as  provided 
by  contract,  a  court  of  equity  may  compel  the  division  and 
may  enjoin  any  election  of  the  corporation  until  such  division 
is  made.® 

The  general  rule  is  that  one  stockholder  has  nothing  to  do 
with  the  motive  of  another  stockholder.  The  injunction  must 
be  based  on  damage  reasonably  certain  to  ensue."    Accordingly, 

from  voting.  The  court  enjoined  de-  purpose  of  controlling  an  election, 
fendants  from  participating  in  any  there  being  a  provision  in  the  char- 
election  unless  plaintiffs'  votes  were  ter  prohibiting  a  single  stockholder 
received  thereat,  and  from  restrain-  from  voting  on  more  than  twenty 
ing  plaintiffs  in  their  right  to  vote,  shares.    See  also  §  621,  infra. 

1 A  stockholder  may  enjoin  direct-  3  gee  §  615.  infra. 

ors  from  postponing  an  annual  elec-  <  See  ^  622,  infra. 

tion  which  comes  in  February,  but  »  Stockton  v.  Russell,  54  Fed.  Rep. 

which  the  directors  by  by-law  have  224  (1892). 

changed  to  October,  thereby  endeav-  6  Archer  v.  American,  etc.  Co.,  50 

oring  to  extend  their  term.    Elkins  N.  J.  Eq.  33  (1892). 

V.  Camden,  etc.  R.  R.,  36  N.  J.  Eq.  467  7  Ryder  v.  Alton,  etc.  R.  R,,  13  Ilk 

(1883).    See  also  Camden,  etc.  R.  R.  v.  516  (1851),  where  a  subscriber  failed 

Elkins,  37  N.  J.  Eq.  274  (1883).  in  his  defense  against  a  subscription 

2  Webb  V.  Ridgely,  38  Md.  364  (1873),  by  attacking  the  poHcy  of  the  mar 

where  stock  had  been  colorably  trans-  jority  in  control, 
ferred  without  consideration  for  the 

1162 


CH.  XXXVII.]         ELECTIONS  — COEPOKATE   MEETINGS.  [§  <31G. 

an  iniunction  will  not  be  granted  upon  the  ground  that  the 
•stockholders  against  whom  the  injunction  is  sought  are  likely 
to  obtain  control  of  the  affairs  of  the  company,  and  that  then 
they  will  probably  misuse  their  power.^  The  form  of  the  in- 
innction  order  varies,  of  course,  with  the  circmnstances  of  the 
case  The  federal  courts  have  sanctioned  a  form  which,  while 
drastic  m  its  terms,  is  effective  in  reaching  the  desired  result, 
and  is  none  too  severe  when  the  difficulties  are  considered.- 
Where  a  party  is  enjoined  from  voting,  the  court  will  enjom 

his  proxy  from  voting.'  ^ 

The  proxy  may  be  enjoined  although  his  principal  is  not  mac  e 
a  party  and  is  not  served.^  But  stockholders  who  are  not  made 
parties  will  not  be  enjoined.^  The  injunction  against  certain 
persons  voting  certain  stock  does  not  prevent  the  election  from 
takino-  place.  On  the  contrary,  the  election  goes  on  and  is 
valid°even  though  it  happen  that  what  would  have  been  a  mi- 
nority  of  the  votes,  had  not  the  injunction  issued  becomes  by 
reason  thereof,  a  majority,  and  elects.^  Where  the  mjunc  ion 
is  applied  for  at  a  time  so  near  the  election  that  the  opposition 
will  have  no  reasonable  opportunity  to  be  heard,  the  court  may 
refuse  the  application  on  that  ground.^  The  practice  of  serv 
ing  an  injunction  after  the  meeting  has  assembled  is  not  looked 

Tcamden,  etc  R  R  u  Elkins,  37    J  f -7^,!^^,^,^^ .'^^^^^^^ 
N  J  Eq  273  (1883).    Cf.  Brovvn  v.  Pa-    Blatchf.  o2o  (1867) ;  S.  C,  4  1  ed.  Uas. 

cific  ^^f'et%Co.    5  Blatchf.   525    ^.^'^^^^^  ^p,,-,.  Mail,  etc.  Co.,  5 
(1867);  S.  C,  4  Fed.  Cas.  420.  J  ^  ^^^ 

2Seetheform  of  in  junction  granted    BlatoM.  &~o  ueo/;,  o.  v. , 

in  Brown  v  Pacific  ^I^^^'f;  ,C^;f    ^J-^j,,,,  ^  bill  was  filed  to  restrain 
Blatchf.  525  (1867)-  S.  C-.  4  Fed^C^s.  ^^  J  ^^^^j^^^^^^,  ,,,^  celling  or 

2  rT^?  B^rb^  3?    33"  aligning  their  stoC,  or  f  ron.  voting 

ti^n^tSkpainst^c^^  ^^^^S^^tZ:^ 

recognizmg  a  '^-f^J^^^^JJ,  ^^m  the  date  of  the  filing  of  the  bill, 
held  not  to  prevent  ^^  ?  tr^°^^^^^^^^^^^  ^^^  ^^,^  that  inasmuch  as  the 

Tl^'Z::^n^:"  probable    effect    of  the    injunction 

168  Pa.  St.  582  (189o  .  P  ^  ^^^  ^^^^^^  ^f  tl,e 

yit:  '338TS  )ln  tl^  -e  election,  and  the  consequent  control 

Fed.  Rep.  3^«  (i^-^-^,           .        ^^  ^j  the  affairs  of  the  company,  with- 

however,  on  ^^^  ^^^J  ^if  J^^^°'plp  out  allowing  the  shareholders  sought 

bill  was  dismissed.    See  6.  Fed.  Rep.  o^  ^^  ^^^,X,^  to  be  heard  in  their 

328  aS94).  defense,  the  injunction  ought 

4  Brown  r.  Pacific  Mail,  etc.  v^o.,  .J  ^                      xt;iia«h  Parish  14N.  J. 

■nio*^i,f   ^o=;,isfi7i.  S  C    4  Fed.  Cas.  to  be  denied.    Hillest'.rarisn,  i^x>.  »'• 

Blatchf.  52a  (186/J,  b.  ^.,  *  ^^  ^^^  ^^^^2).    It  appears,  however, 


420. 

1163 


G17.] 


ELECTIONS  —  CORPORATE   MEETINGS.         [cil.  XXXVII. 


upon  with  favor  by  the  courts.^  Where  an  injunction  has  been 
obtained  on  false  affidavits  and  bill  to  control  an  election,  and* 
the  proceedings  in  court  are  discontinued  immediately  after 
the  election,  the  court  will  summarily  vacate  and  set  aside  the 
election  by  reason  of  the  abuse  of  the  process  of  the  court  and 
the  fraud  on  the  rights  of  the  stockholders.-  An  appeal  from 
an  injunction  against  voting  certain  stock  will  be  dismissed 
where  the  parties  may,  under  a  statute,  apply  to  the  court  to 
review  the  election  on  affidavits.' 

§  GlY.  Illegal  or  fraudulent  elections  —  The  remedies  of  quo 
warranto  and  mandamus. —  There  are  various  ways  in  which 
an  illegal  or  fraudulent  election  of  directors  or  managers  of  an 
incorporated  company  can  be  investigated  and  remedied.  The 
natural  and  proper  remedy  in  all  cases  is  the  old  remedy  of 
quo  wa7'ranto  to  test  the  title  to  office.  In  England  quo  vaar- 
ranto  does  not  lie  to  test  the  legality  of  the  election  of  officers 
of  a  private  corporation,  but  in  this  country  a  contrary  rule 
prevails.*    An  information  in  the  nature  of  a  quo  warranto  is 


that  counsel  stipulated  for  a  new- 
election  in  case  the  complainant  suc- 
ceeded, and  the  court  so  ordered. 

1  "The  practice  of  procuring  an  in- 
junction and  serving  it  after  the 
meeting  had  assembled  is  not  to  be 
commended,  and  should  only  be  tol- 
erated in  cases  where  the  right 
thereto  is  clearly  established."  Re 
Rochester,  etc.  Co.,  40  Hun,  172  (1886). 

2  Putnam  v.  Sweet,  1  Chand.  (Wis.) 
286,  334  (1849). 

3  Where  an  injunction  against  post- 
poning an  election  is  granted,  and 
the  election  is  held,  and  the  next 
day  an  appeal  is  taken  from  the  in- 
junction order,  the  appeal  will  be 
dismissed,  inasmuch  as  the  parties 
have  the  remedy  under  the  statute 
of  applying  to  the  court  to  review 
the  election.  Camden,  etc.  R.  R,  v. 
Elkins,  37  N.  J.  Eq.  273  (1883).  Where 
an  injunction  against  voting  partic- 
ular stock  has  been  refused,  and  the 
election  Jield,  an  appeal  will  be  dis- 
missed. Foster  v.  Smith,  47  Pac.  Rep. 
591  (Cal.,  1897). 


*  Commonwealth  v.  Arrison,  15  Serg. 
&  R.  (Pa.)  127  (1827),  a  case  of  church 
trustees;  Commonwealth  v.  Graliam, 
64  Pa.  St.  339  (1870),  the  same;  Peo- 
ple V.  Tibbits,  4  Cow.  358  (1825),  an 
insurance  company;  State  v.  Ferris, 
45  Mo.  183  (1869),  college  tnistees; 
Creek  v.  State,  77  Ind.  180  (1881), 
church  tiustees;  State  v.  Kupers- 
forte,  44  Mo.  154  (1869),  an  insurance 
company;  State  v.  McDaniel,  22  Ohio 
St.  354  (1872),  directors  of  a  railroad; 
Commonwealth  v.  Smith,  45  Pa.  St. 
59  (1863);  High,  Extraord.  Remedies, 
§  653,  etc.;  Shortt,  Informations,  129 
(Eng.,  1887);  Commonwealth  v.  GiU, 
3  Whart.  (Pa.)  228  (1837),  giving  the 
pleadings  herein;  People  v.  Albany, 
etc.  R.  R.,  55  Barb.  344^  354  (1869). 
Quo  warranto  is  a  proper  remedy  to 
determine  the  right  of  a  relator 
claiming  to  have  been  elected  as  a 
director  of  a  corporation.  Attorney- 
General  V.  Looker,  69  N.  W.  Rep.  929 
(Mich.,  1897).  For  a  clear  statement 
of  the  nature  of  an  information  in 
the  nature  of  a  quo  icarranto  filed 


1164 


CH.  XXXVII.]  ELECTIONS COKPORATE    MEETINGS.  [§  GIS. 

not  allowed  of  course,  but  is  a  subject  for  the  exercise  of  a  sound 
discretion.'  Mandamus,  instead  of  quo  warranto^  lies  when  the 
title  dejure  has  been  adjudicated.^  In  "West  Virginia  mandamus 
is  held  to  be  the  proper  remedy  to  place  a  dejure  director  in 
the  place  of  the  de  facto  director,  and  service  on  the  latter  may 
be  by  publication ; '  and  mandamus  lies  at  the  instance  of  a  cor- 
poration to  compel  illegally-elected  directors  to  turn  over  the 
books  to  the  legally-elected  directors.*  Under  the  l^evada  stat- 
ute mandamus  lies  at  the  instance  of  a  superintendent  to  oust 
a  person  who  is  illegally  holding  that  office.*  The  courts  of 
one  state  will  consider  the  Ijoard  of  directors  as  legally  elected 
until  the  com-ts  of  the  state  wherein  the  company  was  organ- 
ized decide  to  the  contrary.® 

§  618.  Illegal  or  fraudulent  elections — TJie  remedy  lij  in- 
junction against  directors  acting,  and  the  remedy  of  a  suit  in 
eqliity  2vhc7'e  the  validity  of  the  election  arises  incidentally. — 
A  court  of  equity  may,  prior  to  the  holding  of  an  election,  en- 
join such  election.'^  But  a  different  rule  prevails  after  the  elec- 
tion has  actually  taken  place.  A  court  of  equity  has  no  inherent 
power  or  jurisdiction  to  entertain  a  bill  for  the  purpose  of  re- 
viewing a  corporate  election  and  ousting  the  parties  who  claim 
to  have  been  elected.^ 

by  a  claimant  for  an  office  in  the  '  Cross  v.  West  Va.  etc.  R'y,  35  W. 

name  of  the    attorney-general,  see  Va.  174  (1891).    Compare  S.  C,  34  W. 

Gibbs  V.  Somei-s  Point,  49  N.  J.  L.  515  Va.  742,  and  People  v.  New  York,  etc. 

(1887).    A  stockholder  may  institute  Asylum,  122  N.  Y.  190  (1890). 

quo    warranto    proceedings.      Com-  ^  American  R'y  Frog  Co.  u  Haven, 

raon  wealth  v.  Stevens,  168  Pa.  St.  582  101  Mass.  398  (1869). 

( 1895).    See  also  §  713,  infra,  concern-  s  state  v.  Cronan,  49  Pac.  Rep.  41 

ing  de  facto  officers.  (Ner.,  1897). 

1  State  V.  Lehre,  7  Rich.  L.  (S.  C.)  e  State  v.  Cronan,  49  Pac.  Rep.  41 
234  (1854).    Tlie  court  in  its  discre-  (Nev.,  1897). 

tion  may,  in  Minnesota,  decline  to  ^  See  §  616,  supra. 

allow  a  private  person  to  file  an  in-  8  xhe  title  of  de  facto  officers  to 

formation  in  the  nature  of  quo  war-  their  office  cannot  be  tested  by  au 

ranto  to  test  tlie  title  to  office  of  injunction  or  bill  in   equity.     Quo 

directors.     Whitcomb  v.  Lockerby,  warranto  or  a  proceeding  under  the 

59  N.  W.  Rep.  495  (Minn.,  1894).     Quo  statute  is  necessary.    People  v.  Al- 

icarranto  does  not  lie  against  a  su-  bany,  etc.  R  R.,  57  N.  Y.  161,  171 

perintendent  who  may  be  removed  (1874).    A  court  of  equity  has  no  ju- 

at  any  time  by  the  directors.    State  risdiction  to  decide  which  board  of 

V.  Cronan,  49  Pac.  Rep.  41  (Nev..  1897).  directors  was  elected.  Kean  v.  Union 

2  Leeds  v.  Atlantic  City,  52  N.  J.  L.  Water  Co.,  52  N.  J.  Eq.  813  (1895), 
332  (1890).  rev'g  Union  Water  Co.  v.  Kean,  53 

1165 


S   ^18.] 


ELECTIOXS CORPORATE   MEETINGS.         [CH,  XXXVII. 


But  where  there  has  been  a  palpable  fraud  practiced  in  the 
election,  and  usurpers  are  about  to  take  possession  of  the  prop- 


N.  J.  Eq.  111.  An  ex  parte  injunc- 
tion against  a  director  continuing 
iiis  duties  as  a  director  is  void  in  New 
York  as  being  contrary  to  tlie  stat- 
ute. Ciaucimino  v.  Man,  20  N.  Y. 
Supp.  703  (1892).  Where  there  are 
two  rival  boards  of  directors,  each 
«;laiming  to  have  been  legally  elected, 
the  remedy  of  one  against  the  other 
is  not  an  injunction,  but  a  quo  war- 
ranto proceeding.  Carmel,  etc.  Co. 
V.  Small,  47  N.  E.  Rep.  11  (Ind.,  1897). 
No  injunction  lies  against  officers 
acting  as  such,  on  the  ground  of 
illegal  election.  Quo  warranto  lies. 
Hartt  V.  Harvey,  32  Barb.  55  (I860). 
Equity  has  no  power,  except  as  inci- 
dental to  other  relief,  to  review  an 
election.  Perry  v.  Tuskaloosa,  etc. 
Co.,  93  Ala.  3G-1  (1891);  HuUman  v. 
Honcomp,  5  Ohio  St.  237  (ISoo);  New 
England,  etc.  Co.  v.  Phillips,  141  Mass. 
535  (188G),  where  an  injunction  was 
sought  to  restrain  persons  from  act- 
ing as  directors  who  had  been  ille- 
gally elected.  Allen, J.:  "This course 
is  open  to  the  objection  that  suits  to 
remove  or  to  institute  corporation 
officers  do  not  belong  to  the  original 
jurisdiction  of  chanceiy;  and  that 
the  right  to  be  such  officer  cannot,  in 
general,  and  in  the  absence  of  special 
legislation  allowing  this  remedy,  be 
tested  by  means  of  an  injiinction." 
1  Pomeroy,  Eq.,  §  171 ;  3  Pomeroy,  Eq., 
§  1345.  See  also,  to  same  effect,  Owen 
r.  Whitaker,  20  N.  J.  Eq.  122  (1869), 
where  the  legality  of  the  first  elec- 
tion was  the  only  thing  involved; 
Hughes  V.  Parker,  20  N.  H.  58  (1849); 
Johnston  v.  Jones,  23  N.  J.  Eq.  216 
(1872);  Mickles  v.  Rochester  City 
Bank,  11  Paige,  118  (1844);  Mechanics' 
Nat.  Bank  v.  Burnet  Mfg.  Co.,  32  N.  J. 
Eq.  236  (1880),  where  a  third  person 
suing  the  corporation  sought  to  have 
its  answer  stricken  out  becavise  the 


officers  were  not  duly  elected;  Fad- 
ness  V.  Braunborg,  73  Wis.  257  (1889), 
a  religious  corporation  case;  Wands- 
worth, etc.  Co.  V.  Wright,  18  W.  R. 
728  (1870),  where  fraud  was  charged 
on  the  part  of  the  inspectors;  David- 
son V.  Gi-ange,  4  Grant,  Ch.  (U.  C.)  377 
(1854),  where  the  court  refused  an  in- 
junction, but  said  in  a  dictum  that 
the  election  might  be  set  aside  on  ac- 
count of  fraudulent  voting  of  shares 
subscribed  for  by  "dummies"  to  get 
control  of  the  election  on  the  prom- 
ise that  the  subscriptions  would  after- 
wards be  canceled.  Where  by  reason 
of  an  injunction  against  voting  cer- 
tain stock  the  meeting  is  not  held  at 
tlie  time  specified  in  the  notice,  but 
later  in  the  day  a  minority  meet  and 
adjourn  to  the  next  day  and  conceal 
such  adjovirnment  from  the  majority 
and  elect  directors,  tlie  court  will  oust 
them  from  office.  State  v.  Bonnell, 
35  Ohio  St.  10  (1878).  Self-constituted 
directors  without  a  regular  organized 
meeting  have  not  a  good  title  to  their 
office;  and  where  subsequently  the 
incorporators  elected  other  directors, 
the  latter  may  cause  to  be  stayed  an 
action  brought  in  the  name  of  the 
company  by  the  self-constituted  di- 
rectors. John  Morley  Bldg.  Co.  v. 
Barras,  [1891]  2  Ch.  386.  The  Penn- 
sylvania statute  giving  the  court 
power  to  control  and  supervise  elec- 
tions where  fraud,  violence,  or  unlaw- 
ful conduct  prevents  a  fair  and  honest 
election  does  not  sustain  an  injunc- 
tion obtained  by  majority  stockJiold- 
ers  —  who  withdrew  from  the  annual 
meeting  and  held  a  separate  election 
because  a  stock  vote  was  not  allowed 
on  the  election  of  chairman  —  against 
the  board  elected  by  the  minoritj-. 
Quo  iLxirranto  is  the  only  remedy. 
Jenkins  v.  Baxter,  160  Pa.  St  19i> 
(1894). 


1166 


CH.  XXXVII.]         ELECTIONS COKPORATE   MEETINGS. 


[§  018. 


erty  in  violation  of  all  justice,  a  court  of  equity  Tvill  enjoin  tliem 
from  doing  so.^ 

The  de  facto  directors  may  enjoin  the  claimants  to  office 
from  attempting  to  take  forcible  possession  or  exercising  the 
duties  of  the  office.^    If  the  validity  of  a  corporate  election 


1  Where  the  owners  of  the  whole 
stock  sell  it,  and  part  of  them  resign 
and  place  the  representatives  of  the 
vendee  in  possession,  and  those  who 
remain  in  the  board  do  so  at  his  re- 
quest, but  transfer  to  him  their  cer- 
tificates of  stock,  and  then  subse- 
quently, when  the  time  for  the 
annual  meeting  has  gone  by,  they 
publish  a  notice  of  a  meeting  and 
conceal  the  notice  from  him,  and 
elect  a  board,  and  attempt  to  take 
possession,  a  court  of  equity  will  en- 
join them.  Johnston  v.  Jones,  23 
N.  J.  Eq.  21G  (1872).  Equity  is  not 
obliged  "to  leave  the  corx^oration 
and  its  lawful  directors  to  the  rem- 
edy at  law,  always  taking  at  least 
months,  and  in  the  meantime  suffer 
the  road  to  be  operated  and  perliaps 
ruined  by  the  depredators,  because 
they  claim  to  be  directors  de  facto  or 
dejure,"  Johnston  v.  Jones,  23  N.  J. 
Eq.  216  (1872).  In  Clarke  v.  Central, 
etc.  Co.,  54  Fed.  Rep.  556  (1893),  it  ap- 
peared that,  the  board  of  directors 
having  been  illegally  elected,  "the 
voting  power  of  the  stock  was  en- 
joined, a  new  election  ordered,  and 
the  court  appointed  receivers,  not 
for  the  piupose  of  subjecting  the 
properties  to  the  claims  of  creditors, 
but  to  protect  and  to  preserve  them 
until  they  could  be  turned  over  to  a 
legally-elected  board  of  directors,  as 
proper  trustees,  who  would  have  the 
right  under  the  law  to  take  and  op- 
erate tlie  railroad  in  the  interest  of 
all  concerned.  The  court  further  di- 
rected that,  when  this  new  election 
should  have  taken  place,  said  new 
board  of  directors  might  apply  to  the 
court  to  have  the  property  returned 
to  the  couti'ol  of  the  properly  con- 


stituted oflScers  of  the  corporation," 
In  this  case,  however,  on  the  final 
hearing,  the  bill  was  dismissed.  See 
62  Fed.  Rep.  328  (1894).  Where  a 
corporation  has  an  authorized  capital 
of  $5,000,  but  only  $3,500  are  directed 
by  the  stockholders  to  be  issued,  it 
is  illegal  and  fraudulent  to  issue  the 
remaining  authorized  capital  with- 
out giving  the  existing  stockholders 
a  prior  riglit  to  subscribe  to  such  in- 
creased capital  pro  rata.  Directors 
elected  by  reason  of  such  illegal  issue 
will  be  enjoined  from  acting,  where 
they  are  about  to  change  the  whole 
policy  of  the  company.  Humboldt, 
etc.  Assoc.  V.  Stevens,  34  Neb.  528 
(1892),  A  suit  in  Kentucky  between 
rival  claimants  to  office  to  have  an 
adjudication  as  to  the  same  and  to 
have  a  receiver  does  not  prevent  one 
of  the  parties  from  foreclosing  a 
mortgage  on  the  corporate  property 
in  another  state  and  having  a  re- 
ceiver thereof  appointed.  Kelly  v. 
Mitchell,  98  Ky.  218  (1895).  A  suit 
by  a  state  to  enjoin  the  defendant 
railroad  company  from  being  man- 
aged by  directors  elected  by  the 
votes  of  stock  of  the  company  owned 
by  a  foreign  railroad  corporation 
ultra  vires,  and  also  to  declare  such 
votes  and  elections  void,  and  also  for 
a  receiver,  or  in  lieu  of  all  this  for  a 
forfeiture  of  the  charter,  is  not  de- 
murrable. State  V.  Port  Royal,  etc. 
R'y,  45  S.  C,  470  (1895),  For  other  in- 
stances in  wliich  a  court  of  equity 
interfered,  see  §§  593  and  616,  supra. 
2  Reis  V.  Rohde,  34  Hun,  161  (1884). 
Athough  there  is  a  conti-oversy  as  to 
the  legality  of  an  election,  yet  the 
newly-elected  president,  who  takes 
peaceable  possession  of  the  property, 


1167 


§  619.] 


ELECTIONS COEPORArE   MEETINGS.         [cil.  XXXYII. 


arises  incidentally  in  connection  with  a  suit  in'  equity,  the  court 
-will  pass  upon  the  election.  This  may  occur  where  a  bill  is 
filed  to  enjoin  a  forfeiture  of  stock  ^  or  a  consolidation  of  cor- 
porations,- but  not  in  a  suit  to  enjoin  the  sale  of  stock,'  nor  in 
a  suit  to  compel  the  directors  to  turn  over  the  property.* 

A  court  of  equity  may  appoint  a  master  to  hold  an  election 
of  a  corporation  when  by  reason  of  fraud,  violence,  or  unlaw- 
ful conduct  on  the  part  of  some  stockholder  a  fair  election  can- 
not otherwise  be  held.*  Where  a  claimant  to  the  office  of  the 
director  has  with  violence  illegally  taken  possession  of  the  cor- 
porate property,  the  court  may  appoint  a  custodian  of  the  prop- 
erty, and  direct  the  custodian  to  deliver  to  the  proper  officers." 

§  6 J  9.  Illegal  or  fraudulent  elections  —  Statutory  remedy  by 
jyetition  to  a  court  of  equity. —  In  consequence  of  the  delays  and 
difficulties  attending  the  remedy  of  quo  warranto,  statutes  have 
been  enacted  in  many  of  the  states  which  give  courts  of  equity 
the  power  to  review  corporate  elections  at  the  instance  of  the 


can  enjoin  tlie  old  president,  who 
claims  to  hold  over  and  who  has 
forcibly  taken  possession.  Toronto, 
etc.  Co.  V.  Blake,  2  Out.  Rep.  (Can.) 
175  (1882). 

1  In  an  injunction  suit,  brought  by 
a  stockholder  to  prevent  the  corpo- 
rate officers  from  forfeiting  stock, 
the  court  will  pass  upon  the  legality 
of  an  election  of  directors,  but  of 
course  will  not  and  cannot  remove 
them.  Moses  v.  Tompkins,  84  Ala. 
613  (1888);  Garden,  etc.  Co.  v.  McLis- 
ter,  L.  R.  1  App.  Cas.  39  (1875). 

2  Where  the  directors  are  about  to 
make  an  illegal  consolidation,  and  a 
stockholder  files  a  bill  to  enjoin  it, 
the  court  will  pass  also  upon  the  le- 
gality of  the  election  of  the  de  facto 
directors.  Nathan  v.  Tompkins,  83 
Ala.  437  (1887). 

3  In  an  action  to  enjoin  the  sale  of 
stock  by  a  corporation  tmder  a  lien 
which  the  corporation  has  upon  the 
stock,  a  court  of  equity  will  not  in- 
quire into  the  regularity  of  the  elec- 
tion of  the  directors.  Elliott  v.  Sib- 
ley, 101  Ala.  344  (1893). 

*  The  legality  of  the  election  of  di- 

1168 


rectors  cannot  be  tested  by  a  suit  in 
equity,  even  though  the  suit  is  osten- 
sibly brought  to  compel  the  directors 
to  turn  over  the  property.  Bedford 
Springs  Co.  v.  McMeen,  161  Pa.  St. 
639  (1894).  Where  newly-elected  di- 
rectors bring  suit  in  the  name  of  the 
company  for  the  corporate  books, 
the  legality  of  the  election  cannot  be 
questioned  by  way  of  defense.  The 
question  of  such  legaUty  can  be 
raised  only  by  a  direct  proceeding 
for  that  purposa  Austin,  etc.  Co.  v. 
GemmelC  10  Ont  Rep.  (Can.)  696 
(1886). 

5  Tunis  V.  Hestonville,  etc.  R.  R.,  149 
Pa.  St.  70  (1892).  A  decree  to  the 
effect  that  stockholders  entitled  to 
vote  were  forcibly  prevented  from 
voting,  and  to  the  effect  that  a  com- 
missioner should  conduct  another 
election  and  report  to  the  court  the 
vote  and  the  objections,  is  not  a  final 
decrea  National,  etc.  Co.  v.  United, 
etc.  Co.,  36  AtL  Rep.  724  (Pa.,  1897). 
See  also  §  612,  supra. 

6  Ciancimino  v.  llan,  20  N.  Y.  Supp. 
702  (1892). 


GH.  XXXVII.]        ELECTIONS COEPOKATE   MEETINGS. 


[§  619. 


parties  aggrieved.^  Such  a  statute  is  found  in  Kew  York,  New 
Jersey,  California,  and  other  states.^  By  these  statutes  the 
court,  sitting  as  a  court  of  chancery,  is  empowered  to  review 
corporate  elections,  and  to  grant  such  relief  as  the  particular 
circumstances  and  justice  of  the  case  seem  to  require.^ 

Such  a  statute  has  proven  to  be  one  of  the  wisest  and  best 
that  a  legislature  ever  enacted  in  regard  to  corporations.  It 
f urnishes°  a  speedy,  simple,  just,  and  effective  remedy  for  all 
complaints,  and  is  free  from  useless  technicalities  and  expense. 
Various  decisions  under  these  statutes  are  given  in  the  notes 
below.*    Although  by  the  award  of  arbitrators  stock  is  trans- 


i  See  Part  VII,  infra. 

2SeePart  Vn,in/ra. 

3  Brewster  v.  Hartley,  37  CaL  15 
(1869) ;  Wright  v.  Central  California, 
etc.  Water  Co..  67  CaL  533  (1885);  Re 
St  Lawrence  Steamboat  Co.,  44  N.J. 
L.  539  (1883),  a  case  where  proxies 
were  illegally  rejected-  For  various 
cases  in  New  York,  showing  the  wide 


557  (1893),  holding  also  that  the  ajf 
plication  will  be  heard  by  the  co\irt 
Tinder  the  New  York  statute,  al- 
though another  party  is  joined  as 
petitioner  without  authority.  Where 
the  stockholders  disagree,  and  two 
elections  are  held  in  adjoining  rooms 
at  the  same  time,  the  court  may  con- 
sider the  ballots  cast  at  both  meet- 


powers  exercised  by  the  court  under    ings,  in  order  to  arrive  at  the  proper 


this  statute,  see  Ex  parte  Holmes,  5 
Cow.  4-26  (182G);  Schoharie  Valley  R. 
R  Case,  13  Abb.  Pr.  (N.  S.)  394  (1873); 
Ex  parte  Desdoity,  1  Wend.  98  (1828); 
Vandenburgh  v.  Broadway,  etc.  R  R., 
39  Hun,  348  (1883);  Strong  v.  Smith, 
15  Hun,  323  (1878);  Ex  parte  WiU- 
cocks,  7  Cow.  403(1837);  Mickles  v. 
Rochester  City  Bank,  11  Paige,  118 
(1844) ;  Re  Long  Island  R  R,  19  Wend. 
37  (1837).    In  this  case  an  election 
was  set  aside  because  the  directors 
had  illegally  declared  certain  shares 
forfeited  for  non-payment  of  instal- 
ments, and  refused  to  record  an  as- 
signment thereof  so  as  to  entitle  the 
assignee  to  vote.    Under  tliese  stat- 
utes an  election  may  be  declared  void 
by  reason  of  the  conspiracy,  frauds, 
or  trickery  of  a  part  of  the  stockhold- 
ers.   People  V.  Albany,  etc.  R  R,  55 
Barb.  344  (1869). 

*  As  to  a  proceeding  under  the  New 
York  statute  the  strict  rules  as  to  the 
reception  of  evidence  in  civil  actions 
do  not  apply.    Re  Argus  Co.,  138  N.  Y. 


result  of  the  election.    Re  Election, 
etc.   Grove  Cem   Co.,  39  AtL  Rep. 
1024  (N.  J.,  1898).    The  statute  au- 
thorizing a  court  of  chancery  to  re- 
view elections  and  order  new  ones 
does  not  authorize  the  courts  to  issue 
a  mandamus  to  the    inspectors  of 
election  in  regard  to  counting  votes 
by  proxy  and  amending  the  return. 
Peoples.  Simonson,61  Hun,  338  (1891). 
"  Surprise  and  fraud  upon  part  of  the 
electors  is  ground  for  avoiding  an 
election,"  People  v.  Albany, etc.  R.  R, 
55  Barb.  344,  363  (1869).    In  this  case 
the  place  of  an  election  was  filled  by 
one  party  with   roughs  as  proxies 
brought  there  for  purposes  of  intimi- 
dation, and  for  voting  on  viva  voce 
votes,  and  for  crowding  out  the  reg- 
ular voters.    People  v.  Albany,  etc. 
R  R,  55  Barb.  379  (1869).     In  this 
case  also,  under  tlie  New  York  stat- 
ute, in  an  equitable  suit  brought  by 
the  state,  the  court  appointed  a  re- 
ceiver and  issued  an  injimction  pend- 
ing- the    suit,  and  finally  declared 


74 


1169 


§  620.] 


ELECTIONS COKPOKATE   MEETINGS.         [CU.  XXXVII. 


ferred  to  a  certain  party,  and  such  party  votes  the  stock  at  the 
next  election,  and  thereafter  the  award  is  set  aside  and  the 
stock  retrans ferred,  yet  the  party  so  deprived  of  the  stock 
durino:  the  election  cannot  have  the  election  set  aside.^ 

§  620.  Who  may  complain  of  an  illajal  election  — A  neiv  elec- 
tion is  not  granted  if  the  result  tvill  he  the  same. —  Only  a  share- 
holder whose  rights  have  been  infringed  and  who  is  equitably 
entitled  to  complain  may  institute  the  proceedings.  Accord- 
ingly, a  transferee  of  one  of  the  shareholders  who  participated 
in  the  fraud  will  not  be  heard  to  impeach  the  result  of  that 

elected  persons  who  would  Lave  re- 
ceived the  most  votes  of  all  votes 
that  had  been  legally  cast,  although 
there  had  been  two  elections  held  at 
the  same  time  by  the  two  parties  at 
different  places  in  the  same  town. 
Under  the  New  York  statute  making 
the  transfer  book  conclusively  bind- 
ing upon  the  inspectors  of  election, 
the  inspectors  cannot  exclude  tlie 
vote  of  the  registered  stockholder 
although  he  holds  the  stock  merely 
as  pledgee;  but  under  the  New  York 
statute  allowing  the  courts  to  sum- 
marily review  the  election,  the  court 
has  power  to  go  back  of  the  transfer 
book  and  set  the  election  aside,  where 
the  statute  gave  the  pledgor  the  right 
to  vota  Strong  v.  Smith,  15  Him, 
223  (1878).  «  Where  no  aUegation  of 
fraud  or  deceit  is  made,  the  court 
cannot  interfere  under  the  power 
vested  in  it  by  the  Revised  Statutes 
to  nullify  or  set  aside  the  will  of  the 
shareholders  as  expressed  by  their 
votes."  Re  Wellman,  etc.  v.  Cianci- 
mino,  etc.  Co.,  N.  Y.  L.  J.,  Jlay  13, 
1890.  Although  officers  in  possession 
of  the  corporate  property  and  man- 
agement may,  in  proceedings  to  have 
defendant's  election  declared  illegal, 
obtain  an  injunction  against  the  de- 
fendant's interfering  with  the  man- 
agement of  property,  yet  where  the 
plaintiff  obtained  the  property  and 
management  by  violence  on  the  day 
of  the  commencement  of  the  suit,  not- 
withstanding an  injunction  against 

1170 


such  violence,  his  injunction  wiD  be 
dissolved.  Ciancimino  r.  Man,  20  N.  Y. 
Supp.  702  (1892).  The  statutory  power 
of  the  court  to  inquire  into  the  legality 
of  corporate  elections  does  not  apply 
to  the  "  appointment "  of  a  director 
by  the  board  to  fill  a  vacancy  due  to 
a  resignation.  Wickersham  v.  Brit- 
tan,  93  CaL  34  (1892).  Nor  does  such 
a  statute  enable  the  director  so  "  aj>- 
pointed"  to  settle  the  question  of 
the  legality  of  the  election  by  apply- 
ing to  the  court.  Wickersham  v. 
Murphy,  93  CaL  41  (1892).  Nor  does 
it  apply  to  the  legality  of  an  election 
of  the  president  by  the  directors. 
Re  Caguey,  N.  Y.  L.  J.,  Sept  15, 1891. 
Where  two  groups  of  stockholders 
are  contesting  for  control,  the  ex- 
penses of  the  litigation  shoiild  not 
be  borne  by  the  company.  Wicker- 
sham V.  Crittenden,  106  CaL  329  (1895\ 
Although  the  inspectors  admitted 
votes  on  insufficient  evidence,  yet  if 
additional  and  sufficient  evidence  is 
presented  to  the  court  the  election 
wiU  stand.  Conant  v.  MUlaudon,  5 
La.  Ann.  542  (1850).  The  corporation 
itself  may  apply  imder  the  statute 
for  an  order  to  the  effect  that  the 
persons  declared  elected  were  legally 
elected.  Re  Pioneer  Paper  Co.,  36 
How.  Pr.  Ill  (1865).  In  attacking  the 
validity  of  a  vote  the  burden  of  proof 
is  on  him  who  attacks  it.  Re  Indian, 
etc.  Co.,  L.  R  26  Ch.  D.  70  (1884). 
1  Re  Leslie,  58  N.  J.  L.  609  (1896). 


OH.  XXXTII.]        ELECTIONS  — OOEPOEiTE  MEETINGS.  [§  C20. 

fraud.'  And  in  general  the  plaintiff,  a  relator  seeking  to  set 
a^de  a  corporate"  election,  is  barred  of  reUef  if  he  inmseU  w^ 
guilty  of  misconduct  or  neglect,  or  if  it  appears  that  he  has  sub 
fequently  acquiesced  with  knowledge  of  the  facts.'  I  isapnn 
ciple  of  law,;iso,  that  the  legality  of  an  election  wiU  not  be 
inquired  into  upon  the  ground  that  iUegal  votes  were  cast  un 
less  those  votes  were  chaUenged  at  the  election  at  the  time 

when  they  were  cast."  .  „i„Jt,r 

■Where  a  candidate  at  a  corporate  election  receives  a  majority 
of  the  votes  cast,  the  receipt  of  illegal  votes  in  his  ^vor  does 
not  defeat  his  election.'  An  election  will  not  be  =«*  ^^i<l«  ^J^' 
be  shown  that  after  throwing  out  the  invalid  votes  the  officers 
declared  elected  would  still  have,  according  o  he  return,  a 
valid  majority  of  the  votes  cast-  and  a  new  election  w  11  not 
be  orderid  /after  rejecting  aU  the  iUegal  votes,  and  after  ad- 


1  Be  Syracuse,  etc.  R  R.  M  N.  Y.  1 

/-|QOQ\ 

2Wiltz  V.  Peters,  4  La.  Ann.  339 
(1849),  where  a  commissioner  of  elec- 
tion attacked  the  legality  of  votes 
which  he  himself  had  admitted  as 
commissioner. 

3  Re  Chenango,  etc.  Ins.    Co.,   19 
Wend.  635  (1839),  wherein  the  court 
said:    "It  is  quite  clear,  generally 
speaking,  that  an  illegal  vote  not 
challenged    will   not  invalidate  an 
election,  nor  will  even  be  inquired 
into."    See  also  Schoharie  Valley  R. 
R  Case,  12  Abb.  Pr.  (N.  S.)  394  (1872). 
A  stockholder  who  attends  the  elec- 
tion and  votes,  and  does  not  object  to 
otliers    voting,  although  he  knows 
they  are  doing  so  in  violation  of  a 
by-law,  cannot  himself  afterwards 
object  to  the  legality  of  the  election. 
State  V.  Lehre,  7  Rich.  L.  iS.  C.)  234 
(1854).    See  also  People  v.  Robinson, 
64  CaL  373  (1883) ;  Re  Long  Island,  etc 
R  R,  19  Wend.  37,  44  (1837),  and 
g§  599,  594,  mprcu    The  failure  of  a 
stockholder  to  attend  the  stockhold- 
ers' meeting  is  not  a  waiver  of  his 
right  to  object  to  the  acts  of  the 
meeting  as  ultra  vires,  even  though 
the   notice  of  the    meeting    stated 


what  was  to  be  done.    McFadden  v. 
Leeka,  48  Ohio  St.  513  (1891). 

4  Re  Argus  Co.,  138  N.  Y.  557  (1893). 

5  People  V.  TuthiU,  31  N.  Y.  550 
(1864);  Ex  parte  Murphy,  7  Cow.  153 
(1827);  Re  Chenango,  etc.  Ins.  Co.,  19 
Wend.  635  (1839);  State  v.  Lehre,  7 
Rich.  L.  (S.  C.)  234,  325  (1854);  Mc- 
Neeley  v.  Woodruff,  13  N.  J.  L.  353 
(1833);    First  Parish  v.  Steams,  38 
lilass.  148  (1838);   School  District  v. 
Gibbs,   56   Mass.    39    (1848);    Christ 
Church  V.  Pope,  74  Mass.  140  (1857). 
The  court  will  not  consider  the  legal- 
ity or  illegality  of  votes,  where  those 
votes  wiU   not   change   the  result 
whatever  the  decision  might  be.    Co- 
nant  v.  Millaudon,  5  La.  Ann.  542 
(1850).    Where  the  officers  declared 
elected  received  a  majority  of  the 
ori<-inal  stock  as  well  as  a  majority 
of  the  alleged  illegal  increased  stock, 
they  will  not  be  ousted.    Byers  v. 
Rollins,  13  Colo.  22  (1889).    Where, 
after  rejecting  aU  votes  illegally  cast 
by  proxy,  tliere  is  still  a  maoonty 
for  the  persons  who  were  declared 
elected,  the  court  wiU  not  disturb 
the    election.    Craig   v.  First  Pres. 
Churcli,88Pa.St.42(1878). 


§  620.] 


ELECTIONS COKPOEATE   MEETINGS.         [CH.  XXXVIT. 


mitting  the  opposition  legal  votes  whicli  were  rejected,  it  still 
appears  that  the  directors  returned  as  elected  had  a  majority 
of  the  Yotes.^ 

•  The  court  may,  in  the  exercise  of  its  equity  powers,  declare 
a  candidate  elected  who  received  only  a  minority  of  the  votes 
actually  cast,  when  such  candidate  plainl}'-  received  a  majority 
of  all  the  legal  votes  cast.*    "Where  quo  warranto  proceedings 


1  McNeeley  v.  Woodruff,  13  N.  J.  L. 
852  (1833);  Ex  parte  Desdoity,  1 
Wend.  98  (1828). 

2  Where  the  whole  number  of  votes 
is  five  hundred  and  ninety -three,  and 
tliere  were  present  five  hundred  and 
thirty-seven,  and  the  candidates  de- 
clared not  elected  received  three  hun- 
dred votes,  one  hundred  and  fifty  of 
which  were  illegally  rejected  by  the 
inspectors,  the  court,  under  the  New 
Jersey  statute,  declared  those  candi- 
dates elected  and  did  not  order  a 
new  election.  Re  St.  Lawrence  Steam- 
boat Co.,  44  N.  J.  L.  529  (1882);  Mons- 
seaux  V.  Urquhart,  19  La.  Ann.  482 
(1867);  Ex  parte  Desdoity.  1  Wend. 
98  (1828);  Vandenburgh  v.  Broadway 
E'y,  29  Hun,  348  (1883);  Downing  u. 
Potts,  23  N.  J.  L.  66,  84  (1851),  where 
an  election  was  set  aside  and  a  new 
one  ordered  because  votes  were  ille- 
gally rejected  on  one  side  and  ille- 
gally accepted  on  the  other,  which 
changed  the  result,  but  two  directors 
who  were  on  both  tickets  and  re- 
ceived all  the  votes  cast  were  held 
elected.  The  court  said  that  unless 
the  legal  votes  rejected  and  the  ille- 
gal votes  received  were  sufficient  to 
change  the  result  of  the  election, 
the  election  would  not  be  set  aside. 
Hence  where  of  two  thousand  three 
hundred  and  ninety-two  votes  for 
certain  candidates  seven  hundred 
and  ninety-nine  were  illegal,  and 
there  were  illegally  rejected  one 
thousand  eight  hvindred  and  ninety- 
four  votes  for  the  defeated  candi- 
date, who  received  forty-six  votes, 
the  court  ordered  a  new  election.    In 

11 


Re  Long  Island  R  R,  19  Wend.  87 
(1837),  where  the  votes  illegally  re- 
jected would  have  elected  other  per- 
sons, the  coiul;  set  the  election  aside, 
and  did  not  declare  elected  those  who 
would  have  been  elected  if  the  re- 
jected votes  had  been  counted,  there 
being  one  thousand  Seven  hundred 
votes  not  represented,  and  eleven 
thousand  that  were  disqualified  un- 
der the  statute,  Tlie  court  may  de- 
clare part  of  the  directors  illegally 
elected,  and  order  a  new  election  as 
to  them,  without  affecting  the  title 
of  the  others  to  their  offices.  People 
V.  Fleming,  59  Ilun,  518  (1891).  In 
Monsseaux  v.  Urquhart,  19  La.  Ann, 
482  (1867),  the  court  ousted  a  director 
and  declared  elected  another  person 
in  his  stead.  Where  the  presiding 
oflBcer  illegally  rejects  certain  votes, 
declares  certain  persons  elected,  and 
adjourns  the  meeting,  and  the  dis- 
satisfied party  continue  the  meeting 
and  hold  another  election,  the  coiui; 
will  consider  merely  the  question  as 
to  who  received  a  majority  of  the 
votes  which  were  legally  offered  to 
be  cast.  State  v.  Smith,  15  Oreg. 
98  (1887).  A  court  will  not  force 
upon  the  company  directors  who  are 
technically  entitled  to  be  declared 
elected,  certain  proxies  being  irregu- 
larly executed,  but  will  order  a  new 
election.  Harben  v.  Phillips,  L.  R.  23 
Ch.  D.  14  (1882).  A  statute  repealing 
the  statutory  remedy  in  chancery  to 
review  elections  operates  retrospect- 
ively as  well  as  prospectively.  Re 
New  York,  etc.  Co.,  23  Him,  615  (1881). 
In  New  Jersey  it  has  been  held  that. 


CH.  XXXVII.]        ELECTIONS  —  CORPOKATE   MEETINGS.  [§  621. 

are  pursued,  the  court  can  only  oust  tlie  party  who  is  in  office. 
It  cannot  declare  another  person  elected.^ 

§  621.  Bestrictions  on  the  right  to  vote.— It  is  legal  for  a 
corporation,  upon  issuing  preferred  stock  or  increased  capital 
stock,  to  impose  a  condition  that  such  stock  shall  not  have  any 
rio-ht'  to  vote.2    it  is  legal  also  for  the  corporation,  with  the 
as'^ent  of  aU  stockholders,  to  give  to  bonds  a  voting  power,'  al- 
though a  contrary  rule  has  been  reached  in  Illinois  under  a 
statute  to  the  effect  that  elections  shall  be  by  the  stockholders 
and  not  otherwise.*    There  is  no  rule  of  public  pohcy  which 
forbids  a  corporation  and  its  stockholders  from  making  any 
contract  they  please  in  regard  to  restrictions  on  the  voting 
power.    If  the  agreement  is  made  by  unanimous  consent  it  is 
legal      Such  restrictions,  however,  generally  are,  and  always 
should  be,  printed  on  the  certificates  of  stock,  so  that  a  purchaser 
shall  take  with  full  notice.  Thus,  a  by-law  passed  at  the  time  of 
the  organization  of  the  company  may  limit  the  number  of  votes 
which  a  single  stockholder  may  cast.*    Under  the  partnership 


if  the  illegally-rejected  votes  woiild 
have  given  the  defeated  candidate  a 
majority  of  all  the  stock,  the  court 
will  declare  him  elected,  and  will 
oust  the  one  that  was  declared 
elected.  Re  Cape  ]May,  etc  Co.,  in 
AtL  Rep.  191  (N.  J.,  1888). 

1  State  V.  McDaniel,  23  Ohio  St.  354 
(1872),  where  a  number  of  legal  votes 
were  rejected  which  would  have  suf- 
ficed to  elect  certain  directors  who 
without  such  votes  had  only  a  minor- 
ity of  the  votes  cast.  The  court  held 
that  persons  cannot  be  declared 
elected  and  inducted  into  office  upon 
quo  i(;arran<o  information;  People u 
Phillips,  1  Denio,  388  (1845),  making 
the  s:ime  ruling  as  to  a  church  cor- 
poration. 

2  It  is  legal,  upon  the  issue  of  pre- 
ferred stock,  to  provide  that  it  shall 
not  vote  at  corporate  elections.  Such 
a  provision  will  be  upheld.  Miller  v. 
Ratterman,  47  Ohio  St.  141  (1890). 
See  also  oh.  XVI,  §  269,  mpra. 

» In  State  v.  McDaniel,  22  Ohio  St. 
854  (1872),  the  bondlaolders  on  a  re- 


organization were  given  by  contract 
the  power  to  vote,  and  the  court  up- 
held such  contract  right.  In  Phillips 
V.  Eastern  R  R,  138  Mass.  122  (1884), 
the  court  passed  upon  a  statutory 
scheme  in  which  the  creditors  of  a 
raihroad  company,  by  the  terms  of  a 
mortgage,  chose  two-thirds  of  the  di- 
rectors and  the  stockholders  chose 
one-third  until  the  debt  was  reduced 
to  a  certain  figure. 

4  A  contract  and  by-law  giving  a 
voting  power  to  bondholders  at  cor- 
porate elections  is  void  as  against 
public  policy  and  the  statutes,  where 
the  statutes  prescribe  that  the  di- 
rectors shall  be  elected  by  the  stock- 
holders and  shall  not  be  elected  in 
any  other  manner.  Durkeo  v.  Peo- 
ple, 155  m.  354  (1895). 

6  A  by-law  may  provide  that  stock- 
holders shall  have  one  vote  for  each 
share  held  by  them  up  to  ten  shares, 
and  may  fix  the  proportion  which 
their  votes  shall  bear  to  their  shares 
above  that  number.  Commonwealth 
V.  DetwiUer,  131  Pa.  St.  614  (1890).  A 
73 


§  621.] 


ELECTIONS  —  COEPOKATE   MEETINGS.        [CH.  XXXVH. 


association  statute  of  Pennsylvania,  a  by-law  may  bo  enacted 
taking  away  the  voting  power  from  any  stock  which  is  sold, 
even  though  it  is  purchased  by  an  existing  member.^  All 
this  is  a  mere  matter  of  private  contract.  But  a  by-law  that 
all  purchasers  of  stock  shall  agree  that  the  stock  shall  be  voted 
in  favor  of  increasing  the  capital  stock  is  void  as  in  restraint  of 
trade  and  as  attempting  to  limit  the  voting  power  of  a  stock- 
holder.^ Where  the  charter  limits  the  number  of  votes  which 
one  stocldiolder  may  cast,  the  provision  cannot  be  evaded  by 
transfers  to  various  persons.  The  courts  will  enjoin  the  voting 
of  the  stock.' 


by-law  restricting  the  right  of  mem- 
bers of  a  church  to  vote  as  author- 
ized by  statute  is  void.  People  v. 
Phillips,  1  Denio,  388  (1845).  A  by-law 
restricting  the  right  of  electors  in  a 
town  to  vote  is  not  good.  Rex  v. 
Spencer,  3  Burr.  1827  (17GG);  Rex  v. 
Head,  4  Burr.  2515,  2521  (1770).  See 
also  g  4a,  supra;  People  v.  Kip,  4 
Cow.  382,  note  (1822),  holding  that  a 
corporation  has  no  power,  by  a  by- 
law, to  demand  an  oath  of  a  stock- 
holder in  order  to  test  his  qualifica- 
tions as  a  voter.  "Where  the  charter 
authorizes  the  depositors  and  stock- 
holders to  elect  new  members,  the 
directors  cannot  by  by-law  exclude 
the  former  from  elections  and  give  a 
vote  to  stockholders  only.  Common- 
wealth V.  GiU,  3  Whart.  (Pa.)  228 
(1837). 

» Carter  v.  Producers'  Oil  Co.,  38 
AtL  Rep.  571  (Pa.,  1897). 

2  McNulta  V.  Com  Belt  Bank,  164 
HL  427  (1897). 

3  Mack  V.  De  Bardeleben,  etc.  Co., 
90  Ala.  396  (1890).  Where  stock  has 
been  transferred  in  order  to  give  it 
a  vote,  the  transferrer  having  already 
all  the  stock  that  the  charter  allows 
one  stockholder  to  vote,  the  transfer 
being  merely  nominal  and  for  voting 
purposes  only,  an  injunction  will 
issue  against  its  being  voted.  Camp- 
bell V.  Poultney,  6  G.  &  J.  94  (1834); 
Webb  V.  Ridgely,  38  Md.  364  (1873). 


Although  a  person  transfers  stock  to 
another  in  order  to  evade  a  statute 
wliich  prohibits  any  one  stockholder 
from  voting  on  any  more  than  one- 
eighth  of  the  capital  stock,  yet  the 
person  to  whom  it  is  transferred  may 
make  a  valid  agreement  to  retrans- 
fer  the  same  and  the  court  will  en- 
force this  agreement,  Scott  v.  Scott, 
38  AtL  Rep.  5G7  (N.  H.,  1894).  Al- 
though the  charter  limits  each  per- 
son to  one  hundred  votes,  yet  a  per- 
son voting  a  hundred  votes  in  liis  own 
name  may  vote  another  hundred  as 
proxy  for  his  wife,  if  it  is  bona  fide 
her  property.  Conant  v.  MiUaudon, 
5  La.  Ann.  542  (1850).  In  England  a 
contrary  rule  prevails.  It  is  not  ille- 
gal to  transfer  or  procure  shares  be- 
fore a  meeting  so  as  to  multiply 
votes  at  it;  nor  can  votes  so  obtained 
be  disregarded.  They  may  be  cast. 
Pender  v.  Lushington,  L.  R  6  Ch.  D.  70 
(1877);  Stranton  Iron,  etc.  Co.,  L.  R 
16  Eq.  559  (1873);  Cannon  v.  Trask, 
L.  R  20  Eq.  669  (1875);  Moffatt  v.  Far- 
quhar,  L.  R  7  Ch.  D.  591  (1878);  and 
see  Northwest  Transp.  Co.  v.  Beatty, 
L.  R  12  App.  Cas.  589  (1887).  A  stat- 
ute which  confines  the  right  to  vote 
to  stockholders  who  are  citizens  of 
the  state  by  which  the  corporation 
is  chartered  cannot  be  evaded  by  col- 
orable transfers  of  shares  to  residents 
of  the  state  merely  for  the  purpose 
of  having  them  voted  upon.  State  v. 


1174 


CH.  XXXVII.]        ELECTIONS COKPOKATE   ]^EETIXGS. 


[§  (j21a. 


A  statute  prohibiting  a  stockholder  from  voting  "  whose  lia- 
bility is  past  due  and  unpaid  "  refers  to  a  subscription  liability 
and  not  to  a  commercial  liability.^  The  right  to  vote  is  some- 
times restricted  by  the  charter  to  those  who  are  registered 
stockholders.-  In  some  states  the  right  to  vote  is  limited  to 
those  "who  have  been  stockholders  of  record  for  a  certain  num- 
ber of  days  before  the  election.' 

§  621a.  Bestrictions  on  right  to  sell  stock,  and  contracts  against 
selling. — A  stockholder  has  a  right  to  sell  his  stock  at  any  time 
unless  he  has  specifically  agreed  otherwise,*  and  this  right  of  a 
stockholder  to  sell  and  transfer  his  stock  cannot  be  restrained 
by  a  by-law  of  the  corporation.*    An  agreement  or  contract, 


Hunton,  28  Vt.  594  (1850).  Such  a 
statute  would  now,  however,  proba- 
bly be  held  to  be  iinconstitutionaL 
See  §  813,  infra,  relative  to  statutes 
prohibiting  citizens  of  other  states 
from  being  trustees. 

1 U.  a  V.  Berry,  36  Fed.  Rep.  246 
(1888). 

*See  §  611,  supra. 

*See  §  611,  supra, 

*  "  "We  do  not  understand  that  one 
stockholder  is,  by  virtue  of  his  own- 
ership of  stock,  bound  to  continue  in 
the  holding  of  it  in  order  to  allow 
another  stockliolder  to  make  a  profit 
out  of  negotiations  then  pending." 
..."  "We  do  not  understand  that  a 
stockholder  is  under  obligations, legal 
or  moral,  to  sacrifice  his  personal  in- 
terests in  order  to  secure  the  welfare 
of  tl:3  corporation  of  wliich  he  is  a 
stockholder,  or  to  enable  another 
stockholder  to  make  gains  and  prof- 
its." Farmers'  L.  &  T.  Co.  v.  Chi 
cago.  eta  R'y.  163  U.  S.  31  (189G). 

5  Morgan  v.  Strut  hers,  131  U.  S.  246, 
252  (1889);  Feckheimer  v.  National 
Exch.  Bank,  79  Va.  80  (1884),  where 
a  by-law  prohibiting  transfers  except 
with  the  consent  of  the  directors  was 
declared  void;  Bank  of  Attica  v. 
Manufacturers',  etc.  Bank,  20  N.  Y. 
501  (ia59);  Orr  v.  Bigelow,  14  N.  Y. 
556  (185G);  Sargent  v.  Franklin  Ins. 
Co.,  25  Mass.  90  (1829);  Moore  v.  Bank 

11' 


of  Commerce,  52  Mo.  377  (1873).  A 
by-law  to  the  effect  that  a  transfer 
of  stock  shaU  be  allowed  only  upon 
consent  of  all  the  other  stockliolders 
is  void  as  in  restraint  of  trade.  Re 
Klaus,  67  Wis.  401  (1886).  As  regards 
corporate  liens  herein,  see  ch.  XXXI, 
supra.  See  also,  as  to  the  general  pol- 
icy of  the  Law  to  discountenance  re- 
strictions on  right  to  sell,  Moffatt  v. 
Farquhar,  L.  R.  7  Ch-  D.  591  (1878). 
In  this  case  the  directors  were  com- 
pelled to  allow  a  transfer  although 
the  purpose  of  the  transfer  was  to 
multiply  votes.  As  already  stated, 
a  by-law  that  no  stockholder  shall 
transfer  his  stock  except  by  the  con- 
sent of  all  stockholders  is  void.  A 
secretary  cannot  refuse  to  register  a 
transfer  on  account  of  the  motive  of 
the  transferrer.  Re  Klaus,  67  "Wis. 
401  (1886).  A  by-law  providing  that, 
if  any  stockholder  shaU  desire  to  dis- 
pose of  his  stock,  he  shall  give  writ- 
ten notice  of  liis  intention  to  sell,  and 
that  the  other  stockholders  shall 
thereupon  have  the  option  to  pur- 
chase the  stock  at  the  price  named, 
is  an  invalid  restraint  on  alienation. 
Victor,  etc.  Co.  v.  Bloede,  84  Md.  129 
(1896).  A  by-law  that  no  stockholder 
shall  sell  his  stock  or  have  a  transfer 
of  it  vmless  he  shall  first  have  offered 
it  for  sale  to  the  directors  is  illegal 
and    void.    Brinkerhoff-Farris,    etc 


§  G21a.] 


ELECTIONS  —  COEPORATE   MEETINGS.        [CH.  XXXV 11. 


however,  between  the  members,  or  a  part  of  tbem,  not  to  sell 
except  on  certain  conditions,  is  valid,  unless  it  amounts  to  an 
unreasonable  restraint  of  trade.  Thus,  an  agreement  of  several 
holders  of  stock  to  deposit  their  stock  in  a  trust  company  for 
a  term  of  six  months  and  not  to  sell  tlie  same  during  that  time, 
is  legal,  there  being  no  provision  depriving  any  party  of  his 
right  to  vote  on  the  stock.  Where  compensation  in  damages 
for  a  breach  would  bo  dilTicult  or  impossible,  a  court  of  equity 
may  grant  specific  performance  of  such  a  contract  by  enjoin- 
ing a  breach  thereof.     Such  a  contract  is  not  void  as  suspend- 


Co.  V.  Home  Lumber  Co.,  118  Mo.  447 
(1893).  A  by-law  that  all  purcbusors 
of  stock  shall  agree  that  the  stock 
shall  be  voted  in  favor  of  increasing 
the  capital  stock  is  \ou\  as  in  restraint 
of  trade  and  as  attempting  to  limit 
the  voting  power  of  a  stockholder, 
McNulta  V.  Corn  Belt  Bank,  104  III 
427  (1897).  Although  an  unincorpo- 
rated association's  articles  provide 
that  transfers  of  stock  shall  be  made 
only  with  consent  of  the  directors, 
yet,  where  such  provision  is  for  many 
years  disregarded,  a  stockholder  who 
so  transferred  his  stock  at  a  time 
when  the  assets  equaled  the  liabil- 
ities cannot  be  held  liable  as  a  stock- 
holder. Wadsworth  v.  Duncan,  164 
IlL  360  (1898);  Wadsworth  v.  Laurie, 
164  IlL  42  (1896).  The  foreclosure  and 
sale  of  a  pledge  of  stock  in  the  West- 
em  Associated  Press  has  been  refused 
where  it  was  shown  that  the  stock 
merely  entitled  the  holder  to  receive 
news;  that  no  transfer  was  allowed 
except  by  consent  of  the  association, 
and  such  consent  had  never  been 
given,  and  the  association  was  not 
made  a  party  to  the  suit.  Metropol- 
itan Nat.  Bank  v.  St.  Louis  Despatch 
Co.,  36  Fed.  Rep.  722  (1888).  In  this 
case  it  is  to  be  noticed  that  no  profits 
or  dividends  could  arise  from  the 
stock.  Where  a  stockholder  pur- 
chases certificates  of  stock  which 
provide  that  they  are  transferable 
only  to  the  company,  and  at  an  ai>  Trust  Co, 
praisal  to  be  made  by  its  directors,     (1894), 

1176 


as  provided  in  the  by-laws  printed 
on  the  back  of  the  cortificatos.  and 
signs  a  receipt  therefor,  "subject 
to  the  conditions  and  restrictions 
therein  referred  to,  and  to  the  by-laws 
of  the  company,  to  which  I  agree  to 
conform,"  he  is  bound  by  the  provis- 
ions of  the  certificates,  tliough,  when 
considered  as  by-laws,  they  may  be 
void.  In  such  case  the  records  of  a 
directors'  meeting  showing  that,  by 
vote  of  the  directors  present,  a  stock- 
holder's shares  were  appraised  at  a 
certain  price  and  taken  for  the  use 
of  the  company,  sufficiently  show 
an  appraisal,  although  no  notice  of 
hearing  was  given  the  stockholder. 
Where  a  stockholder  agrees  to  trans- 
fer his  shares  to  the  company  at  an 
appraisal  to  be  made  by  the  direct- 
ors, the  decision  of  the  directors  can- 
not be  impeached  by  showing  that 
they  committed  errors  of  judgment 
in  the  appraisal  A  stockholder  may 
be  forced  to  specifically  perform  a 
contract  to  convey  his  stock  to  the 
corporation,  according  to  an  appraisal 
made  by  the  directors,  to  be  disposed 
of  by  them  as  they  may  see  fit,  where 
the  evidence  shows  that  none  of  the 
stock  of  said  corporation  has  ever 
been  sold  on  the  market  or  otherwise 
than  by  transfer  to  the  directors,  and 
no  fraud  in  the  appraisal  is  charged, 
the  remedy  by  an  action  for  damages 
being  inadequate.  New  England 
V.  Abbott,  162  Mass.  148 


OH.  XXXVII.]        ELECTIONS  —  COEPOEATE    MEETINGS. 


[§  G21a. 


ino-  the  power  of  alienation,  nor  is  it  against  pubUc  poUcy  as 
beln-  a  restraint  upon  trade,  the  purpose  of  the  contract  being 
to  prevent  a  sacrifice  of  the  stock.^  An  agreement  between 
the  stockholders  of  a  corporation  that  no  one  of  them  will  sell, 
assin-n,  or  dispose  of  his  stock,  without  having  first  given  the 
other  parties  to  the  agreement  an  opportunity  to  purchase,  does 
not  disable  a  party  from  transferring  a  legal  title  to  his  stock 
^vithout  the  consent  of  the  other  parties  and  in  violation  of  the 
agreement,  and  this  although  the  transferee  was  cogmzant  of 
the  agreement  at  the  time  of  the  transfer.* 


^Williams  v.  Montgomery,  148  N.  T. 
519  (1806),  practically  reversing  68 
Hun,  416,  and  74  Hun,  427.  See  also 
§  622,  infra. 

2  The  enforcement  of  specific  per- 
formance of  such  an  agreement  by  a 
court  of  equity  rests  in  the  discretion 
of  the  court ;  it  may  not  be  demanded 
as  a  right    The  fact  that  the  trans- 
feree holds  the  stock  subject  to  the 
enforcement  of  the  equitable  remedy 
does  not  in  any  way  interfere  with 
his  legal  title,  nor  does  it  preclnde 
the  corporation  from  treating  him 
as,  and  according   to  him    all  the 
rights  of,  a  stockholder,  including  the 
right  to  vote  upon  the  stock  at  a 
stockholders'  meeting.   lie  Argus  Co., 
138  N.  Y.  557  (1893).    An  agreement 
of  the  holder  of  a  majority  of  the 
stock  that  he  will  retain  control  is 
no  defense  by  the  corporation  to  an 
action  by  the  receiver  of  such  stock- 
holder to  transfer  the  stock  on  the 
corporate  books.    Weller  v.  Pace  To- 
bacco Co.,  25  N.  Y.  Week.  Dig.  531 
(1886).    As  to  "pools"  of  stock  and 
contracts  tying  up  stock,  see  §§  621&, 
622,  infra.    A  contract  of  a  stock- 
holder not  to  transfer  or  sell  his  stock 
does  not  bind  a  bona  fide  purchaser. 
Brinkerhoff-Farris,  etc.  Co.  v.  Home 
Lumber  Co.,  118  Mo.  447  (1893).    In 
the  case  of  Jones  u  Brown,  50  N.  E. 
Rep.  648  (^lass.,  1898),  in  a  close  cor- 
poration, the  stockholders  made  a 
contract,  the  essential  parts  of  which 

11 


are  set  forth  in  the  opinion  of  the 
court,  providing  for  the  purchase  of 
the  stock  of  a  certain  stockholder  in 
case  of  his  death,  and  for  the  pur- 
chase of  the  stock  of  any  other  stock- 
holder who  ceased  to  be  connected 
with  the  corporation.  Tlie  former 
stockholder  having  died,  the  comrt 
granted  specific  performance  of  the 
contract  and  compelled  his  estate  to 
deliver  the  stock  upon  payment  of 
the  specified  price. 

The  following  is  a  form  of  contract 
on  this  subject  which  the  author 
drew,  and  has  used  on  several  oc- 
casions: 

Whereas, ,  party  of  the  first  part, 


is  the  owner  of  shares  of  the  capital 

stock  of  the Company,  and , 

party  of  the  second  part,  is  the  owner  of 

shares  of  said  capital  stock;  and 

Whereas,  said  party  of  the  first"  part  has 
agreed  that  in  case  he  hereafter  sells  any  or 
aU  of  the  said  stock  owned  by  him,  he  will  at 
the  same  time  make  it  a  part  of  such  contract 
of  sale  that  the  party  purchasing  shall  extend 
to  said  party  of  the  second  part  the  option  to 

sell  his  said shares  of  stock,  or  any  part 

thereof,  to  said  purchaser  at  the  same  price 
and  on  the  same  terms: 

Now,  therefore,  it  is  hereby  agreed  between 
said  parties  for  a  valuable  consideration,  re- 
ceipt of  which  is  hereby  acknowledged  by 
said  party  of  the  first  part,  that  in  case  said 
party  of  the  first  part  sells  or  causes  to  be 
sold  his  said  shares  of  stock  or  any  part 
thereof,  he  wUl  at  the  same  time  make  it  a 
part  of  such  contract  of  sale  that  the  party 
purchasing  shaU  purchase  from  said  party 
of  the  second  part  at  the  same  price  and  on 
the  same  terms  such  part  of  said  shares  of 
stock  belonging  to  said  party  of  the  second 


§  C21a.] 


ELF.CTIONS  —  CORTOEATE    MEETEN'GS.         [CH.  XXiVIL 


The  right  of  transfer  is  sometimes  limited  by  statute,  as 
in  New  York,  where  stock  in  railroad  or  manufacturing  cor- 
porations cannot  be  transferred  until  all  calls  thereon  shall 
have  been  fully  paid.*  Where  the  charter  or  a  statute  forbids 
transfers  before  the  full  capital  stock  is  paid  in,  any  transfer 
before  such  payment  has  been  held  to  be  void.'  A  personal 
ao-reement  between  the  incorporators,  promoters,  and  proposed 
subscribers  to  the  stock  of  a  proposed  corporation,  by  which 
agreement  the  corporation  is  to  have  the  first  right  to  buy  the 
stock  of  any  one  who  wishes  to  sell,  does  not  prevent  a  sale 
by  a  stockholder  without  offering  the  stock  to  the  corporation. 
Hence  the  corporation  cannot  refuse  to  transfer  the  stock.' 

In  England  sometimes  express  authority  is  given  to  the  di- 
rectors, by  the  articles  of  association,  to  refuse  to  permit  a 
transfer  unless  the  same  is  satisfactory  to  them.*  They  have 
this  power,  however,  only  by  express  authority,  and  it  is  not 
extended  by  implication.'    The  power  must  be  reasonably  ex- 


part  as  the  party  of  the  second  part  may  care 
to  sell  at  that  time  at  that  price  and  on  those 
terms.  In  case  said  p)arty  of  the  first  part 
fails  to  make  such  provision  In  any  sale  or 
transfer  made  by  said  party  of  the  first  part, 
said  party  of  the  second  part  may  tender  to 
the  party  of  the  first  part  the  certificates  for 

any  or  all  of  said shares  of  stock  owned 

by  the  party  of  the  second  part,  and  there- 
upon may  demand  and  collect  therefor  from 
the  party  of  the  first  part,  by  suit,  a  sum  per 
share,  for  the  stock  so  tendered,  equal  to  the 
highest  price  per  share  at  which  said  p>arty 
of  the  first  part  may  have  prior  thereto  sold 
the  shares  of  stock,  or  any  part  thereof,  be- 
longing to  the  party  of  the  first  part.  This 
agreement  shall  bind  the  heirs,  representa- 
tives, agents,  and  assigns  of  the  party  of 
the  first  part,  and  shall  continue  in  force 

for  the  period  of years  from  the  date 

hereof. 
Dated,  New  York, ,  1898. 

1  See  Part  VII,  infra. 

2  Merrill  v.  Call,  15  Ma  428  (1839). 
The  case  of  Quiner  v.  Marblehead 
Social  Ins.  Co.,  10  Mass.  476  (1813), 
holds  that,  nevertheless,  such  a  trans- 
fer vests  in  the  transferee  all  the 
transferrer's  interest  in  the  stock. 
Cf.  Kahn  v.  Bank  of  St.  Joseph,  70 
Mo.  262  (1879),  The  statutes  of  a  state 
cannot  restrict  or  interfere  with  the 
transferability  of  certificates  of  stock 


in  national  banks.    Doty  v.  First  Nat. 
Bank,  3  N.  Dak.  9  (1892). 

'  Ireland  v.  Globe,  etc  Co.,  38  AtL 
Rep.  1 1 6  (R  I. ,  1 897).  Where,  accord- 
ing to  contract,  stock  sold  to  the  cor- 
poration is  appraised  by  the  corpo- 
ration, ami  the  appraised  price  is 
actually  paid  to  and  received  by  the 
stockholder,  he  cannot  maintain  a 
bUl  to  obtain  a  larger  price,  but  must 
either  rescind  or  sue  at  law.  Tuttle 
V.  Batchelder,  eta  Co.,  49  N.  E.  Rep. 
640  fMass.,  1898). 

*  Shortridge  v.  Bosanquet,  16  Beav. 
84  (1852);  Bargat«  v.  Shortridge,  5  H. 
L.  Cas.  297  (1855);  Re  Joint-stock  Dis- 
count Co.,  Shepherd's  Ctise,  L.  R.  2 
Eq.  564  (1866). 

*  Weston's  Case,  L.  R  4  Ch.  App.  20 
(1868);  Gilbert's  Case,  L.  R  5  Ch. 
App.  559  (1870);  Chappell's  Case,  L.  R 
6  Ch.  App.  902  (1871);  Re  Stranton 
Iron,  etc.  Co.,  L.  R  16  Eq.  559  (1873); 
Moffatt  V.  Farquhar,  L.  R  7  Ch-  D. 
591  (1878) ;  Slee  v.  International  Bank, 
17  L.  T.  Rep.  425  (1867).  Judge  DiUon, 
in  Johnson  v.  Lafiin,  5  DilL  65,  78; 
S.  C,  13  Fed.  Cas.  758,  763;  aff'd,  103 
U.  S.  800  (1880), said:  "Such  a  power 


1178 


CIl.  XX::VII.]         ELECTIONS COErOEATE   MEETINGS. 


[§  021a. 


ercisecl,  and  its  exercise  must  be  free  from  fraud,  caprice,  and 
arbitrary-  power.^  TI13  corporation  cannot  refuse  to  allow  a 
registry  on  the  ground  that  there  was  no  consideration  for  the 
transfer;  2  nor  because  a  claimant  of  the  stock  notified  it  not 
to  niake  the  ^egistr3^'  In  this  country  no  such  power  is  given 
to  the  directors.  A  person  who  purchases  stock  is  entitled  to  a 
transfer  on  the  books.  A  resolution  of  the  stockholders  that 
the  company  should  not  allow  any  further  transfers  of  stock 
until  tha-  company  is  out  of  financial  difficulties  does  not  bind 
a  stockholder  who  did  not  take  part  in  the  meeting.* 

TThere  two  stockholders  make  a  contract  by  which  the  stock 
is  placed  in  the  name  of  one  of  them  to  be  held  in  trust  and 
voted  by  him  as  they  agree,  and  in  case  of  disagreement  an  ar- 


ia so  capable  of  abuse,  and  so  foreign 
to  all  received  notions,  and  the  uni- 
versal practice  and  mode  of  dealing 
in  these  stocks,  that  it  cannot,  in  the 
absence  of  legislative  expression,  be 
held  to  exist."  See  also  Farmers', 
etc.  Bank  v.  Wasson,  48  Iowa,  336 
(1S78),  the  court  holding  that  a  by-law 
that  transfers  of  stock  sliall  not  be 
valid  unless  approved  by  the  board 
of  directors  cannot  restrain  trans- 
fers. "  Its  enforcement  would  op- 
erate as  an  infringement  uion  the 
proix,Tty  rights  of  others,  which  the 
law  will  not  permit.  It  would,  be- 
sides, operate  as  a  restraint  upon  the 
disposition  of  property  in  the  stock 
of  the  corporation,  in  the  nature  of 
restraint  of  trade,  which  the  courts 
will  not  tolerate." 

'  Tliey  cannot  refuse  to  allow  any 
transfers.  Robinson  v.  Chartered 
Bank,  L.  R  1  Eq.  32  (ISGo).  And  an 
objection,  not  to  the  transferee,  but 
to  the  purpose  of  the  transferrer  in 
respect  to  voting,  is  not  sufficient 
Jfoffatt  V.  Farciuhar,  L.  R.  7  Ch.  D. 
591  (1878).  But  the  board  may  re- 
fuse to  give  its  reasons  for  refusing 
to  allow  the  transfer,  and  in  that 
case  it  will  be  presumed  to  have  had 
sufficient  reason  for  the  refusaL  Ex 
2>arte  Penney,  L.  R  8  Ch.  App.  44fi 

11: 


(1872).  Where  the  by-laws  limit  the 
right  of  transfer  of  stock,  and  give 
the  directors  the  power  to  pass  upon 
the  same,  the  court  will  presume  that 
their  action  in  refusing  a  transfer 
was  based  on  good  reasons,  even 
though  no  reason  was  given.  Fe  Coal- 
port  China  Co.,  [1895]  2  Ch.  404  If 
misrepresentations  are  made  in  in- 
ducing the  directors  to  allow  trans- 
fer, they,  having  discretion,  may 
avoid  the  same.  Payne's  Case,  L.  R 
9  Eq.  223  (18G9);  Master's  Case,  L.  R 
7  Ch.  292  (1872);  Bishop's  Case,  L.  R  7 
Ch,  296  (1869).  Although  a  transfer 
is  rejected  by  the  directors,  the  trans- 
feree is  nevertheless  entitled  to  divi- 
dends and  the  title  to  the  stock. 
Poole  V.  Middleton,  29  Beav.  646 
(ISCl).  "Where  the  company  may  ac- 
cept or  reject  a  transferee,  and  rejects 
him,  the  transferee  cannot  recover 
back  from  the  transferrer  the  con- 
sideration of  the  transfer.  London 
Foiinders'  Assoc  v.  Clark  0,  59  L.  T. 
Rep.  93  (1888). 

2  Helm  V.  Swiggert,  12  Ind.  194 
(18591. 

» Ex  parte  Sargent,  L.  R  17  Eq.  273 
(1874).     Cf.  §  387,  siiprcL 

*  Smith  V.  Bank,  etc.  Scotia,  8  a  Q 
Rep.  (Can.)  558  (1883). 


9 


§  GSl?-.] 


ELECTIONS COKrOKATE   MEETINGS.         [CH.  XXXYII. 


bitrator  is  to  decide,  and  the  stock  is  not  to  be  sold  until  tliey 
agree  to  sell,  the  one  so  placing  stock  in  the  name  of  the  other 
as  trustee  cannot  sue  the  latter  for  refusal  to  deliver  to  tho 
former  his  part  of  the  stock.^  AVherc  stock  is  transferred  to  a 
trustee  to  sell  with  the  stock  of  other  persons,  the  trustee's 
power  of  sale  is  not  revoked  by  the  death  of  tho  transferrer.' 
An  affreemont  to  hold  stock  and  sell  toirctlicr  is  valid,' 

§  6215.  ^^Fools,'^  ^^ corners,'"'  and  combinations  in  stoclc. — Tho 
courts  will  not  aid  either  pai'ty  in  carrying  out  an  agreement 
for  advancing  the  price  of  stock  by  means  of  fictitious  dealings 
designed  to  deceive  others  concerning  the  real  value  of  such 
stock.*  Where  both  the  vendor  and  vendee  of  stock  know  that 
the  purpose  of  the  vendee  is  to  control  the  corporation  and  ille- 
gally issue  corporate  paper,  the  sale  is  illegal  and  void.'  An 
agreement  to  make  a  "  corner  "  in  stock,  by  buying  it  up  so  as 
to  control  the  market  and  then  purchasing  for  future  deliveries, 
is  illegal.®    It  is  not  necessarily  unlawful  to  form  a  "  pool "  for 


1  Louisville  Trust  Co.  v.  Stockton, 
75  Fed.  Kep.  62  (1896).  A  transfer  of 
the  controlling  interest  of  stock  of  a 
railroad  company  to  trustees  to  hold 
until  the  road  is  completed  and  then 
to  return  the  same  to  the  transferrers, 
the  object  being  to  secure  the  co-op- 
eration of  municipalities  in  obtaining 
an  extension  of  the  charter  and  the 
granting  of  municipal  aid,  is  legal, 
the  transaction  being  a  fair  one,  and 
being  known  to  the  public,  and  in- 
sisted upon  by  the  public  before  aid 
would  be  given.  Greene  v.  Nash,  85 
Me.  148  (1893).  The  contract  of  an 
agent  to  sell  stock  does  not  give  the 
principal  a  right  to  damages  for  fail- 
ure to  sell,  where  the  principal  deliv- 
ered trustee's  receipts  instead  of  the 
stock  itself,  the  stock  having  been 
"pooled."  Simmons  v.  Brooks,  159 
Mass.  219  (1893).    See  §  623,  infra. 

2  Hiller  v.  Ladd,  80  Fed.  Rep.  794 
<1897). 

^Havemeyeru  Havemeyer,  43  N.  Y. 
Super.  Ct.  506  (1878);  S.  C,  45  N.  Y. 
Super.  Ct.  464;  aff'd,  86  N.  Y.  618; 
Griffith  V.  Jewett,  15  W.  L.  BulL  419 


(1886)  —  an  important  casa  But  an 
agi-eement  not  to  sell  except  by  con- 
current cc  nsent  of  all  signers  to  the 
agreement  is  void  as  in  resti-aint 
of  trade  and  against  public  policy. 
Fisher  v.  Bush,  35  Hun,  641  (1885). 
See  also  §  320,  supra.  For  a  full  dis- 
cussion of  this  subject,  see  §  622,  infra. 
For  an  interesting  statement  of  tho 
modus  operandi  of  a  "  corner,"  see 
"An  Investor's  Notes  on  Ameri'^an 
Railroads,"  by  Swann,  ch.  XII  (1886), 
See  §  615,  supra,  relative  to  purchases 
for  the  purpose  of  affecting  corporate 
elections. 

*  Livermore  v.  Bushnell,  5  Hun,  285 
(1875).  See  also,  in  general,  §  445,  note, 
supra,  and  §  622,  infra. 

5  Newark  v.  EUiott,  5  Ohio  St  113 
(1855). 

^  Sampson  v.  Shaw,  101  Mass.  145 
(1869);  Raymond  v.  Leavitt,  46  Midi- 
447  (1881);  Morris  Run  Coal  Co.  v. 
Barclay  Coal  Co.,  68  Pa.  St.  173  (1871); 
Arnot  V.  Pittston,  etc.  Coal  Co..  68 
N.  Y.  558  (1877);  Keene  v.  Kent,  N.  Y. 
D.  Reg.,  March  15;  1887.  Cf  Petrie 
V.  Hannay,  3  T.  R.  418  (1789).    No  suit 


1180 


OH.  XXXVII.]        ELECTIONS CORPOEATE    MEETINGS. 


[§  6215. 


the  purpose  of  dealing  in  a  particular  stock,^  and  tlie  person 
who  does  the  bupng  and  selling  must  account  to  the  others.^ 
A  contract  by  "which  a  shareholder  in  a  corporation  agrees 
to  secure  to  the  purchaser  of  his  stock  a  corporate  office  at  a 
stated  salary,  and  in  case  of  his  removal  to  repurchase  the  stock, 
is  void  as  against  public  policy  and  as  a  fraud  on  other  stock- 
holders, unless  it  is  proved  that  the  transaction  is  not  for  the 
private  benefit  of  the  vendor,  or  that  it  was  consented  to  by 
the  other  stockholders.'  But  a  contract  to  convey  a  majority 
of  the  stock  of  a  corporation,  and  to  procure  the  resignation  of 
the  corporate  directors,  thereby  enabling  the  vendee  to  elect 
directors  satisfactory  to  himself,  is  a  valid  and  legal  agree- 
ment.*    One  railroad  company  cannot  purchase  a  controlling 


lies  against  a  broker  for  fraud  in  car- 
rying out  a  pool  or  combination  to 
"  comer "  and  advance  tlie  price  of 
lard.  Leonard  v.  Poole,  114  N.  Y.  371 
(1889).  See  also  §  445,  sujyrcu  A  per- 
son making  a  "  corner  "  in  wheat  is 
not  subject  to  a  criminal  prosecution 
therefor.  Raymond  v.  Leavitt,  4G 
Mich.  447  (1881).  It  is  not  fraud  for 
the  owner  of  the  larger  part  of  the 
capital  stock  of  a  corporation  to 
•'  comer  "  the  market,  that  is,  to  en- 
ter into  contracts  with  various  par- 
ties to  purchase  stock  of  the  corpo- 
ration, althougli  he  knew  that  such 
contracts  could  not  be  fulfilled  by 
such  parties  by  reason  of  the  fact 
that  he  himself  held  such  stock,  and 
it  could  not  be  obtained  elsewhere. 
The  same  rule  prevails  although  such 
person  offered  the  stock  for  pub- 
lic subscription  and  purchased  the 
greater  part  of  it  himself.  Salaman 
V.  Warner,  64  L.  T.  Rep.  598  (1891). 
Cf  Barry  v.  Croskey,  2  Jones  &  H.  1 
(1861),  holding  that  the  victim  of  the 
"  corner  "  may  file  a  bill  in  equity  to 
recover  back  the  money  lost. 

1  Quincey  v.  White,  C3  N.  Y.  370, 383 
(1875),  modifying  Qtuncey  v.  Young, 
5  Daly,  327  (1873). 

*  Where  several  parties  buy  a  cer- 
tificate of  stock  in  fixed  proportions 
and  the  certificate  is  taken  by  one 


for  the  benefit  of  all,  he  is  a  bailee 
for  the  others  and  not  a  vendor. 
Coquard  v.  Wernse,  100  Mo.  137 
(1890).  See  also  §  320,  supra.  The 
general  rule  that  an  action  aflfect- 
ing  a  joint  enterprise  for  the  pur- 
chase, upon  speculation,  of  certain 
mining  stocks  must  join  all  the  par- 
ties who  enter  the  "  pool "  does  not 
necessitate  the  joinder  of  one  who  is 
out  of  the  jurisdiction.  Angell  v. 
Lawton,  76  N.  Y.  540  (1879).  The 
representative  of  a  syndicate  after 
selling  the  stock  cannot  modify  the 
contract.  He  is  liable  to  the  others 
if  he  does  so.  Kountz  v.  Gates,  78  Wis. 
415  (1891).  Where  there  is  a  joint 
operation  in  stocks,  a  "pool,"  the 
transactions  being  carried  on  in  the 
name  of  one  only,  the  others  may 
have  specific  performance  leading  to 
a  division  of  the  stocks.  Johnson  v. 
Brooks,  46  N.  Y.  Super.  13  (1880); 
Thornton  v.  St.  Paul,  etc.  R'y,  45 
How.  Pr.  416  (1873);  S.  C,  dismissed,  6 
N.  Y.  Week.  Dig.  309  (1878).  A  vendor 
of  stock  may  collect  the  price  even 
though  the  agreement  contains  a 
provision  for  pooling  the  stock  which 
is  illegal  Edgerton  v.  Power,  18 
Mont.  350  (1896).  See  also  §  320, 
suxyra. 

3  See  §  622,  infra. 

*  See  §  622,  infra. 


1181 


§  622.] 


ELECTIONS COErOKATE    MEETINGS.         [CH.  XXXVII. 


interest  in  another  railroad  company  for  the  purpose  of  man- 
aging or  absorbing, the  latter;  but  this  rule  grows  out  of  the 
fact  that  such  purchases  are  beyond  the  powers  of  the  corpo- 
ration. It  is  immaterial  that  a  vendee  already  controls  one 
railroad  company,  and  that  the  stock  contracted  to  be  sold  will 
give  him  the  control  of  another.  He  is  entitled  to  the  stock.' 
An  agreement  to  contribute  stock  towards  a  common  under- 
taking for  the  benefit  of  the  corporation  itself  is  enforceable, 
the  consideration  being  the  mutual  obligation.*  But  the  com- 
mon undertaking  must  be  a  legal  one.* 

§  622.  Contracts  as  to  directors^  elections,  voting,  and  eon- 
trol  —  ComUnations  of  stockholders  —  Voting  trusts  and  pool- 
ing agreements.— StockhoUers  owning  a  majority  of  the  stock 
have  a  right  to  combine  and  control  the  election  of  the  board 
of  directors.'    It  is  legal  for  persons  to  contract  to  form  a  cor 


^  See  §  315,  supra. 

2Havemeyer  v.  Havemeyer,  43 
N.  Y.  Super.  Ct  506  (1878).  Cf.  §  315, 
n.,  supra. 

'  See  §  76,  supra. 

*  If  the  purpose  is  to  rob  a  railroad 
and  bribe  a  judge,  the  court  will  aid 
no  ona  Tobey  v.  Robinson,  99  III 
222  (1881).     Cf.  §  39,  supra. 

5  Havemeyer  v.  Havemeyer,  43 
N.  Y.  Super.  Ct.  506,  513  (1878);  af- 
firmed, 86  N.  Y.  618  (1881);  Faulds  v. 
Yates,  57  IlL  416  (1870),  where  it  was 
held  that  persons  holding  the  ma- 
jority of  stock  in  a  corporation  could 
lawfully  agree  among  themselves  to 
vote  as  a  unit  to  control  an  election; 
and  that  their  agreement  that  their 
votes  should  be  cast  as  sliould  be  de- 
cided by  the  majority  of  their  own 
votes  was  not  void  as  being  against 
public  policy.  "There  is,  if  I  may 
say  so,  no  obligation  on  a  share- 
holder of  a  company  to  give  his  vote 
merely  with  a  view  to  what  other 
persons  may  consider  the  interests 
of  the  company  at  large.  He  has  a 
right,  if  he  thinks  fit,  to  give  his  vote 
from  motives  or  promptings  of  what 
he  considers  his  own  individual  in- 


1183 


terest."  Pender  v.  Lushington,  L.  R 
6  Ch.  D.  70  (1877).  A  stockholdei 
who  signs  an  agreement  with  others 
to  vote  their  stock  as  a  unit  cannot 
afterwards  complain  of  acts  of  the 
board  of  directors,  which  acts  were 
in  accordance  with  the  policy  of  the 
pooling  agreement.  Zeigler  v.  Lake 
St.  EL  R  R,  69  Fed.  Rep.  176  (1895), 
giving  portions  of  the  agreement. 
"  It  is  not  per  se  iinlawful  for  a  num- 
ber of  persons,  by  previous  agreement, 
to  buy  shares  of  the  stock  of  a  corpo- 
ration for  the  purpose  of  controlling 
its  policy,  electing  its  oflScers,  etc." 
Beitman  v.  Steiner,  98  Ala.  241  (1893). 
Where  two  partners  desire  to  incor- 
porate, and  each  to  have  the  same 
interest,  and  a  third  party  to  have  a 
smaller  interest,  thereby  holding  the 
balance  of  power,  and  such  arrange- 
ment is  carried  out,  and  the  third 
party  is  really  a  dummy  of  one  of  the 
partners,  and  thereby  gives  the  con- 
trol of  the  corporation  to  that  part- 
ner, yet  the  other  partner  has  no 
legal  cause  of  complaint,  notwith- 
standing the  general  imderstanding 
as  to  the  division  of  controL  Baum- 
garten  v.  Nichols,  69  Hun,  216  (1893). 


CH.  XXXYII.]        ELECTIONS  —  COKPOEATE  MEETINGS. 


[§  622. 


poration  and  to  provide  for  its  future  management  and  control.^ 
But  a  contract  in  regard  to  elections  in  private  corporations  is 
not  legal  if  it  provides  that  a  lucrative  corporate  position  shall 
be  given  to  one  or  more  of  the  parties  to  the  contract.  Thus, 
an  agreement  of  a  large  stockholder  holding  a  majority  of 
the  stock  that  upon  the  purchase  and  absorption  of  plaintiff's 
business  by  the  corporation  the  plaintiff  should  be  engaged  for 
a  term  of  years  as  vice-president  and  general  manager  of  the 
corporation  at  a  specified  salary  is  contrary  to  public  policy 
and  is  void.*    An  agreement  of  persons  as  a  condition  of  their 


1  Bang  V.  Barnes,  109  N.  Y.  267  (1888). 

2  West  V.  Camden,  135  U.  S.  507 
(1890).  A  contract  made  by  a  stock- 
holder for  a  consideration  to  vote  for 
a  particular  person  for  manager  of 
the  company,  and  in  the  event  of  his 
election  to  vote  for  an  increase  of  the 
salary  attaching  to  that  position,  is  il- 
legal and  cannot  be  enforced.  Wood- 
ruff V.  Went  worth,  133  Mass.  309 
(1882).  An  agreement  of  persons 
holding  a  majority  of  the  stock,  they 
being  directors  also,  that  a  person 
purchasing  stock  from  them  shall  be 
general  manager,  and  may  at  the  end 
of  two  years  sell  the  stock  back  to 
them  at  a  stated  price,  is  contrary  to 
public  policy  and  void.  The  vendors 
need  not  repurchase.  The  arrange- 
ment is  \infair  to  the  corporation- 
Wilbur  V.  Stoepel,  82  Mich.  344  (1890). 
A  proxy  for  five  years,  given  so  as  to 
unite  enough  stock  to  control  the  cor- 
poration, the  holder  of  the  proxy 
agreeing  that  the  person  giving  the 
proxy  shall  have  an  oflSce  at  a  salary 
of  $2,500  a  year,  is  void.  At  the  in- 
stance of  the  latter  person  a  court  of 
equity  will  enjoin  voting  thereunder. 
Cone  V.  Russell,  48  N.  J.  Eq.  208  (1891). 
Where  a  stockholder  in  a  railroad 
company  is  induced  to  take  part  in 
the  formation  of  a  land  company,  and 
is  to  receive  a  certain  sum  of  money 
when  a  depot  is  located  on  such  land, 
he  cannot  enforce  the  agreement.  It 
is  practically  a  sale  of  his  vote.    Ful- 


ler V.  Dame,  35  Mass.  472  (1836).  A 
contract  of  the  vendor  of  bank  stock 
that  he  would  make  the  vendee  the 
cashier  is  illegal  and  void.  Noel  v. 
Drake,  28  Kan.  265  (1882).  An  agree- 
ment to  vote  in  a  particular  way,  in 
consideration  of  some  personal  bene- 
fit, is  illegal ;  for  a  vote  ought  to  be 
an  impartial  and  honest  exercise  of 
judgment.  Elliott  v.  Richardson, 
L.  R  5  C.  P.  744  (1870).  See  also 
Moffatt  V.  Farquliarson,  2  Bro.  C.  C. 
338  (1788);  Card  v.  Hope,  2  B.  &  Cr. 
661  (1834).  Compare  Bolton  v.  Mad- 
den, L.  R  9  Q.  B.  55  (1873),  where  an 
agreement  between  two  subscribers 
to  a  charity  to  vote  for  each  other's 
nominees  was  held  not  to  be  illegaL 
Although  a  contract  of  certain  stock- 
holders to  vote  together  is  legal,  yet 
a  conspiracy  to  obtain  an  illegal  in- 
junction against  others  voting  will 
not  be  countenanced  by  the  court. 
People  V.  Albany,  etc.  R.  R.,  55  Barb. 
344,  368  (1869).  A  contract  by  which 
a  shareholder  in  a  corporation  agrees 
to  secure  to  the  purchaser  of  his  stock 
a  corporate  oflBce  at  a  stated  salary, 
and  in  case  of  his  removal  to  repiir- 
chase  the  stock,  is  void  as  against 
public  policy  and  as  a  fraud  on  other 
stockholders,  unless  it  is  proved  that 
the  transaction  is  not  for  the  private 
benefit  of  the  vendor,  or  that  it  was 
consented  to  by  the  other  stockhold- 
ers. Guernsey  v.  Cook,  120  Mass.  501 
(1876);  Noyes  v.  Marsh,  123  Mass.  286 


1183 


§  622.] 


ELECTIONS  —  COEPOEATE   MEETINGS.        [OH.  XXXVII. 


election  that  the  bank  should  extend  to  a  certain  party  credit 
for  loans  at  a  specified  rate  of  interest  is  illegal.'  A  sale  of  his 
vote  by  a  stockholder  is  illegal.-  A  contract,  however,  by  which 
the  directors  who  own  a  majority  of  the  stock  sell  such  stock 
and  agree  to  substitute  the  vendees  as  directors  of  the  company 
Where  part  of  the  consideration  in  the  sale  of  stock 


is  legal.' 

(1877).  A  contract  to  preserve  the 
coutrol  and  status  quo  was  involved 
in  Harris  v.  Scott,  32  Atl.  Rep.  770 
(N.  H.,  1893).  The  contract  provided 
for  voting  on  all  subjects,  for  salaries, 
and  for  sales  of  stock  before  and 
after  deatli.  The  court  refused  to 
grant  specific  performance  for  sale 
after  deatli.  Where  three  persons, 
being  the  owners  of  a  majority  of  the 
stock,  agree  that  they  will  vote  their 
stock  to  elect  as  directors  three  per- 
Bbns  to  be  named  by  one  of  them,  and 
two  persons  to  be  named  by  the 
others,  and  that  one  of  them,  who 
had  received  a  salary  of  $2,500,  should 
receive  a  salary  of  $5,000,  and  that 
two  of  such  directors  should  receive 
a  salary  of  $500  each,  the  agreement 
is  illegal  Snow  v.  Church,  13  N.  Y. 
App.  Div.  108  (1897).  A  contract  by 
which  a  purchaser  of  a  majority  of 
the  stock  of  three  corporations  agrees 
that  the  corporations  should  employ 
the  seller  of  the  stock  at  a  fixed  sal- 
ary for  a  certain  time,  and  after  a  cer- 
tain time  the  seller  to  have  a  salary 
and  one-half  of  the  directors,  is  ille- 
gal, and  cannot  be  enforced  by  the 
vendor  as  against  the  vendee,  even 
though  the  stock  has  been  delivered 
and  paid  for  under  such  agreement. 
Fennessy  v.  Ross,  5  N.  Y.  App.  Div.  343 
(1896).  A  contract  of  sale  of  stock 
whereby  the  vendee  is  to  be  voted  a 
certain  salary  and  an  equal  represen- 
tation in  the  board,  and  in  case  either 
party  wishes  to  sell  stock  it  is  first 
to  be  offered  to  the  other  party  at  a 
fixed  price,  is  void  as  an  attempt  to 
barter  away  the  offices.  Fennessy  v. 
Ross,  90  Hun,  298  (1895).  Where  a 
part  of  the  consideration  of  a  con- 


1181: 


tract  in  regard  to  voting  stock  in  a 
certain  way  is  that  one  of  the  parties 
shall  be  given  an  official  position  in 
the  corporation  at  a  salaiy,  the  con- 
tract is  void  and  unenforceable.  Gage 
V.  Fisher,  5  N.  D.  297  (1895).  In  the 
case  of  Witliam  V.  Cohen,  28  S.  K  Rep. 
505  (Ga.,  1897),  a  stockholder  who  had 
obtained  proxies  from  most  of  the 
other  stockholders,  on  an  agreement 
by  which  he  was  to  become  president 
on  a  certain  salary,  was  held  to  have 
a  right  of  damages  against  a  stock- 
holder whose  stock  he  had  purchased, 
but  who,  nevertheless,  had  given  a 
proxy  to  some  other  person.  A  per- 
son who  contracts  to  purchase  stock 
may  defend  against  an  action  for  the 
price  by  setting  up  that  the  vendor 
falsely  represented  that  the  vendee 
was  about  to  be  deprived  of  the  presi- 
dency of  the  company;  and  that 
thereby  the  vendee  was  induced  to 
make  the  contract  of  purchase  at  an 
unconscionable  price.  Delano  v.  Rice, 
23  N.  Y.  App.  Div.  327  (1897).  Where 
the  agreement  was  to  keep  the 
vendor  in  a  professorship,  tlie  court 
wUl  not  aid  the  parties.  The  agi-ee- 
ment  is  against  public  policy.  Jones 
u  Scudder,  2  Cin.  Super.  Ct.  178  (1872). 

1  Blue  V.  Capital  Nat.  Bank,  145  Ind. 
518  (1896). 

2Hafer  v.  New  York,  etc.  R  R.,  14 
W.  L.  Bull  68  (1886).  See  also  Yale 
Law  Journal,  vol  1,  p.  7. 

'  A  contract  to  sell  one's  stock  in  a 
corporation,  and  to  resign  a  director- 
ship and  the  presidency,  and,  having 
done  so,  to  endeavor  to  induce  otlier 
directors  to  resign,  in  order  that  the 
purchasers  of  the  stock  may  come  in 
and  take  their  places  and  so  control 


CH.  XXXVII.]         ELECTIONS COEPOEATE   MEETINGS.  [§  622. 

is  that  the  vendor  resign  an  oiSce  in  the  company,  and  the 
vendee  be  elected  in  his  place,  and  this  has  been  carried  out, 
the  vendee  cannot  rescind  for  fraud  unless  he  resigns  the  posi- 
tion or  does  something  towards  restoring  the  vendor  to  his 
former  position.^  An  agreement  by  a  stockholder  to  give  a 
person  part  of  his  stock  if  such  person  would  become  a  director 
of  the  corporation  is  not  necessarily  against  public  policy .^  The 
vendor  of  stock  may  of  course  agree  to  vote  as  the  vendee 
wishes.' 

Closely  connected  with  this  principle  of  law  is  the  question 
whether  a  director  or  stockholder  may  vote  his  stock  in  favor 
of  a  sale  of  corporate  property  to,  or  a  purchase  of  property  for 
the  corporation  from,  another  corporation  in  which  such  di- 
rector or  stockholder  is  interested  as  a  stockholder.  The  gen- 
eral rule  is  that  a  contract  between  two  corporations  having 
certain  stockholders  or  directors  in  common  will  be  sustained 
by  the  courts  if  the  contract  is  fair  toAvards  the  minority  stock- 
holders. If  it  is  so  unfair  as  to  amount  to  a  fraud,  the  courts 
"srill  set  it  aside  upon  the  complaint  of  the  minority  stockhold- 
ers.* 

Kestrictions  on  the  right  to  vote  stock,  like  restrictions  on 

the  management  of  the  company,  out.    Seymour  v.  Detroit  Copper,  etc. 

there  being  no  evidence  of  fraud,  has  Mills,  56  Mich.  117  (1885).    An  agree- 

been  held  a   contract  not  void  as  ment  to  turn  over  the  control  of  a 

against    public    policy.      Barnes    v.  co-operative  insurance   company  is 

Brown,  80  N.  Y.  537  (1880).    Specific  illegal,  and  money  received  therefor 

performance  will  not  be  granted  of  cannot  be  recovered  by  the  company. 

an  agi-eement  of  tlie  vendors  of  stock  McClure  v.  Law,  20  N.  Y.  App.  Div. 

that  they  will  resign  as  directors  and  459  (1897). 

substitute  the  vendee's  representa-  '  Gassett  v.  Glazier,  165  Mass.  473 

tives  instead.    Fremont  v.  Stone,  42  (1890). 

Barb.  169  (ISO  1),  the  court  stating  that  2  Abny  v.  Ome,  165  Mass.  126  (1896). 

such  a  contract  is  unfair  towards  the  *An    agreement  by  a  vendor  of 

minority  stockholders.    See  also,  con-  stock,  which  is  to  be  delivered  after 

tra,  Jacobs  v.  Miller,  15  Alb.  L.  J.  188  an  election,  that  he  will  vote  as  the 

(1877).    Directors  have  no  power  to  vendee  desires,  is  legal    Mobley  v. 

contract  with  an  outsider  that  he  Morgan,  6  AtL  Rep.  694  (Pa.,  1886). 

shall,  upon  purchasing  certain  stock.  One  corporation  issuing  its  stock  as 

be  made  a  director  in  the  company,  security  to  another  may  agree  that 

Seymour  v.  Detroit  Copper,  etc.  Mills,  the  latter  shall  hold  and  vote  the 

56  Mich-  117  (1885).    But  a  sale  of  stock  of  and  in  the  former.    Tona- 

stock  with  an  agreement  that  the  wanda,  etc.  R.  R.  v.  New  York,  etc. 

vendee    should  be  elected  superin-  R,  R.,  42  Him,  493  (1886). 

tendent  may  be  rescinded  if  the  latter  *  See  ch.  XXXIX,  §  662,  infra. 
part  of  the  agreement  is  not  carried 

75  1185 


§  C22.]  ELECTIONS  —  COErOKATE   MEETINGS         [CH.  XXXVII. 

the  right  to  sell  stock,  are  not  favored  by  the  courts.  These 
two  classes  of  restrictions  are  closely  allied,  and  have  partially 
been  considered  elsewhere.^  They  both  are  due  generally  to  a 
desire  to  so  tie  up  the  stock  or  the  voting  power  that  the  control 
will  be  permanently  obtained  and  retained  thereby.  It  is  an 
old  problem  in  corporation  law  how  to  compel  parties  to  live 
up  to  their  agreement  in  regard  to  holding  their  stock  and  vot- 
ing with  other  parties  to  the  contract,  in  order  to  keep  the  con- 
trol of  the  corporation.  Various  devices  have  been  tried,  the 
object  being  to  place  the  stock  in  such  a  position  that  no  one 
of  the  parties  can  break  his  agreement  to  act  with  the  others. 
"  Irrevocable  "  proxies  to  vote  upon  the  stock  have  been  given 
by  all  the  parties  to  a  designated  person,  who  acted  as  their 
agent.  But  the  courts  decided  that  these  proxies  were  not 
irrevocable,  but  might  be  revoked  at  any  time.^ 

Another  plan  was  to  place  the  stock  of  the  various  parties  in 
the  hands  of  trustees  with  power  to  transfer  the  stock  to  them- 
selves, and  to  hold  and  vote  the  same.  Trustees'  certificates 
were  then  issued  by  the  trustees  to  the  various  parties,  specify- 
ing the  amount  of  stock  so  deposited  by  them  and  their  inter- 
est in  the  pool.  But  this  plan  failed.  The  courts  held  that 
any  holder  of  a  trustee's  certificate  miglit  at  any  time  demand 
back  his  part  of  the  stock.* 

1  See  §§  631,  621a,  supra,  to  sell  until  they  have  ofifered  to  sell 

2  See  §  610,  supra,  to  each  other,  yet  any  one  may  sell 

3  Woodruff  V.  Dubuque,  etc.  R  R,  to  an  outsider,  and  the  latter  may 
30Fed.  Rep.  91  (1887):  Haferu  New  demand  back  liis  stock  from  the 
York,  etc.  R.  R,  14  W.  L.  BulL  68  trustee.  Moses  v.  Scott,  84  Ala.  608 
(1885).  See  Griffith  v.  Jewett,  15  W.  (1888).  An  agreement  whereby  $83,000 
L.  Bull.  419  (1886) ;  Vanderbilt  v.  Ben-  of  stock  is  pooled  in  a  trustee's  hands, 
nett,3R'y&Corp.L.J.409(Pa.,1887);  the  latter  issuing  trustee's  certifi- 
Starbuck  v.  Mercantile  Trust  Co.,  60  cates  therefor,  and  electing  such  di- 
Conn.  553  (1891).  See  also  an  excel-  rectors  as  the  certificate-holders  may 
lent  article  and  careful  review  of  the  direct,  according  to  the  trust  agree- 
cases  by  Professor  Baldwin  in  1  Yale  ment,  may  be  annulled  and  set  aside 
L.  J.  1  (1891).  A  trust  of  stock  for  at  the  instance  of  purchasers  of  tlie 
the  benefit  of  both  the  bondholders  remaining  $17,000  of  stock  and  of  a 
and  the  stockholders  cannot  be  majority  of  the  trustee's  certificates, 
broken  up  by  one  of  the  stockholders  White  u  Thomas,  etc.  Co.,  53  N.  J. 
only.  Shelmerdine  v.  Welsh,  47  Leg.  Eq.  178  (1893).  An  agreement  be- 
Int  26  (Phila.  Com.  PL,  Jan.,  1890).  Al-  tween  stockholders  holding  a  major- 
though  many  stockholders  transfer  ity  of  the  shares  to  pool  their  stock 
their  stock  to  a  trustee  to  hold  and  by  transferring  it  to  trustees,  and 
vote  it  for  three  years,  and  agi-ee  not  authorizing  them  to  vote  all  such 

1186 


OH.  XXXVII.]        ELECTIONS  — CORPOKATE   MEETINGS.  [§622. 

Yotino-  trusts  of  this  kind  are  resorted  to  in  forming  "trusts," 
the  combinations  in  trade.  All  the  stock  of  various  competmg 
corporations  are  placed  in  the  hands  of  trustees,  who  issue 
trustee  certificates  therefor.  Such  voting  trusts  as  these  are 
declared  illegal  because  the  monopolistic  combination  that  is 
souo-ht  is  illegal.  Hence  the  decisions  concerning  the  "  trusts  " 
are°not  appli°cable  to  the  questions  now  under  consideration, 
inasmuch  as  the  question  of  monopoly  is  not  here  involved. 

Another  device  was  tried.    The  parties  contracted  together 
not  to  sell  their  stock  for  a  specified  time,  and  agreed  that  if 

stock  at  corporate  meetings,  and  to  the  stock  that  he  wiU  retain  control 
pledge  tas^collateral  for  loans,  is  is  no  defense  by  the  corporation  to 
piouho  lu  cv  o^+ir^n  h-o-  tVift  rficftiver  of  such 


voidras  against  public  policy.   Hence 
the  holder  of  one  of  the  trustee's 
certificates  may  demand  his  stock 
and  may  enjoin  the  trustee    from 
voting  his  stock  or  disposing  of  it. 
Harvey  u  Linville  Imp.  Co.,  118  N.  C. 
693  (1896).    A  vendor  of  stock  may 
collect  the  price  even  though  the 
agreement  contains  a  provision  for 
pooling  the  stock  which  is  illegal 
Edgerton  v.  Power,    18    IMont    350 
<1896).     The  trustees    are  not  pur- 
chasers and  owners    of  the   stock. 
People  V.  North  River  Sugar   Ref. 
Co.,  121  N.  Y.  583  (1890).     An  outside 
stockholder  cannot  object  to  other 
stockholders  uniting  their  interests 
in  a  "  trust,"  and  thereby  obtaining 
control  of  the  corporation.     Zimmer- 
mann  v.  Jewett,  19  Abb.  N.  Cas.  459 
(1^86).    But  he  can  object  when  the 
puri)03e  of  the  "  trust "  is  to  work  out 
some  scheme  which  is  illegal  in  it- 
self.   Hafer  v.  New  York,  etc.  R.  R-, 
14  W.  L.  Bull  68  (1886).    A  "trust  "^ 
of  stock  was  involved  in  Farmers' 
Loan,  etc.  Co.  v.  Chicago,  etc.  R'y,  27 
Fed.  Rep.  146  (1886),  where  Hugh  J. 
Jewett.  president  of  the  Erie  Railway, 
held  as  trustee  the  stock  of  the  Chi- 
cago &  Atlantic  Railroad,  the  west- 
em  connection  of  the  former  com- 
pany.   The  court  did  not  pass  on  the 
permanency  of  the  trust.    An  agree- 
ment of  the  holder  of  a  majority  of 


an  action  by  the  receiver  of  such 
stockholder  to  transfer  the  stock  on 
the  corporate  books.    Weller  v.  Pace 
Tobacco  Co.,  25  N.  Y.  Week.  Dig.  531 
(1886).    A  contract  to    combine  to 
control  the  majority  of  the  stock  of 
a  railroad  company  may  be  violated 
by  a  party  to  it,  although  by  its 
terins  it  is   irrevocable.    Clarke  v. 
Central  R  R.  etc.,  50  Fed.  Rep.  338 
(1892).    In  this  case,  however,  on  the 
final  hearing,  the  bill  was  dismissed. 
See  63  Fed.  Rep.  328  (1894).    Where 
stock  is  placed  in  a  trustee's  hands, 
and  a  trustee's  certificate  is  taken 
therefor,  a  pledge  of  the  trustee's 
certificate  is  not  a  pledge  of  the  stock 
sufficient  to  cut  off  subsequent  at- 
tachments of  the  stock.    Bidstrup  v. 
Thompson,  43  Fed.  Rep.  453  (1891). 
Where    stock  is   deposited  with    a 
trustee  for  purposes  of  reorganiza- 
tion, and  transferable  certificates  are 
issued  therefor  by  the  trustee,  a  claim- 
ant of  stock  which  another  person 
has  deposited,  and  for  which  such 
other  person  has  the  trustee's  certifi- 
cate, cannot  compel  the  trustee  to  de- 
liver up  the  stock  untU  the  trustee's 
certificate  is  returned,  even  though 
the  party  holding  it  is  a  party  d^ 
fendant.    Bean  v.  American  Loan, 
etc.  Co.,  122  N.  Y.  622  (1890). 

1  Pee  ch.  XXIX,  supra,  concernmg 
"  Trusts." 


1187 


§  C22.] 


ELECTIONS CORPOEATE   MEETINGS.         [OH.  XXXVII. 


they  did  they  would  sell  together  or  to  a  purchaser  who  would 
be  agreeable  to  the  old  stocldiolders.  But  this  plan  also  did 
not  succeed.  If  it  prohibited  any  sale  whatsoever,  and  did  not 
limit  the  time  during  which  the  agreement  was  to  last,  it  was 
void  as  an  illegal  restraint  of  trade.^  Moreover,  it  constituted 
n6  check  on  the  parties.  At  any  time  any  one  of  the  parties 
irfight  sell  his  stock.  The  only  remedy  of  the  other  parties 
against  liim  then  was  a  doubtful,  difficult,  protracted,  and  ex- 
pensive suit  for  damages.2  Again,  although  three  stockholders, 
by  an  instrument  similar  to  a  bill  of  sale,  sell  tlicir  stock  to  a 
fom^th  stockholder  "  for  and  dm-ing  the  period  of  six  months, 
...  in  trust  for  the  use  and  benefit  of  the  grantors,"  with 
power  to  sell  the  same  on  certain  terms,  yet  this  instrument 
is  not  a  sale  or  trust  agreement,  but  is  merely  a  power  of  at- 
torney. It  does  not  prevent  the  fourth  stockholder  from  selling 
his  own  stock  on  such  terms  as  he  chooses,  even  though  he  does 
not  sell  the  stock  of  the  others,  it  not  appearing  that  the  sale 


1  Fisher  v.  Bush,  35  Hxin,  641  (1885). 
See  also  §  621a,  supra. 

2  An  agreement  between  the  stock- 
holders of  a  corporation  that  no  one 
of  them  will  sell,  assign,  or  dispose  of 
his  stock  without  having  first  given 
the  other  parties  to  the  agreement 
an  opportunity  to  purchase  does  not 
disable  a  party  from  transferring  a 
legal  title  to  his  stock  without  the 
consent  of  the  other  parties  and  in 
violation  of  the  agreement,  and  this 
although  the  transferee  was  cogni- 
zant of  the  agreement  at  the  time  of 
the  transfer.  The  enforcement  of  spe- 
cific performance  of  such  an  agree- 
ment by  a  court  of  equity  rests  in 
the  discretion  of  the  court;  it  may 
not  be  demanded  as  a  right.  The 
fact  that  the  transferee  holds  the 
stock  subject  to  the  enforcement  of 
the  equitable  remedy  in  no  way  in- 
terferes with  his  legal  title,  nor  does 
it  preclude  the  corporation  from 
treating  him  as,  and  according  to 
him  all  the  rights  of,  a  stockholder, 
including  the  right  to  vote  upon  the 
stock   at    a    stockholders'  meeting. 


Ee  Argus  Co.,  138  N.  Y.  557  (1893).  -A 
personal  agreement  between  the  in- 
corporators, promoters,  and  proposed 
subscribers  to   the    stock  of  a  pro- 
posed corporation,  by  which  agree- 
ment the  corporation  is  to  have  the 
first  right  to  buy  the  stock  of  any 
one  who  wishes  to  sell,  does  not  pre- 
vent a  sale  by  a  stockholder  without 
offering  the  stock  to  the  corporation. 
Hence    the    corporation  caimot  re- 
fuse to  transfer  the  stock.    Ireland 
V.  Globe,  etc.  Co.,  38  Atl.  Rep.  116 
(R  I.,  1897).    See  also  §  G21a,  siipra. 
In  Ilavemeyer  v.  Havemeyer,  43  N. 
Y.  Super.  Ct.  506  (1878);  aff'd,  86  N.  Y. 
618,  it  was  held  that  an  agreement 
of  several  stockholders  not  to  sell 
their  own  stock  except  in  connection 
with  that  of  the  other  parties  to  the 
contract  was  not  in  restraint  of  trade 
and  was  not  contrary  to  public  pol- 
icy, as  restricting  the  right  of  aliena- 
tion, but  the  measure  of  damages  for 
breach  of  such  a  contract  is  only  the 
actual  loss  suffered  by  a  decline  in 
the  value  of  the  stock  by  reason  of 
the  breach. 


IISS 


CH.  XXXVII.]         ELECTIONS COEPOKATE   MEETINGS.  [§  622. 

of  liis  stock  prevented  his  selling  the  stock  of  the  others.  The 
instrument  conveyed  merely  at  most  "  only  a  dry  legal  title  for 
the  mere  purpose  of  sale,  and  with  the  power  of  sale  carefully 
circumscribed."  ^ 

Another  plan  was  to  restrict  by  a  by-law  of  the  corporation 
the  right  to  transfer  stock.    But  such  by-laws  are  illegal.^ 

Still  another  plan  was  tried.  An  unincorporated  joint-stock 
association  was  formed  to  carry  on  the  business.  A  provision 
was  inserted  in  the  articles  of  association  of  the  company  re- 
stricting the  right  of  a  shareholder  to  sell  his  stock.  This  pro- 
vision was  upheld  by  the  courts.  The  purchaser  of  a  certificate 
of  stock,  who  sold  in  violation  of  the  agreement,  received  no 
right  to  vote  or  participate  in  the  company.  He  merely  was 
entitled  to  the  dividends  on  his  stock.'  But  this  device  is  not 
open  to  corporations.  Their  charters  are  generally  obtained 
by  filing  a  certificate  in  accordance  with  a  general  law.  A 
special  provision  inserted  in  the  certificate,  limiting  the  right 
to  transfer  stock,  would  be  ineffectual  and  void.  All  these 
various  devices  have  proved  to  be  impracticable. 

Where,  however,  two  stockholders  make  a  contract  by  which 
the  stock  is  placed  in  the  name  of  one  of  them  to  be  held  in 
trust  and  voted  by  him  as  they  agree,  and  in  case  of  disagree- 
ment an  arbitrator  is  to  decide,  and  the  stock  is  not  to  be  sold 
until  they  agree  to  Sell,  the  one  so  placing  stock  in  the  name 
of  the  other,  as  trustee,  cannot  sue  the  latter  for  refusal  to  de- 
liver to  the  former  his  part  of  the  stock.*  Where  two  patentees 
agree  to  own  their  patents  in  common,  and  then  contract  with 

1  Levi  V.  Evans,  57  Fed.  Rep.  677  any  party  of  his  right  to  vote  on  the 

(1893),  stock.    Where  compensation  in  dain- 

-  See  g  621a,  supra.  ages  for  a  breach  would  be  difficult 

3  Harper     v.    Raymond,    3    Bosw.  or  impossible,  a  court  of  eqiiity  may 

<N.  Y.)  29  (1858).    See  Kingman  v.  grant  specific  performance  of  such 

Spurr,  34  Mass.  234  (1828).    See  also  a  contract  by  enjoining  a  breach 

Taft  V.  Harrison,  10  Hare,  489  (1853),  thereof.    Such  a  contract  is  not  void 

as  to  liability  after  an  offer  to  sell  to  as  suspending  the  power  of  aliena- 

the  company.  tion,  nor  is  it  against  public  policy 

<  Louisville  Trust  Co.  v.  Stockton,  as  being  a  restraint  upon  trade,  the 

75  Fed.  Rep.  62  (1896).    An  agreement  purpose  of  the  contract  being  to  pre- 

of  several  holders  of  stock  to  deposit  vent  a  sacrifice  of  the  stock.    Wil- 

such  stock  in  a  trust  company  for  a  liams  v.  Montgomery,  148  N.  Y.  519 

term  of  six  months,  and  not  to  sell  (1896),  practically  reversing  68  Hun, 

the  same  during  that  time,  is  legal,  416,  and  74  Hun,  427. 
there  being  no  provision  depriving 

1189 


§  622.]  ELECTIONS  —  CORPORATE   MEETINGS.        [CH.  XXXVII. 

a  corporation  to  convey  the  patents  to  it  for  stock  to  be  issued 
to.  them  jointly,  each  to  have  one-half,  and  each  to  have  one- 
half  the  dividends  thereof,  tlie  certificates  not  to  bo  changed, 
sold,  or  pledged  for  ten  years,  except  upon  their  joint  consent, 
the  instrument  may  also  provide  that  one  of  them  shall  vote 
the  stock  as  proxy  for  the  ten  years,  unless  both  agree  other- 
vt^ise.  The  court  held  that  such  a  contract  is  legal,  being  prac- 
tically a  contract  to  become  partners  in  the  ownei-ship  of  stock 
for  ten  years.^  A  transfer  of  a  controlling  interest  of  stock  of 
a  railroad  company  to  trustees  to  hold  until  the  road  is  com- 
pleted, and  then  to  return  the  same  to  the  transferrers,  the 
object  being  to  secure  the  co-operation  of  municipalities  in 
obtaining  an  extension  of  the  charter  and  the  granting  of  mu- 
nicipal aid,  is  legal,  the  transaction  being  a  fair  one,  and  being 
known  to  the  public,  and  insisted  upun  by  the  public  before  aid 
would  be  given.^  Several  parties  in  purchasing  stock  may 
agree  that  each  one's  share  shall  be  transferred  to  him,  but  that 
all  the  stock  shall  be  voted  for  five  years  in  one  way,  that  way 
to  be  determined  by  a  majority  of  the  stock  so  included  in  the 
agreement.  Such  an  agreement  is  legal,  even  though  it  provides 
that  dm-ing  that  time  the  parties  retain  the  power  to  vote  such 
stock.'  It  is  legal  for  stockholders  to  agree  to  place  their  stock 
in  the  hands  of  a  trustee  to  be  held  by  such  trustee  until  cer- 
tain debts  of  the  company  have  been  fully  paid.*  Such  an 
agreement  has  to  be  supported,  however,  by  something  more 
than  the  mere  agreement  of  the  parties.*^  It  is  legal  for  parties 

1  Hey  V.  Dolphin,  92  Hun,  230  (1895).  stock  in  the  hands  of  one  person  as 

2  Greene  v.  Nash,  85  Me.  148  (1892).  trustee  or  agent  to  hold  for  a  certain 

3  The  court  consequently  held  that  period  of  time,  the  parties  agreeing 
a  member  of  the  syndicate  who  re-  not  to  sell  their  stock  without  having 
fused  to  vote  in  accordance  with  a  first  offered  to  sell  it  to  the  rest  of 
decision  of  the  majority  had  no  right  their  associates  at  a  price  not  above 
to  vote  (by  reason  of  the  California  the  then  ciirrent  market  value,  and, 
statute  prescribing  that  only  bona  in  case  of  their  declining  to  take  it, 
fide  holders  of  stock  should  vote),  the  without  next  offering  it  to  tlie  trustee, 
court  holding  that  the  original  pur-  but  any  one  of  the  parties  to  be  at 
ohase  of  the  block  of  stock  bound  liberty  to  withdraw  at  any  time  on 
that  stock  in  its  vote.  Smith  v.  San  those  terms,  is  not  "  contrary  to  pub- 
Francisco,  etc.  R'y,  47  Pac.  Rep.  582  Uc  poUcy,  or  any  wise  open  to  objeo- 
(Cal.,  1897).  tion."    Brown  v.  Pacific  Mail  S.  Co., 

4  Mobile,  etc.  Co.  u  Nicholas,  98  Ala.  5  Blatchf.  525  (1867);  S.  C,  4  Fed 
92  (1893).    An  agreement  by  which  Cas.  420. 

various  owners  of  stock  place  their       5  Fisher  v.  Bush,  35  Hun,  641  (1885)w 

1190 


CH.  XXXVII.]        ELECTIOXS COKPOKATE   MEETINGS. 


[§  622. 


to  agree  that  certain  persons  shall  be  directors  for  a  certain 
length  of  time.'  An  agreement  that  a  certain  person  shall  be 
president  for  two  years  will  not  be  specifically  enforced  by  the 
courts.^ 

It  is  legal  for  the  stockholders  to  deposit  their  stock  with  a 
depositary,  to  be  transferred  to  such  depositary  and  voted  by 
him  as  directed  by  a  committee  of  the  stockholders,  such  com- 
mittee being  named,  the  object  of  the  deposit  being  to  effect 


"There  is  no  consideration  whatever 
between  the  trustees  and  the  sub- 
scribers; none  is  claimed  or  men- 
tioned in  the  agreement  itself,  and 
as  between  the  subscribers  there  is 
also  non&  Tlie  mere  fact  that  sev- 
eral or  a  majority  have  signed  does 
not  furnish  a  supporting  considera- 
tion. No  one  subscriber  acquired 
under  the  agreement  any  interest  in 
any  other  one  stock,  or  any  undivided 
interest  in  the  whole  of  the  stock 
represented  by  the  subscribers.  No 
real  and  special  consideration  is 
claimed,  and  without  this  the  agree- 
ment cannot  be  supported."  Vander- 
bilt  V.  Bennett,  3  R'y  &  Corp.  L.  J. 
409  (Pa.,  1887). 

1  But  a  receiver  will  not  be  ai>- 
pointed  on  account  of  a  breach  of  the 
contract.  Baumgarten  v.  Nichols, 
N.  Y.  L.  J.,  May  19,  1891.  An 
agreement  to  elect  a  certain  person 
president  is  waived  if  he  participates 
in  electing  others.  American,  etc. 
T.  Co.  V.  Toledo,  etc.  R'y,  47  Fed.  Rep. 
343  (1890).  A  contract  between  a 
stockholder  and  a  third  person  by 
which  the  third  person  is  to  be  made 
a  director,  and  agrees  to  devote  his 
time  and  attention  to  the  b\isiness, 
and  develop  the  property,  and  pro- 
cvire  the  construction  of  a  railroad, 
and  cause  various  lots  of  land  owned 
by  the  corporation  to  be  sold,  will 
not  sustain  an  action  at  law  for  dam- 
ages by  the  stockholder  for  breach 
of  the  contract.  An  action  in  such 
a  case  may  be  maintained  only  by 
the  corporation  or  by  the  stockholder 


in  its  behalf.  So  far  as  the  contract 
intended  to  control  the  action  of  the 
board  of  directors  it  was  illegal. 
Kountze  v.  Flannagan,  19  N.  Y.  Supp. 
33  (1892).  An  agreement  that  certain 
persons  should  have  control  of  the 
corporation  imtil  certain  debts  were 
paid  mvist  be  clearly  proved  before 
it  will  be  sustained  by  the  courts. 
Proctor,  etc.  Co.  v.  Finley,  33  S.  W. 
Rep.  188  (Ky.,  1895).  A  contract  be- 
tween two  companies  by  wliich  one 
is  to  name  four  of  the  six  directors 
of  the  other  (and  is  also  to  sell  the 
stock  of  the  latter,  cany  out  its  con- 
tract, and  pay  dividends  on  its  stock) 
is  illegal.  James  v.  Eve,  L.  R.  6  H.  L. 
335  (1873). 

2  Dulin  V.  Pacific,  etc.  Co.,  103  CaL 
357  (1894),  holding  also  that  an  elec- 
tion in  which  the  party  is  not  even 
elected  a  director  will  not  be  set 
aside,  even  under  the  statutory  power 
of  the  courts  to  set  aside  elections  on 
equitable  grounds.  A  coiui;  of  equity 
will  not  grant  specific  performance 
of  a  contract  to  vote  stock  as  the  com- 
plainant stockholder  wishes,  with  a 
view  to  controlling  the  corporation. 
Hence  where  the  promisee  of  such  a 
contract  knows  the  promisor  will  not 
fulfill  his  contract,  and  consequently 
the  promisee  buys  the  promisor's 
stock  at  a  high  price,  he,  the  promisee, 
cannot  rescind  such  purchase,  but 
must  pay  the  stipulated  price.  Gage 
V.  Fisher.  5  N.  D.  297  (1895).  See  also 
Baiungarten  v.  Nichols,  69  Hun,  216 
(1893). 


1191 


§  623.]  ELECTION'S COKPOEATE   MEETINGS.         [CU.  XXXVII. 

an  adjustment  of  differences  between  the  common  and  preferred 
stockholders.^ 

Where,  in  order  to  prevent  the  foreclosure  and  sale  of  a  rail- 
road, a  reorganization  agreement  is  entered  into  by  the  creditors 
and  stocldiolders,  whereby  the  claims  of  the  creditors  and  the 
voting  power  of  the  stockholders  are  vested  in  trustees,  the 
voting  power  to  be  exercised  by  the  trustees  until  certain  debts 
were  paid,  the  stockholders  cannot  withdraw  from  the  agree- 
ment and  claim  the  right  to  vote  upon  their  stock.' 

The  most  effective  way  in  whicli  a  majority  or  all  the  stock 
of  a  company  may  be  pooled  or  tied  up  seems  to  be  by  selling 
and  transferring  it  to  another  corporation  formed  for  that  pur- 
pose. Such  corporations  may  be  organized  under  the  laws  of 
many  of  the  states.  The  objection  to  this  plan  is  that  it  en- 
ables the  directors  of  the  second  corporation  to  sell  the  stock 
at  any  time,  and  it  involves  not  merely  a  temporary  pooling  of 
the  stock,  but  a  permanent  parting  with  the  title  and  interest 
in  it. 

A  contract  by  which  stock  is  contributed  for  the  purpose  of 
developing  the  business  of  the  company  is  legal.' 

§  623.  Who  may  he  a  director  or  corporate  officer —  Qualifi- 
cation shares. —  If  the,  charter  or  statutes  require  a  director  to 
be  a  stockholder,  one  who  holds  stock  transferred  to  him  in 
trust  for  the  express  purpose  of  qualifying  him  for  the  position 

1  The  agreement  did  not  prevent  rectors  who  were  elected  by  the  vote 

any    stockholder    from    demanding  of  the  depositary,  but  whose  title  to 

back  his  stock  whenever  he  saw  fit.  office  was  denied  by  the  company. 

The  court  held  that  this  was  not  a  Ohio,  etc.  Co.  v.  State,  49  Ohio  St.  6G8 

"voting   trust,"   and    that    it    was  (1892);  State  v.  O.  &  M.  R'y,  6  Ohio 

merely  "a  convenient  method    by  Giro.  Ct.  415  (1892). 
which  distant  and  widely-separated        2  Mobile,  etc.  R.  R  v.  Nicholas,  98 

shareholders  became  enabled,  indi-  Ala.  92  (1893).    Not  even  the  subse- 

rectly,  to  participate  in  the  control  quent  change  in  the  agreement  so  as 

and  management  of  the  company,  to  issue  first-mortgage  bonds  to  take 

and  from  which  each  could  recede  at  up  some  of  the  debt  will  enable  the 

any  time  and  demand  return  of  his  stockholders  to  claim  the  right  to 

stock  without  violating  any  term  of  vote  upon    their   stock    before  the 

the  agreement.    The  depositary  is  a  debts  specified  above  have  been  paid, 

proxy  required  to  vote  the  stock  as  Mobile,  etc.  Co.  v.  Nicholas,  98  Ala. 

directed    by  the   committee."    The  92  (1893).    See  also  Shelmerdine  v. 

contract  of  deposit  is  given  in  the  re-  "Welsh,  47  Leg.  Int.  26  (Phila.  Com. 

port.   The  suit  arose  on  g?fotmrrajifo  PL,  1890). 
proceedings  to  oust  the  board  of  di-        3  See  §§  76,  334,  supra. 

1192 


OH.  XXXVII.]        ELECTIONS  —  COKPOKATE   MEETINGS. 


[§  623. 


may  serve.^  And  where  a  person  has  the  right  to  vote  on 
stock  as  a  stockholder,  he  is  eligible  to  any  corporate  oifice  to 
which  any  stockholder  is  eligible,  and  accordingly  may  be 
elected  a  director,  even  though  an  assignee  in  bankruptcy  has 
been  appointed  of  his  estate.^  He  may  obtain  stock  m  any 
way  and  become  thereby  qualified.'  Although  the  charter  re- 
quires the  directors  to  be  stockholders,  it  has  been  held  that 
the  transferee  and  holder  of  a  certificate  of  stock  is  quahfied, 
even  though  the  stock  itself  stands  on  the  books  of  the  com- 
pany in  the  name  of  his  transferrer.^    In  general,  any  one  who 


1  Budd  V.  Munroe,  18  Hun,  31G  (1879). 
Contra,  Bartholomew  v.  Bentley,  1 
Ohio  St.  37  (1852).    Where  an  agent 
of   a    corporation    purchases    with 
corporate  funds,  without  authority, 
stock  in  another  company,  and  sells 
one  of  the  shares  to  a  person  in  order 
to  enable  the  latter  to  qualify  as  a 
director  in  such  company,  the  person 
receiving  the  one  share  is  protected 
in  his  title,  and  the  first-named  cor- 
lx)ration  cannot  compel  him  to  give 
it  up,  even  though  the  agent  had  no 
power  to  sell,  the  purchaser  having 
purchased  in  good  faith.    Hence,  his 
acts  as  a  director  are  valid.    Scarlett 
V.  Ward,  53  N.  J.  Eq.  197  (1893).    Al- 
though the  statute  requires  a  director 
to  be  a  stockholder,  it  is  no  objection 
that  a  quaUfication  share  was  put  in 
a  director's  name  merely  for  the  pur- 
pose of  qualifying  him.    Re  Leslie,  58 
N.  J.  L.  GOO  (1896).    In  a  stockholder's 
suit  to  enjoin  the  corporation  from 
entering  into  a  consolidation,  he  can- 
not question  the  right  of  the  direct- 
ors to  hold  office  on  the  ground  that 
the  qualification  shares  did  not  really 
belong  to  them.    Langan  v.  Franck- 
lyn,  20  N.  Y.  Supp.  404  (1892). 

2  State  V.  Ferris,  43  Conn.  560  (1875). 

3  A  stockholder  may  have  pur- 
chased stock  with  a  view  of  becom- 
ing a  director,  or  have  obtained  it  by 
gift,  or  he  may  hold  it  upon  a  trust, 
and  be  qualified  to  be  a  director.  He 
is  qualifieil  tmless  the  "title  was  put 

^  1193 


in  him  colorably,  with  a  view  to 
qualify  him  to  be  a  director  for  some 
dishonest  purpose,  in  furtherance  of 
some  fraudulent  scheme  touching  the 
organization  or  control  of  the  com- 
pany, or  to  carry  into  effect  some 
fraudulent   arrangement  with   the 
company."    Re  St.  Lawrence  Steam- 
boat Co.,  44  N.  J.  L.  529  (1883).    A 
person  is  qvialified  who  buys  stock  in 
his  own  name  with  his  wife's  money 
and  transfers  the.  certificate  to  her, 
but  afterwards,  and  before  registry, 
keeps  the  stock  for  himself.    Re  St. 
Lawrence  Steamboat  Co.,  44  N.  J.  L. 
529  (1882).    If  the  director  has  suffi- 
cient stock  registered  in  his  name,  it 
is  immaterial  that  he  does  not  own 
it.    Pulbrook  v.  Riclimond,  etc.  Co., 
L.  R.  9  Ch.  D.  610  (1878);  Bainbridge 
V.  Smith,  60  L.  T.  Rep.  879  (1889). 

4  State  V.  Smith,  15  Oreg.  98  (1887). 
The  corporate  books  are  not  conclu- 
sive as  to  the  qualification  of  a  person 
to  act  as  a  director.    If  he  owns  stock 
he  is  qualified,  even  though  he  does 
not  appear  as  a  stockholder  on  the 
corporate  books,  and  vice  versa.    The 
inspectors  cannot  reject  votes  on  the 
ground  that  the    candidate  is  not 
qualified.    Re  St.  La^Tence  Steam- 
boat Co.,  44  N.  J.  L.  529  (1882).    Under 
the  statutes  of  North  Dakota  an  un- 
registered holder  of  stock  is  not  quali- 
fied to  be  "elected    a  director.     Re 
Argus  Printing  Co.,  1  N.  D.  434  (1891). 


§  623.] 


ELECTIONS COKTOEATE    MEETINGS.         [CH.  XXXVII. 


may  be  an  agent  may  be  elected  a  director  of  a  private  corpo- 
ration; and  at  common  law  it  is  not  necessary  that  a  director 
be  a  stockholder.*  A  director  need  not  be  a  citizen  of  the  state 
by  which  the  corporation  is  created.'  The  constitutionality  of 
a  statute  which  prohibits  the  citizens  of  other  states  from  beicg 
directors  in  a  corporation  may  well  be  doubted.' 

An  alien  maybe  a  stockholder  and  director  in  a  corporation 
if  the  statutes  do  not  prohibit  it.*  A  married  woman  is  not  at 
common  law  qualified  to  act  as  an  incorporator  nor  as  treas- 
urer,^ but  under  the  usual  statutes  conferring  rights  upon  her, 
she  is  qualified  to  act  as  a  director  or  ofiicer.'  An  executor 
may  be  a  director.'' 

Yotes  cast  for  a  person  not  eligible  to  the  oflBce  cannot  elect 


1  State  V.  McDaniel.  23  Ohio  St.  354, 
367  (1872);  McDowall  v.  Sheehan,129 
N.  Y.  210  (1891);  Wiglit  v.  Springfield, 
etc.  R  R.,  117  Mass.  226  (1875);  Ee 
St.  Lawrence  Steamboat  Co.,  44  N.  J. 
L.  529  (1882);  Hoyt  v.  Bridgewater, 
etc.  Co.,  6  N.  J.  Eq.  253,  274  (1847);  Ex 
parte  Stock,  33  L.  J.  (Ch.)  731  (1864); 
Bartholomew  v.  B^itley,  1  Ohio  St.  37 
(1852);  People  v.  Northern  R  R,  43 
N.  Y.  317  (1870) ;  Cammeyer  v.  United, 
etc.  Churches,  3  Sandf.  Ch.  186,  349 
(1844) ;  Hurrell  &  Hj^de  on  Directors 
and  Officers,  3;  State  v.  Swearingen, 
13  Ga.  23  (1852)  —  a  municipal  corpo- 
ration case.  The  charter  or  by-laws 
may,  however,  provide  otherwisa 
Despatch  Line  v.  Bellamy  Mfg.  Co., 
13  N.  H.  205  (1841).  It  is  not  neces- 
sary that  the  directors  should  be 
either  subscribers  to  the  stock  or  cor- 
porators. Densmore  Oil  Co.  v.  Dens- 
more,  54  Pa.  St.  43  (1877);  Re  British 
Provident,  etc.  Assoc,  L.  R  5  Ch.  D. 
306  (1877).  It  has  been  doubted 
whether  the  by-laws  of  a  company 
may  require  directors  to  be  stock- 
holders. People  V.  Albany,  etc.  R.  R, 
55  Barb.  344,  373  (1869).  Cf.  Cross  v. 
West  Virginia,  etc.  R'y,  37  W.  Va.  343 
(1893). 

2Kerchner  v.  Gettys,  18  S.  C.  521 
(1883).  A  citizen  of  one  state  may  be 
a  stockholder  and  director  in  a  corpo- 

1194 


ration  incorporated  in  another  stata 
Commonwealth  v.  Detwiller,  131  Pa, 
St  614  1 1890).  Directors  of  a  national 
bank  "are  not  required  to  reside  at 
the  bank's  place  of  business."  Rob- 
inson V.  Hall,  59  Fed.  Rep.  648  (1894). 
The  directors  of  a  corporation  need 
not  be  residents  of  the  state  unless 
the  statutes  expressly  require  it. 
North,  etc.  Rolling-stock  Co.  v.  Peo- 
ple, 147  111.  234  (1893). 

3  See  §  813,  infra,  to  the  effect  that 
such  a  statute  as  regards  trustees  in 
a  mortgage  deed  of  trust  is  unconsti- 
tutional and  void.  A  constitutional 
provision  requiring  directors  to  be 
stockholders  does  not  apply  to  a  con- 
solidated railroad  company  existing 
as  one  corporation  in  two  states. 
Ohio,  etc.  R'y  v.  People,  123  DL  467 
(1888). 

*  Commonwealth  v.  Hemmingway, 
131  Pa.  St.  614  (1890). 

5  9R'y&Corp.  L.  J.  197. 

6  People  V.  Webster,  10  Wend.  554 
(1833). 

^i2e  Santa  Eulalia  S.  Min.  Co.,  4 
N.  Y.  Supp.  174  (1889).  An  executor 
may  be  a  director  even  though  the 
stock  does  not  stand  in  his  nama 
Schmidt  v.  INIitchell,  41  S.  W.  Rep. 
929  (Ky.,  1897);  Re  Santa  Clara,  etc. 
Co.,  N.  Y.  Daily  Reg.,  June  19,  1888. 


CH.  XXXVn.]        ELECTIONS COKPOKATE   MEETINGS. 


[§  623. 


him.  He  is  not  even  a  de  facto  director,  and  he  may  be  ousted 
by  legal  proceedings.^  Such  votes,  however,  are  not  to  be  ig- 
nored so  as  to  elect  a  candidate  who  receives  a  minority  of  all 
the  votes  cast.^    The  election  is  good  as  to  those  who  v/ere 


1  The  election  of  a  person  not  quali- 
fied does  not  make  him  even  a  de 
facto  director.  Re  Newcomb,  18  N.  Y. 
Supp.  16  (1891);  Hamley's  Case,  L.  R 
5  Ch,  D.  705  (1877);  Jenner's  Case, 
L.  R  7  Ch.  D.  133  (1877).  Where 
cumulative  voting  prevails,  and  the 
statutes  require  three  directors  to  be 
residents,  and  all  votes  cast  are 
cumulated  on  non-residents  except- 
ing thirtj-'two  which  are  cast  lor 
three  residents,  the  three  residents 
are  elected,  and  the  remaining  di- 
rectors are  those  of  the  non-residents 
who  received  the  highest  number  of 
votes.  Horton  v.  Wilder,  48  Kan.  222 
(1892).  Where  directors  must  be 
stockholders  qualified  to  vote,  a 
stockholder  not  qualified  to  vote  by 
reason  of  not  owning  his  stock  for 
thirty  days  before  the  election  is  not 
qualified  to  be  a  director.  His  elec- 
tion does  not  make  him  even  a  de 
/acfo  director.  i?e  Newcomb,  18  N.  Y. 
•  Supp.  16  (1891).  Where  an  election 
is  "  conceived  in  fraud  and  conducted 
contrary  to  law,"  the  call  being  in- 
sufficient, the  notice  concealed,  the 
instigators  having  sold  and  trans- 
*  ferred  their  certificates  of  stock,  the 
purpose  of  the  election  being  to  steal 
the  control  from  one  who  really 
owned  all  the  stock,  and  two  of  the 
alleged  new  directors  not  being  stock- 
holders as  required  by  law,  there  are 
no  directors  de  facto,  even  though 
they  take  possession  and  drive  away 
the  contractor  who  is  building  the 
road.  Johnston  v.  Jones,  23  N.  J.  Eq. 
216  (1872).  In  Barber's  Case,  L.  R  5 
Ch-  D.  963  (1877  ,  arising  under  simi- 
lar facts,  the  court  said :  "  Mr.  Barber 
was  not  qualified  to  be  elected  a  di- 
rector, and  his  election  was  abso- 
lutely null  and  void.  ...  If  he  had 


acted  as  a  director,  there  might  have 
been  an  estoppel"  The  board  of  di- 
rectors cannot,  even  under  a  by-law 
authorizing  them  to  fill  vacancies, 
oust  a  director  on  the  gi-ound  that  he 
was  ineligible  when  elected,  and  then 
proceed  to  fill  his  place.  Common- 
wealth V.  Detwiller,  131  Pa.  St.  614 
(1890).  A  director  who  is  not  a  stock- 
holder cannot  sign  a  statutory  notice 
of  a  meeting  to  increase  the  capital 
stock.  Re  Wheeler,  2  Abb.  Pr.  (N.  S.) 
361  (1866).  It  formerly  was  held  in 
England  that  the  election  of  one  not 
a  shareholder  as  a  director  in  a  cor- 
poration in  which  it  is  required  that 
the  directors  be  owners  of  a  certain 
amoiint  of  stock  is  valid;  and  such  a 
person,  ujion  acceptance  of  the  di- 
rectorship, is  bound  to  take  and  pay 
for  the  required  number  of  shares. 
But  the  later  decisions  have  estab- 
lished the  rule  that  by  accepting  the 
directorship  he  does  not  thereby  be- 
come liable  as  a  subscriber  for  stock 
to  the  amount  of  qualification  shares. 
See  §  52,  supra.  The  election  of  a 
disqualified  person  as  director  is  void- 
able, not  void.  People  v.  Albany,  etc 
R  R,  55  Barb.  344,  373  (1809). 

2  Where  the  person  declared  elected 
received  a  minority  of  the  votes,  he 
will  be  ousted  even  though  the  other 
candidate  was  not  qiialified  to  act  as 
a  director.  "  Votes  cast  for  a  candi- 
date who  is  disqualified  for  the  office 
wiU'not  be  thrown  away  so  as  to 
make  the  election  fall  on  a  candidate 
having  a  minority  of  votes,  vmless 
the  electors  casting  such  votes  had 
knowledge  of  the  fact  on  which  the 
disqualification  of  the  candidate  for 
whom  they  voted  rested,  and  also 
knew  that  the  latter  was,  for  that 
reason,  disabled  by  law  from  holding 


1195 


§  G23.]  ELECTIONS  —  COEPORATE   MEETINGS.        [CH.  XXXVII. 

eligible.^  Altliough  the  statutes  require  a  director  to  be  a 
stockholder,  yet  a  person  not  a  stockholder  may  be  elected,  and 
may  then  acquire  one  or  more  shares  of  stock  before  acting  as 
director.  This  satisfies  the  law.^  A  statute  requiring  directors 
to  be  stockholders  does  not  apply  to  directors  named  in  the 
certificate  of  incorporation  for  the  first  year.' 

Where  a  person  not  eligible  to  the  oflice  is  declared  elected, 
and  no  stockholder  objects  or  takes  legal  proceedings  to  test 
the  right  to  the  office,  and  such  person  is  allowed  to  perform 
the  duties  of  his  office,  he  becomes  an  officer  de  facto.  As  sucli 
bis  acts  cannot  be  objected  to  on  the  ground  that  he  was  not  a 
legally-elected  director,  Neither  corporate  creditors,  nor  the 
corporation,  nor  the  stockholders,  nor  the  director  himself,  are 
allowed  to  raise  this  objection  in  that  manner.  The  remedy  is 
to  oust  him  by  (luo  warranto  or  to  enjoin  him  as  a  usurper.  But 
after  he  is  allowed  to  become  a  de  facto  director,  his  title  to  of- 
fice cannot  be  attacked  collaterally,  nor  can  his  acts  be  repudi- 
ated on  that  ground.* 

Where  the  charter  requires  the  director  to  be  a  stockholder, 
he  must  continue  to  hold  stock  during  his  term  of  office.  If  he 
sells  all  his  stock  in  the  company,  he  thereby  becomes  disquali- 
fied and  ceases,  ijpsofacto^  to  be  a  director.'    Where  the  charter 

the  office."    Re  St.  Lawrence  Steam-  a  share  of  stock  was  given  to  him 

boat  Co.,  44  N.  J.  L.  529  (1882),  citing  shortly  after  his  election  and  he  took 

cases.    See  also  People  v.  Clute,  50  the  same.    Hence  he  may  purcliase 

N.  Y.  451  (1872).    Unless  the  stock-  corporation  property  at  a  judicial 

holders  know  that  they  are  voting  sale.    Rozecrans    Gold    Min.   Co.  v. 

for  an  ineligible  candidate,  a  candi-  Morey,  111  CaL  114  (1896). 

date  who  receives  a  minority  of  the  3  Camden,  etc.   Co.   v.  Birrlington, 

stock  cannot  be  declared  elected;  in  etc.  Co.,  33  Atl.  Rep.  479  (N.  J.,  1895); 

other  words,  the  votes  cast  for  the  in-  McDowall  v.  Sheehan,  129  N.  Y.  200 

eligible  person  are  not  to  be  ignored,  (1891);  Portal  v.  Emmens,  L.  R.  1  C. 

but  a  new  election  must  be  held,  P.  D.  664,  667  (1876). 

Schmidt  v.  Mitchell,  41  S.  W.  Rep.  929  <  See  §  713,  infra. 

(Ky.,  1897).  5  Where  the  statutes  require  the  di- 

1  Schmidt  u  Mitchell,  41  S.  W.  Rep.  rector  to  be  a  stockholder,  it  follows 
929  (Ky.,  1897).  "  that  as  soon  as  a  director  parts 

2  Greenough  u  Alabama,  etc.  R.  R,  with  all  beneficial  interest  in,  and 
64  Fed.  Rep.  22  (1894).  Where  direct-  control  over,  the  stock  which  he  is 
ors  must  be  stockholders,  a  person  required  to  hold,  and  causes  the  of- 
elected  director  without  his  knowl-  fleers  of  the  corporation  to  have 
edge  and  owning  no  stock,  and  who  knowledge  of  such  fact  by  a  request 
never  acted  as  a  director  for  ten  that  a  proper  transfer  be  made  on 
years,  is  not  a  director,  even  though  the  books  of  the  company,   he  no 

1196 


OH.  XXXVII.]        ELECTIONS CORPOEATE   MEETINGS. 


[§  623. 


requires  directors  to  be  stockholders,  and  tliree  of  the  seven  are 
clerks,  to  each  of  whom  one  share  of  stock  is  transferred,  and 
the  certificate  therefor  is  at  once  retransf erred  to  the  real  par- 
ties in  interest,  this  is  good  ground  for  a  forfeiture  of  the  char- 
ter.^ A  director  may,  however,  remain  as  a  de  facto  director 
and  bind  the  company  by  his  acts,  if  allowed  to  continue  in  his 
position.^  The  director  does  not  become  disqualified  by  reason 
of  his  pledging  his  stock.'  The  secretary,  treasurer,  or  other 
officer  of  a  corporation  need  not  be  a  resident  or  citizen  unless 
the  statute  requires  it.* 


longer  possesses  the  qualifications 
which  the  statute  declares  to  be 
essential,"  and  hence  he  ceases  ipso 
facto  to  be  a  director,  and  is  no  longer 
liable  on  a  director's  statutory  liabil- 
ity. "The  statute  executing  itself 
operated  to  divest  him  of  title  to  the 
oflSce.'*  Chemical  Nat  Bank  v.  Col- 
well,  132  N.  Y.  250  (1S92).  Under  the 
New  York  statutes  a  director  ceases 
to  be  such  when  he  sells  his  shares, 
and  certainly  after  the  transfer  ia 
recorded  on  the  corporate  books. 
Hence  he  is  not  liable  as  a  director 
on  the  statutoiy  liability  for  not  fil- 
ing a  report  subsequent  to  the  time 
when  he  sold  his  stock.  Sinclair  i'. 
Dwight,  9  N.  Y.  App.  Div.  297  (ISUG). 
Contra,  Nathan  v.  Tompkins,  82  Ala, 
437  (1887),  holding  that  lie  may  be  re- 
moved, but  does  not  cease  to  be  a 
director  by  the  mere  act  of  selling 
his  stock.  To  same  effect,  Atlas  Nat. 
Bank  v.  F.  B.  Gardner  Co.,  8  Biss.  537 
(1879);  S.  C,  2  Fed.  Cas.  186.  Although 
the  statute  requires  three  directors, 
who  shall  be  stockholders,  and  one 
assigns  his  stock,  and  the  other  two 
authorize  and  execute  a  corporate 
mortgage  at  a  meeting  held  without 
notice  to  the  other,  yet  the  mortga- 
gee, having  no  knowledge  of  these 
facts,  is  protected.  Kuser  v.  "SVriglit, 
52  N.  J.  Eq.  825  (1895),  rev'g  Wright 
V.  First  Nat.  Bank,  52  N.  J.  Eq.  392. 
"Where  a  trustee  sells  and  delivers 
all  his  stock,  he  ceases  to  be  an  officer 
dejure,  the  statute  requiring  him  to 

119 


be  a  stockholder;  and  where  the 
whole  board  of  directors  have  sold 
their  stock,  their  acts  as  a  board  of 
directors  are  not  binding  on  the  cor- 
poration. OiT,  etc.  Co.  V.  Reno  Water 
Co.,  17  Nev.  166  (1882).  "  Can  a  di- 
rector part  with  his  qualification 
shares  ?  "  See  on  this  subject,  8  R'y 
&  Corp.  L.  J.  99.  A  person  may  pur- 
chase stock  although  such  stock  con- 
stitute the  qualification  shares  of  the 
vendor  as  a  director.  Kern  v.  Day, 
45  La.  Ann.  71  (1893).  A  motion  de- 
claring the  office  vacant  and  electing 
another  person  before  the  director 
has  really  sold  his  stock  is  void. 
Craw  V.  Easterly,  54  N.  Y.  679  (1873). 

1  Lorilkird  v.  Clyde,  142  N.  Y.  456 
(1894). 

2  A  director  who  sells  his  stock 
ceases  to  be  a  dejure  director.  If  he 
continues  and  is  permitted  to  act  he 
is  a  director  de  facto.  Beardsley  v. 
Johnson,  121  N.  Y.  224  (1890). 

3  Cummings  v.  Prescott,  2  Y.  &  C. 
Exch.  488  (1837).  This  was  held  in  a 
case  where  the  qualification  shares 
were  to  be  held  by  the  directors  in 
their  own  right.  Pulbrook  v.  Eich- 
mond,  etc.  Min.  Co.,  L.  R.  9  Ch.  D.  610 
(1878).  The  covirt,  in  Ex  parte  Little- 
dale,  24  L.  J.  (Bankr.)  N.  S.  9  (1555), 
assumed  that  a  director  became  dis- 
qualified where  he  had  pledged  his 
stock,  even  though  the  transfer  was 
not  recorded. 

*  Kerchner  v.  Gettys,  18  S.  C.  521 
(1882);  McCall  v.  Byram  Mfg.  Co.,  6 


§  624.] 


ELECTIONS COKPOKATE   MEETINGS.         [CH,  XXXVII. 


A  corporation  may  pass  a  by-law  prescribing  the  qualifica- 
tions of  its  directors,  and  may  prescribe  that  a  person  who  is  an 
attorney  against  it  in  a  suit  sliall  not  be  a  director.' 

§  624.  Accejjtance  and  resignation  of  office  and  failure  to  elect 
officers  —  Removal  of  directors. —  An  acceptance  of  the  office  by 
one  who  is  elected  director  is  necessary  to  constitute  him  a  di- 
rector.  Some  direct  and  positive  act  of  acceptance  is  necessary.' 

A  director  may  resign,  and  no  formal  acceptance  or  entry 
thereof  on  the  minute-book  of  the  corporation  is  necessary  to 


effect  the  resignation.' 

Conn.  428  (1827).  But  in  Matthews 
V.  Trustees,  2  Brewst.  (Pa.)  oil  (18G8), 
the  court  enjoined  the  company  from 
compelling  its  resident  treasurer  to 
turn  over  funds  to  a  newly-elected 
non-resident  treasurer. 

1  Cross  V.  West  Virginia,  etc  R'y, 
87  W.  Va.  342  (1892). 

2  Osborne,  etc.  Co.  v.  Croome,  14 
Hun,  164(1878);  alY'd,  77  N.  Y.  629; 
Cameron  v.  Seaman,  69  N.  Y.  396 
(1877);  Rozecrans,  etc.  Co.  v.  Morey, 
111  Cal.  114  (1896).  An  "honorary 
director,"  who  sits  with  the  board, 
makes  up  a  quorum,  and  accepts  pay, 
is  subject  to  the  disabilities  and  lia- 
bilities of  a  director  as  to  being  inter- 
ested in  contracts  with  the  company. 
There  is  no  such  thing  in  law  as  an 
"honorary  director."  Ex  parte  Stears, 
Johns.  V.-C.  480  (1859).  It  is  a  question 
for  the  jiury  whether  a  person  ac- 
cepted a  directorship.  The  mere  fact 
that  as  an  adviser  he  met  with  the 
directors  and  made  motions  is  not 
conclusive  if  he  declined  to  accept. 
Blake  v.  Bayley,  82  Mass.  531  (1860). 
Acceptance  is  pi-esumed.  Lockwood 
V.  Mechanics',  etc.  Bank,  9  R  L  308 
(1869).  But  may  be  disproved,  even 
though  the  person  attended  directors' 
meetings.  Blake  v.  Bayley,  82  Mass. 
531  (1860).  The  fact  that  a  director 
does  not  attend  meetings  or  signify 
his  acceptance  of  the  office  does  not 
justify  the  board  in  declaring  his  of- 
fice vacant.  Acceptance  is  presumed. 
Halpin  v.  Mutual,  etc.  Co.,  20  N.  Y. 


App.  Div.  583  (1897).  Notice  of  a  di- 
rectors' meeting  need  not  be  given 
to  a  director  who  has  never  accepted 
the  oftice.  United  Growers'  Co.  v. 
Eisner,  22  N.  Y.  App.  Div.  1  (1897). 

3  Movius  V.  Lee,  30  Fed-  Rep.  298 
(1887);  Smith  v.  Danzig,  64  How.  Pr. 
320  (1883);  Chandler  v.  Hoag,  2  Hun. 
613  (1874);  aff'd,  63  N.  Y.  624;  Blake 
V.  Wheeler,  18  Hun,  496  (1879);  atf'd, 
80  N.  Y.  128.  A  resignation  to  take 
effect  on  the  termination  of  the  term 
for  which  a  director  is  elected  is  ef- 
fectual, and  he  does  not  hold  over 
though  no  successor  is  elected.  Van 
Ambxirgh  v.  Baker,  81  N.  Y.  46  (1880). 
A  resignation  releases  a  director  if 
laid  before  the  board  of  directors, 
and  it  is  effective,  though  not  ac- 
cepted, where  it  has  been  duly  pre- 
sented. Maitland's  Case,  4  De  G.,  M. 
&  G.  769  (1853).  Even  though  an  of- 
ficer resigns  for  the  pvurpose  of  pre- 
venting sei-vice  upon  the  company, 
yet,  if  the  resignation  is  accepted, 
service  caimot  be  made  upon  him. 
Sturgis  V.  Crescent,  etc.  Co.,  10  N.  Y. 
Supp.  470  (1890).  A  director  may  re- 
sign after  the  company  and  officers 
have  been  enjoined  from  interfering 
with  the  corporate  assets,  and  may 
then  pursue  his  remedies  as  a  corpo- 
rate creditor.  Mexican,  etc.  Co.  v. 
Mexican,  etc.  Co.,  47  Fed.  Rep.  351 
(1891).  A  resignation  takes  effect 
upon  its  deliveiy,  even  though  not  ac- 
cepted. International  Bank  t'.  Faber, 
86  Fed.  Rep.  443  (1898).   A  resignation 


1198 


CH.  XXXVII.]        ELECTIONS  —  COEPOEATE  MEETINGS. 


[§  62i. 


A  director  may  resign  by  an  oral  statement  to  tliat  effect, 
and  his  resignation  may  be  accepted  in  the  same  manner  by  the 
president.^  But  a  mere  statement  of  a  director  that  he  will 
have  nothing  more  to  do  with  the  office  is  not  a  sufficient  res- 
ignation.2 

A  resignation  may  be  effectual  even  though  it  is  not  ac- 
cepted, but  it  has  been  doubted  whether  all  the  directors  can 
resign,  thereby  leaving  the  corporation  helpless.' 

A  director  whose  resignation  has  been  accepted  cannot  after- 
wards vote  at  a  meeting  as  a  director.^  The  fact  of  the  resig- 
nation need  not  be  published  or  made  known  to  corporate 
creditors.* 

In  England  it  has  been  held  that  the  resignation  of  a  director 
must  be  presented  to  a  meeting  of  the  stockholders  in  order  to 
be  effective,  unless  the  by-laws  allow  the  directors  to  accept  it. 
It  is  not  sufficient  to  present  the  resignation  to  a  meeting  of 
the  board  of  directors.  Hence,  although  a  resignation  is  sent 
in  in  the  middle  of  the  year,  and  is  not  accepted  until  the  stock- 
holders' meeting  later  in  the  year,  the  director  continues  to  be 
such  until  such  acceptance.' 


may  be  efiFective  without  acceptance. 
Noble  V.  Euler,  20  N.  Y.  App.  Div.  548 
<1897).  Where  a  treasurer  and  gen- 
eral manager  tenders  his  resignation 
to  take  effect  upon  acceptance,  his 
salary  ceases  upon  the  date  of  accept- 
ance. Savannah  C.  Mills  v.  Cunning- 
ham, 28  S.  E.  Rep.  435  (Ga.,  1897). 

1  Briggs  V.  Spaulding,  141  U.  S.  132, 
150  (1891).  A  director  of  a  coi-pora- 
tion  may  resign  at  any  time.  His 
resignation  may  be  oral  or  in  writing. 
The  fact  that  a  statute  says  directors 
shall  continue  imtil  their  successors 
are  appointed  does  not  prevent  a  di- 
rector resigning  at  any  tima  Fear- 
ing V.  Glenn,  73  Fed.  Rep.  116  (1896). 
Service  upon  the  president  is  good 
although  he  testifies  that  he  had  re- 
signed, there  being  proof  to  the  con- 
trary and  that  he  afterwards  acted 
as  president  Mott  Iron  Works  v. 
West  Coast,  etc.  Co.,  113  CaL  341 
(1896). 

2  A  mere  statement  by  one  director 


to  another  that  he  wovdd  have  no 
more  to  do  with  the  office  is  not  a 
resignation.  Kindberg  v.  Mudgett, 
24  N.  Y.  Week.  Dig.  229  (1880).  A 
statement  by  a  director  to  the  sec- 
retary and  treasurer  at  the  time  of 
transferring  all  his  shares  that  he 
severed  all  connection  with  the  com- 
pany is  not  a  resignation,  so  far  as 
corporate  creditors'  rights  are  con- 
cerned. Chemical  Nat.  Bank  v.  Col- 
weU,  9  N.  Y.  Supp.  285  (1890);  Chem- 
ical Nat.  Bank  v.  Colwell,  9  N.  Y. 
Supp.  288  (1890);  reversed  on  other 
grounds,  132  N.  Y.  250.  Application 
to  sue  may  be  made  to  the  president 
though  he  claims  to  have  resigned. 
Averill  v.  Barber,  6  N.  Y.  Supp.  255 
(1889). 

3  Carnaghan  v.  Exporters',  etc.  Co., 
11  N.  Y.  Supp.  172  (1890). 

*  Wickersham  v.  Crittenden,  93  CaL 
17  (1892). 

5  Bruce  v.  Piatt,  80  N.  Y.  379  (1880). 

SMimicipal,  etc.  Land  Co.  v.  Pol- 


1199 


§  G2i.] 


ELECTIONS  —  CORrORATE   MEETINGS.         [CH.  XXXVII. 


The  insolvency  of  a  director  does  not  vacate  his  office.*  A 
director  does  not  lose  his  seat  by  absence.'  But  the  by-laws 
may  provide  otherwise.' 

A  director,  unless  he  has  resigned,  continues  to  be  such  until 
his  successor  is  elected,  even  though  he  never  attends  meetings 
and  is  never  consulted.'^ 

A  reduction  in  the  number  of  trustees  may  be  valid  although 
the  statutory  certificate  is  not  filed,  so  far  ns  corporate  credit- 
ors are  concerned.*  The  failure  to  have  the  number  of  direct- 
ors required  by  statute  does  not  invalidate  their  acts.' 

The  stockholders  have  no  power  to  remove  directors  before 
the  expiration  of  their  term  of  office  unless  the  charter  or  by- 
laws expressly  give  that  power.'  Nor  can  they  remove  the 
president.^  The  president  is  elected  by  the  directors,*  and  after 
election  the  directors  cannot  remove  him.^" 

A  failure  to  elect  officers  at  the  stated  time  does  not  work  a 
dissolution  of  the  corporation.     The  old  directors  continue  in 


lington,  63  L.  T.  Rep.  238  (1890). 
Where  the  by-laws  give  the  directors 
power  to  fill  vacancies  in  the  board, 
they  may  fill  vacancies  due  to  the 
original  directors  refusing  to  serve. 
La  Compagnie  de  Mayville  v.  Whit- 
ley, [1890]  1  Ch.  788. 

1  Atlas  Nat.  Bank  v.  F.  B.  Gardner 
Co.,  8  Biss.  537  (1879);  S.  C,  3  Fed. 
Cas.  186. 

2  Phelps  V.  Lyle,  10  Ad.  &  K  113 
(1839). 

3  Wilson  V.  Wilson,  6  Scott,  510 
(1888),  holding  that  an  absconding 
director  becomes  "unable  to  act" 
within  the  meaning  of  the  by-laws. 
Sturges  V.  Vanderbilt,  73  N.  Y.  384 
(1878);  S.  C,  below,  sith  nom.  Sturgis 
V.  Drew,  11  Hun,  136. 

4  First  Nat.  Bank  v.  Lamon,  130 
N.  Y.  386  (1891). 

5  Wallace  v.  Walsh,  125  N.  Y.  26 
C1890). 

^  See  §  713a,  infra. 

'  See  §  711,  infra.  Where  a  direct- 
ors' by-law,  confirmed  by  the  stock- 
holders, fixes  their  term  of  office  at 
one  year,  the  stockholders  cannot,  by 


amending  the  by-law,  turn  the  di- 
rectors out  during  the  year.  Stephen- 
son V.  Vokes,  27  Ont.  (Can.)  691  (1896). 
A  director  cannot  be  excluded  from 
his  duties  as  such,  nor  can  his  elec- 
tion be  declared  invalid,  merely  be- 
cause of  what  he  may  contemplate 
doing  as  a  director.  Ohio,  etc.  Co.  v. 
State,  49  Ohio  St.  068  (1892). 

8  Ohio,  eta  Co.  v.  State,  49  Ohio  St. 
008  (1892).  A  contract  between  a 
company  and  a  person  that  he  shall 
be  the  managing  director  for  ten 
years  does  not  prevent  the  corpora- 
tion from  dismissing  him.  Bain- 
bridge  V.  Smith,  60  L.  T.  Rep.  879 
(1889). 

9  The  stockholders  have  no  power 
to  elect  the  president.  Their  action 
is  a  nullity.  Walsenburg  Water  Co. 
V.  Moore,  5  Colo.  App.  144  (1894). 

10  Where  three  out  of  five  directors 
met  without  notice  to  the  other  two, 
and  deposed  the  president  and  au- 
thorized a  mortgage,  their  acts  are 
void.  Hatch  v.  Johnson  L.  «fe  T.  Co., 
79  Fed.  Rep.  828  (1895). 


1200 


CH.  XXXVII.]        ELECTIONS COEPOEATE   MEETINGS.  [§  C25. 

office  until  their  successors  are  duly  elected.^  But  in  England 
it  is  held  that  where  the  by-laws  provide  that  the  directors 
shall  be  elected  annually,  and  shall  hold  office  for  one  year, 
they  cannot  hold  over.  They  cease  to  be  directors  at  the  end 
of  the  year,  and  insurance  assessments  levied  by  them  after  the 
year  are  invalid.^  Even  though  the  failure  to  elect  has  ex- 
tended over  a  period  of  several  years,  and  there  are  by  reason 
thereof  no  directors  in  office,  the  old  directors  having  wholly 
abandoned  their  trust,  the  stockholders  may  at  any  time,  in  a 
lawful  manner,  proceed  to  the  election  of  a  new  board  of  di- 
rectors.^ But  if  the  majority  fail  or  refuse  to  hold  an  election, 
and  the  corporate  property  is  thereby  endangered,  a  court  of 
equity  may  appoint  a  receiver  to  take  charge  of  it,*  and  will  in 
a  proper  case  authorize  a  -winding  up.* 

A  director  is  an  "  officer "  of  the  corporation  in  the  usual 
meaning  of  that  term.  A  director  is  entitled  at  all  times  to 
examine  the  books  and  papers  of  the  company.® 

Questions  relative  to  the  meetings  of  directors  are  considered 
elsewhere.'' 

§  625.  StoclcUolders  can  act  only  at  corporate  meetings. — 
Stockholders  can  hold  elections  and  transact  the  other  busi- 

1  State  V.  Bonnell,  35  Ohio  St.  10, 17  Queen  Min.  Co.  v.  Abraham,  26  Oreg. 

(1878),  in  which  an  election  of  direct-  282  (1894). 

ors    being  held   invalid,  those   pre-  2  Tyne,  etc.  Assoc,  v.  Brown,  74  L. 

viously  in    office  were  restored  to  T.  Rep.  283  (1896). 

office  "as  being  entitled  to  hold  xintil  »  People  v.  Twaddell,  18  Hun,  427 

their  successors  were  qualified.    Hu-  (1879).    In  ReiUy  u.  Oglebay,  25  W. 

guenot    Nat   Bank    v.  Studwell,   6  Va.  36,  43  (1884),  it  is  held  that  where 

Daly,   13  (1875),  reversed   on  other  there  is  no  board  of  directors  the 

grounds,  74  N.  Y.  621  (1878);  and  see  shareholders  themselves  may,  pend- 

§  631,  infra.    Holding  over  may  also  ing  a  regular  election,  lawfully  as- 

arise  from  acting  as  a  director.    San-  sume  and  perform  the  duties  which 

born  V.  Lefferts,  58  N.  Y.  179  (1874).  ordinarily  belong  to  a  board  of  di- 

Hold-over  directors  may  hold  meet-  rectors.    But  see  §  709,  infra. 

ings,  fill  vacancies  in  the  board,  and  *  Lawrence  v.  Greenwich  F.  Ins. 

vote  to  sell  property,  the  same  as  Co.,  1  Paige,  587  (1829). 

though  regular  elections  had  been  &  Brown  v.  Union  Ins.  Co.,  8  La. 

held.  Kent  CoimtyAgr.Socr.  House-  Ann.  177,  182   (1848),  in  which  the 

man,  81  Midi.  609  (1890).    Directors  neglect  for  nearly  ten  years  to"  ap- 

who  hold  over  are  luable  on  the  stat-  point  officers  being  to  the  injury  of 

utory  liability  of  directors.     Jenet  v.  creditors,  the  comt  appointed  a  man- 

Nims,  7  Colo.  App.  88  (1895).   A  hold-  ager  to  wind  up  the  affairs  of  the 

over  president  and  manager  for  six-  company. 

teen  years  may  institute  a  suit  in  ^  gge  §  511,  supra, 

behalf  of  the  corporation-     Lucky  "^  See  §  713a,  infra. 
76                                              1201 


§§626,627.]  ELECTIONS COKPORATE   MEETINGS.       [CH.  XXXVII. 


ncss  which  they  as  a  body  are  qualified  to  transact  only  at  a 
corporate  meeting  duly  called  and  convened.  Consequently, 
all  votes  taken  elsewhere  than  at  such  a  meeting,  and  all  sejv 
arate  consents,  either  oral  or  in  writing,  whereby  the  stock- 
holders assume  to  bind  the  company,  are  invalid  and  void.' 

§§  626,  627.  Stocliliolders  cannot  carry  on  the  lusiness  or 
enter  into  contracts  for  the  corj)oration. —  This  subject  is  fully 
considered  elsewhere.^ 


*  Commonwealth  v.  CuIIen,  13  Pa. 
St.  133  (1850);  Finley  Shoe,  etc.  Ca 
V.  Kurtz,  34  Mich.  89  (1876);  P-irce  v. 
New  Orleans  Building  Co.,  9  La.  397, 
40-1  (1836);  Livingston  v.  Lynch,  4 
Johns.  Ck  573,597  (1820);  Torrey  v. 
Baker,  83  Mass.  120  (1801);  Ex  parte 
Johnson,  31  Eng.  L.  &  Eq.  430  (1854); 
Short  V.  Unangst,  3  Watts  &  S.  (Pa.) 
45(1841).  Cf.  Graham  u.  Boston,  etc. 
R  R.,  118  U.  S.  161  (1886);  Granger  v. 
Grubb,  7  Phila.  350  (1870).  For  the 
rule  relative  to  directors'  meetings, 
see  §  713a,  infra.  A  lease  authorized 
upon  a  two-thirds  vote  of  the  stock- 
holders cannot  be  effected  by  two- 
thirds  consenting  thereto  in  writing 
without  a  meeting.  Reiff  v.  West- 
ern, etc.  TeL  Co.,  49  N.  Y.  Super.  Ct. 
441  (1883>     The  separate  assent  of 


stockholders  to  an  act  is  not  valid. 
Their  acts  must  be  in  meeting  as- 
sembled. Duke  V.  Markham,  105 
N.  C.  131  (1890).  An  actual  meeting 
of  the  stockholders  is  not  necessary 
if  all  consent,  even  though  the  stat- 
utes require  a  meeting.  A  subse- 
quent creditor  cannot  complain.  Coe 
V.  East,  etc.  R  R,  52  Fed.  Rep.  531 
(1892).  In  Re  George  Newman  &  Co., 
[1895]  1  Ch.  074,  the  court  said:  '-In- 
dividual assents  given  separately 
may  preclude  those  who  give  them 
from  complaining  of  wliat  they  have 
sanctioned;  but,  for  the  purpose  of 
binding  a  company  in  its  corporate 
capacity,  individual  assents  given 
separately  are  not  equivalent  to  the 
assent  of  a  meeting." 
2See§709,  etc.,  t7i/ra. 


1202 


CHAPTER  XXXYIII. 


DISSOLUTION,  FORFEITURE,  AND  IRREGULAR  INCORPORATION. 


628.  Jklethods  of  dissolution. 

629,  630.  Dissolution  by  the  stock- 

holders—  A  court  of  equity- 
has  no  power  to  dissolve  a 
corporation  —  Receiver,  and 
distribution  of  assets  by 
court  of  equity  —  Statutory 
dissolution. 

631.  Acts  which  do  not  constitute 

dissolution. 

632.  Only  the  attorney-general  can 

institute  a  suit  to  forfeit  a 
cliarter. 

633.  Forfeiture  for  misuser. 

634  Forfeiture  for  non-user  — For- 
feiture for  failure  to  com- 
plete a  railroad  or  enter- 
prise. 


635.  Forfeitiu-e  for  ultra  vires  acts 

and  for  usurpation  of  fran- 
chises —  Quo  warranto  and 
injunction  at  the  instance 
of  the  stata 

636.  State  may  waive  forfeiture. 

637.  Who  majr  set  up  forfeiture, 

dissolution,  or  non-legal  in- 
corporation—  De  facto  cor- 
porations. 

638.  Lapse  of  charter  by  failm-e  to 

comply  with  conditions. 

639.  640.   Repeals    of    charters  — 

Right  of  stockholders  to  ob- 
ject. 

641.  The  assets  upon  dissolution  -~ 

DistributioiL 

642.  The  liabilities   upon  dissolu- 

tion, consolidation,  or  sale. 


§  628.  Methods  of  dissolution.— The  dissolution  of  a  corpo- 
ration may  be  brought  about  by  reason  of  (1)  the  forfeiture  of 
its  franchises  by  the  adjudication  of  a  court;*  (2)  the  loss  of  its 
charter  by  a  charter  provision  to  that  effect,  in  case  the  corpo- 
ration fails  to  do  certain  things  within  a  certain  time;^  (3)  the 
repeal  of  its  charter  under  the  reserved  power  of  the  state ; ' 
(4)  the  voluntary  surrender  of  the  franchises  by  the  stockhold- 
ers; or  (5)  the  expiration  of  the  time  limited  for  its  existence 
in  the  charter.*  Upon  dissolution  by  any  one  of  these  methods 
the  stockholders  have  certain  rights  in  the  corporate  assets. 


1  See  ?§  632-637,  infra. 

2  See  S  638,  infra. 

s  This  subject  is  considered  in  g  639, 
infra. 

*  "  The  dissolution  of  corporations 
is  or  may  be  effected  by  expirations 
of  their  charters,  by  failure  of  any 
essential  part  of  the  corporate  organ- 
izations that  cannot  be  restored,  by 
dissolution  and  surrender  of  their 
franchises  with  the  consent  of  tlie 
state,  by  legislative  enactment  within 


constitutional  authority,  by  forfeit- 
ure of  their  franchises  and  judgment 
of  dissolution  declared  in  regular  ju- 
dicial proceedings,  or  by  other  lawful 
means."  Swan,  etc.  Co.  v.  Frank,  148 
U.  S.  603,  611  (1893).  In  Michigan 
all  charters  except  those  of  railroads, 
canals,  and  turnpikes  are  limited  by 
the  constitution  to  thirty  years.  "The 
evident  intent  of  this  section  was  to 
prevent  the  pei-petuation  of  coi-po- 
rate  power  and  cori)orate  wealth  so 


1203 


§  629.] 


DISSOLTTTIO^',  FOKFEITUKE,  ETC.  [CH.  XXXVIII. 


§  C29.  Dissolution  dy  the  stocJcholders  —  A  court  of  cquitij 
has  no  poiver  to  dissolve  a  corporation  —  liccciver,  and  distri- 
hution  of  assets  ly  court  of  equity  —  Statutory  dissolution. — 
It  is  an  unquestioned  rule  that  all  the  stocldiolders,  by  unani- 
mous consent,  may  effect  a  dissolution  of  the  corporation  by 
the  surrender  of  the  corporate  franchises.^ 

Greater  difficulty  is  found  in  determining  whether  a  ma- 
jority of  the  stockholders  may  dissolve  a  corporation.  It  has 
been  held  that  the  majority  in  interest  of  the  stocldiolders  of  a 
corporation  may  dissolve  it  by  a  voluntary  surrender  of  its  fran- 
chises, even  though  a  minority  of  the  stockholders  are  opposed 
to  the  dissolution,- 

Such,  undoubtedly,  is  the  case  where  the  corporation  is  in- 
solvent or  is  doing  a  failing  business,  and  is  manifestly  unable 
to  accomplish  the  purposes  of  its  organization.'    But  where  such 


as  to  place  it  practically  beyond  the 
reach  of  the  people  or  the  legisla- 
ture." It  does  not  apply  to  a  county- 
fair  corporation.  Kent  County  Agr. 
Soc.  V.  Houseman,  81  Midi.  009  (1890). 
Where  a  special  charter  is  granted, 
and  nothing  is  prescribed  as  to  the 
duration  of  the  corporation,  the  char- 
ter is  perpetual  State  v.  Ladies  of 
Sacred  Heart,  99  Mo.  533  (1889).  A 
corporation  without  limit  of  time  in 
its  charter  as  to  dui-ation  is  perpetual. 
Snell  V.  Chicago,  133  111.  413  (1890). 

1  Mobile,  etc.  R  R.  u  State,  29  Ala. 
573,  586  (1857);  Savage  v.  Walshe,  26 
Ala,  619  (1855);  Attorney-General  v. 
Oiergy  Society,  10  Rich.  Eq.  (S.  C.) 
004  (1859);  Chesapeake,  etc.  Canal 
Co.  V.  Baltimore,  etc.  R.  R.,  4  Gill  & 
J.  (Md.)  1, 131  (1832);  Mclntyre  Poor 
School  V.  Zanesville  Canal,  etc.  Co., 
9  Ohio,  203  (1839);  La  Grange,  etc. 
R.  R.  V.  Rainey,  7  Coldw.  (Tenn.)  420 
(1870);  Slee  v.  Bloom,  19  Johns.  456 
(1822);  Webster  v.  Turner,  12  Him, 
264  (1877);  Houston  v.  Jefferson  Col- 
lege, 63  Pa.  St.  428  (1869);  Denike  v. 
New  York,  etc.  Co.,  80  N.  Y.  599,  606 
(1880).  Although  a  stockholder  has 
sued  in  the  federal  court  to  wind  up 
a  Connecticut  corporation,  neverthe- 


less it  seems  that  .such  corporation 
may  dissolve  voluntarily.  Kessler 
t'.  Continental,  etc.  Co.,  42  Fed.  Rep. 
258  (1890). 

2  Tread  well  r.  Salisbury  Mfg.  Co.. 
73  Mass.  393  (1856);  Hancock  v.  Hol- 
brook,  9  Fed-  Rep.  353  (1881)  (reversed 
on  anotlier  point,  113  U.  S.  229);  Wil- 
son V.  Central  Bridge,  9  R.  L  590 
(1870).  Compare,  however,  dictum  in 
Denike  v.  New  York,  etc.  Co.,  80  N. 
Y.  599,  603  (1880),  citing  cases,  and  in 
IMobile,  etc.  Co.  v.  State,  29  Ala.  573, 
580  (1857),  citing  New  Orleans,  etc. 
Co.  V.  Harris,  27  Miss.  577  (1854); 
Ward  V.  Society,  etc.,  28  Eng.  Ch.  (1 
CoUier),  370  (1844);  Angell  &  Ames, 
Corp.,  §  772.  See  also  Berry  v.  Broach, 
65  Miss.  450  (1888),  where  the  busi- 
ness was  a  losing  one.  That  the  ma- 
jority may  not  dissolve,  see  Zabriskie 
V.  Hackensack,  etc.  R,  R.,  18  N.  J.  Eq. 
168  (1867);  Mowrey  v.  Indianapolis, 
etc.  R  R,  4  Biss.  78  (1866);  S.  C,  17 
Fed.  Cas.  930;  Lamnan  v.  Lebanon, 
etc.,  30  Pa.  St.  42  (1858),  and  cases  in 
following  notes. 

3  The  majority  have  a  right  to  have 
the  business  wound  up  and  sold  when 
such  business  cannot  be  advanta- 
geously carried  on.  Price  v.  Holcomb, 


1204 


en.  XXXVIII,]  DISSOLTJTIOlSr,  FOKFEITUIlEj  ETO. 


[§  629. 


is  not  tlie  case,  and  where  the  term  during  which  the  corpora- 
tion was  to  exist  has  not  expired;  ^  or  where  the  dissolution  is 
desired  in  order  to  obtain  a  new  charter  for  a  different  object;  ^ 
or  where  the  dissolution  is  merely  a  device  to  effect  a  consoli- 
dation which  otherwise  would  be  ultra  mres^  —  it  has  been 
held  that  the  majority  cannot  dissolve  the  corporation  in  oppo- 
sition to  the  wislies  of  the  minority.*  Stockholders  owning 
only  a  minority  of  the  stock  cannot,  at  common  law,  compel  a 
dissolution  before  the  expiration  of  the  time  limited  in  the  char- 
ter for  the  existence  of  the  corporation.*  The  directors  of  a 
corporation  cannot  dissolve  it.® 
A  court  of  equity  has,  in  the  absence  of  statutory  power,  no 

89  Iowa,  123  (1893).    See  also  §  670,    aging  the  business;  Croft  v.  Lump- 
infra. 

1  Kean  v.  Johnson,  9  N.  J.  Eq.  401 
(1853).  See  also  Van  Schmidt  v.  Hunt- 
ington, 1  CaL  25  (1850).  Dissolution 
of  a  solvent  corporation  before  its 
charter  time  has  elapsed  cannot  be 
had  except  by  unanimous  consent  of 
the  stockholders.  Barton  v.  Enter- 
prise, etc.  Assoc.,  114  Ind.  22G  (1888). 
In  Louisiana  a  majority  of  the  stock- 
holders have  the  power  to  wind  up 
the  affairs  of  the  corporation  even 
though  it  is  solvent  Pringle  v.  El- 
tringham,  etc.  Co.,  21 S.  Rep.  515  (La., 
1897). 

2  Ward  V.  Society  of  Attomies,  1 
Coa  370  (1844). 

3  Black  V.  Delaware,  etc.  Canal  Co., 
22  N.  J.  Eq.  403  (1871).  See  also  §  670, 
infra. 

♦Polar  Star  Lodge  v.  Polar  Star 
Lodge,  16  La.  Ann.  53  (18G1);  Curien 
V.  Santini,  16  La.  Ann.  27  (1861).  See 
also  dictum  in  ilobile,  etc.  R.  R.  v. 
State,  29  Ala.  573  (1857),  and  notes 
supra. 

5  Denike  v.  New  York,  etc.  Co.,  80 
N.  Y.  599  (1880)  (citing  cases);  Folger 
V.  Columbian  Ins.  Co.,  99  Mass.  267 
(1868);  Pratt  v.  Jewett,  75  Mass.  34 
(1857),  where  dissolution  was  denied, 
although  the  business  was  a  losing 
one  and  the  single  person  holding  a 
naajority  of  the  stock  was  misman- 


kin,  etc.  Min.  Co.,  61  Ga.  465  (1878), 
where  the  corporation  was  solvent, 
but  made  no  effort  to  transact  busi- 
ness or  proceed;  Waterbury  v.  Mer- 
chants' Union  Exp.  Co.,  50  Barb.  157 
(1867),  holding  that  misconduct  of 
the  corporate  officers  is  no  cause  for 
dissolution  at  the  suit  of  the  minor- 
ity. To  same  effect,  Belmont  v.  Erie 
R'y,  52  Barb.  637  (1869).  A  stock- 
holder has  no  right  to  bring  an  ac- 
tion for  the  dissolution  of  the  corpo- 
ration. Byrne  v.  New  York  Brick, 
etc.  Co.,  16  Week.  Dig.  139  (1882). 
In  Tennessee  it  is  hold  that  where  a 
hotel  company  cannot  raise  sufficient 
capital  to  build,  and  it  has  become 
impracticable  and  undesirable  to 
proceed,  and  the  enterprise  is  clearly 
a  failure,  a  minority  stockholder  may 
force  a  winding  up  and  distribution. 
O'Connor  v.  Knoxville  Hotel  Co.,  93 
Tenn.  708  (1894). 

6  Lake  Ontario,  etc.  Bank  v.  Onon- 
daga Bank,  7  Hun,  549  (1876);  Jones 
V.  Bank  of  Leadville,  10  Colo.  464 
(1888);  Ward  v.  Sea  Ins.  Co.,  7  Paige, 
294  (1838);  Abbot  v.  American  Hard 
Rubber  Co.,  33  Barb.  578  (1861).  C/. 
Bank  of  Switzerland  v.  Bank  of  Tur- 
key, 5  L.  T.  (N.  S.)  549  (1862),  where 
the  directors  repaid  sums  advanced 
to  an  abortive  company. 


1205 


§  C29.] 


DISSOLUTION,  FOEFEITUKE,  ETC.  [CH.  XXXVIII. 


jurisdiction  over  corporations  for  the  purpose  of  decreeing  their 
dissolution  and  tlie  distribution  of  their  assets  amonc:  the  in- 
dividual  corporators  at  the  suit  of  one  or  more  of  the  stock- 
holders.^   A  court  of  equity  has  no  power  to  sequestrate  the 


1 U.  S.  Tnist  Co.  V.  N.  Y.  etc.  R.  R., 
101  N.  Y.  478  (18SG);  Oldham  v.  Mt. 
Sterling  Imp.  Co.,  45  S.  W.  Rep.  779 
(Ky„  1898);  Verplanck  v.  Mercantile, 
etc.  Co.,  1  Edw.  Ch.  84  (1831);  Ilardou 
V.  Newton,  14  Blatchf.  37G  (1878); 
S.  C,  11  Fed.  Cas.  500 ;  Fomatain  Ferry, 
etc.  Co.  V.  Jewell,  8  B.  Mon.  (Ky.)  140 
(1848);  Ferris  v.  Strong,  3  Edw.  Cb. 
127  (1837).  See  also  Strong  v.  McCagg, 
65  Wis.  624  (1882);  Latimer  v.  Eddy, 
46  Barb.  61  (1804).  But  see  dictum 
in  Benedict  v.  Columbus,  etc.  Co.,  40 
N.  J.  Eq.  23,  36  (1891);  Barton  v.  In- 
ternational, etc.  Alliance,  36  Atl. 
Rep.  658  (Md.,  1897);  Wallace  v. 
Pierce- Wallace,  etc.  Co.,  70  N.  W. 
Rep.  216  (Iowa,  1897);  People  v. 
Weigley,  155  Bl  491  (1895);  State, 
etc.  Ins.  Co.  v.  San  Francisco  Super. 
Ct.,  101  Cal.  135  (1894).  A  court  of 
equity  has  no  jurisdiction  to  appoint 
a  receiver  of  and  dissolve  a  solvent 
beneficial  assessment  association  on 
the  gi-ound  of  mismanagement, 
fraud,  and  the  abuse  of  corporate 
powers.  Mason  v.  Equitable  League, 
77  Md.  483  (1893).  A  stockholder  can- 
not  file  a  bill  for  the  dissolution  of 
an  insolvent  corporation.  Heap  v. 
Heap  Mfg.  Co.,  97  Mich.  147  (1893). 
But  the  court  will  appoint  a  receiver 
to  preserve  the  corporate  assets  where 
the  majority  do  not  elect  officers. 
Lawrence  v.  Greenwich  Fire  Ins.  Co., 
1  Paige,  587  (1829).  Any  person  may 
be  appointed  receiver.  See  §  864, 
infra.  Where,  upon  voluntary  dis- 
solution, the  stockholders  appoint 
two  of  their  number  to  administer 
the  assets,  the  court  will  not  displace 
them  and  appoint  a  receiver.  FoUett 
V.  Field,  30  La.  Ann.  161  (1878).  A 
single  stockholder  in  an  insolvent 
corporation  cannot  have  it  dissolved 


in  a  court  of  equity.  Merryman  v. 
Carroll,  etc.  Co.,  4  R'y  «fe  Corp.  L.  J, 
12  (1888).  A  corporation  cannot  be 
dissolved  except  by  judicial  sentence 
or  sovereign  power.  A  court  of 
equity  has  no  inherent  power  to  de- 
cree dissolution.  A  member  cannot 
sue  for  his  part  of  the  assets  until  a 
diasolution  is  had.  Magee  v.  Geneseo 
Academy,  17  N.  Y.  St.  Rep.  221  (1888). 
A  stockholder  cannot  have  the  cor- 
poration wound  up  in  equity.  Hinck- 
ley V.  Pfister,  83  AVis.  64  (1892).  Where 
for  seven  years  a  stockholder  who 
owned  a  majority  of  the  stock  elected 
liimself  and  two  of  his  dummies  as 
directors  of  the  company,  and  caused 
the  board  to  vote  a  large  salary  to 
himself  as  president  and  manager, 
and  had  leased  to  the  company  his 
property  at  a  large  rental,  the  salary 
and  rental  were  declared  illegal  and 
void.  Where  the  same  company  had 
failed  to  pay  its  dividends  by  reason 
of  such  acts,  a  court  of  equity,  upon 
the  suit  of  another  stockholder,  or- 
dered the  president  to  accovmt,  and 
appointed  a  receiver  of  the  company 
and  directed  that  its  affairs  be  wound 
up.  Miner  v.  Belle  Isle  Ice  Co.,  93 
Mich.  97  (1892).  The  appellate  court, 
in  Florida  Const.  Co.  v.  Young,  59 
Fed.  Rep.  721  (1892),  refused  to  re- 
verse an  order  in  an  action  brought 
by  stockholders  in  a  construction 
company  for  an  accotmting  between 
the  company  and  a  railroad  com- 
pany, and  a  distribution  of  the  assets 
of  the  former.  The  order  appointed 
a  receiver  of  the  former  and  granted 
an  injunction.  "The  power  to  de- 
clare a  forfeiture  of  corporate  fran- 
chises was  originally  in  England 
vested  in  the  courts  of  law,  and  was 
exercised  in  a  proceeding  brought 


1206 


CH,  XXXVIII.]  DISSOLUTION,  rOEFEITUKE,  ETC. 


[§  629. 


property  of  a  corporation  by  means  of  a  receiver.^  Sequestra- 
tion is  the  taking  of  property  from  the  owner  for  a  time  till  the 
rents,  issues,  and  profits  satisfy  a  demand.  The  judgment  in 
such  case  does  not  dissolve  the  corporation.^  Sometimes  the 
corporation,  after  paying  its  debts,  distributes  its  assets  among 
its  stockholders  without  any  dissolution.^ 

In  many  of  the  states  and  in  England  there  are  statutes  reg- 
ulating the  dissolution  of  a  corporation.  These  statutes  gen- 
erally specify  what  parties  may  bring  suit  for  dissolution,  on 
what  grounds  dissolution  will  be  decreed,  and  what  proceed- 
ings must  be  taken  to  obtain  the  decree.  Such  a  statutory  dis- 
solution is  hardly  a  voluntary  dissolution,  and  yet  it  approaches 
that  kind  of  dissolution  more  nearly  than  any  other.* 

by  the  attorney-general  in  \he  na'me       3  See  §§  670-672,  infra,  and  §  548, 


of  the  sovereign.  The  court  of  chan- 
cery never  assumed  jurisdiction  in 
such  cases  until  it  was  conferred  by 
act  of  parliament.  It  declined,  until 
the  power  was  conferred  by  statute, 
to  sequestrate  corporate  property 
through  the  medium  of  a  receiver 
or  to  dissolve  corporate  bodies,  or  to 
restrain  the  usurpation  of  corporate 
powers."  Decker  v.  Gardner,  124  N. 
Y.  334  (1890).  In  the  absence  of  stat- 
utory authority,  a  coiui;  of  equity 
has  no  jurisdiction  to  dissolve  a  cor- 
poration. Wheeler  v.  Pullman  Iron, 
etc.  Co.,  143  IlL  197  (1892). 

ii?e  Binghamton  Gen.  Elect.  Co., 
143  N.  Y.  261  (1894).  A  receiver  will 
not  be  appointed  for  a  benevolent 
society  in  a  suit  by  a  member  charg- 
ing that  illegal  expulsions  have  been 
made  and  illegal  elections  held,  even 
though  the  illegal  officers  are  run- 
ning the  business ;  nor  will  a  receiver 
be  appointed,  although  the  purpose 
of  the  company  is  imi)racticable,  the 
member  bringing  the  suit  having 
been  a  party  thereto.  Equity  will 
not  interfere,  although  the  company 
is  wholly  illegal  and  iinauthorized. 
The  remedy  is  at  law.  Crombie  v. 
Order  of  Solon,  157  Pa.  St.  588  (1893). 

2  Proctor  V.  Sidney,  etc.  Co.,  8  N.  Y. 
App.  Div.  42  (1896). 


supra. 

*  ThvLS,  in  New  York,  elaborate  pro- 
vision is  made.  The  majority  of  the 
directors  may  apply  for  dissolution. 
See  Code  Civ.  Pro.,  g§  2419,  etc.  As 
also  may  a  creditor  or  stockholder. 
Code  Civ.  Pro.,  §§  1784,  etc.  Under 
the  New  York  statute  the  court  will 
order  the  dissolution  of  a  corporation 
where  a  majority  of  the  directors  and 
stockholders  wish  it,  where  the  inter- 
ests are  discordant,  and  a  dissolution 
will  be  beneficiaL  lie  Importers',  etc. 
Exchange,  132  N.  Y.  212  (1892).  Under 
the  old  statute,  part  of  the  stockhold- 
ers might  compel  a  dissolution  where 
there  had  been  a  failure  to  elect  offi- 
cers. Ward  V.  Sea  Ins.  Co.,  7  Paige, 
294  (1838).  Where  a  majority  of  the 
directors  and  stockholders  apply  for 
dissolution  the  court  will  presume 
that  it  should  be  granted.  Ee  Niagara 
Ins.  Co.,  1  Paige,  258  (1828).  In  gen- 
eral, see  also  Re  Pyrolusite,  etc.  Co., 

29  Hun,  429  (1883);  Ee  Boynton,  etc. 
Co.,  34  Hun,  369  (1884).  In  West  Vir- 
ginia one-third  in  interest  of  the 
stockliolders  may  apply  to  the  court 
for  a  dissolution.    See  Hurst  v.  Coe, 

30  W.  Va.  158  (1887).  Corporate  cred- 
itors cannot,  before  judgment,  apply 
for  a  dissolution  of  the  coiporation. 
Cole  V.  Knickerbocker,  etc.  Ins.  Co., 


1207 


§  C29.] 


DISSOLUTION,  FORFEITURE,  ETC.  [cn.  XXXVIII. 


An  American  court  has  no  power  to  dissolve  an  English  cor- 
poration and  wind  up  its  business.  A  resolution  to  that  effect 
by  the  stockholders  may  be  declared  invalid.  The  American 
courts  will  not  enjoin  a  dissolution  and  winding  up  of  the  com- 


23  Hun,  255  (1880);  aff'd,  91 N.  Y.  G41. 
AVhere  the  statute  provides  that  two- 
thirds  of  the  stockholders  may  cause 
the  corporation  to  be  wound  up,  their 
right  to  do  so  is  absolute  and  cannot 
be  controlled  by  the  court.  "NVatkins 
V.  Lawrence  Nat.  Bank,  51  Kan.  254 
(1893).  The  voluntary  dissolution  of 
a  company  imder  the  statute,  but 
without  ten  days'  notice  required  by 
the  statute,  is  not  such  a  dissolution 
as  to  prevent  creditors  from  attach- 
ing the  property  of  the  company  as 
though  no  dissolution  had  been  had. 
Cleveland,  etc.  Co.  v.  Taylor,  etc.  Co., 
54  Fed.  Rep.  83  (1893).  But  the  dis- 
solution cannot  be  enjoined  by  cred- 
itors in  the  absence  of  fraud.  Cleve- 
land, etc.  Co.  V.  Taylor,  etc.  Co.,  54 
Fed.  Rep.  85  (1893).  Under  statutes 
in  some  of  the  states,  an  information 
in  the  nature  of  quo  warranto  may 
be  filed  at  the  relation  of  a  share- 
holder against  an  illegally-existing 
corporation  to  compel  a  dissolution. 
Albert  v.  State,  65  Ind.  413  (1879). 
Under  the  National  Banking  Act, 
see  Kennedy  v.  Gibson,  8  AVall.  498 
(1869) ;  Bank  of  Bethel  v.  Pahquioque 
Bank,  14  Wall.  383  (1871);  Bank  v. 
Kennedy,  17  Wall.  19  (1872);  Re  Piatt, 
1  Ben.  534  (1867) ;  S.  C,  19  Fed.  Cas.  815. 
A  resolution  of  two-thirds  of  the 
stockholders  in  a  national  bank  to  go 
into  liquidation  does  not  dissolve  the 
corporation.  Merchants'  Nat.  Bank 
V.  Gaslin,  41  Minn.  552  (1889). 

Under  the  English  act  it  has  been 
held  that  the  majority  cannot  insist 
upon  dissolution,  though  the  business 
is  a  losing  one.  Re  Suburban  Hotel 
Co.,  L.  R.  2  Ch.  737  (1867).  But  the 
court  may  grant  it  under  such  cir- 
cumstances even  to  a  few  stockhold- 
ers.   Re  Factage  Parisien,  34  L.  J. 

1 


(Ch.)  140  (1865).  In  determining 
wliether  to  order  a  winding  up  the 
court  will  not  consider  possible  i\\- 
ture  profits.  Re  European,  etc.  Soc, 
L.  R.  9  Eq.  122  (1869).  For  an  appli- 
cation to  have  a  winding  up  because 
business  had  not  been  commenced 
within  a  year,  see  Re  Tumacacori, 
L.  R.  17  Eq.  534  (1874).  If  the  cor- 
poration has  sold  its  property  and 
ceased  business  the  court  will  order 
a  distribution  of  the  assets.  Cramer 
V.  Bird,  L.  R  6  Eq.  143  (1868).  The 
mere  fact  that  the  company  is  losing 
money  is  not  sufficient  to  have  a 
winding  up.  Re  Joint-stock  Coal  Co., 
L.  R.  8  Eq.  140  (1869).  The  couj-t  has 
a  judicial  discretion,  and  will  not 
ordinarily  order  a  winding  up  at  the 
instance  of  one  stockholder  in  oppo- 
sition to  all  the  others.  Re  London 
Suburban  Bank,  L.  R  6  Ch.  641  (1871). 
But  if  the  company  is  insolvent  or  is 
doing  a  ruinous  business  with  no 
prospect  of  a  change,  the  court  will 
order  a  winding  up  on  the  petition 
of  a  minority.  Re  Great  Northern, 
etc.  Min.  Co.,  17  W.  R  463  (1869). 
Where  the  main  purpose  of  a  corpo- 
ration is  the  furnishing  of  lodgings 
and  refreshments  at  the  queen's  jubi- 
lee, a  shareholder  has  the  right  to 
have  the  company  dissolved  after 
the  jubilee,  even  though,  under  gen- 
eral clauses,  the  objects  of  the  com- 
pany are  to  furnish  lodgings  and 
refreshments  generally,  and  even 
though  the  directors  intend  to  con- 
tinue the  business.  Re  Amalgamated 
Syndicates,  Ltd.,  77  L.  T.  Rep.  431 
(1897).  Where  a  company  is  organ- 
ized to  work  gold  mines  in  a  speci- 
fied place  as  well  as  elsewhere,  and 
the  company  actually  works  mines 
elsewhere,  but  not  in  the  specified 
208 


CH.  XXXVIII.]  DISSOLUTION,  FOKFEITHRE,  ETC. 


[§  G20. 


pany  in  England  in  accordance  with  English  laws.^  The  courts 
of  one  state  cannot  dissolve  a  corporation  created  by  another 
state,-  but  may  appoint  a  receiver  of  the  corporate  assets  within 
the  jurisdiction.' 

Where  a  dissolution  is  being  obtained  or  has  been  obtained  by 
fraud  and  an  inequitable  overbearing  of  the  rights  of  an  inno- 
cent stockholder,^  a  court  of  equity  will,  at  the  instance  of  the 
latter,  enjoin  or  set  aside  the  dissolution.* 


place,  the  main  purpose  of  the  com- 
pany is  not  carried  out  and  a  disso- 
lution may  be  had.  Re  Coolgardie, 
etc.  Mines,  Ltd.,  76  L.  T.  Rep.  269 
(1897).  Where  a  corporation  has 
been  enjoined  from  using  its  name, 
this  is  cavise  for  a  dissolution.  Re 
Thomas,  etc.  Sons,  Ltd.,  76  L.  T.  Rep. 
100  (1897).  A  court  has  no  jurisdic- 
tion to  wind  up  a  corporation  where 
a  company  was  never  incorporated, 
one  of  the  requisite  incorporators 
not  having  signed  the  articles  of  in- 
corporation. Re  National,  etc.  Corp., 
[1891]  2  Ch.  505.  See  also,  in  general, 
under  this  winding-up  act.  Re  Fac- 
tage  Parisien,  3-1 L.  J.  (Ch.)  140  (1865); 
Re  Exmouth  Docks  Co.,  L.  R.  17  Eq. 
181  (1873);  Re  Sanderson's  Patents 
Assoc.,  L.  R.  12  Eq.  188  (1871);  Re 
Bradford  Navigation  Co.,  L.  R  10  Eq. 
331  (1870);  Princess  of  Reuss  v.  Bos, 
L.  R.  5  H.  L.  176  (1871);  Re  Commer- 
cial Bank,  L.  R.  6  Eq.  517  (1868);  Re 
London  India  Rubber  Co..L.  R  1  Cli. 
329  (1866);  i?ePen-y-Van  Colliery  Co., 
L.  R  6  Cli.  D.  477  (1877);  Re  United 
Service  Co.,  L.  R  7  Eq.  76  (1868);  Re 
German  Date  Coffee  Co.,  L.  R  20  Ch. 
D.  169  (1882),  holding  that  where  a 
company  was  organized  and  char- 
tered to  engage  in  manufacture  and 
sale  of  goods  under  a  certain  patent, 
when  in  fact  there  was  no  patent 
such  as  was  referred  to,  and  an  ap- 
plication for  such  a  patent  was  re- 
fvised,  held,  that  the  substratum  upon 
which  the  company  was  based  or 
main  object  for  which  it  was  formed 
not  being  in  existence,  the  company 


must  be  dissolved  on  petition  of  a 
shareholder,  notwithstanding  it  was 
profitably  engaged  in  the  manufact- 
ure and  sale  of  the  commodity  with- 
out any  patent,  and  notwithstanding 
a  very  large  majority  of  the  com- 
pany desired  to  have  the  company 
continue  in  business.  To  same  ef- 
fect, under  somewhat  similar  circum- 
stances. Re  Haven  Gold  Min.  Co., 
L.  R  20  Cli.  D.  151  (1882).  A  lender  of 
money  to  a  benefit  building  society 
cannot  petition  to  *wind  it  up.  Ex 
parte  Williamson,  L.  R  5  Ch.  309 
(1869).  Mortgage  bondholders  can- 
not institute  winding-up  proceedings 
under  the  English  act.  Re  Uruguay, 
etc.  R'y,  L.  R  11  Ch.  D.  372  (1879). 
For  many  cases  relative  to  the  ques- 
tion of  when  a  court  will  order  a 
winding  up  and  when  not,  under  the 
English  statute,  see  Healey,  Com- 
panies Law  and  Practice,  pp.  446,  etc. 

1  Republican,  etc.  Mines  v.  Brown, 
58  Fed.  Rep.  644  (1893). 

2  Baker  v.  Backus,  32  lU.  79,  110 
(1863). 

3  See  §  865,  infra. 

*  People  V.  Hektograph  Co.,  10  Abb. 
N.  Cas.  358  (1882). 

^Re  Beaujolais  Wine  Co.,  L.  R.  3 
Ch.  t5  (1876);  Re  London,  etc.  Dis- 
count Co.,  L.  R  1  Eq.  277  (1865).  In 
Stupart  V.  Arrowsmith,  3  Sm.  &  G. 
176  (1855),  a  bill  filed  by  a  shareholder 
on  behalf  of  himself  and  others  to 
set  aside  a  dissolution,  after  three 
years'  acquiescence,  no  fraud  or  im- 
position being  alleged,  was  dismissed 
with  costs.     Cf.  Kent  v.  Jackson,  2 


1209 


§  630.] 


DISSOLUTION,  FOKFEITUKE,  ETC.  [CH.  XXXVIII. 


§  G30.  There  lias  been  some  doubt  whether  a  voluntary  dis- 
solution by  all  or  a  majority  of  the  stockholders  is  completed 
by  a  mere  vote  of  the  stockholders,  or  whether  a  decree  of  a 
Courtis  needed  and  is  sufficient;  or  whether  a  legislative  ac- 
ceptance and  confirmation  of  the  dissolution  is  essential.  The 
better  opinion  is  that  the  resolution  of  the  stockholders  to  dis- 
solve will  effect  a  dissolution  only  after  the  leg-islature  has 
accepted  it  and  ordained  it,  or  a  court  duly  authorized  by  stat- 
ute to  accept  a  voluntary  dissolution  has  entered  a  decree  to 
that  effect.*  Where  a  charter  expires  no  adjudication  of  dis- 
solution is  necessary.'^ 


De  G.,  M.  &  G.  49  (18"i2);  Bailey's  Ap- 
peal, 9G  Piu  St.  253  (1880),  where  cer- 
tain stockholders  procured  the  dis- 
solution of  a  corporation  by  fraud. 
They  were  held  to  bo  trustees  ex 
inaleficio  for  the  bona  fide  stockhold- 
ers, and  as  such  liable  to  account  to 
them  for  the  assets  of  the  company. 
1  Portland  Dry  Dock,  etc.  Co.  v. 
Trustees  of  Portland,  13  B.  Mon.  (Ky), 
77  (1851);  La  Grange,  etc.  R  R  v. 
Rainey,  7  Coldw.  (Tenn.)  420  (1870); 
Harris  v.  LIuskingum  Mfg.  Co.,  4 
Blackf.  (Ind.)  2G7  (1836);  Town  v. 
Bank  of  River  Raisin,  2  Doug.  (Mich.) 
530  (1847);  Cm-rier  v.  Santim,  16  La. 
Ann.  27  (1861);  Norris  v.  Smithville, 
1  Swan  (Tenn.),  164  (1851);  Bradt  v. 
Benedict,  17  N.  Y.  93.  99  (1858);  Bos- 
ton Glass  Mfy.  v.  Langdon,  41  Mass. 
49  (1841);  Wilson  v.  Central  Bridge, 
«  R  L  590  (1870);  Penobscot  Boom 
Corp.  V.  Lamson,  10  Me.  224  (1839); 
Enfield  Toll  Bridge  Co.  v.  Connecti- 
cut River  Co.,  7  Conn.  28,  45  (1828); 
Mumma  v.  Potomac,  etc.,  8  Pet.  281, 
287.  An  acceptance  by  the  state  of 
a  surrender  of  a  charter  is  necessary 
in  order  to  complete  a  dissolution  by 
voluntary  surrender.  Mylrea  v.  Su- 
perior, etc.  R"y,  67  N.  W.  Rep.  1138 
(Wis.,  1896).  A  mere  resolution  of 
the  stockholders  is  ineffectual.  New 
York,  etc.  Works  v.  Smith,  4  Duer, 
362  (1855);  PoweU  v.  Oregonian  R'y, 
88  Fed.  Rep.  187  (1889).    A  notice  of 


the  resolution  sent  to  the  governor 
is  ineffectual  Merchants'  Bank  v. 
Heard,  37  Ga.  401  (1807);  Revere  u. 
Boston,  etc.  Co.,  33  IVIass.  351  (1834). 
By  a  statute  the  acceptance  may  be 
made  by  a  proclamation  Campbell 
V.  Mississippi  Union  Bank,  7  Miss.  625, 
681  (1842).  The  judgment  of  a  court 
of  law  in  such  a  case  is  ineffectual. 
Chesapeake,  etc.  Co.  v.  Baltimore, 
etc.  R  R,  4  Gill  &  J.  (Md.)  1,  107 
(1832).  In  England  the  surrender  at 
common  law  was  to  the  king,  and 
had  to  be  accepted  by  him  in  order 
to  work  a  dissolution.  Rex  v.  Amery, 
2  T.  R.  515,  531  (1788);  Rex  v.  Gray,  8 
Mod.  358  (1825).  Cf.  Bruce  v.  Piatt, 
80  N.  Y.  379  (1880).  A  voluntary  dis- 
solution need  not  be  accepted  by  the 
stata  Merchants',  etc.  Line  v.  Wag- 
aner,  71  Ala.  581  (1882).  The  case  of 
W^ebster  v.  Turner,  12  Hun,  264  (1877), 
can  be  upheld  only  in  connection 
with  §  631,  infra.  See  also  cases  in 
notes  siipra,  to  effect  that  a  court 
cannot  decree  a  dissolution  at  the  in- 
stance of  stockholders.  Many  states 
now  have  statutes  expressly  giving 
to  covu-ts  such  authority.  The  stat- 
utes may  of  course  make  a  voluntary 
dissolution  effectual  without  legal 
proceedings. 

2  People  V.  James,  5  N.  Y.  App.  Div. 
412  (1896),  holding  also  that  where 
the  statute  provides  for  the  directors 
winding  up  the  company  the  attor- 


1210 


en.  XXXVIII.]  DISSOLUTION,  FOEFEITUKE,  ETC. 


[§  631. 


8  631  Acts  wldcli  do  not  constitute  dissolution.— Theve  are 
certain  acts  and  facts  which  do  not  in  themselves  constitute  a 
dissolution.  A  dissolution  is  not  effected  by  a  failure  to  elect 
officers; '  nor  by  a  sale  or  assignment  of  all  the  corporate  prop- 
erty-^  nor  by  the  fact  that  one  person  owns  all  the  shares  ot 
stock;'  nor  by  a  cessation  of  all  corporate  business  and  acts; 
ney-geLral  cannot  maintain  an  ac-  v.  Clay,  33  Me  132  (1851) ;  Kansas  ^ty 
trfortUatpu.posein.e.aKon.e    n.eIC..S^^^^^^^^^^^ 

'''^Rose  V.  Turnpike  Co.,  3  Watts  (1854),  where  a  railroad  corporation 
(Pa!  le  (1834);  Lehigh  Bridge  Co.  u  had  leased  tl^^  -Ure  ^pe'^^^^^^^^^ 
Lehigh  Coal,  etc.  Co.,  4  Rawle  (Pa.),    another  corporation.^  ^!'l'?..^^„'!l 


8   23  (1832);  Commonwealth  v.  Cul 
len,  13  Pa.  St.  133  (1850);  Hoboken 
Building,  etc.  Assoc,  v.  Martin,  13  N. 
J  Eq.  427  (1861);  Evarts  v.  KiUing- 
worth  Mfg.  Co.,  20  Conn.  447  (1850); 
Nashville  Bank  v.  Petway,  3  Humph. 
(Tenn.)  522  (1842);  Boston  Glass  Mfy. 
V.  Langdon,  41  Mass.  49  (1841);  Rus- 
sell V.  McLellan,  31  Mass.  63  (1833); 
Cahill  V.  Kalamazoo,  etc.  Ins.  Co.,  2 
Doug.  (Midi.)  124, 140  (1845);  Harris 
V.  Mississippi  Valley,  etc.  R.  R.,  51 
3Iich.  602  (1875);  People  v.  Runkle,  9 
Johns.  147  (1812);  Philips  v.  Wick- 
ham,  1    Paige,  590    (1829);    Slee   v. 
Bloom,  5  Johns.  Ch.  3GG  (1821);  S.  C, 
19  Johns.  450  (1822);  St.  Louis,  etc. 
Loan  Assoc,  v.  Augustin,  2  ]Mo.  App. 
123  (1876);  Knowlton  v.  Ackley,  62 
Mass.  93  (1851);  Mendota  v.  Thomp- 
son, 20  111.  197  (1858);  People  v.  Wren, 
5  III  269  (1843).    Nor  wiU  a  resigna- 
tion of  all  the  officers  dissolve  the 
corporation.  Muscatine  Turn  Verein 
V  Funck.  18  Iowa,  409  (1865);  Evarts 


chant,  37  Ohio  St.  251  (1881);  Smith 
V.  Gower,  2  Duv.  (Ky.)  17  (1865).  To 
same  effect,  State  v.  Rives,  5  Ired.  L. 
(N.  C.)  297  (1844);  Bruffett  v.  Great 
Western  R.  R.,  25  IlL  353  (1861).  The 
fact  that  the  company  sells  its  proi>- 
erty  and  that  one  person  acquires  all 
the  stock  does  not  dissolve  the  corpo- 
ration. Parker  v.  Bethel  Hotel  Co., 
96  Tenn.  252  (1896). 
3  See  §  709,  w/ra. 

*  Attorney-General  v.  Bank  of  Niag- 
ara, Hopk.  Ch.  403  (1825);  Han-ing- 
ton  V.  Connor,  70  N.  W.  Rep.  911  (Neb.. 
1897) ;  Baptist  Meeting-house  v.  Webb, 
66  Me.  398  (1877);  Rollins  v.  Clay,  33 
Me.  132  (1851);  Harris  v.  Nesbit,  24 
Ala.  398  (1854) ;  Kansas  City  Hotel  Co. 
V.  Sauer.  65  Mo.  279,  288  (1877);  Nim- 
mons  V.  Tappan,  2  Sweeney  (N.  Y.), 
652  (1870);  Mickles  v.  Rochester  City 
Bank,  11  Paige.  118  (1844);  State  v. 
Barron,  58^.  H.  370  (1878);  Re  Jack- 
son M.  Ins.  Co.,  4  Sandf.  Ch.  559  (1847) ; 
West  V.  Carolina,  etc.  Co.,  31  Ark. 


..  Funck,  18  Iowa  409  (186o^^jarxs     -;-;--^^^^  ^,  Horticultural 
V.  Kilhngwox-th  Mfg.  Co.,  20  Conn.    4.6  (        )     .^^^,,oq  aSS2y,  Bran- 


447  (1850).  The  corporate  rights  and 
franchises  are,  in  such  a  case,  merely 
dormant  until  other  officers  are 
elected.  Philips  v.  Wickham,  1  Paige, 
590  (1829).     Cf.  Lea  v.  American  At- 


Soc.,10  Lea  (Tenn.),  436  (1882);  Bran- 
don Iron  Co.  V.  Gleason,  24  Vt.  228 
(1852);  Atlanta  v.  Gate.  etc.  Co..  71 
Ga.  106  (1883).  Dissolution  may  exist 
by  cessation,  etc.,  so  far  as  the  rever- 


590  (1829).     Cf.  Lea  u  --— —    sion  of  property  given  to  the  cox-pora 
lantic,  etc.  Canal  Co..  3  Abb.  Pr.  (.N.  b.)    s  I  J  ^^^^^  ^_  P^^^i^g. 


1  (1867). 

2  Barclay  v.  Talman,  4  Edw.  Ch.  123 
(1842);  De  Camp  v.  Aylward,  52  Ind. 
468  (1876);  Reichwald  v.  Commercial 
Hotel  Co.,  106  m.  439  (1883);  RoUins 


tion  is  c'oncerned.  Stone  v.  Frammg- 
ton,  109  Mass.  303  (1872).  A  cessation 
of  business  with  the  understanding 
that  the  company  is  dissolved,  the 
property  having  been  transferred  to 


1211 


§  631.] 


DISSOLUTION,  FOKFEITUKE,  ETC.  [CH.  XXXV II  I. 


nor  by  the  deatli  of  its  stockholders; '  nor  by  insolvency;  -  nor, 
in  all  cases,  by  a  consolidation  with  another  corporation  under 
statutory  authority.'  Kor  is  it  dissolved  by  the  appointment 
of  a  receiver,^  or  the  foreclosure  of  a  mortgage,*  nor  by  failure 
to  file  reports.®  The  fact  that  there  are  less  stockholders  than 
the  charter  requires  docs  not  invalidate  the  acts  of  the  corpo- 
ration.^ For  certain  purposes,  however,  such  as  rendering 
stockholders  liable  on  their  statutory  liability,^  or  relieving  di- 
rectors from  a  penal  liability,^  dissolution  is  held  to  arise  by 
some  of  these  acts. 


the  stockholders,  does  not  work  a  dis- 
solution. Suits  may  be  instituted 
against  the  company.  Carnaghan  v. 
Exporters',  etc.  Co.,  11  N.  Y.  Supp. 
173  (1890).  A  foreclosure  sale  of  all 
the  property  and  franchises  of  a  cor- 
poration will  close  out  and  foreclose 
the  whole  interest  of  the  stockhold- 
ers tlierein.  Va table  v.  New  York, 
etc.  R.  R,  96  N.  Y.  49  (1884);  Thorn- 
ton V.  Wabash  Ry,  81  N.  Y.  4G3,  4C7 
(1880).  See  also  Sullivan  v.  Portland, 
etc.  R.  R.,  94  U.  S.  806  (1876).  As  to 
reorganization,  see  ch.  LII,  infra, 

*  Boston  Glass  Mfy.  v.  Langdon,  41 
Mass.  49,  53  (1841);  Russell  v.  McLel- 
lan,  31  Mass.  03,  69  (1833). 

-Moseby  v.  Burrow,  53  Tex.  396 
(1880);  Valley  Bank,  etc.  Inst.  v.  Sew- 
ing  Soc,  38  Kan.  433  (1883).  Such  is 
the  case  though  a  receiver  has  been 
appointed.  State  v.  Merchant,  37 
Ohio  St.  351  (1881);  National  Bank  v. 
Insurance  Co.,  104  U.  S,;  54  (1881); 
Kincaid  v.  Dwindle,  59  N.  Y.  548 
(1875).  The  insolvency  of  a  corpora- 
tion and  the  appointment  of  a  re- 
ceiver do  not  constitute  dissolution. 
Chemical  Nat.  Bank  v.  Hartford  De- 
posit Co.,  161  U.  S.  1  (1896). 

3  See  ch.  LIII,  infra. 

<  The  appointment  of  a  receiver  does 
not  dissolve  a  corporation.  Nothing 
but  the  expiration  of  the  charter  or 
the  judgment  of  a  court  can  do  that. 
Hasselman  v.  Japanese,  etc.  Co.,  3 
Ind.  App.  180  (1891). 

5  Smith  V.  Gower,  3  Duv.  (Ky.)  17 


(1805);  Wliite,  etc.  R  R  v.  Wliite,  etc. 
R  R.,  50  N.  n.  50  (1870).  In  Pennsyl- 
vania it  seems  to  be  held  that  the 
foreclosure  sale  of  all  the  assets  of 
the  company  extinguishes  tlie  com- 
pany itself.  Reynolds  v.  Cridge,  1  Pa. 
Dist,  693  (1893);  New  Castle  Northern 
R'y  V.  New  Castle,  etc.  R  R,  1  Pa. 
Dist.  768  (1893).  Where  a  railroad 
company's  property  has  been  fore- 
closed, and  for  twenty-six  years  it 
has  owned  no  property  and  kept  up 
no  existence,  it  will  be  presumed  to 
have  been  dissolved,  and  service  upon 
it  will  be  set  aside.  Combes  v.  Keyes, 
89  Wis.  397  (1895).  A  corporation  is 
not  dissolved  by  the  fact  that  it  has 
lost  all  its  property.  Weigand  v.  Alli- 
ance Supply  Co.,  38  S.  K  Rep.  803 
(W.  Va.,  1897). 

''Failure  to  file  a  report  does  not 
work  a  forfeiture  of  the  charter. 
State  V.  Brownstown,  etc.  Co.,  130 
Ind.  337  (1889). 

"Welch  V.  Importers',  etc.  Bank, 
133  N.  Y.  177  (1890).  The  facts  that 
the  corporate  officers  are  dead,  and 
the  number  of  stockholders  is  less 
than  the  number  required  for  incor- 
poration, do  not  dissolve  the  corpo- 
ration. Re  Belton,  47  La.  Ann.  1614 
(1895). 

8  See  Slee  v.  Bloom,  19  Johns.  456 
(1833),  and  §  319,  sttpra.  Cf.  Bradt  v. 
Benedict,  17  N.  Y.  93  (1858). 

9Losee  v.  BuUard,  79  N.  Y.  404 
(1880). 


1313 


CH.  XXXVIII.]  DISSOLUTIOlN,  FOKFEITUKE,  ETC.  [§§  G32,  633. 

§  632.  Only  the  attorney -general  can  institute  a  suit  to  for- 
feit a  cor])orate  charter. —  Such  unquestionably  is  the  hxw.  It 
is  for  the  state  alone  to  withdraw  the  charter  which  the  state 
has  given.  A  stockholder  cannot  institute  the  suit ;  ^  nor  a  cor- 
porate creditor ;  ^  nor  can  the  municipal  authorities  by  reason 
of  a  change  of  route  by  a  railroad ;  ^  nor  can  a  person  who  is 
overcharged  on  a  turnpike  bring  suit  to  forfeit  the  company's 
charter.*  The  secretary  of  state  cannot  forfeit  a  charter,  even 
though  the  statute  prescribes  forfeiture  for  non-payment  of 
taxes.*  A  stockholder  in  a  corporation  cannot  sustain  a  bill  to 
have  the  charter  forfeited  and  the  corporation  wound  up  on 
the  ground  that  it  was  formed  to  purchase  and  combine  various 
competing  linseed-oil  mills  for  the  purpose  of  forming  a  mo- 
nopoly. The  state  alone  can  ask  for  such  a  forfeiture.  More- 
over, the  stockholder,  by  being  a  stockholder,  is  estopped  from 
complaining,  and  is  presumed  to  have  had  knowledge  of  the 
facts  from  the  time  that  he  became  a  stockholder.^ 

§  633.  Forfeiture  for  misuser  —  Acts  which  constitute  a  mis- 
nser. —  The  law  is  clear  that,  if  a  corporation  misuses  its  pow- 
ers, the  state  may  by  a  suit  withdraw  the  charter  which  it  has 

iNorthv.  State,  107  Ind.  356(1880);  <  Commonwealth      v.     Allegheny 

Baker    v.  Backus,  32  IlL  79  (1863);  Bridge  Co.,  20  Pa.  St.  185  (1853);  State 

Commonwealth  v.  Union  Ins.  Co.,  5  v.  White's,  etc.  Co.,  3  Tenn.  Ch.  164 

Mass.  230  (1809);  State  v.  Paterson,  (1876),  where  the  bill  purported  to  be 

etc.  Tunip.  Co.,  21  N.  J.  L.  9  (1847);  in  the  attomey-generars  name.    A 

Murphy  v.  Fanners'  Bank,  20  Pa.  St.  shipper  of  freight  cannot  by  bill  in 

415  (1853);  Rice  v.  National  Bank,  126  equity  compel  a  canal  company  to 

Mass.   300  (1879;;  Folger  v.  Colum-  repair  and  render  its  canal  navigable, 

bian,  etc.  Ins.  Co.,  99  Mass.  207  (1868),  Only  the  state  can  complain.    Buck, 

where  the  court  refused  to  recognize  etc.  Co.  v.  Lehigh,  etc.  Co.,  50  Pa.  St. 

a  dissolution  decreed  by  a  New  York  91  (1865).    The  statutes  of  a  state, 

coiirt  at  the  instance  of  a    stock-  however,  sometimes   change   these 

holder;  Raisbeck  v.  Oesterricher,  4  rules  of  law. 

Abb.  N.  Cas.  444  (1878),  where  the  *  A  statute  of  "West  Virginia  stat- 

plaintiff  claimed  that  the  incorpora-  ing  that  charters  shall  be  forfeited  if 

tion  was  irregvdar.  corporate  taxes  ax-e  not  paid  does  not 

-  Gaylord  v.  Fort  "Wayne,  etc.  R.  R.,  authorize  the  secretary  of  state  to 

6  Bis.s.  286  (1875);  S.  C,  10  Fed.  Cas.  declare  corporate  charters  forfeited. 

121.  A  judgment  forfeiting  the  char-  Forfeiture  can  be  made  only  in  a  suit 

ter  of  a  private  corporation,  where  by  the  state  brought  for  that  purpose, 

the  state  is  not  a  party  to  the  suit,  is  Greenbrier  Lxmiber  Co.  v.  Ward,  30 

a  nullity.    Pickett  v.  Abney,  84  Tex.  W.  Va.  43  (1887). 

045  (1892).  ^  Coquard  v.  National  L.  0.  Co.,  49 

3  Moore  v.  Brooklyn,  etc.  R.  R.,  108  N.  E.  Rep.  563  (III,  1808). 

N.  Y.  98  (1888). 

1213 


§  G33.] 


DISSOLUTION,  rOEFEITUKE,  ETC.  [CH.  XXXVIII. 


given.  Great  difficulty,  liowever,  arises  in  determining  what 
constitutes  a  misuser.  A  clear  idea  can  be  obtained  only  by  a 
study  of  the  cases  themselves.^ 


1  The  state  will,  at  the  instance  of 
the  attorney  general,  forfeit  the  char- 
ter of  the  corporation  whose  stock- 
holders have  entered  into  a  "  trust " 
with  the  stockholders  of  competing 
corporations,  for  the  purpose  of  form- 
ing a  monopoly  in  and  raising  the 
price  of  sugar.    The  "  trust "  is  not  a 
joint-stock  association.    It  is  of  the 
character  of  a  trust  estate.    People 
V.  North  River  Sugar  Ref.  Co.,  121 
N.  Y.  583  (1890).     Quo  warranto  lies 
against  a  cori)oration  formed  to  pur- 
chase substantially  all  the  distilleries 
in  the  countiy.     Distilling,  etc.  Co. 
V.  People,  156  111.   448  (1895).    The 
state  may  forfeit  a  charter  for  a  fail- 
ure of  the  officers  to  file  the  annual 
report  and  of  the  stockholders  to  pay 
in  the  capital  stock  as  required  by 
statute.    It  is  immaterial  that  the 
state's  action  was  induced  by  parties 
who  were  themselves  responsible  for 
the  failure  to  comply  with  the  stat- 
ute.   People  V.  Buffalo,  etc.  Co.,  131 
N.  Y.  140  (1892).    It  is  cause  for  for- 
feiture that  some  of  the  directors,  all 
of  whona  were  required  to  be  stock- 
holders, held  but  one  sliare  each,  the 
certificates  for  which  shares  were 
transferred  back  at  once  to  the  real 
parties  in  interest,  thus  leaving  the 
directors  disqualified;  also  that  re- 
quired certificates  had  not  been  filed ; 
also  that  annual  elections  had  not 
been  held ;  also  that  the  corporation 
had  done  business  ultra  vires.    But 
unless  public  interest  so  I'equires,  the 
attorney-general   should    not  bring 
suit  at  his  own  instance.    Lorillard 
V.  Clyde,  143  N.  Y.  450  (1894). 

In  State  v.  Park,  etc.  Lumber  Co., 
58  Minn.  330  (1894),  the  court  for- 
feited the  charter  of  a  company  that 
had  been  incorporated  in  Minnesota 
for  the  purpose  evidently  of  doing 
all  its  business  in  Wisconsin.    The 


charter  was  forfeited  on  the  ground 
that  the  company  had  not  complied 
with  the  statute  in  having  its  place 
of  business  and  keeping  its  books 
within  the  state.    The  court'  also  ap- 
proved of  a  decision  in  Wisconsin  to 
the  effect  that  at  common  law  a 
charter  may  be  forfeited  where  the 
corporation  keeps  its  principal  ofiice, 
books,  and  records  out  of  the  state 
to  such  an  extent  that  it  is  impos- 
sible for  the  state  and  its  comls  to 
have  full  jurisdiction  and  visitorial 
power  over  the  corporation.    For  fail- 
ure to  keep  a  part  of  its  road  in  re- 
pair, or  to  rebuild  a  burned  bridge, 
or  for  abandoning  a  part  of  its  road, 
a  plank-road  company's  charter  may 
be  forfeited.     People  v.  Plainfield, 
etc.  Co.,  105  Mich.  9  (1895).    The  char- 
ter of  a  water-works  company  may 
be  forfeited  when  in  violation  of  its 
charter  it  does  not  furnish  pure  water 
and  does  not  increase  its  source  of 
supply.   It  is  no  defense  that  the  mu- 
nicipality had  elected  to  take  over  the 
property  as  provided  in  the  original 
ordinance,  or  that  the  municipality 
had  the  right  to  annul  the  contract, 
between  the  municipality  and  the 
company.    Capital  City  Water  Co.  v. 
State,  105  Ala.  406  (1894).    To  a  quo 
warranto  to  forfeit  a  water-works 
charter  because  it  failed  to  supply 
sufficient  water,  it  is  no  answer  that 
the  company  had  intended  to  enlarge, 
but  had  not  done  so  because  the  city 
had  declared  its  intention  to  exercise 
its  option  to  buy  the  works.    State  v. 
Capital  City  W^ater  Co.,  103  Ala.  231 
(1894).  It  has  been  held  to  be  a  misuser 
to  file  a  false  certificate  that  the  capi- 
tal stock  has  been  paid  up.  Eastern, 
etc.  Co.  V.  Regina,  23  Eng.  L.  &  Eq.  328 
(1858);  or  to  establish  a  branch  bank 
where  the  charter  authorizes  only  a 
principal  banking  place,  People  v. 


1214 


OH.  XXXVIII.]  DISSOLUTION,  FOKFEITUBE,  ETO. 


[§  633. 


In  Ohio  it  has  been  hehl  that  a  statute  giving  to  a  court  the 
power  to  forfeit  the  franchises  of  turnpike  roads  for  being  out 


Oakland  County  Bank,  1  Doug.  (IVIich.) 
283  (1843) ;  or  to  keep  its  books  and 
place  of  business  out  of  the  state, 
State  V.  Milwaukee,  etc.  R'y,  45  "Wis. 
590  (1878);  or  for  an  insurance  com- 
pany to  take  risks  wliich  it  cannot 
pay  if  required,  Ward  v.  Farwell,  97 
111.  593  (1881);  or  for  taking  "grave- 
yard" insurance,  State  v.  Central, 
etc.  Assoc,  29  Oliio  St.  399  (1876),  the 
person  receiving  the  insurance  hav- 
ing no  insurable  interest  in  the  per- 
son insured ;  or  for  not  keeping  tracks 
in  a  condition  required  by  the  char- 
ter, State  V.  Madison  Street  R'y,  72 
Wis.  612  (1888);  or  for  a  canal  com- 
pany to  allow  the  canal  to  become 
out  of  repair.  State  v.  Pennsylvania, 
etc.  Canal  Co.,  23  Ohio  St.  121  (1872); 
or  for  a  ferry  company  to  be  guilty 
of  the  same  neglect,  State  v.  Council 
Bluffs,  etc.  Co.,  11  Neb.  354  (1881);  or 
for  filing  false  and  fraudulent  arti- 
cles of  association,  State  v.  Bailey,  16 
Ind.  46  (1861),  holding  also  that  mere 
insolvency  is  no  cause  for  forfeiture; 
or  for  accepting  subscriptions  by  per- 
sons who  are  notoriously  insolvent, 
Holman  v.  State,  105  Ind.  569  (1885); 
Jersey  City  Gas  Co.  v.  Dwight,  29  N. 
J.  Eq.  242  (1878);  or  for  a  faikire  of  a 
river-improvement  company  to  make 
an  improvement  as  commanded  by  a 
statute,  People  v.  Improvement  Co., 
103  111.  491  (1882);  or  for  a  bank  to 
loan  to  its  directors  in  violation  of  a 
statute,  Bank  Com'rs  v.  Bank  of  Buf- 
falo, 6  Paige,  497  (1837);  or  for  a  char- 
itable corporation  to  divide  with  a 
lobbyist  an  appropriation  obtained 
from  the  legislature.  People  v.  Dis- 
pensary, etc.  Soc,  7  Lans.  304  (1873); 
or  for  an  insurance  company  to  in- 
sure in  a  manner  contrary  to  statute 
and  to  delay  payments  of  losses,  State 
V.  Standard,  etc.  Assoc,  38  Ohio  St. 
281  (1882);  for  a  bank  to  contract 
debts  beyond  the  charter  limits,  and 

12 


to  make  dividends  before  resuming 
specie  payments,  State  Bank  v.  State, 
1  Blackf.  (Ind.)  267  (1823);  or  for  per- 
sistently taking  usurious  interest, 
Commonwealth  v.  Commercial  Bank, 
28  Pa.  St.  383  (1857);  State  v.  Com- 
mercial Bank,  33  Miss.  474  (1857);  or 
for  a  mutual  relief  association  to  be 
run  for  the  benefit  of  its  officers  only. 
State  V.  People's,  etc.  Assoc,  42  Ohio 
St.  579  (1885);  or  for  a  bank  to  sus- 
pend specie  payments,  State  v.  Bank 
of  South  Carolina,  1  Spears,  L.  (S.  C.) 
433  (1841);  Commercial  Bank  v.  State, 
14  Miss.  599  (1846);  but  see  State  v. 
New  Orleans,  etc.  Co.,  2  Eob.  (La.) 
529  (1842);  or  for  a  turnpike  company 
to  allow  its  road  to  be  out  of  repair, 
Y/ashington,  etc.  T.  Co.  v.  State,  19 
Md.  239  (1802):  Coon  v.  Plymouth, 
etc  Co.,  32  Mich.  248  (1875);  Darnell 
V.  State,  48  Ark.  321  (1887);  State  v. 
Pawtucket,  etc  Corp.,  8  R.  1. 182  (1865), 
where  the  company  neglected  a  part 
of  its  road  which  it  had  sold  to  a  mu- 
nicipality. Not  every  neglect  is  fatal. 
The  question  is  for  the  jury.  People 
V.  Royal  ton,  etc.  Turnp.  Co.,  11  Vt. 
431  (1839).  And  it  is  no  defense  to 
forfeiture  for  neglect  that  the  road 
has  been  sold  on  an  execution  sale. 
Commonwealth  v.  Tenth,  etc.  Turnp. 
Ca,  59  Mass.  509  (1850)  Nor  is  it  a 
defense  that  the  state  has  authorized 
a  competing  line.  Turnpike  Co.  v. 
State,  8  Wall  210  (18G5). 

In  State  v.  Essex  Bank,  8  Vt.  489 
(1836^1,  the  court  refused  to  decree  a 
forfeiture,  since  the  public  were  not 
injured,  though  the  corporation  was 
clearjy  guilty  of  misuser.  If  a  gas 
company  is  ordered  by  a  municipal- 
ity under  a  statutory  power  to  reduce 
the  price  of  gas,  it  may  defend  against 
forfeiture  for  non-compliance  by  as- 
serting that  the  municipality  was 
fraudulently  induced  to  act.  State 
V.  Cincinnati,  etc  Co.,  18  Ohio  St.  263 
15 


§  633.] 


DISSOLUTION,  FOKFEITUKE,  ETC. 


[cn. 


XXXVIII. 


of  repair  for  the  preceding  six  months,  without  having  a  jury 
pass  upon  the  question  and  without  appeal,  is  unconstitutional.' 


(18G8).  If  a  company  has  incorpo- 
rated under  a  general  act,  but  for  a 
purpose  not  authorized  by  it,  a  suit 
for  forfeiture  lies.  State  v.  Beck,  81 
Ind.  501  (1883),  where  a  turnpike  com- 
pany incorporated  to  purchase  turn- 
pikes, a  purpose  not  authorized  by 
the  statute.  The  state  may  create 
causes  for  the  forfeiture  of  insurance 
companies'  charters.  Cliicago,  etc. 
Ins.  Co.  V.  Needles,  113  U.  S.  574  (1885). 
Where  tlie  state  sues  to  forfeit  the 
charter  of  a  railroad  company  -svliich 
has  leased  its  road,  the  latter  cannot 
institute  a  suit  to  test  the  validity 
of  that  lease.  Ogdensburgh,  etc.  R 
E.  V.  Vermont,  etc.  R  R.,  4  Ilun,  712 
(1875).  If  quo  warranto  is  brought 
for  not  making  reports,  the  corpora- 
tion may  offer  to  make  the  reports. 
State  V.  Barron,  57  N.  H.  498  (1876). 
By  statute,  forfeiture  may  be  decreed 
where  the  court  decides  that  a  con- 
tinuance of  business  by  an  insurance 
company  will  be  hazardous  to  the 
community.  Ward  v.  Farwell,  97  111. 
593  (1881).  The  legislature  cannot 
amend  a  charter  by  forfeiting  the 
charter  if  specie  payments  are  not 
made  within  a  specified  time.  State 
V.  Tombeckbee  Bank,  2  Stew.  (Ala.) 
30  (1829).  It  cannot  provide  that 
charters  shall  be  forfeited  for  non- 
payment of  corporate  obligations,  so 
far  as  corporations  existing  before  the 
statute  are  concerned.  Aurora,  etc. 
Co.  V.  Holthouse,  7  Ind.  59  (1855).  But 
it  may  prescribe  that  the  chai-ter  be  re- 
pealed unless  within  a  certain  time 
the  company  do  certain  things — here 
make  good  its  capital.  Lothrop  v. 
Stedman,  42  Conn.  583  (1875).  And 
may  force  the  dissolution  of  insolvent 


insurance  corporations,  or  corpora- 
tions whose  continuance  of  business 
will  be  dangerous  to  tlie  public.  Ward 
V.  Farwell,  97  IlL  093  (1881);  Chicago 
Life  Ins.  Co.  v.  Auditor,  101  IlL  82 
(1881).  So  also  as  to  banks.  Tlie  rem- 
edy "  for  a  violation  of  duty  may  be 
altered  and  changed  by  legislative 
provisions  if  the  power  of  accom- 
plishing the  same  objects  by  any 
means  is  within  the  legitimate  scope 
of  legislative  authority."  Common- 
wealth V.  Farmers',  etc.  Bank,  38 
Mass.  542  (1839).  Quo  warranto  does 
not  lie  against  a  corporation  for  ultra 
vires  acts,  such  as  issuing  watered 
stock  or  purchasing  its  own  stock. 
"  Acts  in  excess  of  power  may  un- 
doubtedly be  carried  so  far  as  to 
amount  to  a  misuser  of  the  franchise 
to  be  a  corporation  and  a  ground  for 
its  forfeiture."  The  courts  refuse  to 
define  what  ultra  vires  acts  will  and 
what  will  not  sustain  quo  warranto 
proceedings.  They  must  be  acts 
which  "so  derange  or  destroy  the 
business  of  the  corfioration  that  it 
no  longer  fulfills  the  end  for  which 
it  was  created."  State  v.  Minnesota, 
etc.  Co.,  40  Minn.  213  (1889).  A  suit 
by  a  state  to  enjoin  the  defendant 
railroad  company  from  being  man- 
aged by  directors  elected  by  the  votes 
of  stock  of  the  company  owned  by 
a  foreign  railroad  corporation  ultra 
vires,  and  also  to  declare  such  votes 
and  elections  void,  and  also  for  a  re- 
ceiver, or  in  lieu  of  all  this  for  a  for- 
feiture of  the  charter,  is  not  demur- 
rable. State  v.  Port  Royal,  etc.  Ry, 
45  S.  C.  470  (1895). 

The  following  acts  and  facts  do  not 
constitute  a  misuser:    Where,  eight 


1  Salt  Creek  Val.  Tump.  Co.  u  Parks,  charters  of  plank-road  companies 
50  Ohio  St.  568  (1893).  The  legislature  wliich  do  not  keep  their  plank-roads 
may  authorize  county  commissioners  in  repair.  DaA'is  v.  Yerr  on,  etc  Co., 
to  institute  proceedings  to  forfeit  the    29  S.  E.  Rep.  475  (Ga.,  1898). 

1216 


CH.  XXXVIII.]  DISSOLUTION,  FOKFEITUKE,  ETC. 


[§  633. 


A  cliarter  will  not  be  forfeited  merely  because  the  corpora- 
tion was  incorporated  in  one  state  and  all  its  officers  and  stock- 


years  after  the  organization  of  a  wa- 
ter-works company,  the  attorney-gen- 
eral applies  for  leave  to  bring  suit  to 
forfeit  the  charter  on  account  of  the 
issue  of  watered  stock  and  bonds,  and 
of  violations  of  city  ordinances,  and 
for  not  keeping  accurate  books  of 
account,  the  city  having  the  right  to 
buy  the  works  at  the  end  of  seven 
years,  the  court  will  not  allow  the 
suit  to  be  commenced.  The  comrt 
said:  "Unless  there  is  a  clear,  wilfvd 
misuse,  abuse,  or  non  use  of  the  fran- 
chises sought  to  be  forfeited,  or  viola- 
tion of  law, —  something  that  strikes 
at  the  very  groundwork  of  the  con- 
tract between  the  corporation  and 
the  sovereign  power;  something  that 
amounts  to  a  plain,  wilful  abiise  of 
power  or  violation  of  law,  within  the 
meaning  of  the  statute  on  the  sub- 
ject, whereby  the  corporation  fails 
to  fulfill  the  very  design  and  purpose 
of  its  organization, —  leave  will  not 
be  granted  by  the  court  to  resort  to 
the  extraordinary  remedy  for  a  for- 
feiture of  its  franchises."  State  v. 
JanesviUe  Water  Co.,  92  Wis.  496,  501 
(1S9G).  Where  a  company  is  gi-anted 
power  by  a  city  to  build  tracks  on 
the  streets  on  condition  that  the 
tracks  conform  to  the  street  grade, 
and  on  condition  that  the  company 
pay  for  the  paving  between  its  tracks, 
its  failure  to  comply  with  such  con- 
ditions is  no  ground  for  declaring  a 
forfeiture  of  the  company's  charter. 
State  V.  Omaha,  etc.  Co.,  91  Iowa,  517 
(1894).  An  action  by  the  state  against 
a  stock  exchange  in  San  Francisco, 
to  annul  its  charter  on  the  ground 
that  it  was  a  gambling  institution, 
failed  in  People  v.  San  Francisco  Pub- 
lic Stock  Exchange,  33  Pac.  Eep.  785 
(Cal.,  1893),  because  the  complaint 
did  not  clearly  allege  gambling  acts. 
There  is  no  niisuser  of  francliises  by 
a  corporation  where  the  objection- 
77  12 


able  act  was  by  a  cashier  in  direct 
violation  of  orders  given  to  him  by 
the  directors.  State  v.  Commercial 
Bank,  6  Sm.  &  M.  (Miss.)  218  (1846);  or 
where  a  railroad  or  turnpike  com- 
pany has  constructed  its  road  over 
land  without  obtaining  the  right  of 
way,  State  u  Kill  Buck  Tump.  Co., 
38  Ind.  71  (1871);  People  v.  Hillsdale, 
etc.  Tm-np.  Co.,  2  Johns.  190(1807);  or 
where  the  company  deviates  slightly 
from  its  route,  fails  to  file  a  map  of 
the  route,  and  neglects  to  elect  new 
directors,  Harris  v.  Mississippi,  etc 
R  E.,  51  Miss.  602  (1875);  or  fails  to 
file  a  statement  of  its  condition  as  re- 
quired by  statute,  the  object  of  such 
filing  having  ceased.  People  v.  Im- 
provement Co.,  supra;  or  where  the 
pubhc  are  compelled  to  open  a  draw- 
bridge for  themselves.  Common- 
wealth V.  Breed,  21  Mass.  460  (1827); 
or  where  a  bank  has  assigned  its  as- 
sets to  trustees  to  pay  its  debts,  State 
V.  Commercial  Bank,  21  Miss.  569 
(1850) ;  or  for  the  insolvency  of  a  bank, 
it  having  since  then  become  solvent. 
People  V.  Bank  of  Niagara,  6  Cow.  196 
(1826);  People  v.  Washington,  etc. 
Bank,  6  Cow.  212  (1826)  (but  the  con- 
trary has  been  held  as  regards  a 
'  suspension  of  specie  payments  and  a 
subsequent  resumption,  Commercial 
Bank  v.  State,  14  Miss.  599(1846); 
Planters'  Bank  v.  State,  15  liliss.  163  — 
1846);  or  where  a  bridge  company 
gives  reduced  rates  to  constant  pa- 
trons, and  gives  free  passage  in  pay- 
ment for  land  and  fails  to  file  re- 
quired statements.  Commonwealth 
V.  Alleghany,  etc.  Co.,  20  Pa.  St.  185 
(1852);  or  that  the  corporation  has 
incorporated  also  in  another  state. 
Commonwealth  v.  Pittsburg,  etc.  R. 
R,  58  Pa.  St.  26  (1868);  or  that  re- 
quired statements  are  not  filed.  State 
V.  Barron,  58  N.  H.  370  (1878).  Though 
a  corporation  take  more  interest  than 
17 


§  C34.] 


DISSOLUTION,  FORFEITUEE,  ETC.  [CH.  XXXVIII. 


holders  reside  in  anotlier  state ;  nor  because  it  keeps  its  books 
out  of  the  state,  in  violation  of  a  statute.^ 

A  charter  will  be  forfeited  where  it  contemplates  a  medical 
school  and  is  actually  used  to  sell  medical  diplomas.'^ 
In  charging  misuser  tlie  word  "  wilful "  is  not  necessary.' 
§  634.  Non-user  as  a  cause  for  forfeiture  —  Forfeiture  for 
failure  to  complete  a  railroad  or  enterprise. —  Non-user  of  its 
franchise  is  a  cause  for  forfeiture  where  a  corporation  is  pos- 
sessed not  only  of  its  franchise  to  be  a  corporation,  but  also 
other  franchises,  such  as  a  right  of  way,  which  the  public  are 


allowed  by  charter  it  may  recover. 
The  only  penalty  is  such  as  the  usury 
law  prescribes.  Grand  Gulf  Bank 
V.  Archer,  16  Miss.  151  (1847).  For  a 
vigorous  and  interesting  but  futile 
effort  to  oust  a  going  railroad  com- 
pany from  its  franchises  for  all  kinds 
of  misfeasances,  malfeasances,  and 
non-feasances,  see  International,  etc 
R'yv.  State,  75  Tex.  356  (1889);  and 
for  a  successful  case  in  the  same  line, 
see  East  Line,  etc.  R'y  v.  State,  75 
Tex.  434  (1889).  It  is  not  for  the  state 
to  institute  an  action  to  dissolve  and 
wind  up  a  mutual  benefit  and  build- 
ing corporation  merely  because  some 
of  the  members  are  dissatisfied.  Peo- 
ple V.  Lowe,  117  N.  Y.  175,  190  (1889). 
No  quo  warranto  lies  for  iising  an  ab- 
breviated corporate  name.  People  v. 
Bogart,  45  CaL  73  (1872).  The  aver- 
ments of  misuser  must  be  definite 
and  certain.  Danville,  etc  Pr.  Co.  v. 
State,  16  Ind.  456  (1861).  And  the 
misuser  must  be  wilfuL  State  v. 
Columbia,  etc.  Co.,  2  Sneed  (Tenn.), 
254  (1854) ;  Baltimore  v.  Connellsville, 
etc  R'y,  6  Phila.  190  (1866).  Con- 
cerning the  pleadings  in  quo  war- 
ranto, see  People  v.  Stanford,  77  CaL 
3  80  ( 1 888).  An  information  in  the  nat- 
ure of  quo  warranto  to  forfeit  the 
charter  of  a  temperance  enterprise 
is  not  definite  enough  in  its  charges 
when  it  charges  a  perversion  of  funds. 
People  V.  Dashaway  Assoc,  84  CaL 
114  (1890),  containing  also  a  discus- 
sion on  the  pleadings  and  practice. 


Where  the  state  has  brought  suit  to 
forfeit  the  charter  of  a  railroad  com- 
pany on  the  ground  that  a  majority 
of  its  stock  is  held,  contrary  to  the 
statutes  and  constitution  of  tlie  state, 
by  another  railroad  company,  the 
case  may  be  removed  to  the  federal 
court  if  the  latter  company  is  an  in- 
strument of  intei-state  commerce  and 
piirchased  the  stock  for  interstate 
commerce  purposes.  It  is  also  re- 
movable where  the  latter  company 
claims  that  its  charter  existed  before 
such  constitution  and  statutes,  and 
give  it  a  right  to  own  such  stock- 
South  Carolina  v.  Port  Royal,  etc. 
R'y,  56  Fed.  Rep.  333  (1893). 

1  North,  etc.  Stock  Co.  v.  People, 
147  IlL  234  (1893).  In  Kansas  the 
charter  of  a  corporation  may  be  for- 
feited at  the  instance  of  the  state  if 
the  corporation  fails  to  keep  its  gen- 
eral office  and  the  office  of  its  treas- 
urer within  the  state  in  accordance 
with  the  terms  of  the  statutes.  State 
V.  Topeka  Water  Co.,  52  Pac  Rep.  422 
(Kan.,  1898).  Where  a  corporation 
removes  all  its  offices  from  the  state, 
a  stockholder  may  apply,  under  a 
statute,  for  a  dissolution  on  the 
groimd  of  an  abuse  of  powers.  Sim- 
mons V.  Norfolk,  etc.  Steamboat  Co., 
113  N.  C.  147  (1893);  State  v.  Park,  etc 
Lumber  Co.,  58  Minn.  330  (1894). 

2  Illinois,  etc.  University  v.  People, 
46  N.  E.  Rep.  737  (111.,  1897). 

3  State  V.  Equitable  L.  etc  Co.,  41 
S.  W.  Rep.  916  (Mo.,  1897). 


1218 


CH.  XXXVIII.]  DISSOLUTION,  FOEFEITUKE,  ETC. 


[§  634. 


interested  in  having  kept  in  active  use.  Thus,  where  a  charter 
required  a  street  railway  company  to  lay  its  tracks  on  certain 
streets,  and  the  company  did  so  on  a  part  of  such  streets  and 
then  removed  them,  and  for  many  years  operated  no  cars  thereon 
at  all,  the  court  held  that  the  charter  might  be  forfeited  at  the 
instance  of  the  state.^  Where  a  street  railway  does  not  run  its 
cars  as  required  by  the  ordinance,  the  state,  at  the  instance  of 
the  city,  may  by  qv.0  warranto  proceedings  oust  the  company 
from  its  rights  in  said  ordinance.  The  remedy  in  such  a  case 
is  not  in  equity.^    A  street  railway  grant  from  the  city  may  be 


I  People  V.  Broadway  R  R,  126 
N.  Y.  29  (1891).  .A  smt  for  forfeiture 
lies  where  a  railroad  company  takes 
up  part  of  its  track.  State  v.  West, 
etc.  R-y.  34  Wis.  197  (1879);  S.  C, 
36  Wis.  1G6  (1874).  Or  where  a  rail- 
road company  constructs  but  part  of 
its  road,  has  no  station  or  freight- 
houses  and  no  passenger  coaches,  but 
engages  only  in  getting  out  coal  from 
beds  owned  by  those  interested  in  the 
company.  State  v.  Railway  Co.,  40 
Ohio  St  504  (1884).  But  the  suit  does 
not  lie  on  the  ground  that  the  com- 


V.  Seneca  County  Bank,  5  Olaio  St. 
171  (1856).  It  is  not  a  non-user  for  a 
county-fair  corporation  to  rent  its 
grovmds.  Kent  County  Agr.  Soc.  v. 
Houseman,  81  Mich.  609  (1890).  Where 
the  statute  prescribes  that  non-user 
for  a  year  shall  be  causs  for  forfeit- 
iu"e,  a  non-user  for  a  few  days  is  in- 
sufficient. People  V.  Atlantic,  etc 
R  R,  125  N.  Y.  513  (1891).  A  railroad 
which  is  leased  to  another  company 
without  statutory  provisions  to  do  so 
is  subject  to  forfeiture  at  the  instance 
of  the  state.    State  v.  Atchison,  etc 


pany  does  not  intend  to  complete  its    R  R,  24  Neb.  143  (1888).    As  to  a 

failTire  of  a  railroad  corporation  to 
complete  its  road,  see  §  638,  infra. 
The  abandonment  of  the  right  of  way 
by  the  railroad  is  no  ground  for  an 
action  of  trespass  by  the  former 
owner  to  recover  it.  Logan  v.  Vernon, 
etc.  R  R,  90  Ind.  552  (1883).  See,  on 
this  subject,  §  905,  infra.  In  Ten- 
nessee, where  a  corporation  has  aban- 
doned business  for  many  years,  and 
has  no  known  board  of  directors,  a 
stockholder  may  file  a  bill  to  wind 
up  its  affairs,  but  he  should  not  join 
the  corporation  as  a  complainant 
witK  himself.  In  such  a  case  no  re- 
quest to  the  directors  is  necessary. 
Tennessee,  etc.  Co.  v.  Ayers,  43  S-  W. 
Rep.  744  (Tenn.,  1897). 

2  In  this  case  the  company  had  not 
run  its  cars  for  three  years.  State  v. 
East  Fifth  St  Ry,  41  &  W.  Rep.  955 
(Mo.,  1897). 


road.  State  v.  Kingan,  51  Ind.  142 
(1875);  State  v.  Beck,  81  Ind.  501 
(1882).  No  forfeiture  is  decreed  be- 
cause a  railroad  company  discon- 
tinues passenger  trains  over  a  branch 
line  wliich  is  run  at  a  loss  by  reason 
of  horse-car  comi)etition.  Common- 
wealth V.  Fitchburg  R  R,  78  Mass. 
180  (1858).  The  lessee  of  a  railroad  is 
a  proper  party  defendant  to  a  suit  to 
forfeit  franchises  for  non-user.  Peo- 
ple V.  Albany,  etc.  Pu  R,  77  N.  Y.  232 
(1879) ;  State  v.  Minnesota  Cent  Ry, 
86  Minn.  246  (1886).  An  assignment 
of  all  coi-porate  assets  to  others, 
thereby  rendering  the  corporation 
incapable  of  continuing  business,  is 
cause  for  forfeitura  State  v.  Real 
Estate  Bank,  5  Ark.  595  (1843).  A 
bank  which  ceases  to  do  business  and 
to  file  statements,  and  which  makes 
improper  loans  to  its  directors,  is 
liable  to  forfeiture  of  charter.    State 

1219 


§  634.] 


DISSOLUTION,  FOKFEITUEE,  ETC.  [CH.  XXXVIII. 


forfeited  at  the  instance  of  the  state  where  the  company  runs 
but  one  car  a  day  in  order  to  hold  the  franchise.  It  may  also 
be  forfeited  for  failure  to  construct  the  entire  line  "within  the 
time  siDCcificd  by  statute.^ 

It  is  good  cause  for  forfeiture  of  a  charter  by  judicial  decree 
that  a  railroad  company  does  not  compLte  its  road,  or  does 
not  complete  it  within  a  prescribed  time.^  And  such  a  forfeit- 
ure at  the  instance  of  the  state,  by  reason  of  the  failure  of  the 
corporation  to  complete  its  enterprise  as  required  by  charter, 
has  often  been  decreed.' 


1  People  V.  Sutter  St.  R'y,  49  Pac 
Eep.  7oii  (Cal,,  1897),  holding  also  that 
the  court  may  impose  a  tiue  instead 
of  forfeiting  the  riglits. 

2Tlio  failure  of  a  railroad  corpora- 
tion to  complete  its  line  as  laid  down 
in  the  charter  is  ordinarily  good 
cause  for  forfeiture  of  its  cliarter, 
but  the  state  may  waive  it.  People 
V.  Ulster,  etc.  R.  R,  128  N.  Y.  240 
(1891).  See  also  New  York,  etc.  R  R 
V.  New  York,  N.  H.  etc.  R  R,  53  Conn. 
274,  284  (1884).  A  railroad  may  con- 
struct its  line  long  subsequently  to 
the  date  of  its  charter,  there  being 
no  limit  in  its  charter  as  to  time  of 
construction.  Western,  etc.  R  R's 
Appeal,  104  Pa.  St.  399  (1883);  Union 
Canal  Co.  v.  Yonng,  1  "Whart.  (Pa.) 
410  (1836).  If  the  time  limited  for 
the  completion  of  the  road  has  ex- 
pired, this  is  a  defense  to  eminent- 
domain  proceedings.  Morris,  etc.  R 
R  V.  Central,  etc.  R  R,  31  N.  J.  L. 
205  (1865).  Cf.  §  637,  infra.  The 
state  may  forfeit  the  charter  wliere 
the  road  is  not  constructed  within 
the  time  fixed  by  the  charter  and 
amendments;  also  where  it  abandons 
a  part  of  its  lines.  State  v.  Noncon- 
nah  Turnp.  Co.,  17  S.  W.  Rep.  128 
(Tenn.,  1875).  Where  a  railroad  com- 
pany mortgages  such  part  of  its  road 
as  is  completed,  and  the  mortgage 
is  foreclosed,  the  purchasers  are  not 
bovmd  to  go  on  and  complete  the 
road.  Failure  on  their  part  to  com- 
plete it  is  no  defense  to  an  action 


1220 


on  a  subscription.  Chartiers  R'y  v. 
Ho.lgens,  85  Pa.  St.  501  (1877).  The 
court  will  not  forfeit  the  municipal 
grant  to  a  water-works  company, 
even  though  the  latter  does  not  ex- 
tend its  mains  as  required  by  the 
cliarter.  Mandamus  is  the  proper 
remedy.  City  of  Topeka  v.  Topeka 
Water  Co.,  49  Pac.  Rep.  79  (Kan., 
1897).    Cf.  §  931,  infra, 

3  People  V.  Kingston,  etc.  Tump. 
Co.,  23  Wend.  193  (1840),  where  the 
road  was  not  constructed  as  required; 
Thompson  v.  People,  23  AVend.  537 
(1840),  reversing  21  Wend.  235,  hold- 
ing  that  an  immaterial  omission  is 
not  fatal;  People  v.  National  Sav. 
Bank,  11  N.  K  Rep.  170  (IlL,  1887), 
forfeiting  for  failure  to  complete 
subscriptions  as  required  by  charter; 
Eastern,  etc.  Co.  v.  Regina,  22  Eng. 
L.  &  Eq.  328  (1853),  for  failure  to  pay 
in  capital  stock  as  required  by  char- 
ter; People  V.  City  Bank,  7  Colo.  226 
(1883),  to  same  effect.  See  People  v. 
Jackson,  etc.  P.  R  Co.,  9  Mich-  285 
(1861),  for  a  case  of  the  construction 
of  a  road  in  sections.  And  where 
the  charter  prescribes  that  a  certain 
number  of  miles  shall  be  completed 
within  a  certain  time,  but  does  not 
prescribe  that  the  effect  of  non-com- 
pUance  shall  be  a  forfeiture,  then  the 
only  way  of  forfeiting  the  charter  is 
by  a  suit  and  a  decree  of  a  court. 
Hughes  V.  Northern  Pac.  R'y,  18  Fed. 
Rep.  106  (1883);  Arthur  v.  Commer- 
cial Bank,  17  Misa  394,  430   (1848> 


CH.  XXXVIII.]  DISSOLUTION,  FOKFEITUEE,  ETC. 


[§  63i. 


A  water- works  charter  will  be  forfeited  where  the  company 
has  abandoned  business  and  attempted  to  sell  out.^  It  is  not  the 
duty  of  the  attorney-general,  however,  to  lie  in  wait  for  all  cor- 
porations which  have  not  fully  or  technically  complied  with  all 


The  fact  that  a  corporation  com- 
mences business  in  another  state 
within  a  year  suffices  for  a  charter 
provision  that  it  must  commence 
business  within  a  year.  Re  Capital 
F.  Ins.  Co.,  L.  R.  21  Ch.  D.  209  (1882); 
People  V.  Kankakee  Improvement 
Co..  103  IlL  491  (1882).  In  this  case 
the  charter  required  the  proposed  im- 
provements to  be  completed  within 
eight  years  as  far  east  as  the  state 
lina  The  company  completed  as  far 
east  as  Kankakee  City,  and  claimed 
the  right  to  exercise  the  option  of 
making  or  not  making  further  im- 
provements between  that  point  and 
the  state  line.  The  court  say:  "The 
non-compliance  with  the  require- 
ments was  per  se  a  misuser,  and  a 
cause  of  forfeiture  of  the  franchise 
as  for  condition  broken;"  and  "we 
can  see  here  but  one  entire  fran- 
chise for  the  improvement  of  these 
streams,  and  that  this  obligation  to 
make  the  improvements  above  Kan- 
kakee City  was  a  condition  annexed 
to  this  entire  franchisa  .  .  .  We 
think  the  non-compliance  with  the 
requirement  in  question  was  a  cause 
of  forfeiture  of  the  entire  franchise." 
Briggs  V.  Cape  Cod  Land  Co.,*137 
Mass.  71  (1884).  In  this  case  the 
charter  of  a  corporation  required  it 
to  deposit  with  the  state  treasurer 
within  four  months  from  its  date  the 
sum  of  $200,000  as  security  for  cer- 
tain purposes,  among  others  for  the 
payment  of  damages  for  taking  land, 
and  the  corporation  did  not  deposit 
the  $200,000  in  cash,  but  in  bonds  of 
the  United  States  of  the  par  value 
of  $200,000,  and  of  the  market  value 
of  $230,000.  Held,  a  sufficient  com- 
pliance, as  the  object  of  the  provis- 


ion was  to  provide  security  to  vari- 
ous interests.  Also  held  that  the 
question  whether  a  corporation  has 
ceased  to  exist  for  non-compliance 
with  charter  provisions  could  only 
be  judicially  determined  in  a  suit  to 
which  the  commonwealth  was  a 
party.  The  corporation  itself,  when 
sued  for  taxes,  cannot  set  up  this  de- 
fensa  Baltimore,  etc.  R.  R.  v.  Mar- 
shaU  Co.,  3  W.  Va.  319  (1869).  Where 
a  charter,  by  its  terms,  is  to  be  void 
unless  the  capital  stock  is  subscribed 
within  two  years  and  business  com- 
menced, a  failure  to  secure  tlie  whole 
subscription  witliin  that  time  ren- 
ders the  charter  void,  though  busi- 
ness was  commenced.  Quo  warranto 
lies.  People  v.  National  Sav.  Bank, 
11  N.  E.  Rep.  170  (IlL,  1887).  An 
owner  of  laud  which  a  railroad  has 
taken  cannot  reclaim  possession  by 
reason  of  the  failure  of  the  company 
to  complete  its  road  within  the  time 
limited  by  charter.  Cincinnati,  etc. 
R  R.  u  Clifford,  113  Ind.  460  (1888); 
Bravard  v.  Cincinnati,  etc.  R.  R.,  115 
Ind.  1  (1888).  The  bondholders  of  the 
company  take  the  risk  of  this  forfeit- 
ure of  the  charter  for  non-compli- 
ance with  conditions.  Silliman  i\ 
Fredericksburg,  etc.  R  R,  27  Gratt. 
(Va.)  119  (1876),  where,  however,  the 
corporate  officers  were  endeavoring 
to  enforce  fraudulent  bonds.  Some 
of  the  English  railway  acts  are 
plainly  not  obligatory,  but  only  en- 
abling; and  it  is  held  that  the  evi- 
dent intention  of  parliament  was  to 
permit  the  companies  to  complete 
their  lines  as  far  as  possible  or  desir- 
able before  the  limit  of  time  set,  and 
to  abandon  the  remaining  portion. 
York,  etc.  R'y  v.  The  Queen,  1  EL  & 


1  City  Water  Co.  v.  State,  33  S.  W.  Rep.  259  (Tex,,  1895). 
1221 


§  635.] 


DISSOLimON,  FOEFEITUKE,  ETC.  [CH,  XXXVni. 


the  requisites  of  their  charters.^  Even  though  a  corporation 
exercises  no  franchise  except  that  of  being  a  corporation,  yet 
if  it  is  guilty  of  a  non-user,  the  weight  of  authority  holds  that 
quo  warranto  "will  lie,^  Where  a  river-improvement  company 
that  has  received  a  land  grant  from  the  state  for  the  purpose 
of  improving  the  river  has  long  ceased  operations,  and  the  par- 
ties interested  in  it  departed,  an  injunction  and  dissolution  at 
the  instance  of  the  state  may  be  obtained.' 

§  635.  Forfeiture  for  ultra  vires  acts  and  usuri)ation  of  fran- 
chiscs  —  Quo  warranto  and  injunction  at  the  instance  of  the 
state. — Frequently  a  corporation  docs  acts  which  its  charter 


BL  858  (1853),  reversing  same  case,  1 
EL  &  Bl.  178;  Great  Western  R'y  v. 
The  Queen,  1  El.  &  Bl.  87-4  (1853),  re- 
versing same  case,  1  El.  &  Bl.  253; 
Edinburgh,  etc.  R'y  v.  Philip,  2  Macq. 
a  L.  Cas.  514,  526  (1857);  Scottish 
N.  E.  R'y  V.  Stewart,  3  Macq.  H.  L. 
Cas.  382,  414  (1859).  See  also  Rex  v. 
Birmingham  Canal,  2  W.  BL  708  (1780), 
by  Lord  Mansfield;  Blakemore  v. 
Glamorganshire  Canal,  1  MyL  &  K. 
162  (1832),  by  Lord  Eldon;  The  Queen 
V.  Eastern  Coimties  R'y,  10  Ad.  &  EL 
631  (1839);  The  Queen  v.  Lancashire, 
etc.  R'y,  1  EL  &  Bl.  228  (1852). 

1  People  V.  De  Grauw,  133  N.  Y.  254 
(1892);  People  v.  Equity  G.  L.  Co.,  141 
N.  Y.  232  (1894);  Lorillard  v.  Clyde, 
142  N.  Y.  456,  465,  466  (1894).  A  bill 
filed  by  the  attorney-general  to  en- 
join the  construction  of  an  electric 
street  railroad  will  be  dismissed 
where  it  was  filed  really  at  the  in- 
stance of  rival  companies.  People  v. 
General  Electric  R'y,  50  N.  E.  Rep. 
158  (IlL,  1898). 

2  The  state  may  forfeit  a  charter 
for  wilful  non-user,  although  the  cor- 
poration is  a  private  one.  People  v. 
Milk  Exchange,  133  N.  Y.  565  (1892); 
Edgar  Coll.  Inst.  v.  People,  142  111.  363 
(1892).  See  Attorney-General  v.  Si- 
monton,  78  N.  C.  57  (1878),  holding 
that  the  suit  will  not  lie,  although 
only  five  shares  of  stock  were  sub- 
scribed for  and  no  other  act  done 
by  the  corporation;  State  v.  Societe 

1223 


Republicaine,  etc.,  9  Mo.  App.  114 
(1880),  holding  the  same,  though  the 
company  was  dormant.  But  the  case 
of  State  V.  Piphor,  28  Kan.  128  (1882), 
forfeited  the  charter  of  an  agricul- 
tural college  for  non-user  for  nine- 
teen years.  And  see  dicta  in  Ter- 
rett  V.  Taylor,  9  Crauch,  43,  51  (is  15); 
State  V.  Commercial  Bank,  21  Miss. 
509  (1850).  In  New  York  by  statute 
such  a  suit  will  lie.  Code  Civ.  Pro., 
§  1798.  See  also  Re  Jackson,  etc.  Ins. 
Co.,  4  Sandf.  CIi.  559  (1847).  Where 
a  corporation  has  abandoned  its  au- 
thorized business  and  engaged  in 
another  it  will  be  wound  up.  Tliis 
is  different  from  a  case  where  the  di- 
rectors have  merely  and  incidentally 
committed  ultra  vires  acts.  Be 
Crown,  etc.  Bank,  62  L.  T.  Rep.  823 
(1890).  An  abandonment  by  a  cor- 
poration of  part  of  the  purposes  of  its 
incorporation  is  no  cause  for  dissolu- 
tion. Norwegian  Titanic  Iron  Co.,  35 
Beav.  223  (1865),  where,  its  purpose 
being  to  purchase  English  and  Nor- 
way mines,  it  sold  the  English  mines. 
By  the  terms  of  a  new  constitution 
all  corporations  which  have  failed  to 
organize  before  its  adoption  may  be 
deemed  to  have  forfeited  their  fran- 
chises thereby.  Chincleclamanch, 
etc.  Co.  V.  Commonwealth,  100  Pa.  St. 
438,  (1882). 

3  State  V.  Cannon,  etc.  Assoc.,  69  N. 
W.  Rep.  621  (Minn.,  1896). 


CH.  XXXVIII.]  DISSOLUTION,  FOEFEITUEEj  ETC.  [§  635. 

does  not  authorize  it  to  do,  or  which  its  charter  or  a  statute 
expressly  prohibits  it  from  doing.  The  question  then  arises, 
What  is  the  remedy  of  the  state  ?  The  right  of  a  stockholder, 
or  the  corporation  itself,  or  a  person  contracting  with  the  cor- 
poration, to  object  to  such  acts  is  discussed  elsewhere.^  But 
may  the  state  object  ?  Undoubtedly  it  may.  It  seems  that  the 
state  has  four  remedies.  Its  legislature  may  repeal  the  charter 
of  the  corporation  under  the  reserved  right  of  the  state  to  re- 
peal ; '  or  the  state  may  institute  a  proceeding  to  forfeit  the 
charter  for  misuser  of  powers ;  or  such  proceeding  may  be  only 
to  oust  the  corporation  from  the  exercise  of  the  usm-ped  pow- 
ers; or,  according  to  some  authorities,  a  suit  may  be  com- 
menced in  equity  for  an  injunction  restraining  the  corporation 
from  committing  the  ultra  vires  acts.  Taking  up  first  the  sub- 
ject of  quo  warranto,  it  seems  that  the  judgment  in  an  ordi- 
nary quo  warranto  proceeding  may  be  either  a  forfeiture  of  all 
the  corporate  franchises  and  of  the  charter,  or  may  be  a  forfeit- 
ure only  of  the  right  to  continue  to  do  the  illegal  acts,  and  that 
it  is  within  the  discretion  of  the  court  to  say  which  judgment 
shall  be  rendered.'  Quo  warramio  lies  to  forfeit  the  exclusive 
feature  of  a  franchise  without  forfeiting  the  remainder  of  the 
franchise.*  The  nature  of  scire  facias,  quo  warranto,  and  in- 
formation in  the  nature  of  a  quo  warraMo,  is  explained  in  the 
notes  below.' 

1  See  Part  IV,  infra.  court  may  decree  either  a  forfeiture 

2  See  §  639,  infra.  of  the  franchise  to  be  a  corporation 

3  State  V.  People's,  etc.  Assoc,  42  or  an  ouster  from  the  powers  and 
Ohio  St  579  (18S5),  where  only  a  dis-  acts  illegally  assumed  or  done.  There 
continuance  of  the  acts  complained  may  be  a  judgment  of  ouster  of  a 
of  was  ordered ;  People  v.  Improve-  particular  franchise,  and  not  of  the 
ment  Co.,  103  EL  491  (1883),  where  a  whole  charter.  State  v.  Old  Town 
complete  forfeiture  of  charter,  etc.,  Bridge  Corp.,  85  Ma  17  (1892).  "  Cor- 
was  decreed.  See  also  People  v.  porate  charters  are  not  forfeited  in 
Utica  Ins.  Co.,  15  Johns.  357  (1818),  fragments,  or  annulled  as  damages 
where  an  insiuance  company  had  en-  for  the  violation  of  private  con- 
gaged  in  banking  contrary  to  stat-  tracts."  In  condemnation  proceed- 
ute.  In  State  v.  Building  Assoc,  35  ings  the  defendant  cannot  set  up  that 
Ohio  St.  258  (1879),  the  coxirt  said  the  charter  has  been  violated.  Re 
that  where  the  corporation  is  guilty  Long  Island  Pt.  R.,  143  N.  Y.  67  (1894). 
of  an  offense  which  by  statute  is  *  Commonwealth  v.  Sturtevant,  37 
cause  for  forfeiture  of  its  franchise  AtL  Rep.  916  (Pa.,  1897). 

as  a  corporation,  the  court  will  de-  ^  Professor  Dwight  explained  these 
cree  that  forfeiture;  but  where  the    as  follows: 

cause  of  forfeiture  is  outside  of  those  "  Scire  facias  is  resorted  to  where 
prescribed  in  the  statutes,  then  the    there  is  original  defect  in  the  char- 

1223 


§  G35.] 


DISSOLUTION,  FOEFEITUEE,  ETC.  [CH.  XXXVIII. 


Qiio  wa/rranto  at  the  instance  of  the  state  does  not  lie  merely 
because  a  street  railway  company  has  been  given  street  rights 
in  perpetuity  by  a  municipality,  although  the  statute  limits  its 

ter,  as  if,  e.  g.,  a  grant  obtained  by    chise.    The  inquiry  is  the  same  as  in 
fraud.    It  may  be  used  also  in  the    the  writ  of  quo  warranto;  that  is, 


case  where  the  charter  was  valid  but 
the  powers  of  a  corporation  have  been 
abased.  The  distinction  taken  in 
England  is  this:  tliat  a  scire  facias 
may  be  resorted  to  where  a  loj^al 
corporation  in  full  possession  of  its 
powers  abuses  them,  while  a  quo 
ivarranto  is  applicable  whore  a  cor- 
poration, from  a  defect  in  its  consti- 
tution, such  as  a  loss  of  part  of  its 
members  which  are  integral  to  its 
existence,  becomes  an  imperfect 
body,  but  nevertheless  continues  to 
act  as  a  corporatioo.  See  Grant  on 
Corporations,  296. 

"  Writ  of  quo  warranto.  This  is 
an  ancient  writ,  employed  by  the 
king  against  any  one  who  claims  or 
usurps  an  oflSce  or  franchise,  or  who, 
having  had  a  right  to  the  franchise, 
neglects  to  exercise  it,  to  inquire  by 
what  warrant  he  still  claims  to  exer- 
cise it.  The  theoiy  of  the  writ  is, 
there  is  an  unlawful  encroachment 
upon  the  royal  prerogative,  and,  being 
a  dilatory  proceeding  and  teclmical, 
it  is  not  now  so  much  employed  as  tlie 
succeeding  remedy. 

"Information  in  the  nature  of  a 
quo  ivarranto.  This  is  in  form  a 
criminal  proceeding.  There  were  two 
proceedings  in  the  criminal  law  for 
the  conviction  of  criminals.  One  is 
termed  an  information  and  the  other 
an  indictment.  They  differ  in  this 
respect:  that  while  an  indictment  is 
found  by  a  grand  jury,  an  informa- 
tion is  simply  the  allegation  of  an 
oflacer  who  files  it.  In  this  case  the 
attorney-general  proceeds  on  twofold 
groimd,  both  to  punish  the  usurper 
and  to  prevent  the  unlawful  exercise 
of  its  franchises.  In  the  case  of  a 
corporation  the  main  object  is  to  in- 
terfere with  the  exercise  of  the  fran- 


1224 


by  what  warrant  the  franchise  is  ex- 
ercised. The  reason  why  it  is  more 
resorted  to  is  that  it  is  easy  and  sim- 
ple of  application. 

"Under  the  Now  York  code  the 
proceeding  is  simply  an  action 
brought  by  the  attorney-general,  gov- 
erned by  the  same  general  rules  as 
an  action  at  common  law.  If  judg- 
ment goes  against  the  corporation  it 
is  liable  to  be  dissolved.  .Tliis  pro- 
ceeding in  England  was  instituted  in 
the  great  criminal  court,  the  king's 
or  queen's  bencli,  and  in  New  York 
in  the  supreme  court  only,  which 
represents  the  queen's  bench." 

In  the  case  of  State  v.  Merchants', 
etc.  Trust  Co.,  8  Ilumph.  (Tenn.)  235 
(IS  17),  the  court  said :  "  By  the  com- 
mon law  the  forfeiture  of  a  charter 
can  be  enforced  in  a  court  of  law 
only;  and  the  proceeding  to  repeal  it 
is  by  a  scire  facias  or  an  informa- 
tion in  the  nature  of  a  writ  of  quo 
warranto.  A  scire  facias  is  the 
proper  remedy  where  there  is  a  legal 
existing  body  capable  of  acting,  but 
which  had  been  guilty  of  an  abuse 
of  the  power  entrusted  to  it;  a  quo 
warranto  where  there  is  a  body  cor- 
porate de  facto,  which  takes  upon 
itself  to  act  as  a  body  corporate,  but 
from  some  defect  in  its  constitution 
it  cannot  legally  exercise  the  power 
it  affects  to  usa"  Citing  8  Wheat. 
483,  484  In  Pennsylvania,  where  the 
state  filed  an  information  to  declare 
ultra  vires  a  contract  between  a 
canal  company  and  a  coal  comjiany, 
whereby  one-half  of  the  canal  facili- 
ties were  monopolized  by  the  latter, 
the  court  held  that  an  information 
was  a  proper  remedy,  and  that  the 
court,  in  its  judgment  in  favor  of  the 
state,  might  order  the  corporation  to 


CH.  XXXVIII.]  DISSOLUTION,  FOEFEITUEE,  ETC. 


[§  635. 


corporate  existence  to  thirty  years.^  Quo  warranto  lies  against 
a  railroad  corporation  to  recover  back  to  the  state  canal  lands 
which  the  railroad  is  using.^  Where  a  public  corporation,  vested 
with  state  property  for  public  use,  makes  a  lease  of  it  which  is 
ultra  vires,  a  private  person  cannot  sustain  a  suit  to  contest  it; 
this  can  be  done  only  by  the  state  or  the  corporation.'  Quo 
wo/rranto  or  an  information  in  the  nature  thereof  is  the  proper 
remedy  where  the  corporation  has  not  been  legally  incorpo- 
rated.'*   The  attorney-general  may  file  an  information  in  quo 

is  already  in  charge,  unless  the  con- 
sent of  tlie  court  is  first  obtained. 
Wayne  Pike  Co.  v.  State,  134  Ind.  673 
(1893). 

1  Attorney-General  v.  Detroit  Sub- 
urban R'y,  96  Mich.  65  (1893). 

-  State,  etc.  v.  Pittsburgh,  etc.  R'y,  41 
N.  E.  Rep.  205  (Ohio,  1895). 

'  Directors,  as  such,  of  such  corpo- 
ration, cannot  sustain  such  a  suit. 
Smith  V.  Cornelius,  41 W.  Va.  59  (1895). 

<The  state  may  forfeit  a  charter 
where  the  statute  required  five  per- 
sons to  sign  and  acknowledge  the 
articles,  but  only  four  out  of  the  five 
actually  did  acknowledge  them.  Peo- 
ple V.  Montecito  Water  Co.,  97  CaL 
276  (1893).  In  quo  warranto  proceed- 
ings on  the  ground  that  the  company 
was  not  properly  incorporated,  the 
corporation  itself  is  a  necessaiy 
party  defendant.  People  v.  Monte- 
cito Water  Co.,  97  CaL  276  (1893). 
Under  the  statutes  of  Alabama  in 
reference  to  watered  stock,  quo  ivar- 
ranto  lies  where  §1,000,000  of  stock  is 
issued  for  the  possibility  of  patents 
to  be  thereafter  granted.  In  such 
quo  warranto  proceedings  stockhold- 
ers need  not  be  made  parties.  State 
V.  Webb,  97  Ala.  Ill  (1893).  In  an  ac- 
tion by  the  state  to  forfeit  a  railroad 
charter  the  state  must  prove  not  only 
that  a  cause  of  forfeiture  did  exist, 
but  that  it  still  continues  to  exist. 
Moreover  some  public  interest  must 
be  involved  in  obtaining  the  forfeit- 
ure. People  V.  Ulster,  etc.  R.  R.,  128 
N.  Y.  240  (1891).    A  charter  of  the 


discontinue  the  unauthorized  act, 
and  that  the  judgment  need  not  oust 
the  corporation  from  its  charter  and 
franchises.  Commonwealth  v.  Dela- 
ware, etc.  Canal  Co.,  43  Pa.  St.  295 
(1862).  For  the  ancient  learning  as 
to  scire  facias  in  forfeiting  char- 
ters, see  State  v.  !Moore,  19  Ala.  514 
(1851).  When  the  information  has 
for  its  object  to  oust  the  defendants 
from  acting  as  a  corporation,  and  to 
test  the  fact  of  their  incorporation, 
it  must  be  filed  against  individuals. 
When  the  object  is  to  effect  a  disso- 
lution of  a  corporation  which  has 
had  an  actual  existence,  or  to  oust 
such  corporation  of  some  franchise 
which  it  has  unlawfully  exercised, 
the  information  must  be  filed  against 
the  corporation.  People  v.  Rensse- 
laer, eta  R.  R,  15  Wend.  113  (1836). 
Although  the  state  proves  the  case, 
yet  the  court  will  not  adjudge  a  for- 
feiture unless  justice  requires  it. 
State  V.  Essex  Bank,  8  Vt.  489  (1836). 
Quo  warranto  against  a  corporation 
in  its  corporate  name  admits  that  it 
was  legally  incorporated.  North, 
etc.  Stock  Co.  V.  People.  147  III  234 
(1893).  As  to  the  pleadings  in  quo 
warranto,  see  Distilling,  etc.  Co.  v. 
People,  156  BL  448  (1895);  People  v. 
Stanford,  77  Cal.  360  (1888).  As  to  the 
pleadings  in  quo  warranto  against 
a  street  railway  company  assuming 
to  be  a  corporation,  see  Smith  v. 
State,  140  Ind  343  (1895).  The  state 
cannot  file  a  quo  u'arranfo  proceeding 
to  forfeit  a  charter,  where  a  receiver 


1225 


§  635.] 


DISSOLUTION,  FOKFEITIJKE,  ETC.  [CH.  XXXVIII. 


warranto  without  leave  of  the  court.*  Quo  warranto  for  claim- 
ino"  to  be  a  corporation  should  bo  against  the  olhcers  of  the  cor- 
poration as  individuals.^  Under  the  Massachusetts  statutes  any 
person  who  is  injured  by  a  corporation  may  file  an  information 
in  the  nature  of  quo  warranto  against  the  corporation.'  Quo 
warranto  lies  against  foreign  corporations  doing  business  ille- 
gally in  the  state.*     The  state  by  quo  warranto  may  oust  a 


company  will  be  forfeited  at  the  in- 
stance of  the  state  wliere  some  of  the 
parties  who  are  alleged  to  join  in  the 
corporation  did  not  so  join,  but  tlieir 
names  were  inserted  without  their 
sanction  or  authority.  Such  parties 
are  not  liable  as  stockholders.  La 
Banque  d'llochelaga  v.  ^lurray,  63 
L.  T.  Rep.  03  (1890).  In  a  quo  war- 
ranto proceeding  to  declare  void  an 
alleged  charter  the  corporation  is  a 
necessary  party  defendant  People 
V.  Flint,  64  Cal.  49  (1883).  After  the 
attorney-general  institutes  q^lo  war- 
ranto proceedings,  and  much  testi- 
mony is  taken,  and  then  the  proceed- 
ing is  discontinued,  and  the  company 
proceeds  to  expend  money  and  make 
contracts,  the  attorney-general  will 
not  be  allowed  to  institute  new  pro- 
ceedings. Ee  Equity  Gas-Light  Co., 
10  N.  Y.  Supp.  801  (1890).  In  quo 
warranto  charging  defendants  with 
usurping  a  public  franchise  to  oper- 
ate a  feriy,  where  they  attempted  to 
defend  on  the  ground  that  they  had 
a  legal  right  to  use  the  f  eny,  the  bur- 
den was  on  them  to  show  a  valid  titla 
Gunterman  v.  People,  138  111.  518 
(1891).  Where  an  incorporation  is 
for  several  objects,  one  of  whicli  is 
illegal,  the  charter  will  be  forfeited, 
the  objects  not  being  clearly  separa- 
ble. People  V.  Chicago  Gas  T.  Co., 
130  111.  S68  (1889).  The  issuing  of 
transferable  certificates  of  stock  is 
not  assuming  tlie  functions  of  a  cor- 
poration. Eice  V.  Rockefeller,  56  Hun, 
516  (1890).  A  suit  instituted  by  the 
state  to  forfeit  a  charter  cannot  be 
removed  to  the  federal  court  on  the 


ground  that  a  contract  exists  be- 
tween the  corporation  and  the  state, 
and  that  such  contract  wiU  be  via- 
latcil.  Commonwealth  v.  Louisville 
Bridge  Co.,  43  Fed.  Rep.  241  (1890). 
The  court  may  forfeit  the  charter  of 
a  railroad  corporation  for  illegally 
leasing  its  road,  and  need  not  merely 
enjoin  the  continuation  of  the  lease. 
East  Line,  etc.  R  R  u  State,  75  Tex. 
434  (1889).  A  corporation  incorpo- 
rated for  an  illegal  purpose,  such  as 
buying  a  majority  or  all  of  the  stock 
in  each  of  four  competing  gas  corpo- 
rations, and  thereby  creating  a  mo- 
nopoly, is  subject  to  liaving  its  charter 
forfeited  at  tlie  instance  of  the  at- 
torney-general People  V.  Chicago 
Gas  Trust  Co.,  130  111.  268  (1889).  In 
quo  wari'anto  proceedings  against  a 
turnpike  company,  the  latter  has  the 
burden  of  proof  to  show  by  wliat 
authority  it  is  exercising  its  privi- 
leges. People  V.  Volcano,  etc.  Co., 
100  CaL  87  (1893). 

1  State  V.  Equitable  Loan,  etc,  Co., 
41  S.  W.  Rep.  916  (Mo.,  1897). 

2  State  V.  Fleming,  44  S.  W.  Rep. 
758  (Mo.,  1898). 

3  Hartnett  v.  Plumbers'  Supply 
Assoc,  47  N.  E.  Rep.  1003  (Mass.,  1897) 

*  State  V.  Western,  etc.  Ins.  Co.,  47 
Ohio  St.  167  (1890);  State  v.  Fidelity, 
etc.  Co.,  39  Minn.  538  (1888).  Quo 
tvarranto  against  a  foreign  corpora- 
tion illegally  doing  business  in  the 
state  must  be  against  the  corporation 
as  such  and  not  merely  against  its 
officers  and  agents.  State  v.  Somerby, 
43  Minn.  55  (1889). 


1236 


CH.  XXXVIII.]  DISSOLUTION,  FOKFEITUEE,  ETC. 


[§  035. 


railroad  from  discriminations  in  favor  of  oil  shipped  in  tank 
cars.^  An  exemption  from  taxation  is  not  a  franchise.  Hence, 
quo  wa/rranto  does  not  lie  to  oust  the  corporation  from  such  ex- 
emption.'^ Although  quo  warranto  can  be  only  for  acts  com- 
mitted within  five  years  in  Ohio,  yet  it  serves  to  oust  a  company 
from  exercising  a  power  which  it  has  not  exercised  continu- 
ously for  twenty  years.^  The  court  has  no  power  to  appoint  a 
receiver  in  quo  warranto  proceedings.  A  receiver  can  be  ap- 
pointed only  in  a  suit  in  equity  unless  a  statute  provides  other- 
wise.* 

Turning  now  to  the  subject  of  injunction  as  a  remedy,  it  is 
very  doubtful  whether  the  state  may  file  a  bill  in  equity  to  en- 
join a  corporation  from  committing  an  ultra  vires  act.  The 
remedy  of  the  state  is  qiio  warranto.  In  England  a  bill  has 
been  sustained  to  restrain  a  railroad  corporation  from  engag- 
ing in  the  coal  business.*  It  lies  to  enjoin  a  corporation,  the 
same  as  an  individual,  from  creating  a  public  nuisance,^  The 
state  may  enjoin  a  railroad  corporation  from  purchasing  a  com- 
peting line  in  violation  of  the  constitution.^     In  Wisconsin  it 


1  State  V.  Cincinnati,  etc.  R.  R.,  47 
Ohio  St.  130  (1890). 

-  International,  etc.  R'j  v.  State,  75 
Tex.  356  (1889). 

3  State  V.  Standard  Oil  Co.,  49  Oliio 
St.  137  (1892). 

*  Commonwealth  v.  Order  of  Vesta, 
156  Pa.  St.  531  (1893). 

5  Attorney-General  v.  Great  North- 
ern R'y,  1  Dr.  &  Sm.  154  (ISGO).  But 
the  attorney-general  cannot  enjoin  a 
corporate  act  merely  because  it  is 
ultra  vires.  Some  injury  to  the  public 
must  be  involved.  The  attorney-gen- 
eral's suit,  at  the  instance  of  a  manu- 
facturer, to  enjoin  one  railroad  from 
leasing  its  rolling-stock  to  another 
failed.  Attorney-General  v.  Great 
Eastern  R'y,  L.  R.  11  Ch.  D.  449  (1879). 
A  coiu-t  of  equity  cannot  compel  a  cor- 
poration to  cease  collecting  tolls,  al- 
though it  has  not  improved  a  stream 
as  required  by  its  charter.  Pixley  v. 
Roanoke,  etc.  Co.,  75  Va.  320  (1881). 
In  Attorney-General  v.  Mid-Kent  R"y, 
L.  R  3  Ch.  App.  100  (18G7),  a  man- 


datory injunction  requiring  the  de- 
fendant to  construct  a  bridge  was 
granted.  The  case  of  Attorney-Gen- 
eral V.  North,  etc.  Tramways  Co.,  73 
L.  T.  Rep.  340  (1895),  was  an  action 
brought  by  the  attorney-general  at 
the  relation  of  several  car  manufact- 
m-ers  to  restrain  a  street-railway  com- 
pany from  manufact\iringand  selling 
rolling-stock  to  other  companies  on 
the  ground  that  such  acts  were  ultra 
vires. 

<>  Attorney-General  u  Jamaica  Pond, 
etc.  Corp.,  133  Mass.  361  (1882).  A 
corporation  may  be  enjoined  from 
doing  criminal  acts  —  in  this  case 
prize-fighting  —  and  a  receiver  may 
be  put  in.  Columbian  Athletic  Club 
V.  State,  143  Ind.  98  (1895). 

■^  Louisville,  etc.  R.  R.  v.  Common- 
wealth, 97  Ky.  675  (1895);  aflf'd  in  161 
U.  S.  677  (1896),  siib  nom.  Loiiisville, 
etc.  R'y  V.  Kentucky.  A*  court  of 
equity  has  no  jurisdiction  to  forfeit 
the  franchises  of  a  corporation,  but 
it  may,  at  the  instance  of  the  attor- 


1227 


§  635.] 


DISSOLUTION,  FOKFEITUKE,  ETC.  [CH.  XXXVIII. 


is  held  that  the  attorney-general  may  enjoin  railroad  compa- 
nies from  taking  greater  rates  than  are  prescribed  by  statute ;  * 
and  in  some  of  the  states  such  a  bill  will  lie  by  statute.^ 

The  weight  of  authority,  however,  is  tliat  the  remedy  of  the 
state  is  by  quo  loarranto  and  not  by  a  bill  in  equity  for  an  in- 
junction.3    ^g^  for  instance,  the  attorney-general  cannot  enjoin 


ney-general,  enjoin  the  abuse  or  mis- 
use of  corporate  franchises.  State  v. 
American,  etc.  Assoc,  67  N.  W.  Rep. 

1  (]\Iinn.,  1896). 
1  Altoniey-General  v.  Railroad  Cos., 

3j  Wis.  523,  553  (1871),  reviewing 
many  cases;  but  cf.  Strong  v.  Mc- 
Cagg,  55  Wis.  624  (1882).  A  lease  by 
a  domestic  railroad  company  of  its 
railroad  to  a  foreign  railroad  corpo- 
ration is  illegal,  especially  where  it 
is  expi-essly  prohibited  by  statuta 
The  court  will  enjoin  the  lease  upon 
the  application  of  the  attorney-gen- 
eral where  the  effect  of  the  lease 
would  be  to  create  a  combination  in 
the  transportation  of  coal  and  to  de- 
stroy competition  in  production  and 
sale.  Stockton  v.  Central  R.  R.  of 
N.  J.,  50  N.  J.  Eq.  53  (1892).  That  a 
bill  in  equity  will  lie  to  declare  in- 
valid a  violation  of  a  charter,  see 
U.  S.  V.  Western  U.  TeL  Co.,  50  Fed. 
Rep.  28  (1892);  aff'd,  160  U.  S.  1  (1895). 

estate  V.  Merchants',  etc.  Co.,  8 
Humpli.  (Tenn.)  254  (1874),  where  an 
insui'ance  company  was  restrained 
from  banking.  So  also  in  New  York 
Bank  Com'rs  u  Bank  of  Buffalo,  6 
Paige,  496  (1837) ;  Brinckerhoff  u  Bost^ 
wick,  88  N.  Y.  52  (1882),  explaining 
the  difference  between  this  class  of 
cases  and  cases  where  other  parties 
are  complainants.  Concerning  the 
pQwer  of  the  state  to  object  to  an 
ultra  vires  act  of  a  private  corpora- 
tion by  any  proceeding  other  than 
quo  warranto,  see  People  v.  Ballard, 
134  N.  Y.  269  (1892),  a  carefully-con- 
sidered casa 

3  Attorney-General  v.  Utica  Ins.  Co., 

2  Johns.  Ch.  371  (1817);  Attorney- 
General  V.  Bank  of  Niagara,  Hopk. 


Ch.  354  (1825).  But  see  People  v.  Bal- 
lard, 134  N.  Y.  269  (1892).  In  Attor- 
ney-General V.  Tudor  Ice  Co.,  104 
Mass.  239  (1870),  an  injunction  re- 
straining an  ice  company  from  im- 
porting teas  was  denied.  Wlicre  a 
railroad  leases  its  line  in  violation  of 
a  constitutional  provision  prohibiting 
the  consolidation  of  parallel  lines,  it  ia 
subject  to  forfeitura  So  also  where 
it  issues  "  watered  stock  "  in  violation 
of  the  constitution.  State  v.  Atchi- 
son, etc.  R  R.,  24  Neb.  113  (1888).  A 
state  creating  a  corporation  has  no 
visitorial  power  over  it  — i.  e.,  power 
to  correct  corporate  abuses  —  except 
"  (1)  where  mvmicipal,  charitable,  re- 
ligious, or  eleemosynary  corporations, 
public  in  their  nature,  had  abusea 
their  franchises,  perverted  the  pur- 
pose of  their  organization,  or  mis- 
appropriated their  funds;  and  as 
they,  from  the  nature  of  their  corpo- 
rate fvmctions,  were  more  or  less 
under  government  supervision,  the 
attorney-general  proceeded  against 
them  to  obtain  correction  of  the 
abuse;  or  (2)  where  private  corpora- 
tions, chartered  for  private  and  lim- 
ited purposes,  had  exceeded  their 
powers,  and  were  restrained  or  en- 
joined in  the  same  manner  from  the 
further  violation  of  the  limitation  to 
which  their  powers  were  subject." 
Hence  the  United  States,  as  the  cre- 
ator of  the  Union  Pacific  Railroad, 
cannot  exercise  visitorial  power  over 
it  in  respect  to  frauds  in  its  manage- 
ment. U.  S.  V.  Union  Pacific  R  R, 
98  U.  S.  569,  617  (1878).  Cf.  Attorney- 
General  V.  Wilson,  1  Cr.  &  Ph.  1  (1840), 
holding  that  the  court  had  jxu'isdic- 
tion  over  charitable  corporations,  and 
12?8 


CH.  XXXVIII.]  DISSOLUTION,  FOKFEITUEE,  ETC.  [§  636. 

a  gas  company  from  laying  its  pipes,  even  tliough  lie  claims  that 
the  charter  was  void  by  reason  of  the  company  not  having  com- 
menced work  within  the  prescribed  time.^ 

An  injunction  does  not  lie  at  the  instance  of  the  state  against 
a  corporation  doing  business,  on  the  ground  that  its  stock  was 
not  properly  issued  and  that  there  was  no  intent  to  do  any  busi- 
ness within  the  state  or  to  have  an  office  therein;  nor  does  an 
injunction  lie  at  the  instance  of  the  state  to  restrain  a  corpora- 
tion from  transacting  business,  even  though  it  was  formed  to 
bring  about,  by  conditions  imposed  upon  selling  agents,  a  mo- 
nopoly in  the  cigarette  business,  and  had  largely  succeeded  in 
doing  so.^ 

§  636.  The  state  may  waive  its  right  to  forfeit  a  charter. — 
Yarious  acts  have  been  held  to  constitute  such  a  waiver. 
"  When  a  legislature  has  full  power  to  create  corporations,  its 
act  recognizing  as  valid  a  de  facto  corporation,  whether  private 
or  municipal,  operates  to  cure  all  defects  in  steps  leading  up  to 
the  organization,  and  makes  a  de  jure  out  of  what  before  was 
only  a  de  facto  corporation,"  There  must,  however,  be  a  de 
facto  organization  upon  which  this  recognition  may  act.'  ISTu- 
merous  instances  of  acts  of  the  legislature  which  constitute  a 
waiver  are  set  forth  in  detail  in  the  notes  below.* 

that  when  the  trustees  of  them  business  is  not  a  public  or  quasi-pub- 
abused  their  trust  the  court  would  lie  business,  nor  does  it  concern  a 
take  notice  of  such  abuse  by  reason  staple  of  life.  Queen  Ins.  Co.  v.  State, 
of  its  visitorial  powers.  Also,  on  this  86  Tex.  250  (1893). 
point,  Attorney-General  v.  Foundling  ^  xhe  remedy,  if  any,  is  by  quo  war- 
Hospital,  4  Bro.  Ch.  165  (1793).  For  ranto.  The  court  reviewed  the  cases 
pleadings  in  qxio  icarranto  proceed-  wherein  injunction  would  lie.  Stock- 
ings by  the  state  to  oust  a  corpora-  ton  t».  American,  etc.  Co.,  36  AtL  Rep. 
tion  from  usurped  franchises  and  to  971  (N.  J.,  1897). 
forfeit  a  railroad  charter,  see  People  ^  Comanche  Cotmty  v.  Lewis,  133 
V.  Stanford,  77  CaL  360  (1888),  holding  U.  S.  198  (1890). 

a  so  that  the  statute  of  limitations  is  <  A  legislative  recognition  of  a  char- 
no  bar.  See  the  Pennsylvania  cases  ter  cures  any  vmconstitutionality  in 
in  §  315,  supra,  where  the  state  en-  the  statute  creating  it.  Snell  v.  Chi- 
joined  an  illegal  purchase  of  stock  cago,  133  ILL  413  (1890).  The  exten- 
by  a  corporation.  sion  of  time  to  complete  railroads 
1  People  V.  Equity  Gas  Light  Co.,  applies  so  as  to  prevent  forfeitiire  for 
141  N.  Y.  232  (1894).  The  attorney-  non-completion  within  the  original 
general  cannot  maintain  an  injuno-  time.  State  v.  Bergen  Neck  R'y,  53 
tion  against  a  combination  of  in-  N.  J.  L.  108  (1890).  Altliough  suit  is 
surance  companies  to  fix  rates  and  brought  to  forfeit  a  street-railway 
commissions,  inasmuch  as  ins\irance  franchise  for  using  electric  power 

1229 


§  COT.] 


DISSOLUTION,  FOKFEITUKE,  ETC.  [CH.  XiiVIII. 


§  G37.  WJio  may  allege  that  forfeiture  or  non-incorporation 
or  dissolution  exists  —  De  facto  coriyorations. —  It  has  already 
been  shown  that  no  one  but  the  state  can  institute  a  suit  to  de- 


without  authority,  the  legislature 
may  cure  the  defect  of  power.  To 
forfeit  for  not  commencing  work 
within  a  year  the  pleading  must  al- 
lege when  the  work  was  commenced. 
People  V.  Los  Angeles,  etc.  R'y,  91 
Cal.  338  (1891).  An  amendment  to  a 
charter  is  a  waiver  of  any  forfeiture 
thereof  due  to  not  coinmoncing  busi- 
ness within  the  prescribed  tima 
Farnsworth  v.  Lime  Eock,  etc.  R.  R., 
83  Me.  440  (1891).  Although  the  act 
requires  the  certificate  of  incorpora- 
tion to  specify  the  termini,  and  the 
certificate  merely  says  the  termini 
are  in  a  certain  city,  yet  if  the  legis- 
lature subsequently,  by  special  act, 
recognizes  the  company,  the  legality 
of  its  existence  cannot  be  questioned. 
Koch  V.  North  Ava  R'y,  75  Idd.  222 
(1892).  In  this  case  the  organization 
w^as  under  the  general  railroad  law. 
Under  such  a  charter  the  route  and 
its  termini  are  to  be  determined  by  the 
mayor  and  city  council  "  under  their 
general  power  of  control  and  regvUa- 
tion  of  the  streets."  A  statute  author- 
izing a  corporation  to  reduce  its  cap- 
ital stock  waives  informalities  in  its 
incorporation,  and  such  waiver  may 
extend  to  an  illegal  issue  of  watered 
stock.  State  v.  Webb,  20  S.  Rep.  463 
(Ala.,  1896).  A  waiver  may  be  express 
or  by  statutes  recognizing  its  con- 
tinued existence,  Re  New  York  EL  R 
R.,  70  N.  Y.  327,  338  (1877);  People  v. 
Manhattan  Co.,  9  Wend.  352, 380(1832); 
or  requiring  it  to  make  alterations 
on  its  road,  Atty.  Gen.  v.  Petersbiirg, 
etc.  R.  R,  6  Ired.  L.  (N.  C.)  470  (1846); 
or  authorizing  a  transfer  of  its  prop- 
erty and  franchises  to  another  cor- 
poration, Chesapeake,  etc.  Canal  Co. 
V.  Baltimore,  etc.  R  R,  4  G.  &  J. 
(Md.)  1,  127  (1832);  or  requiring  a 
bank  to  resume  specie  payments  by 
a  certain  date,  Commercial  Bank  v. 


State,  6  Sra.  &  M.  (Miss.)  599,  023 
(1846).  But  waiver  as  to  terminus  is 
not  a  waiver  of  an  abandonment  of 
part  of  the  road,  nor  of  a  defect  as 
to  the  width  of  the  turnpike.  Peo- 
ple V.  Fishkill,  etc.  Co.,  27  Barb.  445 
(1857),  Waiver  may  arise  by  a  statute 
ext«nding  the  corporate  powers.  Peo- 
ple V.  Ottawa,  etc.  Co.,  115  IlL  281 
(1883);  Central,  etc.  R  R  u  Twenty- 
third,  etc  R  R,  54  How.  Pr.  168,  186 
(1877);  or  by  authorizing  a  change  of 
route.  State  v.  Fourth,  etc.  Co.,  15 
N.  IL  102  (1844);  or  by  expressly 
waiving  the  cause  for  forfeiture, 
Lumpkin  v.  Jones,  1  Ga,  37  (1846). 
The  legislature  may  expressly  waive 
a  cause  for  forfeiture  arising  from 
suspension  of  specie  payments.  Atch- 
afalaya  Bank  v.  Dawson,  13  La.  497 
(1839).  May  waive  by  extending  the 
time  for  completion.  La  Grange, 
etc.  R  R  V.  Rainey,  7  Coldw.  (Tenn.) 
420  (1870).  Amending  charter,  etc., 
is  a  waiver.  White's,  etc.  Co.  v.  Da- 
vidson County,  3  Tenn.  Ch.  396  (1877). 
An  act  reviving  a  corporation  is  a 
waiver,  even  though  the  act  was 
fx'audulently  passed.  Re  Mechanics' 
Soc,  31  La.  Ann.  627  (1879).  The 
waiver  protects  a  turnpike  corpora- 
tion from  an  indictment  for  obstruct- 
ing the  road.  State  v.  GodwinsvUle, 
etc.  Co.,  44  N.  J.  L.  496  (1882).  But 
the  waiver  must  have  been  clearly 
intended.  People  v.  Kingston,  etc. 
Co.,  23  Wend.  193  (1840).  The  ai> 
pointment  of  a  corporate  officer  by 
the  governor  and  senate  is  not  a 
waiver.  People  v.  Phoenix  Bank,  24 
Wend.  431  (1840).  Long  delay  in 
bringing  the  quo  warranto  may  be 
a  waiver.  People  v.  Williamsburgh, 
etc.  Co.,  47  N.  Y.  586  (1872);  People  v. 
Oakland,  etc.  Bank,  1  Doug.  (Mich.) 
282  (1843).  Dictum,  that  the  state  may 
waive.    Briggs  v.  Cape  Cod,  etc  Co., 


1230 


OH.  XXXVIII.]  DISSOLUTION,  FOKFEITUEE,  ETC. 


[§  637. 


clare  a  forfeiture.^  Also,  that  no  one  can  institute  a  suit  in 
equity  to  dissolve  a  corporation.-  The  question  now  arises 
whether  the  state  or  any  person,  either  as  plaintiff  or  clef  end- 
ant,  may  allege  forfeiture  or  dissolution  or  non-incorporation 
where  there  have  been  no  quo  warranto  proceedings  instituted 
and  prosecuted  by  the  state  to  judgment.  "With  a  few  excep- 
tions such  an  allegation  is  not  allowed. 

A  creditor  of  a  supposed  corporation  cannot  ordinarily  hold 
the  stockholders  liable  as  partners  although  they  did  not  legally 
incorporate.'  It  is  true  that  in  certain  cases,  where  a  stock- 
holder is  made  liable  to  corporate  creditors  upon  the  dissolution 
of  the  corporation,  a  dissolution  is  held  to  exist  where  the  corpo- 
ration is  hopelessly  insolvent.*  And  it  is  true  that  where  a  rail- 
road corporation  attempts  to  acquire  a  right  of  way,  the  persons 
whose  property  will  be  affected  thereby  may  oppose  the  acqui- 
sition of  the  right  of  way  by  showing  that  the  company  is  not 
legally  incorporated.*    But  aside  from  these  exceptions  no  one 


137  Mass.  71  (1884),  citing  cases.  A 
special  act  amending  the  charter 
waives  defects  in  the  articles  of  as- 
sociation as  filed.  Basshor  v.  Dressel, 
34  Md.  503  (1871).  An  amendment  to 
a  charter  waives  the  right  of  forfeit- 
ure for  fraud,  non-user,  and  misuser. 
People  V.  Ottawa,  etc.  Co.,  115  IlL  281 
(1886).  An  amendment  of  the  char- 
ter is  a  vraiver.  Attorney-General  v. 
Petersburg,  etc.  R  R,  G  Ii'ed.  L.  (N.  C.) 
456  (1846);  Charles  River  Bridge  Co. 
V.  Warren  Bridge,  24  Mass  344(1829). 
The  waiver  may  be  express.  State 
V.  Bank  of  Cliarleston,  2  McMulL 
(S.  C.)  439  (1843);  Enfield  Bridge  Co. 
V.  Connecticut,  etc.  Co.,  7  Conn.  28 
(1828);  Kanawha  Coal  Co.  v.  Kana- 
wha, etc.  Co.,  7  Blatchf.  391  (1870); 
S.  C,  14  Fed.  Cas.  108.  Where  the 
incorporation  had  been  irregular, 
the  recognition  of  a  corporation  by 
the  legislature  is  equivalent  to  a 
charter.  McAuley  v.  Columbus,  etc. 
R'y,  83  IlL  348  (1876);  Cowell  v.  Colo- 
rado Springs  Co.,  3  Colo.  83  (1876); 
Mead  V.  New  York,  etc.  R  R,  45 
Conn,  199  (1877);  Kanawha  Coal  Co. 
V.  Kanawha,  etc.  Co.,  7  Blatchf.  391 


(1870);  S.  C,  14  Fed.  Cas.  108;  St. 
Louis  R  R.  V.  Northwestern,  etc.  R'y, 
2  Mo.  App.  69  (1876);  Atlantic,  etc. 
R  R  v.  St.  Louis,  66  Mo.  228  (1877); 
State  V.  Morris,  73  Tex.  435  (1889).  Con- 
tra, where  charters  must  be  granted 
by  general  laws.  Oroville,  etc.  R 
R  V.  Suj)ervisors,  37  CaL  354  (1869). 
But  see  Brent  v.  State,  43  Ala.  297 
(1869). 

1  §  632,  supra. 

2  §  639,  sux>ra. 

3  See  ch.  XIII,  supra. 
<  See  §  631,  supra. 

5i2e  Brooklyn,  etc.  R'y,  72  N.  Y. 
245(1878);  Re  New  York  Cable  Co. 
V.  Mayor,  etc.,  104  N.  Y.  1  (1887).  In 
condemnation  proceedings  the  incor- 
poration may  be  attacked  as  not 
being.de  facto.  Its  de  jure  existence 
cannot  be  so  attacked.  Brown  v. 
Calumet  River  R'y,  125  111.  600  (1888). 
An  adjacent  ovsner  cannot  enjoin 
a  street-railway  company  on  the 
ground  that  its  charter  is  invalid, 
ujiless  his  property  rights  are  af- 
fected. Nichols  V.  Ann  Arbor,  etc. 
R'y,  87  Mich.  361  (1891).  A  person 
whose  land  a  corporation  seeks  to 


1231 


§  COT.] 


DISSOLUTION,  FOKFEITUKE,  ETC. 


[cn. 


XXXVIII. 


is  allowed  to  assert  that  the  corporation  is  dissolved,  or  its 
fruncliise  forfeited,  or  its  incorporation  illegal,  until  after  such 
a  result  has  been  decreed  by  a  court  in  a  proceeding  instituted 
for  that  purpose  by  the  state.  Thus,  a  stockholder  sued  on 
his  subscription  cannot,  unless  his  subscription  was  made  pre- 
vious to  the  incorporation,  set  up  that  the  company  was  not 
legally  incorporated.^ 

The  corporation  is  called  a  de  facto  corporation,  and  only 
the  state  is  allowed  to  question  its  existence.  There  are  many 
instances  where  attempts  have  been  made  to  avoid  this  rule  of 
law  Iw  setting  up  that  the  charter  has  been  rendered  forfeit- 
able at  the  instance  of  the  state,  but  they  have  uniformly 
failed.-^ 


take  under  power  of  eminent  domain 
cannot  set  up  that  the  articles  of  in- 
corporation had  not  been  filed  with 
the  secretary  of  state,  as  required  by 
the  incorporating  statute.  Portland, 
etc.  Co.  V.  Bobb,  88  Ky.  226  (1889).  A 
railroad  charter  is  not  good  so  far  as 
the  right  to  condemn  land  is  con- 
cerned, where  the  terminus  is  stated 
to  bo  on  the  state  line  in  a  certain 
county.  Atlantic,  etc.  E.  R.  v.  Sul- 
livant,  5  Oliio  St.  27G  (18oo).  In  con- 
demnation proceedings  the  defend- 
ant cannot  set  up  that  the  charter 
has  been  violated.  Re  Long  Island 
E.  R.,  143  N.  Y.  67  (1894).  The  ex- 
istence of  a  railroad  corporation  can- 
not be  questioned  in  an  action 
brought  by  it  to  condemn  land.  Wel- 
lington, etc.  R.  R.  V.  Cashie,  etc.  Co., 
114  N.  C.  690  (1894).  Where  a  gas 
company  opens  the  streets  under 
a  statute  and  pays  damages,  and 
partly  lays  its  pipes,  it  cannot  subse- 
quently be  enjoined  by  a  property 
owner  on  the  ground  that  the  stat- 
ute has  subsequently  been  adjudged 
to  be  unconstitutional.  King  v. 
Philadelphia  Co.,  154  Pa.  St.  160  (1893). 
1  §§  183-186,  supra.  Concerning 
the  question  of  who  can  complain  of 
mistakes,  irregularities,  and  illegali- 
ties in  the  corporation,  see  ch.  I,  §  5, 
supra, 

12: 


2  Thus,  a  person  sued  for  tolls  can- 
not set  up  that  the  corporation  has 
not  rendered  required  statements, 
and  hence  its  charter  is  forfeitable. 
Kellogg  V.  Union  Co.,  12  Conn.  7 
(1837).  Nor  that  the  charter  was 
never  legally  vested  or  has  been  vio- 
lated. Dyer  v.  Walker,  40  Pa.  St.  157 
(1801).  Under  the  California  Code, 
§  358,  the  regular  incorporation  of  a 
de  facto  corporation  cannot  be  ques- 
tioned in  an  action  by  it  for  damages 
for  an  injury  to  property.  Golden 
Gate,  etc.  Co.  v.  Joshua,  etc.  Works, 
82  CaL  184  (1890).  In  a  suit  by  a 
water  company  to  enjoin  another 
company  from  diverting  water,  the 
legality  of  the  incorporation  of  the 
plaintiU  cannot  be  questioned  where 
it  is  a  de  facto  corporation.  Peo- 
ple's, etc.  Co.  V.  '76  Land,  etc.  Co., 
44  Pac.  Rep.  176  (CaL,  1896).  In  a 
trial  for  embezzlement  from  a  cor- 
poration, proof  of  a  de  facto  corpora- 
tion is  sufficient.  People  v.  Leonard, 
106  CaL  302  (1895).  In  a  trial  for  re- 
ceiving stolen  goods  belonging  to  a 
corporation,  a  corporate  officer's  tes- 
timony of  its  existence  is  sufficient 
if  not  contradicted.  State  v.  Hahib, 
18  R.  L  558  (1894).  In  Irvine  Co.  v. 
Bond,  74  Fed.  Rep.  849  (1896),  an 
owner  of  land  in  California  incorpo- 
rated a  company  under  the  laws  of 


OH.  XXXVIII.]  DISSOLUTION,  FOEFEITUKE,  ETC. 


[§  637. 


If  there  is  a  law  authorizing  incorporation,  and  a  company  has 
attempted  to  organize  under  it  and  has  acted  as  a  corporation, 
it  is  a  de  facto  corporation,  and  its  dejure  existence  can  be  ques- 


West  Virginia,  and  transferred  to  it 
in  payment  for  stock  certain  por- 
tions of  his  land.  He  owned  all  the 
stock  and  caused  one  share  each  to 
be  issued  to  his  lawyer,  his  wife,  and 
tluree  employees.  The  comt  held  that 
the  corporation  was  legal  so  far  as 
the  jurisdiction  of  the  United  States 
court  was  concerned.  A  director  is 
not  personally  liable  in  damages  to 
a  property  owner  over  whose  prem- 
ises the  company's  road  runs  without 
warrant.  Lamming  v.  Galusha,  81 
Hun,  247  (1894),  where  it  was  also 
claimed  that  the  incorporation  had 
been  insufficient.  Where  two  rail- 
road companies  claim  a  right  of  way, 
one  cannot  allege  that  the  other's 
charter  is  forfeitable.  Central,  etc. 
R.  R.  V.  Twenty-third,  etc.  R.  R,  54 
How.  Pr.  168, 185  (1877).  A  religious 
corporation  suing  for  its  real  estate 
cannot  be  met  by  a  plea  of  dissolu- 
tion, there  having  been  no  decree. 
Baptist  House  u  Webb,  66  Ma  398 
(1877).  A  corporation  suing  for  per- 
sonal property  is  not  defeated  by  a 
plea  that  it  was  not  legally  organ- 
ized or  is  dissolved  by  non-user.  Pe- 
nobscot, etc.  Corp.  V.  Lamson,  16  Me. 
234  (1839).  A  grantee  of  a  corpora- 
tion's right  to  overflow  land  is  not 
deprived  of  liis  right  by  dormancy 
and  non-user  of  its  franchises  by  the 
corporation.  Heard  v.  Talbot,  73 
Mass.  113  (1856).  Attachment  lies 
against  the  land  of  a  foreign  corpo- 
ration though  a  receiver  of  it  exists 
in  the  state  creating  it.  Moseby  v. 
Burrow,  52  Tex.  396  (1880).  One  cor- 
poration cannot  enjoin  a  competing 
corporation  from  proceeding  on  the 
ground  that  the  latter  has  subjected 
its  charter  to  forfeiture  by  misuser 
or  non-user.  Elizabethtown  Gasliglit 
Co.  V.  Green,  46  N.  J.  Eq.  118  (1889). 
A  county  cannot  seize  a  turnpike, 
78  12.: 


although  the  company  is  guilty  of 
misuser  or  non-user.  A  judgment  of 
forfeitm-e  is  first  necessary.  Moore 
V.  Schoppert,  23  W.  Va.  383  (1883).  A 
city  seeking  to  lay  out  a  road  on  a 
right  of  way  caimot  claim  that  the 
railroad  company's  right  is  forfeited 
by  non-user.  New  Jersey  R.  R.  v. 
Long  Branch  Com'rs,  39  N.  J.  L.  38 
(1876).  The  corporation  cannot  avoid 
a  tax  on  the  ground  that  it  has  ceased 
business.  Bank  of  U.  S.  v.  Com- 
monwealth, 17  Pa.  St.  400  (1851).  A 
grantor  of  land  to  a  corporation  can- 
not reclaim  it  on  the  ground  of  a 
dissolution,  there  having  been  no 
decree  of  dissolution.  Bohannan  v. 
Binns,  31  Miss.  355  (1856).  Service 
on  a  corporation  cannot  be  made 
by  service  on  a  stockholder  on  the 
gi'ound  that  it  has  forfeited  its  char- 
ter by  non-user.  Bache  v.  Nashville, 
etc.  Soc,  10  Lea  (Tenn.),  436  (1882). 
A  suit  by  the  corporation  on  a  bond 
is  not  to  be  met  by  a  plea  of  forfeit- 
vire  for  non-user.  West  v.  Carolina, 
etc.  Ins.  Co.,  31  Ark.  476  (1876).  Nor 
its  suit  on  a  note  by  the  plea  that  it 
has  abandoned  its  franchises.  John 
V.  Farmers',  etc.  Bank,  2  Blackf.  367 
(1830);  East  Tennessee,  etc.  Co.  v. 
GaskeU,  2  Lea  (Tenn.),  743  (1879); 
Hartsville  University  v.  Hamilton, 
34  Lid.  506  (1870).  The  forfeiture  can 
exist  only  after  a  decree  to  that 
effect.  Chesapeake,  etc.  Co.  v.  Balti- 
more,_  etc.  R.  R.,  4  G.  &  J.  (Md.)  1 
(1833).  An  agent  sued  for  conversion 
of  fvmds  cannot  allege  that  the  cor- 
poration is  guilty  of  a  non-user  of  its 
franchises.  Elizabeth,  etc.  Acad.  v. 
Lindsey,  6  Ired.  L.  (N.  C.)  476  (1846). 
A  railroad  suing  on  a  note  cannot  be 
defeated  by  the  defense  that  it  has 
forfeited  its  charter,  tliere  being  no 
adjudication  to  that  effect.  Toledo, 
etc.  R.  R  V.  Johnson,  49  Mich.  148 


§  G37.] 


DISSOLUTION,  FOKFEITUEE,  ETC.  [CH.  XXXVIII. 


tioned  only  by  the  state.*  So,  also,  a  party  contracting  with  a 
corporation  cannot  defeat  his  obligation  by  showing  that  the 
corporation  was  never  legally  incorporated.'* 


(1883).  A  squatter  on  corporate  land 
cannot  dispute  the  corporate  title  by 
alleging  that  it  was  not  legally  in- 
corporated or  organized-  Only  the 
state  can  object.  East,  etc.  Church 
V.  Froislie,  37  Minn.  447  (1887).  In  a 
suit  by  a  toll  road  to  recover  a  pen- 
alty for  refusal  to  pay  toll,  the  valid- 
ity of  the  company's  organization 
and  the  condition  of  the  road  cannot 
be  brought  into  the  controversy  by 
way  of  defense.  Canal  St.  etc.  Ca 
V.  Paas,  95  Midi.  373  (1893).  But  a 
turnpike  company  cannot  recover 
fares  for  the  part  of  its  road  wliich 
is  constructed  beyond  its  chartered 
limits.  Pontiac,  etc.  Co.  v.  Hilton,  69 
Mich.  115  (1888).  Statutory  provisions 
as  to  notice  of  the  first  meeting  are 
directory.  They  need  not  be  ob- 
served if  the  stockholders  acquiesce. 
Brain  tree,  etc.  Co.  v.  Braintree,  146 
Mass.  482  (1881).  See  §  590,  supra. 
But  the  failvire  of  a  railroad  to  cause 
to  be  paid  in  a  certain  amount  of  its 
capital  stock  before  incorporation 
may  defeat  municipal  bonds  which 
are  given  to  it.  Farnham  v.  Bene- 
dict, 107  N.  Y.  159  (1887).  An  in- 
dorser  sued  by  the  corporation  can- 
not claim  that  it  has  rendered  its 
charter  liable  to  forfeiture  by  sus- 
pension of  specie  payments.  Atcha- 
falaya  Bank  v.  Dawson,  13  La.  497 
(1839).  A  corporation  cannot  defeat 
its  taxes  by  alleging  failure  to  com- 
ply with  conditions  subsequent  in  its 
charter.  Baltimore,  etc.  R.  R  v.  Mar- 
shall Co.,  3  W.  Va.  319  (1869).  Though 
the  provision  in  the  Kentucky  stat- 
utes requiring  publication  of  the 
charter  is  not  complied  with,  yet  the 
corporation  is  valid  and  complete, 
except  that  the  state  may  proceed 
to  annul  the  charter.  No  other  party 
can  raise  the  objection.  Stutz  v. 
Handley,  41    Fed.   Rep.   531    (1890); 


Irregularities  in 


rev'd  on  other  grounds,  139  U.  S.  417; 
Walton  V.  Riley,  85  Ky.  413,  421 
(1887),  overruling  Ileinig  v.  Adams, 
etc.  Mfg.  Co.,  81  Ky.  300  (1883). 

1  Independent  Order  v.  United 
Order,  94  Wis.  234  (1890).  A  corpora- 
tion wliose  articles  are  not  filed  in 
the  riglit  county,  and  which  has  never 
had  an  organization  meeting,  is  not 
de  jure  nor  de  facto.  It  cannot  sue  a 
director  for  preventing  organization. 
Martin  v.  Deetz,  102  CaL  55  (1894).  In 
proving  a  de  facto  corporation  the 
meetings  and  the  issue  of  stock  and 
the  transaction  of  business  may  be 
proved  by  parol  without  producing 
the  books.  Johnson  v.  Schulin,  73 
N.  W.  Rep.  147  iMinn.,  1897). 

2  Keokuk  Commercial  Bank  v.  Pfeif- 
fer,  108  N.  Y.  242  (1888).  The  maker 
of  a  note  to  a  bank  cannot  question 
its  incorporation.  Exchange  Nat. 
Bank  v.  Capps,  32  Neb.  243  (1891); 
Colmubia  Electric  Co.  v.  Dixon,  46 
Minn.  463  (1891);  Butchers',  etc.  Bank 
V.  McDonald,  130  Mass.  204  (1881); 
Jones  V.  Bank  of  Tennessee,  8  B.  Mon. 
(Ky.)  122(1847);  Leonardsville  Bank 
V.  Willard,  25  N.  Y.  574  (1862);  Nut- 
ting V.  Hill,  71  Ga.  557  (1883);  Irvine 
V.  Lumberman's  Bank,  3  Watts  &  S. 
(Pa.)  204  (1841);  Congregational  Soc. 
V.  Perry,  6  N.  H.  164  (1833);  Rape  v. 
Capital  Bank,  20  Kan.  440  (1878); 
Massey  v.  Building  Assoc,  22  Kan.  624 
(1879);  Vater  v.  Lewis,  36  Ind.  288 
(1871);  Smith  v.  Miss.  etc.  R.  R.,  14 
Miss.  179  (1846),  where  the  maker  of 
the  note  claimed  that  the  corpora- 
tion was  fraudulently  and  illegally 
organized;  Studebaker,  etc.  Co.  v. 
Montgomery,  74  Mo.  101  (1881) ;  Stouti- 
moreu  Clark,  70  Mo.  471  (1875);  Blake 
V.  Holley,  14  Ind.  383  (1860);  Jones  v. 
Cincinnati,  etc.  Co.,  14  Ind.  89  (1860), 
holding  also  that  the  corporation 
need  not  prove  even  a  de  facto  exist- 


1234 


CH.  XXXTIII.]  DISSOLUTIOX,  FOEFEITUEE,  ETC. 


[§  637. 


the  organization  of  a  corporation  created  by  a  state  will  not  be 
inquired  into  in  the  comets  of  another  state,  a  charter  having 


enca  To  same  effect,  Montgomery 
R.  R.  V.  Hurst,  9  Ala.  513  (1846).  Cf. 
Wliite  V.  Campbell,  5  Humpli.  (Temi.) 
38  (1844),  where  the  remarkable  de- 
cision was  made  that,  if  the  corporar 
tion  had  been  dissolved  at  the  time 
the  note  was  given,  the  maker  was 
not  liable  and  conld  have  a  mortgage 
which  he  gave  as  security  set  aside. 
A  de  facto  corporation,  as  indoi-seeof 
a  note,  may  enforce  it.  "Wilcox  v. 
Toledo,  etc.  R  R.,  43  Mich.  584  (1880); 
Haas  V.  Bank  of  Commerce,  41  Neb. 
754  (1894);  Bank  of  Shasta  v.  Boyd,  99 
Cal.  604  (1893).  An  officer  cannot 
defend  against  an  action  to  make 
him  accovmt,  by  setting  up  that  the 
company  was  fraudulently  organ- 
ized. Haacke  v.  Knights,  etc.  Club, 
76  Md.  429  (1892).  In  the  case  of 
Ferine  v.  Grand  Lodge,  48  Minn.  82 
(1892),  where  an  insurance  policy  was 
sued  upon,  the  court  held  that  it  was 
immaterial  that  the  defendant  was 
not  incorporated,  inasmuch  as  it  had 
held  itself  out  as  a  corporation.  Bon 
Aqua  Imp.  Co.  v.  Standard  F.  lus. 
Co.,  34  W.  Va.  764  (1891).  Where  a 
coi-poration  sues  for  the  price  of 
articles  sold,  the  defendant  cannot 
set  up  that  the  plaintiff  sold  the 
articles  before  its  capital  stock  was 
fully  paid  up,  as  required  by  statuta 
Chase's,  etc.  Co.  v.  Boston,  etc.  Co., 
152  Mass.  428  (1891);  McCord,  etc.  Co. 
V.  Glenn,  6  Utah,  139  (1889).  In  a  suit 
by  a  bona  fide  indorsee  of  a  note  from 
a  corporation  as  indorser,  the  maker 
cannot  set  up  that  the  company  was 
not  properly  incorporated.  Brickley 
V.  Edwards,  131  Ind.  3  (1892).  The  de- 
fendant cannot  allege  that  the  cor- 
poration was  for  an  illegal  purpose  — 
that  of  running  blockades  —  the 
charter  not  showing  that  fact.  Im- 
porting, etc.  Co.  V.  Lock,  50  Ala.  332 
(1873).  Where  the  suit  is  on  a  bond, 
a  stockholder  cannot  sue  to  have  the 


corporation  declared  a  copartnership 
by  reason  of  irregular  incorporation. 
Baker  v.  Backus,  32  lU.  79  (1863). 

A  corporation  cannot  be  defeated 
in  an  action  on  a  contract  by  the  fact 
that  twenty-four  instead  of  twenty- 
five  persons  signed  the  articles  of  in- 
corporation. Buffalo,  etc.  R'y  v.  New 
York,  etc.  R  R.,  22  Alb.  L.  J.  134 
(N.  Y.,  1886).  Proof  of  organization 
in  fact  and  user  meets  a  plea  of  nul 
tiel  corporation  by  the  maker  of  a 
note  to  the  corporation.  Mitchell  v. 
Deeds,  49  IlL  416  (1867);  Smelser  v. 
Wayne,  etc.  T.  Co.,  82  Ind.  417  (1882). 
But  see  Williams  v.  Bank  of  Michi- 
gan, 7  Wend.  540  (1831).  The  corpo- 
ration itself,  when  sued  upon  notes 
which  it  has  made,  cannot  set  up  any 
informality  in  its  incorporation.  Kel- 
ley  V.  Newbuiyport,  etc.  R.  R.,  141 
Mass.  496  (1886);  Empire  Mfg.  Co.  v. 
Stuart,  46  Midi.  482  (1881),  where  the 
corporation  re-incorporated  in  order 
to  cure  the  irregularity.  Estoppel  as 
to  corporate  existence  seems  to  mean 
that  the  corporation  is  obliged  to 
prove  only  a  de  facto  existence,  and 
need  not  prove  the  details  of  incor- 
poration. Leonards ville  Bank  v.  Wil- 
lard,  25  N.  Y.  574  (1862).  A  person 
taking  water  from  an  in-igation  com- 
pany under  contract  cannot  defend 
against  an  action  thereon  by  alleging 
that  the  company  was  not  incorpo- 
rated. Fresno,  etc.  Co.  v.  Warner,  72 
CaL  379  (1887).  In  a  suit  by  a  corpo- 
ration on  a  note,  the  execution  of  the 
note.to  the  corporation  is  prima  facie 
proof  of  its  incorporation.  A  de  facto 
corporation  may  enforce  a  note  given 
to  it.  Hudson  v.  Green  HiU  Semi- 
nary, 113  IlL  618  (1885);  Booske  v. 
Gulf  Ice  Co.,  24  Fla.  550  (1888);  Win- 
get  V.  Quincy  Bldg.  etc.  Assoc,  128 
111.  67  (1889).  A  debtor  sued  by  a  cor- 
poration on  an  account  cannot  deny 
the  corporate  existence  which  he  has 


§  637.] 


DISSOLUTION,  FOKFEITUKE,  ETC.  [cn.  XXXVIII, 


been  issued  to  the  company  in  the  state  Tvhcre  it  was  organ- 
ized.* 

A  person  who  gives  a  bond  to  a  corporation  is  not  allowed 
to  defeat  the  bond  by  alleging  that  the  corporation  was  not 
duly  incorporated;'*  nor  can  the  corporation  defeat  its  bonds 
by  alleging  its  want  of  lawful  incorporation.'  A  tenant  cannot, 
in  an  ejectment  suit,  set  up  that  his  landlord  was  not  duly 
incorporated.*  A  person  who  mortgages  land  to  a  supposed 
corporation  cannot  defeat  a  foreclosure  of  the  mortgage  by 
alleging  that  the  mortgageee  is  not  a  corporation;'  nor  can 


recognized.  Plummer  v.  Struby,  etc 
Co.,  33  Colo.  190  (1896).  A  debtor  or 
creditor  of  a  corporation  cannot  at- 
taclc  the  incorporation  on  the  ground 
that  the  certificate  of  the  payment 
of  the  capital  stock  has  not  been  filed 
as  required  by  the  New  York  stat- 
utes. Port  Jefferson  Bank  v.  Darling, 
91  Hun,  236  (1895).  That  the  corpo- 
ration may  ratify  and  enforce  con- 
tracts entered  into  in  its  behalf  by 
its  promoters  before  incorporation, 
see  §  705,  etc.,  infra, 

1  Lancaster  v.  Amsterdam  Imp.  Co., 
110  N.  Y.  576  (1891). 

2McFarlan  v.  Triton  Ins.  Co.,  4 
Denio,392  (1817);  St.  Louis  v.  Shields, 
63  Mo.  247  (1876);  Loaners'  Bank  v. 
Jacoby,  10  Hvm,  143  (1877);  Commis- 
sioners, etc.  V.  BoUes,  94  U.  S.  104 
(1876);  Henriques  v.  Dutch  West 
India  Co.,  2  Ld.  Raym.  1532  (1729), 
where  a  foreign  corporation  sued,  and 
the  general  issue  was  not  pleaded. 

3  Independent  Order,  etc.  v.  Paine, 
122  111.  625  (1887) ;  Blackburn  v.  Sehna, 
etc.  R.  R.,  2  Flip.  525  (1879);  S.  C, 
3  Fed.  Cas.  526;  Racine,  etc.  R.  R  v. 
Farmers',  etc.  Co.,  49  111.  331,  346 
(1868);  Liter  v.  Ozokerite  Min.  Co.,  7 
Utah,  487  (1891);  Aller  v.  Cameron,  3 
Dill.  198  (1874);  S.  C,  1  Fed.  Cas.  522, 
where  a  municipality  set  up  this  de- 
fense; Empire,  etc.  Mfg.  Co.  v.  Stuart, 
46  Mich.  482  (1882),  a  promissory  note 
case.  A  corporation  cannot  defend 
against  its  contracts  by  alleging  that 


it  never  published  its  articles  of  asso- 
ciation as  required  by  statute.  Wood 
V.  Wiley,  eta  Co.,  56  Conn.  87  (1888^. 
A  corporation  is  liable  for  a  tax  even 
though  it  failed  to  file  its  articles  of 
association  with  the  secretary  of  state 
as  required  by  statuta  Walton  v. 
Riley,  85  Ky.  413  (1887). 

<  Ricketson  v.  Galligan,  89  Wis,  394 
(1895).  A  lessee  of  corporate  prop- 
erty cannot  refuse  to  vacate  on  the 
groimd  that  the  company  was  not 
properly  incorporated  and  officered, 
and  that  it  did  not  own  the  property. 
Fayetteville  Waterworks  Co.  v.  Til- 
linghast,  119  N.  C.  343  (1896). 

*  People's  Sav.  Bank  v.  Collins,  27 
Conn.  142  (1858);  West,  etc.  Sav.  Bank 
V.  Ford,  27  Conn.  282  (1858);  and 
Hasenritter  v.  Kirchhoffer,  79  Mo.  239 
(1883),  where  the  mortgagor's  grantee 
was  held  to  be  estopped;  Franklin  v. 
Twogood,  18  Iowa,  515  (1865) ;  Hacken- 
sack  Water  Co.  v.  De  Kay,  36  N.  J. 
Eq.  548  (1883);  Hubbard  v.  Chappel, 
14  Ind.  601  (1860),  where  it  was  held 
that  the  mortgagee  need  not  even 
prove  itself  to  be  a  de  facto  corpora- 
tion; Jones  V.  Kokomo,  etc.  Assoc, 
77  Ind.  340  (1881).  But  the  mortgagor 
may  deny  the  corporate  existence 
of  the  assignee  of  the  mortgagee. 
Dundee,  etc.  Co.  v.  Cooper,  26  Fed. 
Rep.  665  (1886).  A  second  mortgagee 
cannot  question  the  incorporation  of 
the  first  mortgagee.  Williamson  i'. 
Kokomo,    etc.    Assoc,    89    Ind.   389 


1236 


OH.  XXXVIII,]  DISSOLUTION,  FOKFEITUEE,  ETO. 


[§  037. 


the  corporation  itself,  having  given  a  mortgage,  defeat  a  fore- 
closure by  such  a  plea.^  It  has  been  held,  however,  that  where 
a  consolidation  of  two  railroad  companies  without  statutory 
authority  is  void,  and  the  consolidated  company  is  not  even  a 
de  facto  company,  a  mortgage  deed  of  trust  and  the  bonds  given 
by  such  a  consolidated  company  cannot  be  enforced  and  do  not 
bind  even  the  constituent  companies.'' 


(1883).  In  a  mortgage  foreclosui-e 
case  brought  by  a  corporation,  the 
mortgagee  cannot  claim  that  the  cor- 
poration took  the  mortgage  before 
stock  was  subscribed  to  the  amoiint 
required  by  its  charter.  Johnson  v. 
Elizabeth,  etc.  Assoc,  10-1  Pa.  St.  394 
<1883).  Parties  contracting  Avith  a 
corporation  as  such  cannot  attack  a 
mortgage  given  by  the  corporation 
on  the  ground  that  the  corporation 
was  never  legally  organized.  An- 
drews V.  National,  etc.  Works,  77  Fed. 
Rep.  774  (1897).  A  mortgagor  to  a 
foreign  insurance  company  cannot 
demur  to  a  bill  for  foreclosure  on 
the  ground  that  the  taking  of  the 
mortgage  was  ultra  vires  and  no  cer- 
tificate was  filed.  Bovdware  v.  Davis, 
90  Ala,  207  (1890).  A  stockholder 
who  has  given  a  mortgage  to  the 
corporation  cannot  defeat  the  same 
on  the  ground  that  the  charter  was 
unconstitutional.  Building  &  Loan 
Assoc  V.  Chamberlain,  4  S.  D.  271 
(1893).  As  against  its  mortgage  the 
coi-poration  cannot  set  up  the  de- 
fense that  it  was  not  legally  organ- 
ized, in  that  no  stock  was  ever  sub- 
scribed for.  Jones  v.  Hale,  52  Pac 
Rep.  311  (Oreg.,  1898). 

1  Quoted  and  approved  in  Phinizy 
V.  AugvLsta,  etc.  R.  E.,  62  Fed.  Ptep.  678 
<1894);  Wallace  v.  Loomis,  97  U.  S. 
146  (1877);  Racine,  etc  R.  R.  v.  Farm- 
ers', etc.  Co.,  49  IlL  331,  846  (1868). 


Ind.  365  (1884).  The  lessee  of  the 
road  of  a  railroad  corporation  cannot 
defeat  the  foreclosure  of  a  mortgage 
given  by  the  latter  by  alleging  that 
the  latter  was  never  duly  incorpo- 
rated. Beckman  v.  Henderson,  etc 
R'y,  35  Fed.  Rep.  3  (1888).  A  mox-t- 
gagee  of  a  de  facto  corporation  is  not 
defeated  by  an  attachment  against 
the  company.  Defects  in  incorj)ora- 
tion  are  immaterial  herein.  Duggan 
V.  Colorado,  etc.  Co.,  11  Colo.  113 
(1888).  In  a  mortgage  foreclosure 
the  defense  that  the  mortgagor  was 
not  legally  incorporated  or  organized 
cannot  be  set  up.  Hackensack  Water 
Co.  V.  De  Kay,  36  N.  J.  Eq.  548  (1883). 
A  mortgagor  corporation  cannot  de- 
fend against  the  mortgage  on  the 
ground  that  the  special  charter  of 
the  mortgagor  was  \m  constitutional 
and  void.  McTighe  v.  Macon  Const.' 
Co.,  94  Ga.  306  (1894). 

2  American  L.  &  T.  Co.  v.  Minne- 
sota, etc  R  R,  157  III  641  (1895).  A 
general  creditor  of  a  consolidated 
corporation  cannot  attack  the  valid- 
ity of  the  bonds  of  the  corporation 
on  the  ground  that  the  consolidation 
was  not  legal  Louisville  T.  Co.  v. 
Louisville,  etc  Co.,  84  Fed.  Rep.  539 
(1898).  A  general  creditor  cannot 
attack  bonds  on  the  ground  that  the 
corporation  had  no  existence,  inas- 
much as  that  affects  his  claim  also. 
A  consolidation  is  binding  as  a.  de 


Where  the  mortgagor  was  a  consoli-  facto  consolidation  where  the  stat- 

dated  company,  the  grantee  of  the  utes  rendered  it  possible  to  consoii- 

corporation  cannot  deny  the  validity  date  legally.    Continental  T.  Co.  v. 

of  its  mortgage  to  another  person  by  Toledo,  etc  R  R,  82  Fed.  Rep.  643 

alleging  its  want  of  legal  incori^ora-  (1897). 
tion.    Hasselman  v.  U.  S.  etc.  Co.,  97 

1237 


§  637.] 


DISSOLUTION,  FOKFEITTJKE,  ETC.  [cO.  XXXVIII. 


A  grantor  of  land  to  a  supposed  corporation  cannot  deny  the 
legality  of  his  grant  on  the  ground  that  the  corporation  was 
not  duly  incorporated.^  And,  in  general,  the  courts  do  not 
allow  parties  to  suits  on  contracts  to  question  the  due  incorpo- 


1  Smith  V.  Sheeley,  12  Wall  358 
(1870);  Frost  v.  Frost  bui-g  Coal  Co.,  24 
How.  278  (1860).  See  also  Caliall  v. 
Citizens',  etc.  Assoc,  Gl  Ala  233 
(1878),  where  the  corporation  brought 
ejectment;  Thompson  v.  Candor,  60 
lU.  244  (1871),  where  the  grantor 
sued  to  recover  possession;  Sword 
V.  Wickersham,  29  Kan.  746  (1883), 
where  the  grantee  was  a  municipal- 
it  j;  Cowell  V.  Colorado  Springs  Co.,  3 
Colo.  82  (1876);  affirmed,  100  U.  S.  55 
(1879),  where  the  corporation  sued 
for  breach  of  covenant;  Alexander 
t?.  Tolleston  Club,  110  IlL  05  (1884), 
where  the  grantor  claimed  the  right 
of  way;  BakersQeld,  etc.  Assoc,  v. 
Chester,  55  CaL  98  (1880);  Keene  v. 
Van  Reuth,  48  Md.  184  (1877);  Baker 
V.  Neff,  73  Ind.  G8  (1880);  Snyder  v. 
Studebaker,  19  Ind.  4G2  (1862),— cases 
where  a  grantee  of  the  grantor  was 
held  estopped;  Fay  v.  Noble,  61  Mass. 
188  (1851),  where  a  third  person  was 
not  allowed  to  impeach  a  transfer  of 
property  by  a  corporation  to  another 
person,  setting  up  that  the  transfer 
was  invalid  owing  to  informalities  in 
the  corporation. 

The  grantee  of  the  corporation  can- 
not defeat  an  attaclmaent  against  it 
and  levied  on  the  land  by  setting  up 
this  defense.  Dooley  v.  Walcott,  86 
Mass.  406  (1862).  But  Carey  v.  Cin- 
cinnati, etc.  R.  R.,  5  Iowa,  357  (1857), 
allowed  a  grantor  to  a  foreign  corpo- 
ration to  allege  this  defense  to  its  suit 
for  possession.  A  grantor  to  a  corpo- 
ration who  aids  the  corporation  in 
conveying  to  others  is  certainly  not 
allowed  this  defense.  Close  v.  Glen- 
wood  Cemetery,  107  U.  S.  466  (1882). 
A  corporation  may  hold  and  sell  land, 
though  in  its  incorporation  the  incor- 
porators did  not  attach  a  seal  to  their 


signatures  as   required  by  statute. 
Stoker  v.  Schwab,  1  N.  Y.  Supp.  425 
(1888).    A  conveyance  to  or  by  a  de 
facto  corporation  cannot  be  avoided 
on  the  ground  of  any  defect  in  its 
organization.     Doyle  v.  San  Diego, 
etc.  Co.,  46  Fed.  Rep.  709  (1891).    The 
grantor  who  has  been  paid  cannot  re- 
scind on  the  ground  that  the  grantee 
corporation  could  not  take.    Long  v. 
Georgia  Pac.  R'y,  91  Ala,  519  (1891). 
In  ejectment  the  incorporation  of  a 
prior  grantor  need  not  be   shown. 
Finch  V.  Ullmann,  105  Mo,  255  (1891). 
A  creditor  of  a  supposed  corporation 
cannot  attack  a  mortgage  given  by 
it  to  another  creditor  on  the  ground 
that  the  companj-  was  irregularly  or- 
ganized.    Briar  Hill  Coal,  etc.  Co,  v. 
Atlas  Works,  146  Pa.  St.  290  (1892).   A 
deed  to  a  corporation  not  in  existence 
is  void.    Provost  v.  Morgan's,  etc.  Co., 
42  La.  Ann,  809  (1890).    A  transfer  of 
land  by  a  de  facto  corporation  is  valid 
as  against  all  parties  except  the  state. 
Crenshaw  v.   Ullman,   113    Mo.   63^ 
(1893).    The  grantor  of  land  cannot 
claim  that  the  grantee  was  unincor- 
porated and  not  qualified  to  hold 
land,  the  incorporation  being  only 
partially    completed.      Reinhard    v. 
Vii-ginia,  etc.  Co.,  107  Mo.  616  (1891). 
In  ejectment  the  corporate  existence 
cannot  be  questioned,  its  deed  being 
in  the  chain  of  title.    Finch  v.  Ull- 
mann, 105  Mo,  255  (1891).    In  a  suit 
by  a  corporation  to  protect  real  estate 
held  for  it  by  trustees,  the  defendants 
cannot  attack  the  incorporation  of 
the  company.    First  Baptist  Church 
V.  Branham,  90  CaL  22  (1891).  Where 
land  has  been  condemned  by  a  rail- 
road corporation,  the  grantee  of  the 
party  whose  land  has  been  so  con- 
demned, the  grant  liaving  been  made 


1238 


en.  XXXVIII.]  DISSOLUTION,  FOEFEITITRE,  ETC. 


[§  637. 


ration  of  a  company  wMch  it  was  possible  to  incorporate,  wliich 
has  attempted  to  incorporate,  and  which  has  acted  as  a  corpo- 
ration.^ 


prior  to  the  condemnation,  but  the 
grantee  being  represented  in  the  pro- 
ceedings, cannot  maintain  ejectment 
therefor  on  the  ground  that  the  rail- 
road charter  provided  "  that  the 
riglits,  privileges,  and  powers  of  said 
corporation  shall  be  null  and  void," 
unless  certain  work  was  done  within 
a  certain  time,  even  if  the  work  had 
not  been  done  within  the  prescribed 
time.  Only  the  state  can  question  the 
corporate  existence  on  this  groom d. 
New  York  &  N.  E.  R  R.  u  New  York, 
N.  H.  eta  R.  R,  52  Conn.  274,  284 
(1884). 

'  A  junior  mortgagee  cannot  ques- 
tion the  incorporation  of  a  senior 
mortgagee,  the  latter  being  a  de  facto 
corporation-  Williamson  v.  Kokomo, 
etc  Assoc,  89  Ind.  389  (1883).  A  di- 
rector cannot  escape  his  statutory  lia- 
bility by  reason  of  the  failure  of  the 
company  to  file  its  certificate  of  incor- 
poration with  the  secretary  of  state. 
Meriden  Tool  Co.  r.  Morgan,  1  Abb. 
N.  Cas.  125,  n.  (N.  Y.  Super,  a.,  1875). 
A  de  facto  corporation  suffices  where 
it  seeks  to  enjoin  a  city  from  disturb- 
ing its  property.  Denver  v.  Mullen, 
7  Colo.  345  (1884).  Or  where  an  as- 
signment by  the  corporation  was  ille- 
gal and  the  assignee  is  sued  by  cred- 
itors. Rafferty  v.  Bank  of  Jersey  City, 
33  N.  J.  L.  368  (1869).  Or  wheae  the 
president  is  sued  by  the  company  to 
recover  its  assets  from  him.  Bank 
of  Circleville  v.  Renick,  15  Ohio,  322 
(1846).  Or  where  an  execution  pur- 
chaser of  the  corporate  property  sues 
the  mortgagee  of  the  corporation. 
Morgan  v.  Donovan,  58  Ala.  241  (1877). 
Or  where  the  corporation  sues  the 
sheriff  for  an  illegal  levj^  on  its  prop- 
erty. Dannebroge  Min.  Co.  v.  Ail- 
ment, 26  CaL  286  (1864).  Or  where 
the  suit  grows  out  of  contracts  with 
the  corporation.   Imboden  v.  Etowah, 


etc  Min.  Ca,  70  Ga.  86  (1883);  Platte 
Valley  Bank  v.  Harding,  1  Neb.  461 
(1870).  Or  where  a  bank  sues  its  cor- 
respondent bank.  Bank  of  Toledo  v. 
International  Bank,  21  N.  Y.  542 
(1860).  Or  where  the  corporation 
sues  for  rent  due  on  a  lease  made  by 
it.  Oregonian  R'y  v.  Oregon,  etc  Nav. 
Co.,  22  Fed.  Rep.  245  (1884);  S.  C,  23 
Fed-  Rep.  232  (1885).  Or  where  a  for- 
eign corporation  sues  for  a  stipulated 
part  of  the  oil  taken  from  its  land, 
and  the  defendant  alleges  that  it  is 
doing  all  its  business  outside  of  the 
state  incorporating  it.  Newburg,  etc. 
Co.  V.  Weare,  27  Ohio  St.  343  (1875). 
See  also  §§  237-239,  supra.  Or  where 
a  foreign  corporation  sues  the  sheriff 
for  trespass.  Persse,  etc.  Works  v. 
WiUett,  1  Rob.  (N.  Y.)  131  (1863).  Or 
where  the  company  sues  for  tolls. 
Smelser  v.  Wayne,  etc.  Turnp.  Co.,  82 
Ind.  417  (1882).  Although  the  char- 
ter states  that  it  shall  be  forfeited 
unless  the  corporation  is  organized 
within  two  years,  yet  a  stockholder 
cannot  set  up  such  a  forfeiture  in  a 
suit  involving  a  lien  of  the  corpora- 
tion on  his  stock.  Boyd  v.  Redd,  27 
S.  E.  Rep.  35  (N.  C,  1897).  A  de  facto 
corporation  exists  where  the  com- 
pany might  have  incorporated  under 
the  statutes  and  has  acted  as  a  cor- 
poration. Methodist,  etc.  Church  v. 
Pickett,  19  N.  Y.  482  (1859).  A  per- 
son who  agreed  to  and  did  convey 
property  to  a  company  to  be  incorpo- 
rated may  subsequently  repudiate 
the  "corporation  and  his  conveyance 
as  against  his  associates  who  shared 
in  the  stock  received  therefor.  Doyle 
V.  Jtlizner,  42  Mich-  332  (1879).  '  The 
case  of  Boyce  v.  Tmstees,  etc.,  46 
Md.  359  (1876),  allowed  a  coi-poration 
to  deny  its  existence  as  against  a 
director  who  sued  it  for  moneys  ad- 
vanced to  it.    'Welland  Canal  Co. 


1239 


§  637.] 


DISSOLUTION,  FOEFEITUEE,  ETC.  [CH.  XXXVIII. 


In  like  manner  tlie  corporation  itself  is  not  allowed  to  defeat 
its  contracts  by  such  a  plca.^ 

But  tliere  are  cases  where  a  party  is  not  estopped  from  de- 
nying the  incorporation  of  the  other  party.-  Thus,  the  mere 
fact  that  a  person  contracts  with  a  party  and  designates  the 
latter  as  a  "  company  "  will  not  estop  the  former  from  deny- 
ing the  incorporation  of  the  latter.  This  is  the  law,  and  is 
reasonable,  since  many  copartnerships  do  business  and  make 
contracts  under  the  name  of  "company."'  Such,  also,  is  the 
rule  where  a  supposed  incorporation  is  not  even  a  de facto  cor- 
poration.* But  where  the  party  contracted  with  is  a  de  facto 
corporation,  then  the  rules  given  above  apply.  It  is  to  be  borne 
in  mind,  also,  that  a  company  which  is  supposed  to  be  incor- 


V.  Hatliaway,  8  Wend.  480  (1832), 
allowed  a  contractor  to  deny  the 
existence  of  a  corporation  which 
sued  to  recover  back  money  which 
had  been  overpaid  to  him.  A  cor- 
poration receiving  the  stock  of  an- 
other corporation  in  consideration  of 
certain  agreements  as  to  renting  ma- 
chines belonging  to  said  latter  com- 
pany cannot,  when  enjoined  from 
violating  that  agreement,  set  up  that 
the  latter  company  was  not  properly 
organized.  Automatic,  et(\  Co.  v. 
North  American,  etc.  Co.,  45  Fed.  Rep. 
1  (1891).  Although  there  are  less 
stockholders  and  less  directors  than 
the  statute  or  charter  require,  yet  the 
acts  of  these  are  suflScient  to  sustain 
obligations  incurred  by  the  corpora- 
tion with  third  persons.  Welch  v. 
Importers',  etc.  Bank,  122  N.  Y.  177 
(1890).  It  is  no  defense  to  a  proceed- 
ing by  a  religious  corporation  to  col- 
lect a  legacy  to  allege  that  there 
were  irregularities  in  its  incorpora- 
tion, and  that  there  has  been  a  non- 
user  of  its  franchises.  Re  Cutchogue 
Congregational  Church,  131  N.  Y.  1 
(1892).  In  order  to  constitute  a  de 
facto  corporation  "there  must  at 
least  be  an  organization  under  some 
existing  charter  or  law.  And  such 
organization  must  be  in  good  faith." 


Welch  V.  Old  Dominion,  etc.  R'y,  10 
N.  Y.  Supp.  174  (1890).  Where  an  at- 
torney sues  for  his  services,  the  sup- 
posed corporation  may  set  up  that  it 
is  not  a  de  facto  nor  dejure  corpora- 
tion. Welch  V.  Old  Dominion,  etc. 
R'y,  10  N.  Y.  Supp.  174  (1890).  The 
California  code  provides  that  the  ex- 
istence of  a  de  facto  corporation  shall 
not  be  called  in  question  in  private 
suits.  Lakeside,  etc.  Co.  v.  Crane,  23 
Pac.  Rep.  76  (CaL,  1889):  Golden,  etc. 
Co.  V.  Joshua,  etc.  Works,  83  CaL  184 
(1890). 

1  Dooley  v.  Cheshire  Glass  Co.,  81 
Mass.  494  (1800);  Callender  r.  Paines- 
ville,  etc.  R.  R.,  10  Ohio  St.  516  (1860); 
Holbrook  v.  St.  Paul,  etc.  Ins.  Co.,  25 
Minn.  229  (1878).  See  also  Bommer 
V.  American,  etc.  Co.,  81  N.  Y.  468 
(1880),  where  the  corporation  sought 
to  escape  royalties  by  alleging  that 
it  incorporated  after  the  contract  by 
it  to  pay  them  was  made.  A  corpo- 
ration sued  for  work  done  cannot  set 
up  that  it  was  not  regularly  incorpo- 
rated. Merrick  v.  Reynolds,  etc.  Co., 
101  Mass.  381  (1869). 

2  Carey  v.  Cincinnati,  etc  R.  R,  5 
Iowa,  357  (1857),  and  the  principles 
and  cases  supra.  See  also  §  638,  infra. 

3  See  §§  233,  234,  mpra. 

4  See  §§  233,  234,  supra. 


1240 


CH.  XXXVIII.]  DISSOLUTIONj  FORFEITUKE,  ETC. 


[§  638. 


porated,  but  is  not,  may  after  incorporation  ratify  and  enforce 
contracts  made  in  its  belialf.^ 

§  638.  Lapse  of  charter  hj  failure  to  comply  with  condi- 
tions.—  Frequently  a  charter  of  a  railroad  corporation  requires 
it  to  complete  its  road  or  a  certain  number  of  miles  of  road 
within  a  certain  time,  and  the  charter  expressly  declares  that 
for  failure  to  comply  with  this  requisite  the  corporate  powers 
and  existence  shall  cease.  There  is  a  strong  line  of  decisions 
to  the  effect  that  such  a  provision  as  this  forfeits  the  charter 
absolutely  upon  non-compliance,  and  that  no  decree  of  a  court 
is  necessary  to  effectuate  that  forfeiture.^    But  this  drastic  and 


1  See  §  705,  etc.,  infra. 

2  See  Brooklyn,  etc.  Co.  v.  City,  78 
N.  Y.  524  (1879);  Be  Brooklyn,  etc. 
R.  R.,  72  N.  Y.  245  (1878);  Re  Brook- 
lyn, etc.  R  R.,  75  N.  Y.  335  (1878); 
Commonwealth  v.  Lykons,  etc  Co., 
110  Pa.  St.  391  (1885);  Farnham  v. 
Benedict,  107  N.  Y.  159  (1887).  Cf. 
Re  Kings  County  EL  R'y,  105  N.  Y. 
97  (1887),  rev"g  41  Hvm,  415;  People 
V.  National  Sav.  Bank,  11  K  K  Rep. 
170  (DL,  1887);  aff'd,  129  III  618  (1889). 
A  new  state  constitution  may  forfeit 
all  charters  previously  existing,  but 
which  have  not  been  used  by  the  in- 
corporators. Chincleclaraonche  Lum- 
ber, etc.  Co.  V.  Commonwealth,  100 
Pa.  St.  438  (1882),  holding  also  that  a 
constitutional  provision  that  char- 
ters under  which  no  organization 
has  been  made  and  business  has  been 
commenced  shall  lapse  forthwith  is 
constitutional  and  self-enforcing.  In 
Putnam  v.  Ruch,  54  Fed.  Rep.  216 
',1893),  the  court,  in  a  dictum,  said 
that  the  repeal  of  a  charter  by  a  con- 
stitutional enactment  may  be  self- 
executing,  but  that  in  the  case  before 
the  court  the  judgment  of  the  court 
was  necessary.  Where  by  its  char- 
ter a  street  railroad  is  to  be  com- 
menced within  three  years  and  com- 
pleted within  ten,  but  it  does  not 
even  open  books  for  subscriptions 
until  nearly  twenty  years  have 
elapsed,  the  corporation  never  came 


into  existence,  and  an  abutting  prop- 
erty owner  may  enjoin  the  laying 
of  tracks.  Bonaparte  v.  Baltimore, 
etc.  R  R.,  75  Md.  340  (1892).  Contra, 
New  York,  etc.  R.  R.  v.  New  York, 
N.  H.  etc.  R.  R,  52  Conn.  274,  284 
(1884).  Cf.  State  v.  Bull,  16  Conn. 
179  (1844).  In  Texas  the  statute  is 
self-executing,  the  words  used  being 
the  same  as  in  the  New  York  statute. 
But  the  property  rights  survive  for 
the  benefit  of  creditors  and  stock- 
holders. Sulphur  Springs,  etc.  R'y 
V.  St.  Louis,  etc  R'y.  3  Tex.  Civ.  App. 
650  (1893).  A  provision  that,  unless 
certain  roads  should  be  completed 
within  a  certain  time,  "  its  corporate 
existence  and  its  powers  shall  cease, 
so  far  as  it  relates  to  that  portion  of 
said  road  then  unfinished,"  is  self- 
executing.  Houston  V.  Houston,  etc. 
R'y,  84  Tex.  581  (1892).  A  subscriber, 
sued  on  his  subscription  for  stock, 
may  defeat  the  suit  by  showing  that 
by  statute  the  charter  was  to  be  void 
if  no  work  was  commenced  within 
two  years,  and  that  such  two  years 
have  *  elapsed  and  no  work  has  been 
done.  Bywaters  v.  Paris,  etc.  R'y,  73 
Tex.  624  (1889).  Under  the  Virginia 
law  requiring  organization  within 
two  years  or  else  the  charter  is  void, 
the  charter  becomes  void  *'  witliout 
legal  proceedings  of  any  kind,  from 
mere  operation  of  law."  Welch  v. 
Old    Dominion,  etc   Co.,  10    N.  Y. 


1241 


§  638.] 


DISSOLUTION,  FOKFEITUEE,  ETC.  [CH.  XXXVIII. 


dangerous  construction  of  charters  does  not  commend  itself  to 
law  and  justice.  It  adds  one  more  to  the  perils  which  are  at- 
tached to  all  great  corporate  enterprises.  Even  in  New  York, 
where  the  above  doctrine  seems  to  have  had  its  origin,  the 
courts  are  inclined  to  limit  its  application.  The  New  York 
courts  have  recently  held  that  a  provision  in  a  charter,  that  un- 
less certain  things  are  done  within  a  certain  time  the  company 
should  "  forfeit  the  rights  acquired,"  does  not  work  a  forfeiture 
ijpsofacto^  and  that  a  provision  in  a  charter  that  unless  work 
shall  be  commenced  within  two  years  "  all  rights  and  privileges 
granted  hereby  shall  be  null  and  void  "  is  not  self-executing, 
and  a  judgment  of  the  court  is  necessary  before  forfeiture  takes 
place.-  Occasionally  the  charters  of  railroad  corporations  liuiit 
the  time  within  which  tlie  road  must  be  constructed,  and  pre- 
scribe a  forfeiture  of  the  charter  in  case  of  failure  so  to  com- 
plete.'   A  statute  that  after  a  year's  suspension  of  business  the 


Supp.  174  (1890);  Silliman  v.  Fred- 
ericlisburg,  etc.  R.  R.,  27  Gratt.  (Ya.) 
119  (187G).  A  provision  in  tho  gen- 
eral statutes  to  the  effect  that  the 
powers  of  a  corporation  shall  cease 
if  it  does  not  organize  within  one 
year  does  not  apply  to  a  special  char- 
ter the  terms  of  wliich  indicate  that 
organization  might  be  after  one  year. 
People  V.  Bowen,  30  Barb.  24  (1859); 
affirmed  on  other  grounds,  21  N.  Y. 
517.  In  Bybee  v.  Oregon,  etc.  R.  R., 
139  U.  S.  663  (1891),  the  court  re- 
viewed the  conflicting  decisions  on 
the  question  whether  a  corporate 
charter  could  be  made  by  the  legis- 
lature to  lapse  and  cease  i'pso  facto 
and  without  judicial  action.  As  to 
the  effect  on  corporate  mortgages, 
see  §  792,  infra. 

1  Consequently  this  is  no  defense 
to  condemnation  proceedings.  Re 
Brooklyn,  etc.  R.  R.,  125  N.  Y.  484 
(1891).  A  provision  that  if  the  road 
is  not  completed  within  a  certain 
time  "  the  charter  shall  be  forfeited  " 
is  not  self-executing.  Galveston,  etc. 
R'y  V.  State,  81  Tex.  572  (1891).  Such 
also  is  the  rule  where  the  statute 
merely  limits  the  term  of  existence 


of  the  corporation.  Elizabeth  Gas- 
light Co.  V.  Green,  46  N.  J.  Eq.  118 
(1889).  A  provision  in  the  charter 
that  the  corporate  powers  should 
cease  and  become  void  imless  cer- 
tain things  were  done  within  a  cer- 
tain time  does  not  work  a  forfeiture 
ipso  facto.  A  judicial  proceeding  is 
necessary.  State  v.  Spartanburg,  C. 
etc.  R  R,  28  S.  K  Rep.  145  (S.  C, 
1897). 

'^Re  New  York,  etc.  Bridge  Co.,  148 
N.  Y.  540  (1896).  The  attorney-gen- 
eral cannot  enjoin  a  gas  company 
from  laying  its  pipes  on  the  ground 
that  the  charter  was  void  by  reason  of 
the  company  not  having  commenced 
work  within  the  prescribed  time. 
The  local  authorities  are  fully  com- 
petent to  raise  the  question  if  they 
wish.  People  v.  Equity  Gas  Liglit 
Co.,  141  N.  Y.  232  (1894).  Failure  to 
commence  work  within  a  time  speci- 
fied in  the  charter,  and  a  penalty 
that  therefor  the  company  should  be 
dissolved,  does  not  effect  dissolution, 
A  judgment  is  necessary.  Day  v. 
Ogdensburg,  etc.  R.  R.,  107  N.  Y.  189 
(1887). 

3  See  §  633,  supra. 


1242 


CH.  XXXVIII.]  DISSOLUTION,  FOKFEITUKE,  ETC.  [§§  639,  640. 

franchises  sliall  be  deemed  surrendered  and  the  corporation  be 
adjudged  dissolved  is  not  self -executory,  but  requires,  tlie  judg- 
ment of  the  court.^ 

Where  by  a  charter  a  bridge  is  to  revert  to  the  state  after 
forty  years,  the  state,  upon  the  expiration  of  the  forty  years, 
may,  by  an  information,  enforce  the  reversion  of  the  bridge  to 
the  public.^  Proof  of  the  charter  and  user  is  suflQcient  without 
proving  organization  within  the  time  allowed  by  law.^  Where 
a  bank  charter  provided  that  it  should  be  void  unless  the  com- 
pany should  organize  and  proceed  to  business  within  two  years, 
and  the  company  organized,  but  failed  to  transact  any  business 
for  fifteen  years,  a  judgment  of  ouster  against  it  will  not  be 
disturbed.*  The  failure  of  a  street  railway  company  to  perform 
a  condition  of  its  charter  may  enable  a  city  to  make  a  new 
grant  to  another  company.* 

§§  639,  640.  li('i)eals  of  charters  —  Bight  of  stocMolders  to  oh- 
ject. —  The  repeal  by  the  state  of  a  charter  before  the  expiration 
of  the  time  it  was  to  exist,  or  the  repeal  at  any  time  where  the 
charter  is  perpetual,  is  an  unconstitutional  breach  of  tlie  contract 
between  the  state  and  the  corporation  and  the  stockholders.^ 
Where,  however,  the  right  of  repeal  is  reserved  by  the  legisla- 
ture, then  such  reservation  becomes  a  part  of  the  contract, 
and  the  repeal  of  the  charter  rests  in  the  discretion  of  the  leg- 
islature.^   Upon  a  repeal  the  corporate  property  becomes  a 

^  Jlylrea  v.  Superior,  etc.  R'y,  67  N.  out  limitation  as  to  time  it  is  for- 

W.  Rep.  1138  (Wis.,  189G).  ever  irrepeaiable."    Erie,  etc.  R.  R 

2  A  subsequent  act  of  the  legisla-  v.  Casey,  26  Pa.  St.  287  (1856).  The 
ture  waiving  tlie  reversion  upon  con-  legislature  cannot  forfeit  a  charter, 
dition  does  not  prevent  the  reversion  Forfeiture  can  be  decreed  only  by 
if  the  condition  is  not  performed,  the  courts.  It  is  not  a  legislative 
State  V.  Old  Town  Bridge  Corp.,  85  function  unless  reserved.  Allen  v. 
Me.  17  (1892).  Buchanan,  9  PhHa.  (Pa.)  283  (1873). 

3  St.  Louis,  etc.  R  R  u  Belleville  Congress  may  repeal  a  charter 
City  R'y,  158111.  390  (1895).  granted    by   a   territory.     Mormon 

*  Henderson,  etc.  Assoc  v.  People,  Church  v.  United  States,  136  U.  S.  1 
§  163  IlL  196  (1896).  (1890).    A  forfeiture  of  land  by  the 

*  Santa  Rosa,  etc  R  R  v.  Central  government  for  non-compliance  with 
St.  R'y,  113  CaL  436  (1896).  See  also  the  tei-ms  of  the  grant  may  be  by 
931,  infra,  and  §  634,  supra.  legislative  enactment.    Farnsworth 

6 Greenwoods.  Freight  Co.,  105 U.S.  v.  Minnesota,  etc.  R  R,  92  U.  S.  49 
13  (1881).    "A    grant  of    corporate    (1875). 

privileges  for  a  si)ecified  period  can-  '  Under  a  reserved  power  to  repeal 
not  be  resumed  by  the  state  within  at  the  pleasure  of  the  legislature  the 
such  period.    If  the  cnarter  be  with-    courts  cannot  question  the  necessity 

1243 


§  G41.] 


DISSOLUTION,  FORFEITURE,  ETC.  [cH.  XXXVIII. 


fund  to  be  applied,  first  to  the  payment  of  the  debts  of  the  cor- 
poration, and  the  balance  to  be  distributed  among  the  stock- 
holders.^ The  question  as  to  the  right  of  a  legislature  to  repeal 
a  part  of  a  charter,  such  as  an  exemption  from  taxation,  is  con- 
sidered elsewhere.'^ 

§641.  Tlie  assets  vpon  dissolution  —  Distribution. —  Upon 
the  dissolution  of  a  corporation,  all  its  property,  both  personal 
and  real,  is  to  be  used  to  pay  the  debts  of  the  corporation,  and 
after  the  debts  are  paid  the  remainder  is  to  be  distributed 

Formerly  it  was  held  that  the  real  es- 

which  a  prior  corporation  has  desig- 
nated but  not  acquired.  Be  Cable 
R'y,  40  Hun,  1  (1886).  A  general 
statute  or  constitutional  provision 
reserviug  the  right  to  repeal,  alter, 
or  amend  charters  enters  into  all 
charters  granted  sulisequent  thereto 
as  much  as  if  actually  inserted  in 
such  charters.  Re  Lee's  Bank  of 
Buffalo,  31  N.  Y.  9  (18G0);  Commis- 
sioners, etc.  V.  Holyoke  Water-power 
Co.,  104  Mass.  4-10  (1870);  Delaware  R 
R  V.  Tharp,  5  Harr.  (Del)  454  (1854). 
The  repeal  of  a  general  incorporating 
act  and  the  enactment  of  a  new  one 
does  not  repeal  charters  which  have 
already  been  taken  out  under  the  old 
act.  Freehold,  etc.  Assoc,  v.  Brown, 
29  N.  J.  Eq.  121  (1878);  United,  etc. 
Assoc.  V.  Benshimol,  ICO  Mass.  325 
(1881).  Contra,  Wilson  v.  Tesson,  12 
Ind.  285  (1859). 

^  See  §  G41,  infra. 

-^  See  ^^  501,  572b,  supra. 

3Krebs  v.  Carlisle  Bank,  2  WalL 
(C.  C.)  33  (1850);  Heath  v.  Barmore, 
50  N.  Y.  302  (1872);  Burrall  v.  Bush- 
wick  R  R,  75  N.  Y.  211  (1878);  James 
V.  Woodruff,  10  Paige,  541  (1844); 
Frothingham  v.  Barney,  6  Hun,  366 
(1876);  Wood  v.  Dummer,  3  Mason, 
308,  322  (1824);  S.  C,  30  Fed.  Ca&  435. 
Cf.  Be  Hodges  Distillery  Co.,  L.  R  6 
Ch.  51  (1870);  Nathan  v.  Wliitlock,  9 
Paige,  152  (1841);  Curran  v.  State, 
15  How.  304,  307  (1853);  Hastings  v. 
Drew,  76  N.  Y.  9  (1879),  affirming 
S.  C,  50  How.  Pr.  254  (1887).    The 


among  the  stockholders.' 


nor  the  legislative  motives  leading 
to  a  repeal  Greenwood  v.  Freight 
Co.,  105  U.  S.  13  (1881);  Lothrop  v. 
Stedman,  43  Conn.  583  (1875);  Lo- 
throp V.  Stedman,  13  Blatclif.  134 
(1875).  See  Sinking  Fund  Cases,  99 
U.  S.  700,  720  (1878);  Northern  R  R  u 
Miller,  10  Barb.  200  (1851);  Erie,  etc. 
R  R  V.  Casey,  26  Pa.  St  287,  303 
(1856);  Miners'  Bank  v.  U.  S.,  1  Greene 
(Iowa),  553  (1848);  ]\IcLaren  v.  Pen- 
nington, 1  Paige,  102  (1828);  Crease  v. 
Babcock,  40  ]\Iass.  334,  344  (1839).  If 
the  power  of  repeal  arises  only  upon 
an  abuse  of  franchise  the  court  may 
review  the  question  whether  there 
was  an  abuse.  Erie,  etc.  R  R  u 
Casey,  26  Pa.  St.  287  (1850) ;  Baltimore 
V.  Pittsburgh,  etc.  R  E.,  1  Abb.  (U.  S.) 
9  (1865).  Hence  the  legislature  cannot 
forfeit  a  charter  merely  because  the 
corporation  has  been  incorporated 
elsewhere  and  has  brought  suits  in 
the  federal  coiu-ts.  Commonwealth 
V.  Pittsburgh,  etc.  R  R,  58  Pa.  St.  26 
(1808).  See,  in  general,  Flint,  etc. 
Plank-road  Co.  v.  Woodhidl,  25  Mich, 
9S>  (1872);  Montgomery  v.  Merrill  18 
Mich.  338  (1869);  State  v.  Noyes,  47 
Me.  189  (1859);  Canal  Co.  u  RaUroad 
Co.,  4  G.  &  J.  (^Id.)  122  (1832);  Uni- 
versity of  Maryland  v.  Williams,  9 
G.  &  J.  (Md.)  365  (1838);  Cooley's 
Const.  Lim-  106;  Mayor,  etc.  v. 
Twenty-third  Street,  113  N.  Y.  311 
(1889).  Under  this  reserved  power 
the  state  may  authorize  one  corpora- 
tion to  build  its  road  on  a   route 


1244 


CH.  XXXVIII.]  DISSOLUTIOlSr,  FOEFEITTJKE,  ETC. 


[§  6^1. 


tate  of  the  corporation  upon  dissolution  reverted  to  the  grantor, 
its  personal  property  to  the  state  or  sovereign,  and  the  debts  due 
to  it  and  from  it  were  forgiven  and  extinguished.^  But  con- 
trary rules  now  prevail.^    A  deed  made  by  a  corporation  after 


same  rule  prevails  where  the  charter 
is  repealed  by  the  legislature.  Lo- 
throp  V.  Stedman,  13  Blatchf.  134 
(1875);  McLaren  v.  Pennington,  1 
Paige,  103  (1828),  by  statute;  Detroit 
V.  Detroit,  etc.  P.  R.  Co.,  43  INIich.  140 
(18S0);  San  Mateo  County  t?.  South- 
em  Pacific  R.  R,  8  Sawyer,  238  (1882), 
per  Field,  J.,  holding  that  "  the  prop- 
erty of  the  corporation  acquired  in 
the  exercise  of  its  faculties  is  held  in- 
dependently of  such  reserved  power, 
and  the  state  can  only  exercise  over 
it  the  control  which  it  exercises  over 
the  property  of  individuals  engaged 
in  similar  business  "  (p.  279).  People 
V.  O'Brien,  111  N.  Y.  1  (1888).  The 
legislature  cannot  repeal  a  charter 
granted  by  the  constitution  of  the 
state.  New  Orleans  v.  Houston,  119 
U.  S.  265  (1886). 

1  Hightower  v.  Thornton,  8  Ga.  486 
(1850);  Life  Association  v.  Fassett, 
102  IlL  315  (1883);  Commercial  Bank 
V.  Lockwood,  2  Har.  (Del)  8  (1835); 
State  V.  Rives,  5  Ired.  L.  (K  C.)  297 
(1841);  White  v.  Campbell,  5  Humph. 
(Tenn.)  38  (1844);  MaUoy  v.  Mallett,  6 
Jones,  Eq.  (N.  C.)  345  (1863),  holding 
also  that  the  stockholder's  liability 
was  extinguished;  Port  Gibson  v. 
Moore,  21  Miss.  157  (1849);  Bingham 
V.  Weiderwax,  1  N.  Y.  509  (1848); 
Owen  V.  Smith,  31  Barb.  641  (1860); 
State  Bank  v.  State,  1  Blackf.  (Ind.) 
267,  282  (1823);  Acklin  v.  Paschal,  48 
Tex.  147  (1877);  St.  Philip's  Church 
V.  Zion,  etc.  Church,  23  S.  C.  297  (1885) ; 
Coulter  V.  Robertson,  24  Miss.  278 
(1852);  Bank  of  Mississippi  v.  Dim- 
can,  56  Miss.  166  (1878);  Hamilton  u 
Accessory  Transit  Co.,  26  Barb.  46 
(1857). 

2  Bacon  v.  Robertson,  18  How.  (U.  S.) 
480  (1855) ;  Heath  v.  Barmore,  50  N.  Y. 


303  (1872);  L\im  v.  Robertson,  6  Wall. 
277  (1867);  Robinson  v.  Lane,  19  Ga. 
337  (1856);  Lothrop  v.  Stedman,  13 
Blatchf.  134  (1875);  S.  C,  15  Fed.  Cas. 
933;  Blake  v.  Portsmouth,  etc.  R.  R., 
39  N.  H.  435  (1859);  Ee  Woven  Tape 
Skirt  Co.,  8  Hun,  508  (1876);  Mumma 
V.  Potomac  Co.,  8  Pet.  281  (1834);  Fox 
V.  Horah,  1  Ired.  Eq.  (N.  C.)  358  (1841); 
Bingham  v.  Weiderwax,  1  N.  Y.  509 
(1848);  Cxury  v.  Woodward,  53  Ala. 
371  (1875);  2  Kent,  Com.  307,  n.; 
Powell  V.  North  Missouri  R.  R.,  43 
Mo.  63  (1867);  Wood  v.  Dummer,  3 
Mason,  308  (1824);  S.  C,  30  Fed.  Cas. 
435.  Land  conveyed  to  a  corpora- 
tion in  fee  does  not  revert  to  the 
grantor  or  his  heirs  on  the  extinction 
of  the  corporation.  Wilson  v.  Leary, 
120  N.  C.  90  (1897),  overruling  Fox  v. 
Horah,  36  N.  C.  358.  Statutes  are 
frequently  enacted  to  this  effect. 
Nevitt  V.  Bank  of  Port  Gibson,  14 
Miss.  513  (1846);  McCoy  v.  Farmer, 
65  Mo.  244  (1877);  Owen  v.  Smith,  31 
Barb.  641  (1860).  A  deed  of  property 
to  a  railroad  for  fifty  years  or  so  long 
as  its  charter  continues,  which  by 
charter  is  fifty  years,  passes  the  land 
to  a  corporation  which  by  legislative 
enactment  succeeds  to  the  rights  of 
the  first  corporation.  Davis  v.  Mem- 
phis, etc.  R.  R.,  87  Ala.  633  (1889).  So 
far  as  land  grants  are  concerned  the 
consolidated  company  is  the  same  as 
the  old  company.  U.  S.  v.  Southern 
Pac.  R.  R.,  45  Fed.  Rep.  596  (1891).  A 
consolidated  company  succeeds  to 
land  owned  by  one  of  the  consolidat- 
ing companies.  Cashman  v.  Brown- 
lee,  128  Ind.  266  (1891).  An  agree- 
ment that  upon  dissolution  of  the 
company  the  telegraph  line  should 
go  to  the  railroad  is  binding.  La- 
trobe  V.  Western  TeL  Co.,  74  Md.  233 


1345 


§  041.] 


DISSOLUTION,  FOEFEITURE,  ETC.  [CH.  XXXVIII. 


its  charter  has  expired  is  a  nullity.*  The  dissolution  of  a  cor- 
poration after  an  execution  has  been  levied  upon  its  property 
does  not  prevent  a  sale.^ 

"When  the  corporation  owns  a  right  of  way  or  other  fran- 
chise obtained  from  a  municipality  or  by  the  exercise  of  the 
state's  power  of  eminent  domain,  this  right-of-way  francliiso 
is  a  corporate  asset  upon  the  dissolution  of  tlie  corporation  and 
may  survive  the  death  of  the  corporation.  It  does  not  revert 
to  the  state  or  municipality.' 

(1891).    A  deed  duly  authorized  is    (1885).    See  also,  as  to  the  rule  in 

New  York,  Heard   v.    Brooklyn,  CO 
N.  Y.  243  (1875);  People  v.  Wliite,  11 
Barb.  20  (1851);  Hooker  v.  Utic-a,  etc. 
Turup.  Co.,  12  Wend.  371  (1834).  There 
is  no  revei-sion  of  the  right  of  way 
on  the  dissolution  of  the  company 
after  fifty  years.     Davis  v.  Memphis, 
etc.  R.  R,  87  Ala.  633  (1880).    A  lot- 
tery grant  cannot  be  repealed,  when 
mortgaged  by  the  corporation,  until 
the  mortgage  is  paid.     Gregory  v. 
Shelby  College,  2  Mete.    (Ky.)  589 
(1859).      Compare,  in  general.  Turn- 
pike Co.  V.  Illinois,  96  U.  S.  63  (1877). 
Where  the    stockholders  of  an  old 
plank-road  company  are  still  operat- 
ing the  road,  but  under  another  char- 
ter, they  cannot  be  ousted  from  the 
latter  by  an  injunction  suit  against 
their    operating  under  the  former. 
The  court  stated  that  it  did  not  favor 
such  a  confiscating  suit.    People  v. 
De  GraUw,  133  N.  Y.  254  (1892).     An 
unused  right  of  way  does  not  revert 
to  the  original  owner.     McConihay 
V.  Wright,  121  U.  S.  201  (1887).    See 
also  g  906,  infra.     The  state  may 
grant  an  unused  street-railway  fran- 
chise to  another  company.    Hender- 
son V.  Central,  etc.  R'y,  21  Fed.  Rep. 
358  (1884).     No  reverter  where  the 
railroad  takes  a  fee.    Yates  v.  Van 
De  Bogert,  56  N.  Y.  526  (1874).    See 
also,  in  general,  Norton  v.  Walkill, 
etc.  R.   R.,  42  How.  Pr.  228  (1871); 
State  V.  Rives,  5  Ired.  (N.  C.)  L.  297 
(1844);  Hopkins  t;.  Whitesides,  1  Head 
(Tenn.),  31  (1858).    Where  a  turnpike 


good,  though  executed  after  the  cor- 
poration is  consolidated  with  another. 
Edison,  etc.  Co.  v.  New  Haven,  etc. 
Co.,  4  Ry  &  Corp.  L.  J.  4  (1888). 

1  Bradley  v.  Reppell,  133  Mo.  545 
(1896) ;  Maiysville  In  v.  Co.  v.  Munson, 
44  Kan.  977  (1890).  Wliere  by  stat- 
ute, after  dissolution,  the  corporation 
continues  for  three  years  for  the  pur- 
pose of  winding  up,  it  may,  during 
those  three  years,  convey  its  real  es- 
tate to  a  trustee  in  trust  to  wind  up 
its  business.  Hanan  v.  Sage,  58  Fed. 
Rep.  651  (1893).  A  corporation  can- 
not deed  land  after  its  charter  has 
expired.  IMarysville  Invest.  Co.  v. 
Munson,  44  Kan.  491  (1890). 

2  Boyd  V.  Hankinson,  83  Fed.  Rep. 
876  (1897). 

3  Where  a  legislature,  under  its  re- 
served right  of  repeal,  repeals  a  street 
railroad  charter,  the  right  to  use  the 
streets  and  operate  the  road  does  not 
revert  to  the  state,  but  passes  as 
property  to  the  receiver  for  the  ben- 
efit of  the  creditors  and  stockholders 
of  the  corporation.  People  v.  O'Brien, 
111  N.  Y.  1  (1888).  See  also  §  792,  in- 
fra. In  Pennsylvania  the  franchise 
of  the  right  of  way  of  a  railroad  vests, 
upon  its  dissolution,  in  the  state,  and 
the  state  may  grant  it  to  another  rail- 
road. Erie,  etc.  R.  R.  v.  Casey.  26  Pa, 
St.  287  (1856).  See  also  PUtt  v.  Cox, 
43  Pa.  St.  486  (1862).  In  Ohio  it  seems 
that  the  right  of  way  reverts  to  the 
owner  of  the  fee.  New  York,  etc.  R. 
R.  V.  Parmalee,  1  Ohio  C.  C.  Rep.  239 


1246 


CH.  XXXVIII.]  DISSOLTJTIOlf,  rOEFEITTJEE,  ETC. 


[§  641. 


This  is  the  natural  and  logical  result  of  the  principle  of  law 
that  a  railroad  company  may  make  a  contract  to  run  longer 
than  its  chartered  existence ;  ^  may  take  a  deed  of  land  in  fee, 
although  the  company's  duration  is  limited ;  -  and  may  acquire 
a  perpetual  right  of  way  under  the  same  circumstances.^  On 
the  dissolution  of  a  corporation  having  no  stockholders,  the 
common-law  rules  of  reverter  and  appropriation  apply.*  Upon 


company  is  authorized  to  collect  tolls 
only  for  fifteen  years,  the  road  is  free 
after  that  date.  People  v.  Anderson, 
etc.  Co.,  76  CaL  190  (1888).  The  dis- 
solution of  a  water-works  company 
does  not  put  an  end  to  the  contract 
between  it  and  the  city.  Weatherly 
V.  Capital,  etc.  Co.,  22  S.  Rep.  140  (Ala., 
1897).  In  Haffcke  v.  Clark,  50  Fed. 
Rep.  531  (1892),  the  court  said  in  a 
dictum  that  inasmuch  as  a  license  is 
not  assignable  the  dissolution  of  a 
corporation,  which  is  the  licensee, 
puts  an  end  to  the  license.  See  note 
3,  sub. 

1 A  contract  between  two  railroad 
companies  by  which  one  is  given  the 
right  to  run  its  trains  over  the  tracks 
of  the  other  may  be  for  a  period  be- 
yond the  duration  of  the  charter  of 
one  of  the  companies,  the  court  say- 
ing that  the  contingency  that  the 
company  "will  cease  to  exist  and 
leave  neither  assigns  nor  successors 
is  far  too  remote  to  have  any  influ- 
ence upon  the  validity  of  this  con- 
tract." Union,  etc.  R'y  v.  Chicago, 
etc.  R'y,  163  U.  S.  564,  592  (1896).  A 
corporation  may  lease  its  property 
for  a  hundred  years,  even  though  the 
statutes  forbid  any  disposition  of 
property  which  suspends  the  abso- 
lute power  of  controlling  the  same 
for  more  than  two  lives  and  twenty- 
one  years,  and  may  mortgage  its  in- 
terest as  lessor.  Sioux,  etc.  Co.  v. 
Trust  Co.,  82  Fed.  Rep.  124  (1897). 

2  NicoU  V.  New  York,  eta  R.  R,  12 
N.  Y.  121  (1854>  See  also  §  694,  note, 
infra. 

»  Miner  v.  New  York,  etc.  R.  R.,  123 


N.  Y.  242(1890);  Davis  r.  Memphis, 
etc.  R.  R,  87  Ala.  633  (1889);  Bailey  v. 
Platte,  etc.  Co.,  12  Colo.  230  (1889).  See 
note  3,  p.  1246.  A  street  railway  com- 
pany may  legally  receive  from  a  city 
a  grant  of  street  rights  for  a  period  ex- 
tending beyond  the  chartered  life  of 
the  corporation,  Detroit  Citizens'  St. 
R'y  V.  Detroit,  64  Fed.  Rep.  628  (1894), 
rev'g  Detroit  v.  Detroit  City  R'y,  56 
Fed.  Rep.  867,  and  60  Fed.  Rep.  161,  a 
case  wjiere  a  thirty-year  street  ease- 
ment was  given  to  a  corporation  hav- 
ing only  fourteen  years  of  corporate 
life.  Dissolution  does  not  terminate 
a  lease  to  a  corporation.  People  v.  Na- 
tional Trust  Co.,  82  N.  Y.  284  (1880). 
*  Upon  the  dissolution  of  a  public 
or  charitable  corporation  its  property 
goes  to  the  state  and  former  owners, 
subject  to  the  trust  that  the  property 
shall  still  be  used  for  similar  pur- 
poses if  those  purposes  be  legaL  Mor- 
mon Church  V.  U.  S.,  136  U.  S.  1  (1890). 
Upcn  the  dissolution  of  an  eleemosy- 
nary corporation  having  no  stock- 
holders or  creditors,  the  title  to  its 
land  reverts  to  the  donor.  Danville 
Seminary  v.  Mott,  136  IlL  289  (1891). 
A  private  corporation  —  a  normal 
college  —  cannot  by  act  of  the  legis- 
lature be  converted  into  a  public  cor- 
poration and  the  property  vested  in 
the  state.  Bakewell  v.  Board  of  Edu- 
cation, 33  N.  E.  Rep.  186  (III,  1893). 
In  California,  on  the  dissolution  of  a 
corporation  for  literary  purposes,  its 
land  goes  to  the  state.  People  v. 
College  of  CaHfomia,  38  CaL  1G6 
(1869).  Upon  dissolution  of  a  mutual 
insurance  company  having  no  stock- 


1247 


§  641.] 


DISSOLUTION,  FOK"EITUEE,  ETC.  [CH.  XXXVIII. 


dissolution  the  stockholders  are  entitled  to  an  immediate  set- 
tlement of  the  corporate  debts  and  a  distribution  of  the  residue.' 
Usually  they  are  not  obliged  to  accept  the  stoclc  of  anotlicr 
corporation  as  payment  upon  a  final  distribution,  but  may  de- 
mand that  the  distribution  be  in  cash.^  The  stockholders  upon 
dissolution  may  make  a  contract  as  to  the  mode  of  distribution.' 
The  company  by  unanimous  consent  may  distribute  the  assets 
witliout  a  dissolution,  provided  all  creditors  are  {)aiil.* 

Upon  dissolution  a  stockholder  may  file  a  bill  for  distribution 
of  the  assets.'  When  corporate  assets  are  placed  in  the  hands 
of  a  corporate  officer  or  other  person  for  distribution,  a  stock- 
holder may  file  a  bill  in  equity  for  his  part,  but  in  such  a  suit 
the  corporation  is  a  necessary  party."    The  remedy  in  such  a 


holders,  its  assets,  after  the  payment 
of  its  liabilities,  belong  to  the  state. 
Titcomb  v.  Kennebec,  etc.  Co.,  79  Me. 
315  (1887).  But  where  an  insurance 
company  is  organized  both  on  the 
stock  and  mutual  plan,  upon  a  disso- 
lution of  the  stock  part  of  the  organ- 
ization the  guaranty  accumulations 
belong  to  the  stockholders.  Traders', 
etc.  Ins.  Co.  v.  Brovra,  143  Mass.  403 
(1886).  Land  reverts  to  the  former 
owner.  Mott  v.  Danville  Seminary, 
139  111.  403  (1889).  Distribution  of 
funds  of  incorporated  association. 
Ashton  V.  Dashaway  Assoc,  84  CaL 
61  (1890).  As  to  unincorporated  asso- 
ciations, see  oh.  XXIX,  supra. 

iFrothingham  v.  Barney,  6  Hun, 
366  (1876). 

2  See  §  671,  infra. 

3  White  V.  Boreing,  45  S.  W.  Rep. 
343  (Ky.,  1898). 

*  Unless  some  statute  prohibits  it, 
or  someone  objects,  a  corporation 
may  declare  a  dividend  out  of  its 
capital  stock.  People  v.  Barker,  141 
N.  Y.  Sol  (1891).  See  also  Rorke  v. 
Thomas,  56  N.  Y.  559  (1874).  Although 
the  state  is  prosecuting  a  suit  to  for- 
feit the  charter  for  entering  into  a 
combination,  yet  a  sale  of  part  of  the 
corporate  property  to  a  stockholder 
pending  the  suit  is  legal,  and  the  re- 
ceiver  cannot  follow  the  property. 


1248 


A  writ  of  prohibition  will  issue 
against  him.  Ilavemeyer  v.  Superior 
Court.  84  Cal.  337  (1890).  "SVliore  a 
corporation  distributes  all  its  assets 
among  its  stockholders  without  pay- 
ing the  debts,  a  corporate  creditor 
may  hold  them  Liable;  but  he  must 
first  obtain  a  judgment  against  the 
corporation,  and  execution  must  be 
returned  unsatisfied.  Lamar  i\  Alli- 
son, 28  S.  E.  Rep.  686  (Ga.,  1897).  See 
also  §  548,  supra. 

5  Brown  v.  Mesnard  M.  Co.,  63  N.  W. 
Rep.  1000  (Mich.,  1895).  Where  a  cor- 
poration has  been  dissolved  at  the  in- 
stance of  the  state,  a  stockholder  may 
file  a  bill  for  the  appointment  of  a 
receiver  to  administer  the  assets. 
Olmstead  v.  Distilling,  etc.  Co.,  73 
Fed.  Rep.  44  (1895),  the  com-t  holding 
also  that  the  appointment  could  not 
be  questioned  collaterally. 

6  Young  V.  Moses,  53  Ga.  638  (1875). 
For  the  remedy  and  procedure  when 
the  directors  on  dissolution  have  di- 
vided the  assets  fraudulently,  see 
Horner  v.  Carter,  11  Fed.  Rep.  363 
(1883),  The  minority  may  bring  the 
officers  to  an  accounting  for  an  un- 
fair distribution  of  the  bonds,  etc., 
owned  by  a  construction  company. 
Meyers  v.  Scott,  3  N.  Y.  Supp.  753 
(1888).  The  corporation  may  file  a 
bill  to  distribute  a  specific  fund  only, 


CH.  XXXVIII.]  DISSOLTJTIOIT,  FOKFEITUKE,  ETC. 


[§  6il. 


case  is  not  at  la^r.^  The  stockholders  may  insist  on  the  appli- 
cation of  the  statute  of  limitations  as  far  as  it  is  a  bar  to  the 
claim  of  corporate  creditors  upon  the  assets.^  The  statute  of 
limitations  does  not  run  as  against  the  estate  of  a  dissolved 
corporation.'  Where  the  corporation  has  been  dissolved,  and 
its  assets  distributed,  and  its  trustees  discharged  by  a  decree  of 
com-t,  a  creditor  who  was  a  party  to  the  suit  cannot  afterward 
maintain  a  biU  against  the  trustees  to  reach  unpaid  subscrip- 
tions.^ The  mode  of  distribution  among  corporate  creditors, 
where  some  have  other  security  and  others  not,  is  considered 
elsewhere.*  The  rights  of  the  stockholders  in  the  assets  upon 
a  dissolution  depend  upon  the  law  of  the  country  creating  the 
corporation.^  And  these  rights  cannot  be  taken  from  the  stock- 
holders by  an  act  repealing  the  charter.''  It  has  been  held  that 
surplus  assets  ought  to  be  distributed  in  proportion  as  the  sub- 
scriptions to  the  stock  have  been  paid.^    In  winding-up  pro- 


and  need  not  in  that  bill  have  a  gen- 
eral distribution  of  all  its  funds.   Par 
cific  R.  R.  V.  Cutting,  27  Fed.  Eep. 
638  (ISSG).    If  the  directors,  who  by 
statute  are  made  trustees  to  wind  up 
the    corporation    upon    dissolution, 
delay  in  so  doing,  the  court  will  ap- 
point a  receiver.  lie  Pontius,  26  Hun, 
233  (1882).    Although  the  charter  is 
forfeited  at  the  instance  of  the  state, 
yet  the  directors  are  trustees  to  wind 
up  the  company  vmder  the  statute, 
unless  a  receiver  is  appointed  at  the 
instance  of  a  creditor  or  stockholder. 
Havemeyer  v.  Superior  Court,  84  CaL 
327  (1890).    Although  the  fund  upon 
dissolution  is  small  and  the  nvmiber 
of  stockholders  large,  yet  the  direct- 
ors cannot  avoid  their  duty  as  to  the 
distribution  of  the  fund  by  turning 
it  over  to  a  court  to  administer.    Re 
Centennial  Board,  48  Fed,  Rep.  350 
(1891). 

1  Bro^vn  v.  Adams,  5  Biss.  181  (1870); 
S.  C,  4  Fed  Cas.  350.  Cf.  Pacific 
R.  R.  V.  Cutting,  27  Fed.  Rep.  638 
(18S6);  Hodsdon  v.  Copeland,  16  Me. 
314  (1839). 

2  Johnston  v.  Talley,  60  Ga.  540 
(1878).    On  a  bill  to  wind  up  an  in- 

79  1249 


solvent  corporation  the  stockholder 
may  prove  that  some  claims  against 
the  company  were  not  legally  con- 
tracted. Crutclifield  v.  Mutual,  etc 
Co.,  2  S.  W.  Rep.  658  (Tenn.,^1886). 

3  Ludington  v.  Thompson,  153  N.  Y. 
499  (1897). 

*  Chavent  v.  Schef er,  59  Fed.  Rep. 
231  (1894). 

5  See  §  763,  in/ra. 

6  Hamilton  v.  Accessory  Transit 
Co.,  26  Barb.  46  (1857). 

7  Lothrop  V.  Stedman,  13  Blatchf. 
134  (1875);  S.  C,  15  Fed.  Cas.  922. 

SKrebs  v.  Carlisle  Bank,  2  Wall 
(C.  C.)  33  (1850) ;  Sheppard  v.  Scinde, 
etc.  R'y,  56  L.  T.  Rep.  180  (1887);  Ee 
Hodges,  etc.  Co.,  L.  R  6  Ch.  App.  51 
(1870).  On  winding  up,  stockhold- 
ers who  have  advanced  on  the  sub- 
scription price  more  than  the  calls 
required,  under  an  agreement  of  re- 
payment with  interest,  are  entitled  to 
repayment  before  a  general  dividend 
is  made.  So  held  where  fvdl-paid 
stock  was  issued  for  property,  but 
other  stock  for  cash  was  not  fully 
paid  up.  Exchange,  etc.  Co.,  L.  R. 
38  Ch.  D.  171  (1888). 


§  0-11.]  DISSOLUTION,  FOKFEITUEE,  ETC.  [CH.  XXXVIII. 

ceedings  an  assessment  may  bo  levied  upon  stock  which  is  not 
fully  paid,  in  order  to  adjust  the  rights  of  the  stockholders  as 
between  themselves.*  "Where  increased  capital  stock  is  only 
partly  paid  up,  and  a  dissolution  is  had,  the  court  will  order 
repayment  of  all  that  was  paid  on  the  original  capital  stock 
and  on  the  increased  capital  stock,  and  then  a  distribution  of 
the  surplus  on  the  whole  capital  stock.-  In  the  distribution  of 
the  assets  of  a  corporation  upon  its  winding  up,  the  accumulated 
profits  will  be  considered  separate  from  the  capital,  if  some  of 
the  stock  is  held  in  trust  for  life  tenants  and  remainder-men.' 
In  Maine  it  has  been  held  that  wliile  a  corporation  may  pay  an 
ordinary  dividend  to  a  stockholder  of  record,  yet  that  a  divi- 
dend paid  in  the  liquidation  and  winding  up  of  the  corporation 
must  be  paid  to  the  holder  of  the  certiiicate,  even  though  such 
holder  be  a  transferee  who  has  not  been  recorded  as  such  on 
the  books  of  the  company,  and  that  the  comjxiny  is  liable  to 
him  for  dividends  in  liquidation,  even  though  it  has  paid  them 
to  the  registered  stockholder,  and  that  this  rule  applies  to  a 
pledgee  of  a  certificate  of  stock  as  well  as  a  purchaser  of  a  cer- 
tificate of  stock.*  A  contest  between  the  preferred  and  com- 
mon stockholders  as  to  who  shall  be  entitled  to  the  surplus 
will  not  be  decided  in  a  foreclosure  suit,  but  the  surplus  will 
be  paid  to  the  corporation  for  distribution.*  The  distribution 
is  made  upon  equitable  principles.  ^ 

iWelton  V.  Saffeiy,  76  L.  T.  Rep.  assets  remaining  after  paying  the 

505(1897).  Upon  dissolution  the  court  debts,  and  also  paying  back  what- 

may  and  will  call  in  unpaid  subscript-  ever  the  stockholders  had  originally 

tions  where  this  is  necessary  in  order  paid  in.  Re  New  Transvaal  Co.,  [189G] 

to  make  a  proper  distribution.    Re  2  Ch.  750. 

Sheppard's,  etc.  Co.,  70  L.  T.  Rep.  3  ^Re  Rogers,  22  N.  Y.  App.  Div.  428, 

(1893).   In  Re  Anglo,  etc.  of  W.  A.,  78  435  (1897). 

L.  T.  Rep.  157  (1898),  the  coui-t  ordered  *  Bath  Sav.  Inst  v.  Sagadahoc  Nat. 

a  call  as  a  matter  of  form  on  subscrip-  Bank,  89  Me.  500  (1897). 

,  tions,  so  as  to  equalize  the  amoimt  '  Continental  Ti-ust  Co.  v.  Toledo, 

already  paid  on  such  subscriptions  etc.  R  R.,  80  Fed.  Rep.  929  (1898). 

with  a  view  to  distribution  on  disso-  ^  Where  the  original  stock  is  paid 

lution.  for  in  cash  at  par,  and  then  increased 

2  ReP  Driffield  Gas  L.  Co.,  78  L.  T.  stock  is  paid  for  at  the  rate  of  $3  on 
Rep.  162  (1898).  Founders'  shares  are  §10,  and  upon  the  winding  up  of  the 
a  species  of  preferred  or  deferred  company  a  large  surplus  exists  for 
stock;  and  where,  on  dissolution,  the  distribution,  the  court  ordered  that 
founders'  shares  are  to  have  one-fifth  the  original  stock  should  first  receive 
of  the  surplus  assets,  the  words  "  sur-  $7  on  each  $10,  and  then  that  the  re- 
plus  assets  "  were  construed  to  be  the  maining  assets  should  be  distributed 

1250 


CH.  XXXVIII.]  DISSOLUTION,  FOKFEITUKE,  ETC.  [§  041. 

Debts  due  from  the  stockholder  to  the  corporation  are  in  any 
event  to  be  deducted  from  his  interest  in  the  assets.^  And  an. 
assignment  or  transfer  of  stock  by  a  stockholder  after  the  dis- 
solution of  the  corporation  is  merely  an  equitable  assignment 
of  his  interest  in  the  assets  of  the  concern  as  it  may  appear 
upon  the  settlement.^  Where  profits  have  been  earned  and 
properly  entered  as  profits  on  the  corporation  books  they  be- 
long to  the  stockholders,  even  though  thereafter  the  corporar 
tion  becomes  insolvent  and  is  wound  up  before  such  profits  are 
declared  to  be  dividends.  The  creditors  of  the  corporation  are 
entitled  to  the  corp^is  of  the  estate,  but  not  to  any  profits.  If 
there  is  preferred  stock  such  profits  go  to  that  stock.^ 

A  person  who  conveys  property  to  the  corporation  in  pay- 
ment for  stock  may  contract  that  upon  dissolution  he  shall  re- 
ceive back  that  property.*  Where  the  corporation  is  dissolved, 
but  by  statute  suits  may  be  brought  during  the  three  succeed- 
ing yeixrs,  a  stockholder  must  request  the  directors  to  sue  before 
he°sues  to  compel  a  creditor  to  restore  property  illegally  taken.* 
A  forfeiture  of  a  charter  by  a  state  court  does  not  affect  the 
status  of  a  receiver  appointed  by  the  United  States  court.  Such 
receiver  may  proceed  to  administer  the  property.^ 

pro  rata  on  all  the  stock.    Re  Wey-  to  the  stockholders  after  the  debts 

mouth,  etc.  Co.,  [1891]  1  Ch.  60.    On  are  paid,  such  dividend  being  less 

a  dissolution  and  winding  up,  where  than  his  assessment.   Neither  can  his 

part  of  the  stock  is  paid  up  and  part  transferee,  nor  the  purchaser  of  hi3 

not,  each  class  of  stockholders  is  re-  stock  at  an  execution  sale.    Richard- 

paid  the  amount  paid  upon  that  class  son  v.  Wallace,  39  S.  C.  216  (1893). 

of  stock,  and  then  the  surplus  is  di-  2  James  v.  Woodruff,  10  Paige,  o41 

Tided  proportionately.  J2e  Wakefield,  (1844);  aifd,  2  Denio,  574  (1845);  Sew- 

etc  Co.,  [1892]  3  Ch.  165.    On  a  wind-  all  v.  Chamberlain,  82  Mass.  581  (1860). 

ing  up,  if  it  turns  out  that  the  profits  3  Bishop  v.  Smyrna,  etc.  Co.,  [1895] 

had    been    systematically   overesti-  2  Ch,  265.                            ^      „    t-   i 

mated  for  many  years,  thereby  de-  ^Fish  v.  Nebraska,  etc.  Co.,  2a  Fed. 

priving  common  stockholders  of  the  Rep.  795  (1885). 

dividends,  an  account  should  be  taken  &  General  Electric  Co.  v.  West  Ashe- 

and  such  dividends  be  then  paid.    Re  ville  Imp.  Co.,  73  Fed.  Rep.  386  (1896). 

Bridg^vater,  etc.  Co.,  [1891]  2  Ch.  317.  «  City,  etc.  Co.  v.  State,  32  S.  W.  Rep. 

1  James  v.  Woodruff,  10  Paige,  541  1033  (Tex.,  1895).    But  where,  after 

(1844)-  Nathan  v.  Whitlock,  9  Paige,  an  injunction  has  been  obtained  m 

152  (1841)-  Purton  v.  New  Orleans,  the  federal  court,  the  corporation  is 

etc    R.  R.'   3  La.  Ann.   1932  (1848).  dissolved  in  the  state  court,  the  suit 

Where  a  stockholder  in  an  insolvent  in  the  federal  court  falls.    Lang  v. 

national  bank  does  not  pay  the  as-  Louisiana  Tanning  Co.,  o6  Fed.  Kep. 

sessment  levied  by  the  comptroller,  675  (1893). 
he  cannot  participate  in  a  dividend 

1251 


§  642.]  DISSOLUTIOiSr,  FOKFEITUKE,  etc.  [cU.  XXXVIII. 

§  G42.  The  lidbilitics  iqwn  dissolution,  consolidation,  or  sale. 
As  already  seen,  the  old  rule  that  upon  dissolution  all  debts  by 
or  to  the  corporation  ai'e  rendered  unenforceable  is  no  longer 
the  law.* 

An  important  question  arises  in  this  connection  where  one 
corporation  sells  out  all  its  property  to  another  corporation 
lea\ang  some  of  the  debts  of  the  former  corporation  unjiaid.  The 
rights  and  remedies  of  the  creditors  in  such  a  case  are  fully  con- 
sidered elsewhere.^  So  also  it  frequently  becomes  important  to 
know  whether  a  consolidated  company  is  liable  for  the  debts  of 
the  constituent  companies,'  and  wlicthcr  a  purchaser  at  a  foro 
closm^e  sale  is  liable  for  the  debts  of  the  foreclosed  corpora- 
tion.'* 

Dividends  paid  to  the  stockholders  out  of  the  capital  stock 
are  illegal  as  against  corporate  creditors  whether  paid  before 
or  at  the  time  of  dissolution.* 

The  question  of  liability  where  the  corporation  is  a  mere 
"  dummy  "  is  considered  elscAvhere.' 

Another  question  is  whether  a  person  or  corporation  which 
owns  all  the  stock  of  another  corporation  is  ever  liable  for  the 
debts  of  the  latter  on  the  ground  that  the  latter  is  a  mere 
"  dummy  "  for  the  former.  This  subject  also  is  considered  elsc- 
where.'^ 

At  common  law,  upon  dissolution  of  a  corporation,  all  suits  by 
or  against  it  abate.^ 

^  See  preceding  section.  But  a  jndg-  (1884) ;  Greeley  v.  Smith,  3  Story,  C.  C. 
ment  declaring  a  corporation  illegal,  G57  (18-45);  Saltmarsh  v.  Planters', 
void,  and  the  association  dissolved  etc.  Bank,  17  Ala,  761  (1850);  Merrill 
puts  an  end  to  a  contract  by  it  to  pay  v.  Suffolk  Bank,  31  Ma  57  (1849);  In- 
certain  parties  its  bonds  and  stock  if  graham  v.  Terry,  11  Huxnpli,  (Tenn.) 
they  would  build  its  road.  Vinal  v.  573  (1851);  Life  Assoc,  v.  Fassett,  103 
Continental,  etc.  Co.,  33  Fed.  Rep.  345  IlL  315  (1883);  Piatt  v.  Ashman,  33 
(1887).  Hun,  230  (1884).    An  action  for  tort 

2  See  ch.  XL,  tn/ro.  abates  upon  the  expiration  of  the 

3  See  ch.  LIII,  infra,  corporate  charter.     Grafton  v.  Union 

4  See  ch.  LII,  infra.  Ferry  Co.,  13  N.  Y.  Supp.  878  (1891). 

5  See  §  548,  supra.  Corporate  suits  end  when  the  charter 
«  See  §§  C,  mipra,  and  663,  664,  709,  expires.  Logan  v.  Western,  etc.  R.  R, 

infra.  87  Ga,  533  (1891).    An  action  against 

"  See  §§  6,  supra,  and  663,  664,  709,    a    corporation    may    be    continued 

infra.  against  those  who  administer  its  as- 

SMcCulloch  V.  Norwood,  58  N.  Y.    sets  where  the    corporation  is  dis- 

563  (1874);  Re  Norwood,  33  Hun,  196    solved  pending  the  suit.    Hep  worth 

1253 


CU.  XXXVIII.]  DISSOLUTIOIT,  FOEFEITUKE,  ETC. 


[§  C43. 


Suit  does  not  lie  against  a  corporation  wHch  has  been  dis- 
solved^  Buttlie  statutes  often  contain  a  provision  tiiat  tiie 
corporate  existence  shall  be  continued  for  a  fixed  time,  pending 
the  proceedings  for  dissolution,  so  that  suits  maybe  brought  by 
and  against  the  corporation  for  the  purpose  of  closing  the  busi- 
ness  and  disposing  of  the  assets "" 


V.  Union  Ferry  Co.,  G3  Hun,  25S 
(1891).  Where  by  consolidation  a  cor- 
poration ceases  to  exist,  suits  against 
it  abate.  Council,  etc.  R'y  v.  Law- 
rence, 45  Pac.  Rep.  125  (Kan.,  1896). 
A  dissolution  of  a  corporation  puts 


if  beaten.  Attleboro  Nat.  Bank  v, 
Wendell,  64  Hun,  208  (1893).  _  After 
dissolution  has  been  decreed  it  is  too 
late  for  a  corporate  creditor  to  bring 
an  action  to  hold  the  directors  liable 
for  declaring  dividends  out  of  the 


anenuiucts  a^nfton   v.    the  dissolution  being  alleged.  Coxon 


for   personal    injuries.     Grafton   v. 
Union  Ferry  C».,  19  N.  Y.  Supp.  966 
(1892).    Under  the  New  York  statute 
dissolution  does  not  bar  an  action 
for  damages.    Marstaller  v.  IMills.  143 
N.  Y.  398  (1894).    Upon  dissolution  of 
a  coi-poration  all  suits  abate.    Marion 
Phosphate  Co.  v.  Perry,  74  Fed.  Rep. 
425  (1896).    The  dissolution  of  a  for- 
eic-n  k5orporation  ends  a  suit  against 
it."  Wamsley  v.  Horton.  13  N.  Y.  App. 
Div.  313  (1896).    A  judgment  in  Illi- 
nois against  a  New  York  corporation 
that  has  already  been  dissolved  in 
New  York  is  not  good  in  New  York. 
Rodgers  V.  Adriatic  F.  Ins.  Co.,  87 
Hun,  384  (1895).    An  action  in  tort  for 
personal  injuries  abates  upon  the  dis- 
solution of  the  company.  Re  Yueng- 
ling  Brewing  Co.,  24  N.  Y.  App.  Div. 
223  (1897).     See  «T  Fed.  Rep.  256. 

1  Dobson  V.  Simonton,  86  N.  C.  493 
(1882);   Gold  v.  Clyne,  58  Hun,  419 
(1890).    The  legislature  may  provide 
for  suits  against  corporations  after 
dissolution,  thus  changing  the  com- 
mon-law rule.    Stetson  v.  City  Bank, 
etc    2  Ohio  St.  167  (1853);  Foster  v. 
Essex  Bank,  16  Mass.  244  (1819).    A 
corporation  may  be  sued  as  such  for  a 
tort  committed  by  it  after  its  charter 
has  expired.    IMiller  v.  Newburg,  etc 
Co   31  W.  Va.  836  (1888).    Where  an 
attorney  brings  suit  in  the  name  of  a 
corporation  that  has  been  dissolved 
before  the  action,  he  is  Uable  for  costs 


the  dissolution  being  alleged.  Coxon 
V.  Gorst,  [1891]  2  Ch.  73.  Upon  disso- 
lution, the  directors  becoming  trust- 
ees by  statute,  the  statute  of  limita^ 
tions  begins  to  run  against  claims 
against  the  secretary.  Landis  v.  Sax- 
ton,  105  Mo.  486  (1891).  A  corpora- 
tion  may  give  a  bond  on  appeal,  eveu 
though  the  charter  has  been  for- 
feited, an  appeal  having  been  taken 
from  the  judgment  of  forfeiture. 
Texas,  etc.  R.  R.  v.  Jackson,  22  S.  W. 
Rep.  1030  (Tex.,  1893). 

2  Stetson  V.  City  Bank  of  New  Or- 
leans,  12  Ohio  St.  577  (1861);  McGoon 
V  Scales,  9  Wall.  23  (1869);  Mariners' 
Bank  V.  Sewall,  50  Me.  220  (1861); 
^luscatine  Turn  Verein  v.  Funck,  18 
Iowa,  469  (1865);  Thornton  v.  Mar- 
ginal Freight  R'y,  123  Mass.  32  (1877); 
Folger  V.  Chase,  35  Mass.  63  (1836); 
Crease  v.  Babcock,  51  iMass.  525,  567 
(1846);    Re    Independent    Ins,    Co., 
Holmes,  103  (1872);  S.  C.,13  Fed.  Cas. 
13;  Franklin  Bank  v.  Cooper,  36  Me. 
179  (1853);  Nevitt  v.  Bank  of  Port 
Gibson,  14  Miss.  513  (1846).    The  life 
of  the  corporation  is  frequently  ex- 
tended by  these  statutes  for  three 
years.    Herron  v.  Vance,  17  Ind.  595 
(1861) ;  Foster  u  Essex  Bank,  16  Mass. 
245  (1819);  Blake  v.  Portsmouth,  etc. 
R  R    39  N.  H.  435  (1859);  Van  Glahn 
V.  De  Rosset,  81  N.  C.  467   (1879); 
^lichigan  State  Bank  v.  Gardner,  81 
^lass.   363    (1860).     Sometimes    five 


1353 


§  642.]  DISSOLUTION,  FOEFEITUKE,  ETC.  [CU.  XXXVIII. 

A  contract  made  by  the  officers  after  the  charter  has  been 
forfeited  does  not  bind  the  stockholders.^ 

A  director  who  is  a  creditor  of  tlie  corporation  may  share 
proportionately  with  other  creditoi-s  in  the  assets.* 

Where  a  company  owing  debts  allows  a  foreclosure  of  a  mort- 
gage and  buys  in  the  property  and  holds  it  secretly  in  the  name 
of  a  trustee,  an  execution  may  be  levied  on  it  by  a  judgment 
creditor  of  the  company.' 

The  dissolution  of  a  company  does  not  put  an  end  to  its  ex- 
ecutory contract  to  employ  a  person,*  nor  obligations  which 
were  created  for  a  period  longer  than  the  duration  of  the  cor- 
porate charter.' 

Where  a  corporation  is  dissolved  before  a  lease  taken  by  it 
runs  out,  the  lessor  may  hold  its  assets  liable  for'the  breach  of 
contract.^  Dissolution  may  put  an  end  to  a  guaranty  of  divi- 
dends on  the  stock  of  the  company.^  The  directors  are  not 
personally  liable  for  attorney  fees  for  services  rendered  in  a 
voluntary  dissolution  of  the  company.^  Where  suit  for  disso- 
lution is  instituted  against  an  insurance  company,  the  claims 
against  it  are  figured  at  their  value  at  the  commencement  of 
the  suit,  even  though  an  insured  person  dies  thereafter  and  be- 
fore distribution.' 

years.  Tuskaloosa,  etc.  Assoc,  v.  not  enforceable  if  the  company  aban- 
Green,  48  Ala.  346  (1872).  Cf.  Lin-  dons  business.  Zimmer  v.  Brooklyn 
coin,  etc.  Bank  v.  Richardson,  1  Ma  Sub.  Ry,  6  N.  Y.  Supp.  316  (1889). 
79(1820),  A  suit  abates  upon  the  » See  ^  841,  t/i/m. 
expiration  of  the  time  limited,  where  «  Kalkhoff  v.  Nelson,  60  Minn.  284 
by  statute  the  corporation  continues  (1895).  Damages  for  breach  of  a  con- 
fer five  years  after  dissolution  for  tract  should  be' allowed  in  liquida- 
the  purpose  of  prosecuting  and  de-  tion,  even  though  the  time  for  the 
fending  suits.  Dundee,  etc.  Co.  v.  performance  of  such  contract  is  not 
Hughes,  77  Fed.  Rep.  853  (189G).  yet  complete.    Rosenbaum  v.  United 

1  Wilson   V.    Terson,  12   Ind.    285  States,  etc.  Co.,  40  AtL  Rep.  591  (N.  J., 
(1859)-  1898). 

2  Thompson  v.  Huron  Lumber  Co.,  ^Lorillard  v.  Clyde,  142  N.  Y.  456 
4  Wash.  St.  600  (1892).  (1894). 

3  State   V.    McBride,  105   Mo.  265  8  Drew  v.  LongweU,  81  Hun,  144 
(1891).  (1894). 

J^ Tiffin  Glass  Co.  v.  Stoehr,54  Ohio,        9  People  v.  Commercial  A.  L.  Ins. 
157  (1896).  A  contract  made  by  a  cor-    Co.,  154  N.  Y.  Rep.  95  (1897). 
poration  to  pay  when  it  is  in  f  imds  is 

1254 


PAET  IT. 

FRAUDS— ULTRA  VIRES  ACTS— INTRA  VIRES  ACTS- 
NEGLIGENCE  AND  IRREGULAR  CONTRACTS  OP 
DIRECTORS,  STOCKHOLDERS,  PROMOTERS,  AND 
AGENTS. 


CHAPTER  XXXIX. 

FRAUDULENT  ACTS  OF  DIRECTORS,  MAJORITY  OF  STOCKHOLD- 
ERS, AND  THIRD  PERSONS. 


A,  TQE  OCCASION,  SCOPE,  AND  PURPOSE 

OF  THE  SUBJECT  HEREIIN. 

g  643.  The  caase  and  occasion  of  this 
subject. 
644  The  three  classes  of  stockhold- 
ers' wrongs  herein — The  cor- 
poration is  ordinarily  the 
party  to  remedy  these 
wrongs. 

645.  But  the  corporation  failing  to 

do   so,  a  stockholder  may 
bring  the  action. 

646.  The  facts  and  conditions  which 

allow  and  sustain  a  stock- 
holder's suit  herein- 

B.  FRAUDS  OF  CORPORATE  DIRECTORS, 

OF  A  MAJORITY  OF  THE  STOCK- 
HOLDERS, OR  OF  THIRD  PERSONS, 
TO  REMEDY  WHICH  A  STOCK- 
HOLDER MAY  BRING  SUIT. 


t5  647, 


Different  methods  of  perpe- 
trating these  frauds. 

Directors  as  trustees. 

Director  or  other  corporate 
officer  interested  in  con- 
struction company  —  Con- 
tracts between  a  director 
and  his  company. 

Secret  gifts  to  directors  from 
persons  contracting  with  the 
corporation. 
651.  Promoters'  frauds  on  the  cor- 
poration. 
Co2.  Sales  of  property  by  corporate 
officers  to  the  corporation. 


648, 
049, 


650. 


§  653. 

654. 
655. 

650. 

657. 
658. 

659. 

660. 
601. 


Sales  of  property  by  the  cor- 
poration to  corporate  offi- 
cers, and  purchases  by  corpo- 
rate officers  at  foreclosure 
and  execution  sales. 

Reorganizations  of  corpora- 
tions. 

Issue  of  "  watered  "  stock  and 
of  bonds  at  a  discount  — 
Division  of  assets,  leaving 
creditors  unpaid. 

Stockholders'  actions  against 
persons,  other  than  direct- 
ors, for  frauds,  etc.,  against 
the  corporation. 

Salaries  or  compensation  to 
corporate  officers. 

Contracts  between  corpora- 
tions having  one  or  more  di- 
rectors in  common. 

Foreclosure  of  mortgage  on 
corporate  property,  and  col- 
lusion with  directors,  where- 
by no  defense  is  made  to  the 
foreclosure. 

Directors'  purchases  of  prop- 
erty needed  by  the  corpora- 
tion —  Buying  up  the  debts 
of  the  corporation. 

Loans  by  the  directors  to  the 
corporation,  mortgages  by 
the  corporation  to  directors, 
and  the  right  of  a  corpora- 
tion— solvent  or  insolvent— 
to  give  a  mortgage  or  assign- 
ment of  its  property  to  a  di- 
rector in  order  to  prefer  the 
payment  of  his  debt. 


1255 


§  C43.] 


TEAUDS    OF   DIEECTOKS,  TKOMOTEES,  ETC.       [cn.  XXXIX. 


§  662.  Frauds  by  a  majointy  of  the 
stockholders  on  the  minor- 
ity— Dii'ectors  owning  stock 
in  another  corporation  with 
whicli  a  contract  is  made  — 
Stockholders'  I'atification  of 
the  voidable  acts  of  direct- 
ors— One  corporation  voting 
stock  in  another  competing 
corporation. 
6G3.  "Dummy"  corporations — The 
courts  will  ignore  the  cori>o- 
rate  existence  where  it  is 


fraudulently  used  to  do  what 
the  stockholders  cannot  le- 
gally do. 

664.  " Duni my  "  corjwrations  —  An 

individual  or  corporation 
owning  all  tlio  stock  of  an- 
otlier  corporation  is  not  or- 
dinarily liable  for  the  debts 
of  the  latter. 

665.  Participation,  ratification,  and 

laches  as  a  bar  to  stockhold- 
ers' complaints. 

666.  Parties,  pleadings,  etc 


A.   THE   OCCASION,    SCOPE,   AND    TUKPOSE    OF    THE   SUBJECT   HEREIN. 

§  643.  The  cause  and  occasion  of  this  sxibjcct —  Perhaps  the 
most  striking  feature  of  the  modern  era  of  industrial  develop- 
ment is  the  growth,  wealth,  and  power  of  corporations.     They 
have  built  the  railways,  dug  the  canals,  established  the  factor- 
ies, carried  the  ocean  commerce,  and  assumed  control  of  the 
industries  of  Europe  as  w^ell  as  of  America.     They  have  ab- 
sorbed a  large  part  of  the  surplus  wealth  of  the  world,  and 
have  accumulated  or  distributed  enormous  gains  and  profits. 
But  these  gains  and  profits  have  not  always  been  honestly 
preserved  and  administered  for  the  benefit  of  those  who  are 
entitled  thereto  — the  stockholders  of  the  company.     Corpora- 
tions, with  their  vast  capital  stock,  their  great  income,  their 
rapidly-changing  personal  property,  and  their  large  purchases 
and  sales,  have  proved  to  be  a  temptation  which  corporate 
officers  are  too  often  unable  to  withstand.    These  companies 
have  been  found  to  be  efficient  instruments  of  fraud,  specula- 
tion, plunder,  and  illegal  gain.     In  these  latter  days  the  rob- 
bery and  spoliation  of  corporations  and  stockholders  by  the 
corporate  directors  and  managers  have  been  systematized  into 
well-known  methods  of  proceeding,  and  the  carrying  out  of 
such  plans  has  become  a  profession  and  an  accomplishment. 
Skill,  audacity,  experience,  and  talent  of  the  highest  order 
have  reduced  to  a  certainty  the  methods  of  diverting  the  profits, 
capital,  and  even  the  existence  of  the  corporation  itself  to  the 
enrichment  of  the  corporate  managers  and  their  co-conspirators. 
Corporations  become  insolvent,  and  stockholders  lose  their  in- 
vestment,  while  individuals  become  millionaires.     Illegitimate 
gains  are  secured  and  enormous  fortunes  are  amassed  by  the 
few  at  the  expense  of  the  defrauded  but  generally  helpless 
stockholders. 

1256 


CH,  XXXIX.]       FEAUDS    OF   DIEECTOES,  PEOMOTEES,  ETC.  [§  G43. 

The  expense,  difficulty,  and  delays  of  litigation ;  the  power, 
wealth,  and  unscrupulousness  of  the  guilty  parties;  the  secrecy, 
skill,  and  evasive  nature  of  their  methods;  and  the  fact  that 
the  results  of  even  a  successful  suit  belong  to  the  corporation, 
and  not  to  the  stockholders  who  sue,  all  combine  to  baffle  in- 
vestigation and  exposure,  to  discourage  the  stockholders,  and 
to  encourage  and  protect  the  parties  guilty  of  the  wrong. 

In  England,  ever  since  the  year  1Y20,  when  the  "  South  Sea 
Bubble  "  exploded  and  unsettled  the  finances  of  the  kingdom, 
there  has  been  a  constant  recurrence  of  "  bubble  companies  " 
and  dishonest  promoters.  The  English  reports  are  filled  with 
cases  of  frauds  of  corporate  directors,  corporate  agents,  and 
corporate  organizers.  A  system  of  jurisprudence  has  grown 
up  from  these  cases.  This  system,  however,  is  as  yet  in  a 
formative  state ;  and  there  is  no  branch  of  the  law  more  com- 
plicated, difficult,  and  full  of  pitfall,  for  the  court,  practitioner, 
and  client  than  that  growing  out  of  the  frauds  of  corporate 
directors. 

In  America  the  cases  involving  a  breach  of  trust  by  the  di- 
rectors arise  generally  out  of  the  management  of  corporations, 
and  not  in  their  formation.  These  cases  frequently  involve 
colossal  transactions,  and  exhibit  a  scope,  grasp,  and  ability  for 
railway  management  and  manipulation  that  excite  the  stock- 
holder's admiration  fully  as  much  as  his  indignation. 

It  is  a  curious  fact  that  the  American  talent  for  organiza- 
tion, executive  management,  and  the  invention  and  adoption 
of  means  to  ends  —  a  characteristic  talent  that  formerly  was 
engrossed  in  the  political  affairs  of  the  nation  —  is  now  very 
largely  engaged  in  the  development  and  management  of  the 
American  railroads.  With  energy,  enterprise,  daring,  and  sa- 
gacity the  American  railway  has  been  built,  improved,  consoli- 
dated, and  perfected,  frequently  far  in  advance  of  even  the 
remarkable  growth  of  the  country  itself.  For  the  most  part 
this  work  has  been  done  honestly,  efficiently,  and  creditably. 
But  not  always  has  this  been  thd  case.  The  ingenuity  and 
fruitful  cunning  of  adroit,  experienced,  and  unscrupulous  talent 
have  plundered  and  robbed  the  corporations  and  the  stock- 
holders, and  have  brought  reproach  on  the  management  of  the 
American  railway.  Great  fortunes  have  been  accumulated  by 
"  wrecking  "  great  corporations.     Eailroads  which  were  capar 

12.j7 


§  C4u.]  FRAUDS    OF    DIRECTORS,  PROMOTERS,  ETC.       [cil.  XXXII. 

ble  of  earning  a  fair  return  upon  the  capital  invested  have  beea 
rendered  insolvent  by  the  fraudulent  management  and  illegal 
gains  of  the  corporate  officers.  The  plans,  devices,  and  meth- 
ods of  accomplishing  this  result  have  been  systematized  and 
elaborated  to  a  degree  equal  to  the  great  resources  and  fer- 
tility of  mind  employed  in  their  execution.  It  is  the  purpose 
of  this  part  of  the  present  work  to  explain,  so  far  as  is  possi- 
ble, the  methods  of  those  frauds,  and  to  point  out  the  remedy 
for  the  wrong. 

§  644.  The  three  classes  of  stoclholders'  wrongs  herein — The 
corporation  is  ordinarily  the  i)artij  to  remahj  these  wrongs. — 
Stockholders'  wrongs,  arising  from  a  breach  of  trust  by  direct- 
ors or  a  majority  of  the  stockholders  or  third  persons,  are 
clearly  divisible  into  three  classes.  They  are:  first,  fraudulent 
acts;  ^  second,  ultra  vires  acts;^  third,  negligence  of  corporate 
directors.' 

There  is  another  class  of  grievances  —  that  of  internal  dissen- 
sions in  the  corporation  and  dissatisfaction  with  its  policy  and 
acts.  These,  however,  are  intra  vires  of  the  directors  or  major- 
ity of  the  stockholders.  The  law  gives  no  remedy  for  such  dis- 
sensions, since  the  stockholder  has  the  corporate  elections  as  a 
remedy.  The  majority  are  to  rule  so  long  as  they  do  so  with- 
out fraud  and  mthin  the  powers  of  the  corporation.*  So  also 
the  decision  of  the  board  of  directors  is  bindino:  as  recrards  the 
usual  suits  which  a  corporation  might  bring  against  third  per- 
fions.* 

These  frauds,  ultra  vires  acts,  and  acts  of  negligence  are  in- 
juries to  the  corporation ;  and  the  corporation  is  ordinarily  the 
party  to  bring  suit  to  rectify  them.  The  frauds,  ^dtra  vires 
acts,  and  negligence  of  directors  do  not  affect  the  stockholder 
directly;  but  they  affect  the  stockholders  indirectly  by  decreas- 
ing the  corporate  assets,  and  thereby  affecting  the  value  and 
privileges  of  the  stock.  Accordingly  it  is  the  duty  and  right 
of  the  corporation  to  bring  suit  to  remedy  these  wrongs,  just 
as  it  is  the  duty  and  right  of  the  corporation  to  bring  suit  to 
remedy  an  ordinary  trespass,  conversion,  or  fraud,  whereby 
third  parties  injure  the  corporate  property  and  interests.     That 

1  This  is  the  subject  of  this  chapter.        <  See  ch.  XLI,  infrcu 

2  See  ch.  XL,  infra.  5  gee  §  750,  infra. 
s  See  ch.  XLII,  infra. 

1258 


CH.  XXXIX.]       FRAUDS    OF   DIKECTOKS,  PKOMOTEKS,  ETC.  [§  645. 

a  corporation  may  bring  suit  to  remedy  the  frauds,  nltra  vires 
acts,  or  neffli<2:ence  of  its  trustees  or  directors  was  tlie  decision 
of  Lord  Chancellor  Hardwicke,  in  1742,  in  the  case  of  The 
Charitable  Corporation  against  Sutton.^ 

§  645.  But  the  corporation  failing  to  do  so,  a  stoclilwlder  may 
Iring  the  action. —  During  the  next  hundred  years,  however, 
corporations  having  a  capital  stock  and  stockholders  came  into 
existence  and  rose  into  prominence.  The  large  capital  and 
great  profits  of  many  of  these  corporations  led  to  frequent 
frauds,  breaches  of  trust,  and  illegal  acts  on  the  part  of  the 
directors.  It  was  the  duty  of  the  corporation  to  bring  suit  to 
remedy  these  wrongs.  Eut  it  gradually  became  apparent  that 
frequently  the  corporation  was  helpless  and  unable  to  institute 
the  suit.  It  was  found,  where  the  guilty  parties  themselves 
controlled  the  directors  and  also  a  ^majority  of  the  stock,  that 
the  corporation  was  in  their  power,  was  unable  to  institute 
suit,  and  that  the  minority  of  the  stockholders  were  being 
defrauded  of  their  rights  and  were  without  remedy;  and  it 
became  apparent  that  there  was  a  wrong  which  had  no  remedy. 
The  time  had  come  when  the  minority  of  the  stockholders  of  a 
defrauded  corporation  —  the  corporation  itself  being  controlled 
by  the  guilty  parties — must  be  given  a  standing  in  court  for 
the  purpose  of  taking  up  the  cause  of  the  corporation,  and  in 
its  name  and  stead  bringing  the  guilty  parties  to  an  account. 
Accordingly,  in  1843,  in  the  leading  case  of  Foss  v.  Harbottle,^ 
a  stockholder  brought  suit  in  the  name  of  himself  and  other 
defrauded  stockholders,  and  for  the  benefit  of  the  corporation, 
against  the  directors,  for  a  breach  of  their  duty  to  the  corpo- 
ration. This  case  was  decided  against  the  complaining  stock- 
holders on  the  ground  tliat  the  complainant  did  not  prove  that 
the  corporation  itself  was  under  the  control  of  the  guilty  par- 
ties, and  that  it  was  unable  to  institute  the  suit.  The  court, 
however,  broadly  intimated  that  a  case  might  arise  when  a  suit 
instituted  by  the  defrauded  stockholders  would  be  entertained 
by  the  court  and  redress  given.     Acting  upon  this  suggestion, 

1  2  Atk-  400.    In  this  case  the  court    rate  or  public  capacity."    As  to  the 
Baid:    "Nor  will  I  ever   determine    power  of  the  state  to  remedy  such 
that  a  court  of  equity  cannot  lay    abuses,  see  §  635,  suprcu 
hold  of  every  breach  of  trust,  let  the        2  2  Hare,  461. 
person  be  guilty  of  it  either  in  a  pri- 

1259 


§  645.]  FKAUDS   OF    DIRECTORS,  PROMOTERS,  ETC.       [CH.  XXXIX. 

and  impelled  by  the  utter  inadequacy  of  suits  instituted  by  the 
corporation,  defrauded  stockholders  continued  to  institute  these 
suits  and  to  urge  the  courts  of  equity  to  grant  relief.*  These 
efforts  were  unsuccessful  in  clearly  establishing  the  rights  of 
stockholders  herein  until  the  cases  of  Atwool  against  Merry- 
Aveather,  in  England,  in  1807,^  and  of  Dodge  v.  AYoolsey,  in  this 
country,  in  1855.^  These  two  great  and  leading  cases  have 
firmly  established  the  laAv  for  both  England  and  America,  that 
where  corporate  directors  have  committed  a  breach  of  tru.st 
either  by  their  frauds,  ultra  vires  acts,  or  negligence,  and  the 
corporation  is  unable  or  unwilling  to  institute  suit  to  remedy 
the  wrong,  a  single  stockholder  may  institute  that  suit,  suing 
on  behalf  of  himself  and  other  stockholders  and  for  the  benefit 
of  the  corporation,  to  bring  about  a  redress  of  the  wrong  done 
directly  to  the  corporation  and  indirectly  to  all  the  stockholders.* 
The  rule  as  formulated  and  enounced  therein  has  been  re- 
peated, applied,  explained,  and  extended  by  subsequent  cases  and 
by  text-books  until  a  system  of  jurisprudence  may  be  said  to  be 
based  thereon.  That  system  is  the  subject  of  the  present  fourth 
part  of  this  work.  It  may  be  well  to  add  that  stockholders  are 
not  liable  for  libel  and  slander  by  reason  of  allegations  in  their 
suit  against  directors  for  fraud.  Not  even  a  director  who  was 
not  a  party  can  sue  them  for  libel.* 

1  Mozley  v.  Alston,  1  Phil.  Ch.  790  to  these  cases  it  had  been  held  by  the 

(1817),  where  the  court  said  there  was  courts  in  various  cases  that  a  stock- 

no  reason  assigned  "  wliy  the  corpo-  holder's  action  herein  wovdd  lie,  but 

ration  does  not  put  itself  in  motion  the  principle  was  not  clearly  estab- 

to  seek  a  remedy;  "  Lord  v.  Copper  lished  until  the  foregoing  decisions 

Miners,  2  PhiL  Ch.  740  (1848),  where  were  made.    Tlius,  in  New  York,  as 

the  court  refused  relief  because  the  early  as  1832,  in  the  case  of  Robinson 

acts  were  capable  of  confirmation  and  v.  Smith,  3  Paige,  222  (1832),  the  rem- 

had  been  confirmed  by  the  majority;  edy  was  declared  to  exist.    In  the 

Gray  v.  Lewis,  L.  R.  8  Ch.  App.  1035,  early  case  of  Preston  v.  Gr&nd  Col- 

1050  (1873).    See  also  MacDougall  v.  lier  Dock  Co..  11  Sim.  327  (1840),  a 

Gardiner,  L.RlCh.D.  13  (1875),  in  re-  bill  by  a  stockholder  in  behalf  of 

gard  to  the  principle  of  law  decided  himself  and  others  to  render  certain 

by  these  cases.  persons  liable  as  stockholders,  they 

2L.  R.  5  Eq.  464,  n.  having  subscribed  in  order  to  get  a 

3 18  How.  331.    The  case  of  Hawes  charter,  and  then  declared  tliat  they 

V.  Oakland,  104  U.  S.  450  (1881),  is  subscribed  as  tnistees  for  the  cori^o- 

perhaps  of  even  greater  importance  ration,  was  sustained, 

than  Dodge  nWoolsey,  and  may  take  SRungg  ^j.  Franklin,  72  Tex.  585 

the  place  of  the  latter.  (1889). 

*  It  is  to  be  noticed  that  long  prior 

1260 


CH.  XXXIX.]       FKAUDS    OF   DIKECTOKS,  PKOMOTEKS,  ETC.       [§§  046-7. 

§  QiQ.  The  facts  and  conditions  ivliicli  allow  and  sustain  a 
stockholder's  suit  herein. —  Before  a  stockliolder  can  sustain  a 
suit  to  remedy  the  frauds,  ult)'a  vires  acts,  or  negligence  of 
directors,  he  should  be  certain  that  three  distinct  facts  or  con- 
ditions exist  in  his  favor.  These  are :  first,  that  the  acts  com- 
plained of  are  such  as  amount  to  a  breach  of  trust,  and  such  as 
neither  a  majority  of  the  directors  nor  of  the  stockholders  can 
ratify  or  condone;^  second,  that  the  complaining  stockholder 
himself  is  free  from  laches,  acquiescence,  or  ratification  of  the 
acts  to  remedy  which  the  suit  is  brought ;  ^  third,  that  the  cor- 
poration has  been  requested  and  has  neglected  or  refused  to 
institute  the  suit ;  that  the  suit  is  instituted  by  ho?ia  fide  stock- 
holders as  complainants,  and  that  the  corporation  and  the 
guilty  parties  and  other  proper  parties  have  been  made  defend- 
ants.' 

E.    FRAm)S   OF   CORPORATE  DIRECTORS,  OF  A  MAJORITY  OF  THE  STOCK- 
HOLDERS, OR   OF  THIRD  PERSOXS,  TO   REMEDY  WHICH  A  STOCK- 


HOLDER  MAY   BRING   SUIT. 


§  647.  Different  methods  of  perpetrating  these  frauds. —  The 

various  ways  in  which  stockholders  are  generally  defrauded  out 
of  their  legal  rights  in  a  corporation  are  described  in  subsequent 
sections  of  this  chapter.  These,  however,  are  the  older  and 
more  easily-remedied  wrongs.  The  principles  of  law  govern- 
ing them  are  known  to  those  who  contemplate  such  frauds. 
Consequently,  new  plans  and  methods  of  circumventing  the 
law  are  being  constantly  devised.  There  is  a  continual  contest 
between  the  courts  in  branding  certain  acts  as  frauds  and  the 
unscrupulous  corporate  ofiicers  in  forming  new  and  unknown 
methods  of  defrauding  the  corporation  and  stockholders.  Some 
of  these  devices  vary  little  from  the  older  ones,  but  others  are 
new  and  are  evolved  by  the  fertile  resources  of  the  misdirected 
talent  of  corporate  managers. 

Thus,  a  frequent  fraud  is  perpetrated  by  withholding  or  im- 
properly increasing  dividends  in  order  that  the  corporate  man- 
agers may  cause  fluctuations  in  the  price  of  the  stock,  and  by 

1  This  subject  is  treated  in  the  re-        2  gee  ch.  XLIV,  infra, 

mainder  of  this  chapter  and  in  chap-        ^Sae  ch.  XLV,  infra, 

ter  XL,  infra.    See  also  as  to  such 

ratification,  §  740,  infra, 

1261 


§  G-18.]  FRAUDS    OF   DIRECTORS,  PROMOTERS,  ETC.       [cn.  XXXIX. 

speculation  in  the  market  enrich  themselves.^  It  exists  also 
when  the  statements  of  the  corporate  condition  and  business 
are  garbled  and  arranged  so  as  to  mislead  the  investing  pul)- 
lic.  A  favorite  modern  device  is  the  purchase,  by  corporate 
officers,  of  the  stock  and  bonds  of  another  corporation,  fol- 
lowed by  a  consolidation  of  the  two  cor])orations,  to  the  ruin 
of  the  former  and  the  enrichment  of  the  holders  of  the  stock 
and  bonds  of  the  latter.  Still  another  method  is  tlie  divei'sion 
of  traffic  from  a  corporation,  or  a  use  of  its  income  for  improve- 
ments, whereby  its  dividends  are  cut  off,  until  the  manag«M-3 
have  purchased  the  stoclc  and  bonds  at  a  price  far  below  the 
real  value.  These  various  frauds,  and  many  others  which  miglit 
be  enumerated,  are  discovered  and  exposed  with  difficulty,  and 
generally  at  great  expense  and  delay,-  The  courts  of  equity 
are  ready  and  reliable  in  remedying  the  wrong  whenever  the 
fraud  can  be  proved.  But  in  the  fact  that  the  proof  is  con- 
cealed or  destroyed,  and  generally  beyond  the  reach  of  the  de- 
frauded stockholder,  lies  the  safety  of  the  guilty  parties. 

§  648.  Directors  as  trustees. —  It  is  frequently  said,  both  in 
the  cases  and  in  the  text-books,  that  the  directors  of  a  corpora- 
tion are  practically  trustees,  with  the  whole  body  of  the  stock- 
holders as  cestuis  que  trust. ^  The  New  York  court  of  appeals, 
however,  has  recently  said  that  directors  are  trustees  in  their 

1  It  probably  was  by  reason  of  such  Railroads,  36-4-1.  In  Wasatch  Min. 
frauds  that  the  New  York  legislature  Co.  v.  Jennings,  5  Utah,  243  (1887), 
in  1884  passed  the  act  (ch,  223)  pro-  the  comi;  well  said  in  reference 
hibiting  directors  from  selling  stock  to  corporate  directors:  "  Courts  of 
"  short."  equity  have  carefully  refrained  from 

2  For  a  vivid  description  of  a  num-  defining  the  particular  instances  of 
ber  of  these  devices  to  defraud  stock-  fiduciary  relations  in  such  a  manner 
holders  and  the  public  generally,  see  that  other  and  perhaps  new  cases 
Swann,  "  Investor's  Notes  on  Ameri-  might  be  excluded."  The  corpora- 
can  Railroads,"  p.  29  (1886).  tion,  however,  stands  in  no  fiduciary 

3  That  directors  occupy  the  position  relation  towards  its  stockholders, 
of  trustees  towards  the  stockholders,  Karnes  v.  Rochester,  etc.  R  R.,  4  Abb. 
see  European,  etc.  R'y  v.  Poor,  59  Pr.  (N.  S.)  107  (18G7).  As  stated  in 
Me.  277  (1871) ;  Koehler  v.  Black  Hoyle  v.  Plattsburgh,  etc.  R.  R.,  54 
River,  etc.  Co.,  2  Black,  715  (1862).  N.  Y.  314  (1873),  whether  a  director 
See  also  Green's  Price,  Ultra  Vires  of  a  corporation  is  to  be  called  a 
(2d  ed.),  p.  478,  citing  many  cases,  trustee  or  not,  in  a  strict  sense,  there 
Cf.  Smith  V.  Anderson,  L.  R.  15  Ch,  can  be  no  doubt  that  his  character  is 
D.  247  (1880);  Imperial  Hotel  Car.  fiduciary.  Fougeray  u'Cord,  50  N.  J. 
Hampsun,  L.  R.  23  Ch.  D.  12  (1882);  Eq.  185  (1892);  Wickersham  v.  Crit- 
Angell  &  A  Corp.,  §  312,  etc. ;  Pierce,  tenden,  93  CaL  17  (1892). 

1263 


CH.  XXXIX.]       FRAUDS    OF   DIRECTORS,  PROMOTERS,  ETC.  [§  G49. 

relations  towards  the  corporation,  but  not  in  their  relations 
towards  the  stockholders.^  N'evertheless,  the  obligations  of 
this  trusteeship,  whether  to  the  corporation  or  to  the  stock- 
holders, have  been  the  means  of  ascertaining  what  acts  of  di- 
rectors constitute  a  fraud,  and  what  remedies  may  be  applied. 
These  fraudulent  acts  and  remedies  have  been  quite  accurately 
defined  and  ascertained.  New  methods  and  devices,  however, 
are  constantly  being  devised  by  unscrupulous  directors  and 
managers.  There  will  be  much  doubt,  confusion,  inconsist- 
ency, and  difficulty  in  working  out  the  questions  which  will 
arise ;  but  there  can  be  no  doubt  of  the  result  if  courts  of  equity 
are  allowed  the  same  freedom  and  power  of  searching  and  cir- 
cumventing all  frauds  that  characterized  the  origin  of  the  courts 
themselves. 

§  G49.  Director  or  other  corporate  officer  interested  in  con- 
struction company  —  Contracts  letiveen  a  directqr  and  Ms  com- 
panij. —  The  law  is  well  settled  that  a  director  cannot,  as  against 
the  dissent  of  a  single  stockholder,  become  a  contractor  with 
the  corporation,  nor  can  he  have  any  personal  and  pecuniary 
interest  in  a  contract  between  a  third  person  and  the  company 
of  which  he  is  a  director.^  "Where  a  construction  company  con- 

1  Bloom  V.  National  United,  etc.  by  means  of  "  dummy "  intermedia- 
Co.,  152  N.  Y.  114  (1897).  ries,  at  an  improvident  price,  one  of 

2  Port  V.  Russell,  36  Ind.  GO  (1871),  the  contractors  cannot  compel  the 
where  an  injunction  was  granted  other  to  divide  the  profits.  Jackson 
against  the  payment  by  a  plank-road  v.  McLean,  36  Fed.  Rep.  213  (1888).  A 
company  of  money  to  a  construction*  president  is  personally  liable  on  loans 
company  of  which  a  director  of  the  by  his  bank  to  an  insolvent  person 
former  was  a  member.  The  court  with  wliom  he  has  other  interests. 
said  that  the  three  leading  American  First  Nat.  Bank  v.  Reed,  36  Mich.  263 
cases  on  the  subject  of  frauds  by  di-  (1877).  A  waiver  of  the  statute  of 
rectors  are  Michoud  v.  Girod,  4  How.  limitations  by  the  board  of  directors 
503  (1846);  Cumberland,  etc.  Co.  v.  is  illegal  where  the  party  benefited 
Sherman,  30  Barb.  553  (1859) ;  and  was  a  director  and  was  present  when 
S.  C,  20  Md.  117  (1863);  and  Hoffman  the  resolution  was  passed.  Lowndes 
Steam  Coal  Co.  v.  Cumberland,  etc.  v.  Garnett,  etc.  Co.,  33  L.  J.  (Ch.)  418 
Co.,  16  Md.  456  (1860);  and  in  Eng-  (1864).-  Although  the  officers  of  a 
land  the  case  of  Aberdeen  R'y  v.  railroad  company  take  in  their  names 
Blakie,  1  Macq.  461  (1854).  Where  lands  wliich  are  donated  to  the  rail- 
two  contractors  cause  a  railroad  cor-  road,  yet  the  railroad  cannot  compel 
poration  to  be  formed,  in  which  one  them  to  give  up  the  lands,  if  the  rail- 
contractor  becomes  a  director,  and  road  company  had  no  power  to  ac- 
the  otlier  directors  are  clerks  of  the  quire  such  lands.  Case  v.  Kelly,  133 
second  contractor,  and  the  construe-  U.  S.  21  (1890). 

tion  contract  is  made  with  these  two, 

1263 


§  649.] 


FKAUDS    OF   DIKECTOES,  PKOMOTEKS,  ETC.       [CH.  XXXIX. 


tracts  with  a  corporation,  the  director  cannot  be  interested  in 
the  construction  company  at  the  time  the  contract  is  made, 
nor  subsequently;  and  it  is  immaterial  that  the  contract  was 
fair,  or  even  to  the  advantage  of  the  corporation.  The  corpo- 
ration, upon  discovering  the  fact  that  the  director  is  interested 
in  the  construction  company,  may  compel  him  to  pay  over 
to  the  corporation  all  profits  that  he  has  derived  from  the 
construction  contract.^     If  the  company  contracting  with  the 


1  See  §  663,  infra.  Quoted  and  ap- 
proved in  Rutland,  etc.  Co.  v.  Bates, 
68  Vt.  579  (1896).  It  is  illegal  for  di- 
rectors to  be  stockholders  in  a  con- 
struction company  to  which  a  con- 
struction contract  is  let.  Oilman, 
etc.  R.  R.  V.  Kelly,  77  IlL  426  (1875). 
See  also  Bayliss  v.  Lafayette,  etc.  R'y. 
8  Biss.  193  (1878);  S.  C,  2  Fed.  Cas. 
1079;  Paine  v.  Lake  Erie,  etc.  R  R., 
31  lud.  283  (1869);  Flint,  etc.  R'y  v. 
Dewey,  14  Mich.  477  (1866),  where  a 
director  had  become  interested  in  the 
construction  work  after  the  contract 
had  been  given.  To  same  effect,  see 
Thomas  v.  Brown ville,  etc.  R.  R.,  109 
U.  S.  522  (1883),  rev'g  2  Fed.  Rep.  877, 
where,  however,  it  is  held  that  bonds 
issued  to  a  construction  company  in 
which  a  director  is  interested  cannot 
be  altogether  repudiated,  but  are 
valid  to  the  extent  of  the  actual 
value  of  work  done.  See  also  Ryan 
V.  Leavenworth,  etc.  R'y,  21  Kan.  365 
(1879),  holding  also  that  a  stockholder 
in  a  corporation  which  is  a  stock- 
holder in  the  defrauded  corporation 
may  sue  to  remedy  the  wrong  to  the 
latter;  European,  etc.  R'y  v.  Poor,  59 
Me.  277  (1871).  See  also  Risley  v.  In- 
dianapolis, etc.  R.  R.,  62  N.  Y.  240, 
248  (1875);  Whitman  v.  Bowden,  27 
S.  C.  53  (1887),  where  a  buildmg  com- 
mittee of  a  joint-stock  company  se- 
cretly contracted  with  themselves. 
Where  the  president,  in  order  to  get 
control  of  the  corporation,  causes  a 
meeting  of  the  board  of  directors  to 
vote  stock  in  payment  for  services 
and  property  whose  value  is  much 


less  than  the  par  value  of  the  stock, 
the  stock  being  voted  to  outside  par- 
ties, but  thereafter  secretly  trans- 
ferred to  the  president,  a  stockholder 
may  compel  him  to  return  the  stock 
to  the  corporation  for  cancellation. 
Such  an  issue  is  also  illegal  by  the 
statutory  law  of  the  state.  Perry  v. 
Tuskaloosa,  etc.  Co.,  93  Ala,  364 
(1891).  In  Lewis  v.  Meier,  14  Fed. 
Rep.  311  (1882),  the  remarkable  de- 
cision is  made  that  the  corporation 
cannot  have  such  a  contract  set 
aside,  since  the  corporation  is  respon- 
sible for  the  frauds  of  its  directors, 
and  hence  both  parties  are  in  pari 
delicto.  Where  one  of  the  common 
council  and  of  the  committee  grant- 
ing a  street-railway  franchise  to  in- 
dividuals who  convey  the  same  to  a 
corporation  becomes  a  stockholder  in 
that  corporation  as  soon  as  it  is 
formed,  the  franchise  is  void  as  hav- 
ing been  fraudulently  obtained. 
Finch  V.  Riverside,  etc.  R'y,  87  CaL 
597  (1891).  Where  three  out  of  a 
board  of  five  public  officers  give  a 
contract  for  the  supply  of  water  to 
the  town,  and  one  of  the  three  is  in- 
terested in  the  contract,  the  contract 
is  illegal.  Santa  Ana  Water  Co.  v. 
San  Buenaventura,  65  Fed.  Rep.  324 
(1895).  Under  the  Kentucky  statute 
a  contract  between  a  city  and  a 
printing  company,  in  which  company 
a  member  of  the  common  council  is 
a  stockholder,  is  illegal.  Nunemacher 
V.  Louisville,  98  Ky.  334  (1895).  Where 
two  competing  street-railway  com- 
panies   apply  for    the  right  to  lay 


1264 


CH.  XXXIX.]       FEAUDS    OF    DIEECTOKS,  PEOMOTEKS,  ETC.  [§  649. 

corporation  secretly  gives  to  the  contracting  agent  of  tlie  lat- 
ter a  subcontract  for  the  construction  work,  the  corporation 
may  attack  the  whole  contract  and  recover  back  the  profits- 
realized  therefrom.^    Nor  is  a  contract  valid  and  enforceable 


tracks,  and  the  board  of  public 
works  grants  the  right  to  a  company 
in  whicli  one  of  the  members  of  the 
board  is  a  stockholder,  the  other  com- 
pany may  have  the  grant  set  aside. 
State  V.  Board  of  Public  Works,  29  AtL 
Rep.  163  (N.  J.,  1894).  Where  one  cor- 
poration buys  a  street  railroad  from 
another,  a  stockholder  in  the  former 
cannot  question  the  validity  of  bonds 
issued  by  the  latter  and  exi^ressly  as- 
sumed by  the  former,  nor  can  he  raise 
the  question  of  fraud  in  constructing 
the  road.  Smitli  v.  Ferries,  etc.  R'y, 
51  Pac.  Rep.  710  (CaL,  1897).  Where 
an  agent  to  sell  is  able  to  sell  for 
more  than  he  accounts  for  to  his 
principal,  the  latter  cannot  recover 
the  difference  unless  the  sale  was 
actually  made.  Edison  v.  Gilliland, 
42  Fed.  Rep.  205  (1890j.  Where  the 
rolling-stock  is  pvirchased  by  the  di- 
rectors and  in  the  name  of  a  trustee 
of  a  car  trust,  he  being  merely  a 
figure-head,  payments  being  made 
from  the  funds  provided  for  the 
building  of  the  road  under  the  con- 
struction contract,  the  court  held 
that  there  was  such  a  mingling  of 
the  funds  and  of  the  interests  of  the 
directors  as  directors  with  their  in- 
terests as  purchasers  of  the  rolling- 
stock  that  the  title  to  the  rolling- 
stock  passed  to  the  company,  and  the 
car  trust  was  invalid.  The  court 
said:  "Any  arrangement  by  which 
the  road  is  equipped  with  rolling- 
stock  belonging  to  another  corpora- 
tion should  be  distinct,  imequivocal, 
and  above  suspicion."  McGourkey 
V.  Toledo,  etc.  R'y,  146  U.  S.  536,  567 
(1892). 

• "  According  to  my  view  of  the 
law  of  this  court,  I  take  it  to  be  clear 
that  any  siureptitious    dealing  be- 


tween one  principal  and  the  agent  of 
the  other  principal  is  a  fraud  on  such 
other  principal  cognizable  in  this 
court."  Panama,  etc.  Tel.  Co.  v.  India 
Rubber,  etc.  Tel.  Works  Co.,  L.  R.  10 
Ch.  App.  515  (1875).  In  this  case  the 
secret  subcontractor  was  the  agent 
and  engineer  of  the  corporation.  He 
received  a  commission  for  his  work, 
and  the  work  was  to  be  accepted  sub- 
ject to  his  approval.  The  case  of 
Currier  v.  New  York,  etc.  R.  R.,  35 
Hun,  355  (1885),  goes  still  further, 
and  holds  that  a  stockholder  may 
compel  the  contractors  to  disgorge 
when  they  obtain  the  contract  with 
the  corporation  through  their  asso- 
ciates or  hirelmgs  being  made  di- 
rectors. An  agreement  of  an  attor- 
ney to  share  his  fees  with  a  director 
who  votes  and  aids  him  in  getting 
the  company's  business  is  void.  The 
com-ts  will  not  compel  the  attorney 
to  cany  out  the  agreement.  All  par- 
ties are  left  as  they  are  found  by  the 
law.  Attaway  v.  Third  Nat.  Bank, 
93  Mo.  485  (1887).  See  also  Lindley, 
Company  Law,  pp.  328,  368.  Where 
the  managing  director  of  the  Union 
Pacific  Railroad  caused  a  contract 
for  its  construction  to  be  given  to  a 
person  who  acted  as  his  agent,  and 
the  director  then  formed  the  Credit 
MobiUer  company,  a  Pennsylvania 
corporation,  and  had  the  construc- 
tion contract  assigned  to  it,  and  all 
the  stockliolders  of  the  railroad  were 
invited  to  become  stockholders  in 
the  latter  company,  and  all  the  facts 
herein  were  more  or  less  known  to 
all  parties,  a  court  of  equity  refused 
to  enjoin  the  Credit  Mobilier  from 
collecting  the  contract  price  of  the 
construction  work.  Union  Pac.  R.  R. 
V.  Credit  MobiHer,  135  Mass.  367  (1883X 


80 


1265 


Ci9.] 


FKAUDS    OF   DIRECTOES,  TROMOTEES,  ETC.       [CH.  XXXIX. 


against  the  corporation  where  the  parties  contracting  with  the 
corporation  have  given  to  the  directors  of  the  corporation  a 
secret  interest  in  the  profits  of  the  contract.^  Where  a  di- 
rector of  a  construction  company  compels  an  iron  concern  to 
agree  to  give  a  bonus  to  the  company  under  threat  that  other- 
wise the  railroad  would  be  run  on  another  route,  the  contract 
cannot  be  enforced.^  The  circumstances  may  be  such,  how- 
ever, as  will  vary  these  rules.  Thus,  where  the  director  was  a 
surety  for  the  contractor,  and  the  latter  failed,  the  former,  who 
finished  the  construction  work  under  compulsion  by  the  com- 
pany, may  set  up  its  acquiescence  as  a  bar  to  its  suit  to  recover 
from  him  the  profits  of  the  transaction.'  "Where  the  president 
by  secret  agreement  is  to  participate  in  a  construction  contract, 
he  cannot  enforce  such  contract,  and  hence  bonds  issued  to  the 
contractor  are  not  affected  by  the  Ohio  statute  prohibiting  the 
sale,  directly  or  indirectly,  of  bonds  to  an  officer  at  less  than 
par.*  Again,  where  a  director  purchased  an  interest  in  the 
construction  contract  after  it  had  been  entered  into,  but  sold 

Although  an  assistant  engineer  of    holder  may  bring  them  to  accoxint. 

'     Sage  V.   Culver,   71   Hun,  42  (1893); 

a£f'd,  147  N.  Y.  241.  Where  the  di- 
rectors are  secretly  interested  in  the 
construction  contract  and  are  to  have 
a  portion  of  the  profits,  bonds  issued 
under  the  contract  are  void  except 
in  bona  fide  hands.  Vanderveer  v. 
Asbury  Park,  etc.  R'y,  82  Fed.  Rep. 
355  (1897).    See  also  S  650,  infra. 

2  Woodstock  Iron  Co.  v.  Richmond, 
etc.  Co.,  129  U.  S.  643  (1889). 

3  Kelley  v.  Newburyport,  etc.  R  R., 
141  Mass.  496  (1886). 

*  Continental  Trust  Co.  v.  Toledo, 
etc.  R  R.,  86  Fed.  Rep.  929  (1898).  Al- 
though the  president  is  secretly  to 
participate  in  the  construction  con- 
tract, yet  if  the  company  does  not 
rescind  the  contract  on  tliis  ground, 
and  the  corrupt  relation  is  termi- 
nated before  the  completion  of  the 
contract,  bonds  issued  mider  the  con- 
tract are  valid.  Continental  Trust 
Co.  V.  Toledo,  etc.  R  R,  86  Fed.  Rep. 
929  (1898). 


the  company  is  secretly  interested 
with  the  contractor  in  the  profits  of 
the  construction,  yet  where  the  for- 
mer had  nothing  to  do  with  the  let- 
ting the  contracts  or  accepting  the 
work,  and  merely  testified  in  an  ar- 
bitration in  the  settlement,  but  did 
not  testify  falsely,  the  parties  need 
not  give  up  their  profits.  Union 
R  R.  V.  Dull,  124  U.  S.  173  (1888).  In 
Fox  V.  Hale,  etc.  Co.,  108  CaL  369  (1895), 
the  president  was  held  liable  for 
fraud  in  reducing  ores  belonging  to 
the  company. 

1  Quoted  and  approved  in  Rutland, 
etc.  Co.  V.  Bates,  68  Vt.  579  (1896); 
Warden  v.  Railroad  Co.,  103  U.  S.  651 
(1880).  A  per^n  who  brings  about  a 
contract  whereby  the  president  ob- 
tains a  secret  profit  in  a  coi-porate 
contract  cannot  recover  for  his  serv- 
ices. Van  Valkenburgh  v.  Thomas- 
ville,  etc.  R.  R,  4  N.  Y.  Supp.  782 
<1889).  Where  the  directors  appro- 
priate the  money  of  the  corporation 
to    themselves,    a    minority    stock- 


1266 


CH.  XXXIX.J      FKATOS   OF   DIEEOTOES,  PEOMOTEES,  ETC.  [§  6i9. 

that  interest  before  any  work  was  done  thereunder,  the  iUe- 
e:ality  of  his  connection  with  the  construction  company  cannot 
affect  the  legaUty  of  his  sale  of  that  interest.^    Where  the  busi- 
ness of  a  lumber  railroad  has  been  exhausted,  it  is  legal  for  the 
maiority  of  the  directors  to  vote  to  extend  the  road,  even 
thouo-h  the  extension  is  to  enable  them  to  market  their  own  tim- 
ber 2°Upon  the  consolidation  of  two  companies,  it  is  legal  for  one 
of  the  companies  to  pay  the  president  and  vice-president  of  the 
other  company  a  sum  of  money  in  consideration  of  their  agi^e- 
ino-  not  to  engage  individually  in  the  same  business  during  the 
period  of  ten  years  within  a  defined  territory.    A  stockholder 
in  the  company  in  which  such  persons  were  officers  cannot 
compel  the  officers  to  account  for  the  money  if  the  consolida- 
tion  itself  is  acquiesced  in  and  the  transaction  was  honest  m 
fact'    But  a  settlement  between  a  corporation  and  its  crea- 
itors,  made  by  a  board  of  directors  of  whom  a  majority  are 
interested  in  the  matter  adversely  to  the  corporation  is  void- 
able  as  against  the  corporation  and  non-assenting  stockholders, 
even  though  the  settlement  may  have  been  for  the  best  inter- 
ests  of  the  corporation  at  the  time.^    In  England  it  is  custom- 
arv  to  insert  in  the  by-laws  a  provision  that  ifa  director  is 
interested  in  a  corporate  contract  without  declaring  his  m  cr- 
est, his  office  is  thereby  vacated.^    A  person  dealing  wit^^  a 
director,  and  taking  from  him  notes  or  securities  ^^^^^    ^^ 
corporation  has  issued,  must  investigate  as  to  the  legality  of  the 
issue  of  such  securities.'  . 

A  contract  between  a  director  aud  the  corporatioii  is  to  d- 
able  and  not  void.  Accordingly,  if  none  ot  the  stockhold- 
ers object  to  such  a  contract  it  is  legal.'    Where  the  directors 

iRarnes  V    Brown,  80  N.  Y.  637  by  the  company  of  bonds  and  stock 

1  Barnes  v.  crowu,  .^  another  company  owned  by  di- 

*'?„     ,       ^    .tn    p    R.   o    Edin-  rectors  of  the  first  company,  such 

.    T Tco  SFe?R™  978(7895).  guaranty,  being  in  consideration  of 

"TI  i.  S-'^Sc^So^S^Fed.'  Eep.  ^'-e,  wiil  not  be  set  asid.    Ba„ 

70   ,lS03),ara,  03    Fed.    Eep   2X8  -  3^- ^.°*  :]r;,^  f  Jj,' j^jelt 

'^^^  r.  Lansingh,  .U  lU.  301  to^a  ---t^ --»^the  ^^^^^^^^ 

1  If  aU  parties  assent  to  a  guaranty    (1890).    Where  neitner 


1267 


§  650.] 


FEAUDS    OF   DIKECTOKS,  PKOMOTEES,  ETC.       [CH.  XXXIX. 


own  all  the  stock  of  a  corporation,  the  usual  rules  preventing- 
a  director  from  contracting  with  the  corporation  do  not  apply.* 
A  stockholder  may  be  interested  in  the  construction  company, 
and  bonds  may  be  issued  to  him,  even  thouf^h  he  owns  a  ma- 
jority of  the  stock  and  thereby  has  control.^ 

§  650.  Secret  gifts  to  directors  from  persons  contracting  with 
tJie  corimration. —  It  is  a  well-establislied  principle  of  law  that 


tion  nor  any  stockholder  objects,  it 
is  legal  for  the  directors  to  have  an 
interest  in  the  profits  of  a  contract 
for  the  construction  of  the  road,  and 
they  may  compel  the  contractor  to 
pay  over  to  them  their  part  of  the 
profits.  The  contract  was  voidable, 
not  void.  Robison  v.  McCracken,  53 
Fed.  Rep.  72G  (1892);  aff'd,  57  Fed. 
Rep.  375,  sub  nom.  McCracken  v.  Rob- 
ison. Bonds  issued  at  tlieir  full  par 
value  to  the  president  in  payment  for 
work  done  by  him  under  a  contract 
between  himself  and  his  company 
are  valid  and  enforceable  where  all 
the  stockholders  assented  to  such 
contract.  Arkansas,  etc.  Co.  v.  Farm- 
ers', etc.  Co.,  13  Colo.  587  (1889). 
Where  all  the  stockholders  unite  in 
the  issue  of  watered  stock  to  the 
president  for  his  own  use,  and  assent 
to  a  contract  between  him  and  the 
company,  the  corporation  itself  can- 
not subsequently  complain.  Arkan- 
sas, etc.  Co.  V.  Farmers',  etc.  Co.,  13 
Colo.  587  (1889).  The  letting  of  a  con- 
struction contract  to  one  who  owns 
ninety-nine  one-hundredths  of  the 
stock,  in  payment  for  such  stock,  is 
legal,  although  he  as  president  issues 
it  to  himself,  where  a  bona  fidehooird 
of  directors  ordered  it  in  the  usual 
discharge  of  their  duties.  The  fact 
that  the  contractor  received  stock 
and  bonds  four  times  in  par  value 
the  value  of  the  work  is  not  fatal 
where  no  fraud  is  alleged  and  the 
actual  cost  of  the  work  is  not  alleged. 
But  where  the  contractor  then  en- 
tered into  a  contract  whereby  the 
mortgage  was  to  be  foreclosed,  and 
lie  was  to  participate  at  the  sale,  all 


for  the  purpose  of  cutting  ofif  other 
creditors,  he  is  liable  to  tiiem.  Cleve- 
land, etc.  Co.  V.  Crawford,  9  R'y  & 
Corp.  L.  J.  171  (Chicago,  1891).  In 
McGourkey  v.  Toledo,  etc.  R'y,  146 
U.  S.  536  (1892),  the  court,  speaking 
of  a  contract  in  which  the  directors 
were  interested,  said :  "  Did  the  vice 
of  these  contracts  lie  in  an  attempted 
concealment  of  the  actual  facts,  as 
is  frequently  the  case  where  prefer- 
ences are  secretly  reserved  in  assign- 
ments, there  would  be  much  force  in 
this  suggestion;  but  if  it  inheres  in 
the  very  nature  of  the  contract, —  if 
there  be  a  thread  of  covin  running 
through  the  Aveb  and  woof  of  the  en- 
tire transaction, —  in  other  words,  if 
the  pm-pose  be  unlawful,  it  is  not 
perceived  that  an  open  avowal  of 
such  purpose  makes  it  the  less  un- 
lawfuL  We  do  not  wish  to  be  under- 
stood as  saying  that  the  transaction 
in  question  necessarily  involved  act- 
ual fraud  on  the  part  of  those  par- 
ticipating in  it. "  A  contract  between 
the  president  and  a  third  party  from 
whom  the  company  buys  lumber,  that 
such  third  party  shall  pay  him  a 
commission,  is  not  illegal  per  se.  The 
president  may  collect  such  commis- 
sions unless  it  is  shown  that  the 
agreement  was  concealed  from  the 
corporation,  or  that  the  president  was 
exercising  some  discretion  or  trust. 
Jameson  v.  Coldwell.  23  Greg.  144 
(1892).    See  also  ch,  XLIV,  infra. 

^  McCracken  v.  Robison,  57  Fed. 
Rep.  375  (1893). 

2  Porter  v.  Pittsburg,  etc  Co..  120 
U.  S.  649,  G70  (1887). 


12G8 


CH.  XXXIX.]       FRAUDS   OF   DIEECTOKS,  PEOMOTEES,  ETC.  [§  C50. 

a  director  commits  a  breach  of  trust  in  accepting  a  secret  gift 
or  secret  pay  from  a  person  tvIio  is  contracting  or  lias  con- 
tracted with  the  corporation,  and  that  the  corporation  may 
compel  the  director  to  turn  over  to  it  aU  the  money  or  prop- 
erty so  received  by  him.     Thus,  an  agreement  of  a  third  per- 
son to  pay  a  certain  sum  tea  dkector  if  a  certain  location  of 
a  railroad  is  adopted,  or  an  agreement  to  allow  him  to  par- 
ticipate in  the  profits  derived  from  such  location,  is  not  an 
enforceable  contract.^     So  also  where  a  director  receives  a  com- 
mission from  one  who  obtains  a  loan  from  the   corporation 
throuo-h  the  director's  influence,  the  latter  may  be  compelled  to 
pay  over  the  commission  to  the  corporation.^    A  treasurer  who 
receives  a  secret  commission  from  a  party  selling  to  a  corpora- 
tion must  turn  the  same  over  to  the  corporation.^ 

A  similar  rule  was  applied  where  a  director  of  an  insolvent 
insurance  company  accepted  a  secret  gift  for  re-insurmg  the 
company's  risks  in  a  certain  other  insurance  company.  And, 
in  o-eneral,  whenever  an  officer  or  agent  of  the  corporation  ac- 
cepts a  secret  gift  or  participates  in  the  profits  of  a  contract 
with  the  corporation,  the  corporation  is  entitled  to  the  gifts  or 

1  Warden  v.  R^iilroad  Co.,  103  U.  S.  agreed  to  purchase  lands,  the  pur- 
651  (18S0);  Bestor  v.  Wathen,  CO  111.  pose  of  all  the  parties  bemg  to  n- 
138  1871  •  Linder  v.  Carpenter,  63  fluence  thereby  the  location  of  the 
m  309  V^"  Fuller  u  Dame,  35  railroad.  A  note  for  $5,000  given  to 
"72  (183  ,holdmg  that  a  prom-  a  general  manager  to  use  his  influence 
is^Ty  note  g  Ven  therefor  is  void,  to  have  the  company  remove  its  mill 
Lwso  Union  Pac.  R.  R  v.  Durant,  is  iUegaL  Luxnu  McEwen,  56  Mmn. 
q  Dill  343  (1874);  S.  C,  24  Fed.  Cas.    278(1894). 

60? tl  itg  that  where  the  president  ^  Farmers',  etc  Bank  v  Downey,  53 
ui's  h!s  po^ver  oppressively  and  by  CaL  466  (1879);  ^^ ^l^^^- 
threats  to  compel  citizens  to  convey  v.  Coleman,  L.  R  6  H.  L.  189  (18. o). 
Ws  to  hL  for  the  company,  the  3  m  this  case  the  commission  was 
co^  wil  decree  a  reconveyance  to  received  by  an  ou  side  Pa^  -  the 
th^L^ntors-  HoUaday  v.  Patterson,  way  of  stock  issued  at  par  which  he 
5  Orn77('l8n).  where  the  agree-  immediately  and  secretly  turned 
Lnt lo  plymoney to  a  director  and  over  to  the  tr-su.^  Rutland,  etc. 
presideiitof  araU^yif  adepotwa.    ^a  .^^^s^^V  -^^^  ^^^^^ 

^Pr  coSoned  upon  the  location  (1858),  where  the  director  received  a 

^;^^'  r    ;  1  "!,i7  See  §  83  mpra.  secret  gift  for  bringing  about  a  con- 

?A6.S?l;^^^^^^^  -^^^^tion.     Con^m,  if  aU  assented 

2?f1  W'  167  (1882),  the  court  re-  Southall  ..  British  etc.  Assoc,  K  K 

fused  to  enforce  specifically  a  con-  6  Ch.  App.  614(18.1). 
tract    whereby    corporate     officers 

1269 


§  650.] 


FKAUDS    OF    DIRECTOES,  PROMOTERS,  ETC.       [cn.  XXXIX. 


profits,  and  a  stockholder  may  bring  tiie  suit  to  compel  the  of- 
ficer or  agent  to  pay  over.* 


1  In  Chandler  v.  Bacon,  30  Fed.  Rep. 
538  (1887),  the  president  and  secretary 
were  held  liable  for  stock  received 
by  them  secretly  from  a  patentee  to 
whom  all  the  capital  stock  had  been 
issued  for  his  patent  Directors  re- 
ceiving stock  as  a  gift  from  one  who 
sells  property  to  the  company  for 
stock  will  be  compelled  to  ^ive  it  up 
to  the  company.  So  also  will  an  out- 
side party  who  aided  in  the  bribe 
and  took  some  stork  himself,  Padu- 
cah,  etc.  Co.  v.  Mulholland,  21  S.  W. 
Rep.  624  (Ky.,  1894).  Wiiero  tlie  party 
selling  property  to  the  company  for 
stock  gives  part  of  the  stock  to  di- 
rectors, a  person  who  afterwards  be- 
comes president  and  takes  a  part  of 
this  stock  as  a  gi  ft  is  liable  for  it  or  its 
value  to  the  company,  oven  though 
he  did  not  know  of  the  fraud  until 
after  he  took  the  stock.  Paducah, 
etc.  Co.  V.  Hays,  24  S.  W.  Rep.  237 
(Ky.,  1893).  In  Yale  Gas  Stove  Co.  r. 
Wilcox,  64  Conn.  101  (1894),  a  pro 
meter  and  director  was  compelled  to 
restore  to  the  corporation  the  cash 
or  stock  which  he  had  received 
secretly  as  a  girt  from  a  party  who 
had  sold  patents  to  the  company. 
The  same  case  holds  that  such  a  con- 
tract cannot  be  enforced  by  the  pro- 
moter against  the  patentee.  Where 
the  incorporating  act  required  all 
the  proceeds  of  sales  of  lots  by  a 
cemetery  company  to  be  used  for 
embellishments,  and  the  directors 
proceed  to  buy  land  for  a  considera- 
tion of  $500,000  in  bonds,  of  which 
bonds  $480,000  were  turned  back  by 
the  vendor  to  the  directors,  who 
divided  them  among  themselves,  the 
bonds  are  void  in  the  hands  of 
directors.  The  directors  in  this  case 
had  erected  over  the  entrance  to  the 
cemetery  a  statue  of  Immortality, 
and  had  done  so  "  with  great  pomp 
and  solemnity."  Campbell  v.  Cypress 

121 


Hills  Cemetery,  41  N.  Y.  84(1860).  In 
Tyrrell  v.  Bank  of  London,  10  II.  I.. 
Ca-s.  26  (18G2),  a  solicitor  was  com- 
pelled to  repay  with  interest  a  secret 
gift;  General  Excli.  Bank  r.  Homer, 
K  R.  9  Eq.  480  (1870),  wliere  the  man- 
ager was  paid  a  largo  sum  in  order 
to  obtain  lii.s  aid  to  a  consolidation 
scheme.  Where  the  company  pays 
to  its  solicitor  a  commission  for 
shares  which  lie  induces  the  presi- 
dent to  take,  ho  must  rejiay  the  com- 
nii-ssion  on  the  winding  upt  lie 
Stapleford  Colliery  Co.,  49  L.  J.  (Ch.) 
2r)3  (IS'^O).  A  manager  who  take.^ 
secret  gifts  from  parties  witli  whom 
he  contrjtcts  for  his  company  mast 
disgorge  the  sama  He  also  may  bo 
dismissed  and  Ids  contract  salary 
stopped.  Boston,  etc.  Co.  f.  Ansell, 
L.  R.  39  Clu  D.  339  (1888).  Where  cor- 
porate agents  organize  local  branch 
companies  on  a  basis  i>rescribed  by 
the  parent  company,  and  the  agents 
demand  and  obtain  from  tlio  local 
company  more  tiian  the  parent  com- 
pany prescribed,  the  excess  belongs 
to  the  parent  company.  Sheridan  r. 
Sheridan,  etc.  Co.,  38  Hun,  396  (18S6). 
Directors  borrowing  money  from  the 
cori)oration  and  giving  rotes  there- 
for cannot  defend  against  the  notes 
on  the  ground  that  a  discount  thereon 
was  to  be  allowed  to  them.  Alford 
V.  IMillcr,  32  Conn.  543  (1865).  See 
Western  U.  Tel.  Co.  v.  Union  Pac. 
R'y,  3  Fed.  Rep.  721  (1880);  and  qiicerc. 
as  to  the  effect  of  the  contract  be- 
tween the  complainant  and  defend- 
ant where  one  of  the  minor  provisions 
was  that  the  railway  officers  were  to 
have  free  telegraph  service  for  them- 
selves and  families.  Although  the 
purchasing  agent  of  a  railroad  com- 
pany buys  coal  from  a  coal  company 
in  which  such  agent  owns  one 
quarter  of  the  stock,  the  dividends 
received  by  such  agent  on  such  stock 
0 


CH.  XXXIX.]       FKAUDS    OF   DIEECTOKS,  PROMOTEES,  ETC. 


[§  650. 


The  contract  being  illegal  it  cannot  be  enforced  by  the  guilty 
ojEcer  or  agent  as  against  the  party  Avith  whom  it  is  made.^ 

The  party  paying  the  bribe  may  also  be  held  liable  in  dam- 
ages to  the  defrauded  party .^  An  agreement  to  tm^n  over  the 
control  of  a  co-operative  insurance  company  is  illegal,  and  money 
received  therefor  cannot  be  recovered  by  the  company.' 

There  is  another  large  class  of  cases,  particularly  in  England, 
wherein  persons  who  desire  to  form  a  company  for  the  purpose 
of  purchasing  and  working  certain  property,  such  as  patents 
and  mines,  cause  their  friends  to  accept  the  position  of  direct- 
ory or  agents,  and  then  give  them  money  or  stock  in  compen- 
sation therefor.  This  is  still  a  common  practice  in  business ; 
but  the  Courts  have  uniformly  held  that  a  stockholder  or  the 
corporation  or  a  receiver  on  the  winding  up  may  compel  such 

may  be  retained  by  him,  although 
the  railroad  company  was  ignorant 
of  tlie  fact  that  he  was  such  stock- 
lioliler,  tliere  being  no  i)roof  of  fraud 
and  tlio  coal  being  sold  cheaper  than 
the  going  rate.  Clark  v.  American 
Coal  Co.,  80  Iowa,  436  (1892).  Nine 
years'  delay  on  the  part  of  a  minority 
stockliolder  in  complaining  of  the  act 
of  the  directoi-s  in  causing  the  corpo- 
ration to  purchase  stock  upon  which 
tliey  received  a  secret  profit  is  fatal 
to  the  suit  CuUen  v.  Coal  Creek, 
etc.  Co.,  42  S.  W.  Rep.  693  (Tenn., 
1897). 

^A  person  suing  for  services  ren- 
dered in  procuring  a  construction 
contract  cannot  collect  if  he  was  not 
instrumental  in  obtaining  the  con- 
tract, or  if  he  gave  a  secret  commis- 
sion to  the  agent  of  the  party  who 
was  to  pay  the  whole  commission, 
unless  the  principal  ratified  the  con- 
tract with  knowledge  of  such  com- 
mission to  the  agent  Smith  r.  Seat- 
tle, etc.  R'y,  72  Hun,  202  (1893).  The 
officers  cannot  recover  secret  com- 
missions on  sales  to  the  corporation 
where  the  corporation  repudiated 
the  purchase  by  reason  of  such  com- 
missions and  then  bought  from  the 
same  [Kirties  at  a  lower  figure.  Jame- 
son V.  Coldwell,  25  Oreg.  199  (1894). 


A  secret  commission  paid  to  the 
agent  of  the  other  party  to  the  con- 
tract invalidates  the  contract.  Find- 
lay  V.  Pertz,  66  Fed.  Rep.  437  (1895). 
"  It  seems  to  be  illogical  to  contend 
that  a  contract  can  be  avoided  as  be- 
tween the  officer  and  the  corporation, 
and  yet  be  held  to  be  valid  in  favor 
of  the  officer  against  the  party  with 
whom  he  has  contracted."  Gillig  v. 
Barrett,  N.  Y.  L.  J.,  Jan.  6,  1891.  A 
general  manager  of  a  road  cannot 
enforce  a  contract  by  which  he  was 
to  receive  stock  in  another  road  for 
aiding  the  latter  in  procuring  mu- 
nicipal bonds,  his  aid  being  due  to 
his  influence  as  general  manager. 
Sargent  v.  Kansas  Mid.  R.  R.,  48  Kan. 
072  (1892). 

2  The  president  and  managing 
agent  renders  his  corporation  liable 
for  a  bonvis  of  stock  in  anotlier  cor- 
poration which  he  gives  secretly  and 
corruptly  to  the  agent  of  the  latter 
corporation  in  order  to  get  a  contract 
for  the  former  corporation.  Grand 
Rapids,  etc.  Co.  v.  Cincinnati,  etc. 
Co.,  45  Fed.  Rep.  071  (1891),  holding 
the  former  corporation  liable  for  the 
par  value  of  the  stock,  inasmuch  as 
it  was  the  original  issiie  of  that  stock. 

SMcClure  v.  Law,  20  N.  Y.  App. 
Div.  459  (1897). 


1271 


§  050.] 


FKAUDS    OF    DIRECTOKS,  PKOMOTEES,  ETC.       [CU.  XXXIX. 


directors  or  agents  to  pay  over  to  the  corporation  the  money 
received,  or,  if  stock  was  received,  then  to  pay  to  it  the  highest 
price  reached  by  such  stock  between  the  time  when  tlie  gift 
was  made  and  the  time  when  it  was  discovered.* 


iWliere  a  director  is  required  to 
hold  a  certain  amount  of  stock,  and 
he  takes  that  stock  with  a  secret 
agreement  by  wliich  the  promoter  is 
to  purchase  the  stock  from  the  di- 
rector at  a  certain  price  wlienever 
the  director  so  desires,  and  after  the 
company  becomes  insolvent  the  di- 
rector sells  the  stock  to  the  promoter 
at  such  price  and  receives  the  money, 
the  director  may  be  compelled  to 
turn  in  the  money  to  the  corporation. 
Re  North  Australian,  etc.  Co.,  [1892] 
1  Ch.  322.    A  gift  by  a  promoter  to  a 
director  of  a  company  whilst  there 
are  any  questions  open  between  the 
company  and  the  promoter  must  be 
accounted  for  by  the  director  to  the 
company;  and  the  company  is  en- 
titled to  the  highest  value  of  the  gift 
at  any  time  between  the  wrongful 
act  and  the  time  wlieu  it  came  to 
their  knowledge.    Eden  v.  Ridsdales, 
etc.  Co.,  L.  R.  23  Q.  B.  D.  369  (1889); 
Pearson's  Case,  L.  R.  5  Ch.  D.  336, 
aiTg  L.  R.  4  Ch.  D.  222  (1876),  the 
court  saying:    "Whether   the  pur- 
chase was  or  was  not  an  advanta- 
geous one  for  the  company  ...  is  a 
question  wholly  immaterial  for  us  to 
consider;  he  cannot,  in  the  fiduciary 
position  he  occupied,  retain  for  him- 
self any  benefit  (jr  advantage  that  he 
obtained  under  such  circumstances; " 
Leeke's  Case,  L.  R  6  Cli.  App.  469 
(1871);  De  Ruvigne's  Case,  L.  R  5  Ch. 
D.  306  (1877);  Ormerod's  Case,  25  W. 
R  765  (1877),  where  the  director  was 
elected  and  the  gift  received  even 
after  the  contract  was  made.    The 
court  said:  "If  it  is  lawful  that  a 
man  may  be  bought  as  a  director,  it 
must  be  decided  by  some  one  else.    I 
never  will  decide  it ;  "  Weston's  Case, 
L.  R  10  CIl  D.  579  (1879),  where  the 

12' 


director  was  held  liable  for  the  full 
price  of  the  stock  less  wliat  he  paid 
therefor;  Re  E.skern  Slate,  etc.  Co., 
37  L.  T.  (N.  S.)  222  (1877),  whore  the 
articles  of  association  allowed  the 
gift,  but  were  held  to  be  fraudulent; 
McKay's  Case,  L.  R  2  Cli,  D.  1  (1875), 
where  the  secretary  of  the  corixtra- 
tion  was  compelled  to  pay  over; 
Hay's  Case,  L.  R  10  Ch.  App.  593 
(1875),  where  the  court  said:  "No 
agent  can  in  the  course  of  his  agency 
derive  any  benefit  whatovQr  without 
the  sanction  or  knowledge  of  his 
principal  ;"i2eEnglefield  Colliery  Co., 
L.  R  8  Ch.  D.  388  (1878);  Emma  Sil- 
ver Min.  Co.  V.  Lewis,  L.  R  4  C.  R  D. 
896  (1879),  where  the  mining  experts 
of  the  corporation  were  compelled  to 
disgorge;  Re  Carriage,  etc.  Assoc, 
L.  R  27  Ch.  D.  322  (1884);  Re  Drum, 
etc.  Co.,  53  L.  T.  250  (1885),  where  the 
party  gave  money  to  the  directors. 
See  also  ^Madrid  Bank  v.  Pelly,  L.  R. 
7  Eq.  442  (1869),  where  the  directors 
were  held  liable  for  the  money  re- 
ceived by  them,  but  for  no  more; 
Nant-y-GIo,  etc  Co.  v.  Grave,  L.  R. 

12  Ch.  D.  738  (1878),  holding  that  the 
corporation  may  sue  herein  the  same 
as  a  liquidator;  Mitcalfe's  Case,  L.  R 

13  Ch.  D.  169  (1879),  where  a  director 
was  held  liable  for  the  market  value 
of  stock  given  to  him  by  the  person 
to  whom  the  stock  was  issued  as  full 
paid  in  consideration  of  property. 
There  was  no  evidence  that  the  di- 
rector acted  unfairly  or  acted  as  a 
promoter.  He  was  held  liable,  al- 
though he  had  sold  part  of  the  stock. 
The  secretary  need  not  give  up  a 
profit  which  he  made  as  one  of  the 
promoters.  La  Salle,  etc  Gardens, 
Ltd.,  78  L.  T.  Rep.  368  (1898),  rev'g  77 
L.  T.  Rep.  631.     Where  the  directors 


CH.  XXXIX.]       FRAUDS    OF    DIKECTOES,  PEOMOTEES,  ETC.  [§  G50. 

A  vendor  of  property  to  a  corporation  may,  however,  pay 
the  officers  of  the  corporation  for  services  in  promoting  and 

voten^oneytoapromoter  andhein-    received  fronj  ^^^  ^^^^^^^Zl 
vests  it  in  the  company's  debentures    ent  of  £1,000  to  buy  one 

::fdi...es  the.  long  *.•?«_  '^tt  'j^^jz^'^^Trjk^^^rrz 


ors,  the  latter  must  refund  the  money 
so  voted,  and  cannot  offset  a  debt 
due  to  them  from  the  company.    Be 
Anglo-French  Coop.   Soc,  L.  R.  21 
Ch.  D.  492  (1882).    Money  paid  to  di- 
rectors by  the  person  seUing  to  the 
company,  in  order  to  induce  them  to 
become  directors,  cannot  be  retained. 
Be  Brighton  Brewery  Co.,  37  K  J. 
(Ch.)  278  (1868).     Where  the  com- 
pany's agent,  in  negotiating  a  con- 
tract, procures  a  larger  sum  for  the 
company  than  it  demands,  on  a  se- 
cret agreement  that  it  should  pay 
him  the  increase,  he  cannot  collect 
it.     Be  Owens,  Ir.  Kep.  7  Eq.  235, 
434  (1873).    Where   the   owners   of 
property,  the  promoters,  the  direct- 
ors, and  the  soUcitor  sold  to  the  com- 
pany property  the  title  to  wliich  was 
bad,  and  divided  the  proceeds,  each 
was  made  to  repay  the  amount  re- 
ceived by  him.    Phosphate  Sewage 
Co.  V.  Hartmont,  L.  R  5  Ch.  D.  394 
(1877).  And  see  many  English  cases  m 
Healev.  Company  Law  andPr.,pp.  543, 
544      Directors  will  be   compelled, 
upon  the  dissolution  of  the  company. 


the  qualification  of  a  director,  the 
present  being  expressly  stated  to  be 
a  commission  for  certain  contracts 
which  he  ^s  about  to  enter  into  at 
the  request  of  the  promoters  in  rela- 
tion to  the  proposed  company.    The 
director  afterwards  took  part  in  mak- 
ing an  agreement  for  the  purchase 
by  the  company  of  a  quarry  of  which 
the  promoters  were  part  owners,  the 
carrying  out  of  which  was  stated  in 
the  memorandum  and  articles  of  as- 
sociation of  the  company  to  be  the 
first  object  of  the  company.     The 
company  was  subsequently  wound 
up.    Held,  that  the  director  was  lia- 
ble to  account  to  the  liquidator  for 
the  value  of  the  shares  at  the  value 
at  which  they  stood  at  the  date  he 
received  the  present,  together  with 
interest  at  five  per  cent  from  the 
date  of  such  gift    Be  Carriage,  etc. 
Assoc,  L.  R.  27  Ch.  D.  322  (1884). 
Here  the  articles  of  association  of  a 
company  provided  that  each  of  the 
first  directors  (of  whom  R.  was  one) 
must  take  or  hold  at  .least  twenty  £5 
shares  within  three  months  of  his 


upon  the  dissolution  ot  tie  company     ^rrjntment,  wliich  shares  might  be 
^iS  t:^  ^^  -  ^^    r::W:^ny  issued  as  fully-paid 


by  the  promoters  in  order  to  induce 
them  to  act  as  directors,  even  though 
the  arrangement  was  known  to  all 
stockholders,  it  appearing  that  stock 
had  been  offered  to  the  public  with- 
out mention  of  these  facts,  although 
tlie  public  did  not  subscribe  for  any 
of  the  stock.  So  far,  however,  as 
the  contract  between  the  promoter 
and  the  company  disclosed  the  facts, 
the  directors  were  protected  Be 
Postage  Stamp,  etc.  Co..  [1892]  3  Ch. 

'^Be  Drum,  etc.,  53  L.  T.  Rep.  250 
(1S85).    Here  a  director  of  a  company- 


shares,  or  otherwise.    It  was  also  pro- 
vided by  a  contemporaneous  agree- 
ment for  the  paj-m^nt  to  the  promot- 
ers of  the  company,  for  preliminary 
expenses  and  promotion,  of  £3,000  in 
cash  and  three  hundred  fully-paid 
shares.  Towards  the  end  of  the  three 
months  the  five  original  directors,  in 
order  to  qualify  for  their  office,  ac- 
cepted from  the  promoters,  at  a  board 
meeting,  transfers  without   consid- 
eration of  the  requisite  number  of 
fully-paid  shares,  part  of  the  promo- 
tion shares.    Tlie  company  was  after- 
wards ordered  to  be  wound  up.    It 


1273 


G50.] 


FKAUDS    OF   DIELCTOESj  PEOMOTEES,  ETC.       [CH.  XXXII. 


organizing  the  company  and  procuring  the  purchase  of  his 
lands,  there  being  no  fraud  or  concealment  in  the  matter.* 

In  a  somewhat  similar  class  of  cases  the  person  selling  to  the 
corporation  acts  himself  as  a  director  and  a  promoter  of  the 
enterprise,  and  by  the  aid  of  other  friendly  directors  controls 
the  corporation;  or  the  guilty  party  may  be  merely  a  promoter 
and  also  a  director.  Even  though  the  articles  of  incorporation 
provide  that  the  directors  shall  not  be  liable  for  their  profits 
as  promoters,  yet  where  one  of  the  directors  receives  a  gift 
from  another  of  the  promoters  he  is  liable  therefor,  and  is  lia 
ble  also  for  a  similar  gift  to  another  promoter.'  And  evet 
though  a  party  purchases  property  and  makes  a  part  payment 
thereon,  yet,  where  he  then  proceeds  to  form  a  corporation  urn; 
controls  the  corporation,  and  acts  as  a  director  in  taking  over 
the  property  at  a  largely  increased  price,  the  corporation  may 
compel  him  to  turn  over  to  it  all  the  profit  he  has  made  by  the 
transaction.'     In  any  case,  unless  all  persons  interested  arc 


was  not  disputed  that  each  director 
was  liable  to  the  extent  of  the  par 
value  of  his  own  sliares  if  unpaid  for; 
but,  all  of  the  directors  except  R. 
being  unable  to  pay,  it  was  sought 
to  make  R.  liable  for  the  whole 
amount  —  £500.  R.  contended  that 
he  was  not  liable  for  anything,  hav- 
ing, since  the  date  of  the  transfer, 
advanced  £520  to  the  company,  and 
having,  since  acknowledging  his  lia- 
bility, paid  £100  more  to  the  company, 
intending  it  to  be  as  and  for  satis- 
faction of  the  amount  due  upon  his 
twenty  shares.  He  also  virged  that 
in  any  case  there  was  no  joint  and 
several  liability  *under  the  circvun- 
stances.  Held,  that  there  was  no 
right  of  set-oflf  in  his  favor;  that  the 
£100,  however  it  had  been  intended, 
had  been  accepted  as  a  further  ad- 
vance, and  not  in  payment  for  his 
shai-es;  and  that  he  mvist  be  declared 
liable  for  the  whole  £500.  As  to  the 
American  cases  on  this  subject,  see 
the  notes  supra. 

1  Dexter  v.  McClellan,  23  S.  Rep. 
461  (Ala.,  1897).  Where  one  company 
Duys  out  another,  the  former  may 


1274 


agree  to  pay  a  certain  sum  to  tlie 
directors  and  secretaiy  of  the  lattei 
"as  compensation  for  loss  of  office." 
This  agreement  is  legal  if  the  stock- 
holders of  the  selling  company  ratify 
the  same.  The  notice  of  a  meeting 
of  the  stockholdei-s,  however,  to  rat- 
ify such  an  agreement,  must  si)ccify 
such  payment,  in  addition  to  stating 
that  tlie  object  of  the  meeting  is  to 
ratify  the  agreement  generally.  A 
circular  subsequently  sent  to  the 
stockholders  referring  to  the  pay- 
ment to  the  directors  and  secretary 
is  not  sufficient,  even  though  it  was 
sent  before  the  meeting  was  heM. 
Kaye  v.  Croydon,  eta  Co.,  78  L.  T. 
Rep.  237  (1898). 

2  Ee  "Westmoreland,  etc.  Co.,  [189-3] 
2  Ch.  612. 

3  The  only  way  he  could  have 
avoided  this  result  would  have  been 
by  making  a  full  disclosure  of  all  tlie 
facts,  and  by  furnishing  the  com- 
pany with  a  board  of  directors  ca- 
pable of  forming  a  competent  and 
impartial  judgment  as  to  the  wisdom 
of  the  purchase  and  the  price  to  be 
paid.    The  company  may  enjoin  him 


OH.  XXXIX.]       FEATTDS    OF   DIEECTOES,  PKOMOTEES,  ETC. 


[§  650. 


fully  informed  of  the  facts  and  assent  thereto,  the  promoter, 
director,  or  vendor  may  be  brought  to  account.^  Thus,  a  person 
who  agrees  with  the  owner  of  patent-rights  to  form  a  corpo- 


f  rom  voting  or  selling  stock.  Plaque- 
mines, etc.  Co.  V.  Buck,  52  N.  J.  Eq. 
219  (1893). 

1  As  regards  the  duties  and  liabil- 
ities of  a  promoter,  pure  and  simple, 
see  the  next  section.  That  a  director 
is  disqualified  to  buy  for  the  corpo- 
ration from  himself,  see  §  652,  infra. 
The  cases  now  under  consideration 
involve  a  combination  of  frauds. 
Thus,  where  the  owner  of  property 
agrees  with  two  persons  that  if  they 
form  a  company  to  purchase  the 
property  he  will  secretly  pay  them 
a  certain  amount,  and  they  form  a 
company  and  act  as  a  minority  of 
the  directors,  and  it  purchases  the 
property  even  at  a  fair  valuation,  tlie 
court,  upon  corporate  insolvency, 
will  refuse  to  allow  the  two  persons 
their  salaries  and  will  declare  their 
agreement  to  be  a  fraud.  Re  Here- 
ford, etc.  Ck).,  L.  R.  2  Ch.  D.  621  (1876). 
Where  the  directors,  who  were  also 
promoters,  had  purchased  property 
before  the  company  was  formed,  and 
then  sold  to  the  company  at  an  ad- 
vance, and  induced  the  public  to  sub- 
scribe by  representations  that  the 
price  paid  was  the  original  price  paid 
by  them  to  the  original  vendors,  they 
miist  pay  the  secret  profit  to  the  com- 
pany. Simons  v.  Vulcan,  etc.  Co.,  61 
Pa.  St.  202  (1869).  Where  the  directors 
had  purchased  property  before  the 
company  was  formed,  and  then  as  di- 
rectors bought  it  for  the  company  at 
an  advance,  the  title  passing  direct 
from  the  first  vendor  to  the  company, 
and  the  directors'  interest  being  con- 
cealed, the  court  held  the  directors 
liable  to  the  company  for  their  profit, 
the  suit  being  brought  by  stockhold- 
ers. Hichens  v.  Congreve,  1  Russ.  & 
IkL  150  (1829).  Under  similar  facts 
and  to  same  effect,  Benson  v.  Hea- 

12' 


thorn,  1  Y.  &  C.  326  (1842).  A  stock- 
holder cannot  rescind  a  subscription 
for  fraud  where  a  person  purchased 
a  patent  outright  on  condition  that 
he  could  resell  it,  and  then  proceeded 
to  promote  and  organize  a  company 
and  to  sell  to  it  the  patent  at  an  ad- 
vanced price,  even  though  he  was  a 
director,  it  being  clearly  known  to 
all  that  he  owned  and  sold  the  pat- 
ent as  his  own.  Cover's  Case,  L.  R 
1  Ch.  D.  182  (1875).  Where,  however, 
parties  purchase  property  and  agree 
absolutely  to  pay  therefor  themselves, 
and  not  by  the  issue  of  the  stock  of 
a  corporation  to  be  formed,  or  by  the 
money  of  that  corporation,  the  fact 
that  they  intend  to  and  do  then  form 
a  company  to  buy  the  property  from 
themselves  at  an  advance  does  not 
render  them  liable  to  the  company 
for  the  profit.  If  they  had  formed 
the  company  partially  or  completely 
before  they  purchased,  the  case  might 
be  different.  The  court  referred  to 
the  word  "  promoters,"  but  only  to 
refuse  to  use  it  on  account  of  its  in- 
definiteness.  The  party  purchasing 
the  mine  and  afterwards  selling  to 
the  company  was  a  director  in  the 
latter  at  the  time  of  purchase.  The 
right  to  rescind,  however,  was  barred 
by  the  fact  that  the  company  had 
lost  the  property,  a  leasehold,  by  non- 
payment of  rent.  Ladywell  IMin.  Co. 
V.  Brookes,  L.  R.  35  Ch.  D.  400  (1887). 
For  a  valuable  explanation  of  this 
case,  see  2  R'y  &  Corp.  L.  J.  481.  It 
is  to-be  borne  in  mind  in  all  transac- 
tions of  this  kind  that  the  objections 
mentioned  above  may  be  obviated  by 
the  unanimous  consent  of  the  stock- 
holders or  by  their  acquiescence  or 
participation  with  knowledge,  all  of 
which  is  considered  in  g  662  and  ch 
XLIV,  infra. 


051.] 


FKAUDS   OF   DIRECTORS,  TROMOTERS,  ETC.       [cn.  XXXIX. 


ration  to  buy  them  is  a  promoter,  and  is  liable  to  give  up  a 
secret  gift  given  to  him  by  the  patentee,  especially  where  such 
promoter  was  a  director  when  the  purchase  was  made  by  the 
company.^ 

§  651.  Promoters'  frauds  on  the  corporation. —  A  promoter 
is  a  person  who  brings  about  the  incorporation  and  organization 
of  a  corporation.  lie  brings  togetlicr  the  persons  who  become 
interested  in  the  enterprise,  aids  in  procuring  subscriptions,  and 
sets  in  motion  the  machinery  which  leads  to  the  formation  of 
the  corporation  itself.^    A  person  who  procures  subscriptions 


•  Yale  Uas  Store  Co.  i.  Wilrox,  29 
Ail  Rep.  ;^^3  (Conn.,  1894). 

'"Quoted  cind  approveil  in  Burbank 
V.  Dennis,  101  Cal.  90  (1894).  Great 
difficulty  is  experienced  in  determin- 
ing who  is  and  who  is  not  a  promoter. 
An  old  English  statute  defined  a  pro- 
moter as  "every  person  acting,  by 
whatever  name,  in  the  forming  and 
establishing  of  a  company  at  any 
period  prior  to  the  company  "  being 
fully  incorporated  (7  &  8  Vict,  c.  110, 
S  H).  Other  definitions  are,  "  one  who 
XiJidertakes  to  form  a  company  with 
reference  to  a  given  project  and  to 
set  it  going,  and  who  takes  the  neces- 
sary steps  to  accomplish  that  pur- 
pose."    T\vycross  v.  Grant,  L.  R.  2 

C.  P.  D.  469,  541  (1877);  Bagnall  v. 
Carlton,  L.  R.  6  Ch.  D.  371,  381,  382, 
407  (1877).  See  also  New  Sombrero 
Co.  V.  Erlanger,  L.  R  5  Ch.  D.  73. 118 
(1877);  Erlanger  v.  New  Sombrero 
Co.,  L.  R.  8  App.  Cas.  1218, 1268  (1878); 
Whaley  Bridge,  etc.  Co.  v.  Gseen, 
L.  R.  5  Q.  B.  D.  Ill  (1879);  Emma 
Silver  Min.  Co.  v.  Lewis,  I^  R.  4  C.  P. 

D.  396,  407  (1879),  -There  Lindley.  J., 
said :  "  The  Lerm  '  promoter '  involves 
the  idea  of  exertion  for  the  purpose 
of  getting  up  and  starting  a  company 
(of  what  is  called  '  floating '  it),  and 
also  the  idea  of  some  duty  towards 
the  company  imposed  by  or  arising 
from  the  position  which  the  so-called 
promoter  assumes  towards  it."  See 
also  Re  Great  Wheal  Polgooth,  32 

12^ 


W.  R  107  (1883),  holding  that  t^ie  so- 
lifitor  was  not  a  promoter;  Re  Great 
Western,  etc.  Co.,  L.  R  31  Ch.  D. 
490  (1880),  practically  overruling  £> 
parte  Valpy,  L.  R  7  Ch.  App.  289 
(1872).  But  see  Tyrrell  v.  Bank  of 
Loudon,  10  H.  L.  Cas.  20  (18R2).  An 
agent  of  a  person  selling  property  to 
the  corporation  may  be  also  a  pro- 
moter of  the  latter  and  liable  as  such. 
Lydney,  etc.  Co.  v.  Bird,  L.  R  33 
Cii.  D.  8o  (1880),  reversing  L.  R  31 
Ch.  D.  328.  For  other  definitions,  sef 
Ladywell  Min.  Co.  v.  Brookes,  L.  R 
85  Ch.  D.  400  (1887);  Healey,  Com- 
pany Law  and  Pr.  (3d  ed.),  p.  35,  and 
articles  in  1  R'y  &  Corp.  L.  J.  27,  2 
R'y  &  Corp.  L.  J.  1.  In  Emma  Silver 
:Min.  Co.  V.  Grant,  L.  R  11  Ch.  D.  918 
(1879),  a  promoter  is  defined  as  "a 
trustee,  agent,  or  pci-son  in  a  fiduciary 
position  as  regards  the  company;  one 
who  has  undertaken  a  duty  toward.? 
the  company  of  such  a  character  as 
incapacitates  him  from  making  a 
secret  profit  at  the  expense  of  the 
company."  No  doubt  a  very  little  will 
make  people  promoters  of  a  company, 
if  it  can  be  seen  that  they  were  really 
doing  something  in  the  way  of  specu- 
lation for  their  own  interest  and  not 
acting  merely  as  agents  for  others. 
Glasier  v.  Rolls,  L.  R  42  Ch.  D.  436 
(1889).  A  banker  is  not  a  promoter. 
Re  Imperial  Land  Co.,  L.  R.  10  Eq. 
Cas.  298  (1870^  See  also  an  article  in 
10  R'y  &  Corp.  L.  J.  23a 
■6 


en.  XXXIX.]       FKATOS    OF   DIKECTOKS,  PKOMOTEKS,  ETC.  [§  651. 

and  aids  in  organizing  the  company  and  frames  the  papers  and 
mana-es  the  procuring  of  options  and  the  vestmg  of  title  is  a 
promoter,  even  though  he  is  also  a  subscriber.^ 

It  is  le-al  for  persons  to  contract  to  form-  a  corporation  and 
to  provide  for  its  future  management  and  control.^  But  it  is 
not  leo-al  for  promoters  to  cause  the  board  of  directors  to  vote 
stock  to  such  promoters  for  services  dready  performed;  nor  is 
it  leo-al  for  him  to  make  his  profit  indirectly,  by  contracts  be- 
tween the  corporation  and  others.  A  promoter  is  considered 
in  law  as  occupying  a  fiduciary  relation  towards  the  corpora 
tion  He  is  an  agent  of  the  corporation,  and  is  subject  to  the 
disabilities  of  such.  There  are  two  classes  of  cases  m  which  he 
may  be  guilty  of  a  breach  of  his  duties  to  the  company 

First  where  he  sells  property  to  the  corporation.  If  he  pur- 
chased the  property  before  he  began  promoting  the  company, 
he  may  sell  to  the  company  at  an  advance  without  disclosing 
his  profit/  But  where  the  promoter  obtains  merely  an  option 
on  property  and  then  causes  a  company  to  be  formed  to  which 
he  sells  it  at  a  profit,  without  disclosing  the  amount  of  that 
profit,  he  is  liable  in  damages  to  subscribers  for  the  stock,     bo 

,w     1^,^    PtP    Co    V   Loudens-  purchases  land  and  partly  pays  there- 

^"^-^'^       4-5%  J    1896)  for  may  afterwards  cause  a  corpora- 

^     'T.^-t    Barnes    10^^  tion  to'be  organized  to  purchase  the 

2Kmg  V.  Barnes,   109   r^.  ^^^^  ^^  ^  ^.^^^^^  ^^^^^  ^^^  -^  ^^t 

^^f^^here   a  company  issues  fvUly  j^able  to  ^^^^^^^^^^ 

paid-up  stock  to  partjes^  f  ther^    .vas            ^^^^  ^^^^^^^  ^^^ 

for  services  rendered  to  the  con_^a^  eommission  to  parties  to  induce 

in  its  formation,  and  in  establibUing  a                subscribe  for  stock.    The 

its  business,  such  Pe-ons  -e  hab  e  h^m  ^^^^^^^^^^^^^^      ^.,,,t.r  in  the 

on  such  stock  as  unpaid  stock,  if  ^^^\^^^^:^             ^^,    necessarily 

the  company  becomes  insolvent.    2^^^  Sg:  the    rule.    Milwaukee,   etc. 

is;^sra?d,^^.?-iS^s^  C.^^^^^^^ 

also  ^  46.  m^ra.  ^^^  ^^^^^^^^^  ^_  H^^^h^  I03  N.  Y. 

^e  sale  and  t,,en  o.gan.es  a  c^^-  oUow.  ^^^^^^^^^  ,,,o„„. ,., 
pany  to  take  it  ^;f;'  ^  .,  ^  by  which  they  had  the  privilege  of 
discloses  the  price  J^-^^^^^^^^^^^^^  pLchasing  certain  mines  at  any  time 
!r\"l''drre^v^lybou^^^^^^  lithinfoiimonths for $135,000.  This 

that  he  had  P^^^;""^^^'^"  ^  J^k-  a^eement  is  set  forth  in  the  case, 
of  the  --tS^f  J;°;^^^i,'e  :  profit  They  then  issued  a  prospectus  to  the 
rupt  company  and  had  made  apo  y  subscriptions  to  a 

therebv.     Re  Olympia,  Limited,  78    P^^^^^^'  ""^''^^^^^^^ 
L  T  Rep  6-^9  (1898).    A  person  who    cori)oration  thereatter  to  oe 


§  C51.] 


FEAUDS    OF   DIKEOTOES,  PEOMOTEES,  ETC.       [CH.  XXXIX. 


also  if  he  purchased  after  he  began  promoting  and  then  sold  to 
the  company,  the  sale  is  valid  only  wlicn  he  informs  the  direct- 
ors that  the  property  belongs  to  him,  and  when,  also,  the  di- 
rectors are  competent  and  impartial  judges  as  to  whether  the 


to  purchase  the  mines  for  all  its  capi- 
tal stock,  which  was  to  be  $1,500,000. 
The  stock  was  ofTered  to  the  public 
at  forty  cents  on  the  dollar.    Sub- 
scriptions for  $010,000  par  value  were 
received,  netting  $244,000.    The  cor- 
poration was  tlien  formed,  the  pro- 
moters making  themselves  dii'ectors, 
and  the  above  plan  caiTied  out.    A 
subscriber  then  sued  the  promoters 
for  damages.    The  court  held  that 
the  plaintiff  could  recover.    The  de- 
fendants were  not  mere  vendors  of 
the  stock.    Tlie  fatal  defect  seems  to 
have  been  in  the  fact  that  the  pro- 
moters did  not  buy  the  property  be- 
fore offering  the  stock.    On  the  con- 
trary they  merely  obtained  options, 
and  would  have  abandoned  them  if 
the  stock  had  not  been  taken.   ]Mo re- 
over  they  placed  the  stock  before  the 
corporation  was  organized.    All  this 
made  them  fiduciary  agents  of  the 
subscribers.    If  they  had   been  in- 
trinsically vendors  of  tlie  stock,  it 
was  admitted  that  they  would  not 
have  been  liable.    In  the    case   of 
Franey  v.  Warner,  71  N.  W.  Rep.  81 
(Wis.,  1897),  wliere  promoters  pur- 
chased land  for  $22,000  and  sold  it  to 
the  corporation  for  $45,000  without 
divulging  the  profit,  the  court  held 
that  a  stockholder  could  not  rescind 
his  subscription,  inasmuch  as  the  cor- 
poration was  innocent,  but  that  he 
might  have  a  judgment  against  the 
promoters  for  his  pro  rata  share  of 
the  profit.    A  person  holding  an  op- 
tion right  to  purchase  land  for  $G,000 
may  cause  a  corporation  to  be  organ- 
ized to  purchase  such  land  for  $8,500, 
thereby  giving  a  profit  to  the  pro- 
moter, for  which  the  company  may 
issue  to  him  its  stock,  it  being  known 
in  advance  that  such  promoter  was 

1271 


the  owner  of  such  option  and  would 
sell  the  same  at  that  prica   Richard- 
son V.  Graham, 80  S.  E.  Rep.  92 (W.  Va,, 
1898).    In  South  Joplin  Land  Co.  v. 
Case,  104  Mo.  572  (1891),  it  was  held 
that  a  person  who  secures  an  option 
on  a  property  with  a  view  to  organ- 
izing a  cori -oration  and  selling  tlie 
property  to   it,  and  wlio,  together 
with  another  person   employed  by 
him,  forms  the  company  and  places 
the  stock  on  representations  that  the 
property  cost  $2,000  more   than   it 
actually  did,  and  also  that  certain 
notes  would  be  included  in  the  sale, 
but  after  the  company  is  organizeil 
informs  the   stockliohlers  that  the 
notes  were  not  included,  thougli  they 
were  received  by  himself,  is  account- 
able to  the  corporation  for  the  profits 
thus  realized  by  himself,  as  he  occu- 
pied a  position  of  trust  towards  the 
subscribers,  and    could    not    make 
secret  profits  out  of  the  transaction. 
The    court    said  that  persons  who 
"  project  and  form  a  corporation,  by 
soliciting  and  procuring   others  to 
subscribe  for  and  take  shares  of  stock, 
for  the  purpose  of  selling  or  turning 
over  to  the  company  property  which 
they  own,  or  have  a  right  to  acquire 
by  executory  contract,  do  occupy  a 
double  position.    On  the  one  hand 
they  represent  their  own  interest  in 
respect  of  the  disposition  of  the  prop- 
erty; on   the  other,  they  represent 
the  proposed  corporation."  The  court 
also   said  that  a  vendor  is  a  pro- 
moter, and  is  bound  to  protect  the 
interests  of  those  who  ultimately  con- 
stitute the  company  "  if  he  assumes 
to  act  for  them,  or  if  he  induces  them 
to  trust  him,  or  to  trust  persons  who 
are  under  his  control  and  who  are 
practically  himself  in  disguise.    He 


CH.  XXXIX.]       FEAI7DS    OF   DIEECTOES,  PEOMOTEES,  ETC.  [§  C51. 

purchase  ought  or  ought  not  to  he  made.^  Where  the  promot- 
ers misrepresent  the  price  paid  by  them  for  property  sold  by 
them  to  the  company,  they  are  liable  to  the  company  for  their 

company  into  existence  in  order  that  Kent  v.  Freehold,  etc.  Co.,  L.  E.  4  l.q. 

itXbuywhathehastosell;  bnt  588(1867).    Where  a  person  who  is 

he  does  not  assume  such  duty  by  the  owner  of  land  buys  option    on 

negotiating  with  persons  who  have  adjoining    ^^^^^.^^^^^^^^ 

themselves  assumed  that  duty,  and  the  whole  for  $66,000  (the  deeds^reci^ 


who  are  in  no  way  under  his  influ- 
ence." Where  the  person  holding  an 
option  for  the  purchase  of  a  mine 
represents  that  he  is  to  pay  a  certain 
price  for  the  mine,  and  induces  par- 
ties to  form  a  corporation  and  to 
have  the  corporation  purchase  the 
mine  at  that  price,  the  corporation 
may  rescind  the  contract  if  the  act- 
ual price  paid  by  such  person  was 
much  less.  But  the  corporation  can- 
not recover  back  its  expenses,  Cor- 
tes Co.  V.  Thannhauser,  45  Fed-  Hep. 
730  (1891). 

I  Erlanger  v.  New  Sombrero  Co.,  Lu 
R.  3  App.  Cas.  1218  (1878);  New  Som- 
brero Co.  V.  Erlanger,  L.  R  5  Ch.  D. 
73  (1877);  Be  Coal,  etc.  Co.,  L.  R.  20 
Eq.  114  (1875);  S.  C,  L.  R.  1  CK  D. 
182;  Lindsay  Petroleum  Co.  v.  Hurd, 
L.  R.  5  P.  C.  221  (1874);  Emma  SHver 
Min.  Co.  V.  Grant,  L.  R  11  Ch.  D.  918 
(1879).  where  the  promoter  was  com- 


ing  the  consideration  as  $80,000),  and 
then  sells  the  same  to  a  corporation, 
wliich  he  forms,  for  $80,000  cash  and 
$40,000  stock,  and  then  divides  the 
stock  among  the  stockholders,  keep- 
ing the  cash  himself,  he  is  liable  to 
refund  to  the  corporation  his  profit, 
the  court  holding  open  the  question 
as  to  whether  he  was  liable  for  the 
profit  of  the  others.    Woodbury,  etc. 
Co.  V.  Loudenslager,  35  Atk  Rep.  436 
(N.  J.,  189G).    In  Be  Hess  Mfg.  Co., 
23  S.  C.  of  Can.  644,  658  (1894),  the 
court  said  of  a  promoter:  "  It  was  in- 
cumbent upon  him  to  sell  the  land 
for  no  excessive  price;  he  was  bo\md 
to  misrepresent  nothing  which  could 
influence  the  company  in  determin- 
ing whether  to  buy  or  not;  to  con- 
c^l  nothing  that  it  was  material 
should  be  known  in  order  to  enable 
them  to  form  a  sound  judgment  on 
that  question,  and  to  put  them  in 


(1879).  where  the  promoter  was  co^  ;::  ession  of  all  materW  informa- 

pelled  to  disgorge  a  gift  given  to  hun  P^^^«^^^^^^^^^^^  .,  ^^..^e  aU,  the 

by  the  vendors  of  a  mine  to  t^ie  cor-  tio^  J^rSioan,  as  a  vendor  selling 

poration,  but  he  was  aUowed  to  re-  ^^^J  ^^,^  ^  ,,^^^^ 

tain  therefrom  his  disbursements  It  ^roV^^J^o         fiduciary  relation,  to 

is  immaterial  that  the  ^^e  w^^^  ^ee  that  the  executive  management 

Z::^:^^^^rt^^  ^^^  a\oar/  over  which  he 


Iron  Co.  V.  Shaw,  14  W.  N.  159  (1879); 
Beck  V.  Kantorowicz,  3  K  &  J.  230 
(1857);  Whaley  Bridge,  etc.  Co.  v. 
Green.  L.  R  5  Q.  B.  D.  109  (1879),  hold- 
m<^  also  that  if  the  vendor  has  not  yet 
paid  the  money  to  the  promoter  the 
corporation  may  recover  it  from  the 
former;  Twycross  f.  Grant,  L.  R  -  C. 
P  D.  469  (1877),  disapproving  Craig  v. 


could  exercise  no  influence,  and 
which  would,  as  the  expression  is, 
keep  him  at  'arms'  length'  in  mak- 
ing the  bargain."  But  the  court  held 
that  the  promoter  is  not  liable  unless 
the  company  rescinds  and  restores 
whatever  it  has  received.  In  this 
case  the  court  stated  that  although 
the  promoter  stands  in  a  fiduciary 


1279 


C51.] 


FKAUDS    or   DIEECTOES,  PEOMOTEES,  ETC.       [CH.  XXXIX. 


profits,  even  though  the  property  is  worth  all  that  the  company 
paid  for  it.^ 

If  the  promoter  conceals  the  fact  that  he  is  selling  his  own 
property  to  the  company,  the  latter  may  rescind  the  sale ;  ^  or. 


relation  to  the  company,  yet  that  he 
is  not  necessarily  a  trustee  of  prop- 
erty which  he  acquires  to  sell  to  the 
company;  and  that  even  if  he  were, 
the  remedy  is  rescission  and  the  turn- 
ing back  of  the  property  to  him.  In 
Densmore  Oil  Co.  v.  Densmore,  04  Pa. 
St.  43  (1870),  the  court  refused  to  hold 
the  defendants  liable  who  owned 
property  and  formed  a  company,  and 
sold  the  property  to  the  company  at 
a  profit,  without  disclosing  the  origi- 
nal price,  but  without  misrepresent- 
ing that  price.  The  court  said,  how- 
ever, "  that  where  persons  form  such 
an  association,  or  begin  or  start  tiio 
project  of  one,  from  that  time  they 
do  stand  in  a  confidential  relation  to 
each  other,  and  to  all  others  who 
may  subsequently  become  members 
or  subscribers;  and  it  is  not  compe- 
tent for  any  of  them  to  pirrchaso 
property  for  the  pui-pose  of  such  a 
company,  and  then  sell  it  at  an  ad- 
vance without  a  full  disclosure  of 
the  facts.  They  must  account  to  the 
company  for  the  profit,  because  it  le- 
gitimately is  theirs."  Where  a  pro- 
moter, after  the  company  is  formed, 
buys  land  for  $6,000  and  sells  it  to 
the  company  at  $13,000,  and  repre- 
sents to  a  subscriber  for  stock  that 
the  land  cost  $12,000  originally,  the 
stockholder  may  recover  from  the 
promoter  the  amount  paid  for  his 
stock.  Short  V.  Stevenson,  G3  Pa.  St. 
95  (1869).  In  Rice's  Appeal,  79  Pa.  St. 
168  (1875),  where  a  promoter  elected 
the  directors  and  sold  property  to  the 
corporation  at  an  exorbitant  price, 
taking  payment  in  money,  stock,  and 
bonds,  the  court  refused  to  allow  the 
bonds  upon  the  winding  up.  In  Mc- 
Elhenny's  Appeal,  61  Pa.  St.  188 
(1869),  where  a  person  bought  land 


for  $2,000,  and  then  induced  otliers 
to  join  him  in  organizing  a  company 
to  purchase  it  for  $40,000  after  he  liad 
sold  it  to  them  for  $12,000,  is  liable  to 
accoimt  to  the  comp;iny  for  liis  part 
of  the  $28,000  profit,  but  not  for  hi.s 
§10,000  profit.  A  person  may  pur- 
chase property  and  then  proceed  to 
form  a  corporation  and  sell  the  prop- 
erty to  it  at  an  advanced  prica  He 
is  not  bound  to  disclose  his  profit,  nor 
is  he  liable  therefor  unless  he  makes 
misrepresentations.  Lungren  v.  Pen- 
nell,  10  W.  N.  Cas.  297  (Pa.,  1881). 

iBurbank  v.  Dennis,  101  CaL  90 
(1894). 

2  Lindsay  Petroleum  Co.  v.  Ilurd, 
L.  R  5  P.  C.  221  (1874);  Erlanger  v. 
New  Sombrero  Co.,  L.  R.  3  App.  Cas. 
1218,  aft'g  New  Sombrero  Phosphate 
Co.  V.  Erlanger,  L.  R  5  Ch.  D.  73 
(1877) ;  Be  Ambrose  Lake,  etc.  Co.,  L. 
R  14  Cli.  D.  390  (1880);  Re  Cape  Bre- 
ton  Co.,  L.  R  29  Ch.  D.  795  1 1885). 
But  not  if  the  company  is  unable  to 
restore  the  property,  wliore  the  disa- 
bility to  restore  it  is  due  to  the  com- 
pany and  not  the  promoter.  Western 
Bank  v.  Addie,  L.  R.  1  R  L.  Sc.  145 
(18G7);  Phosphate  Sewage  Co.  v.  Hart- 
mont.  L.  R,  5  Cli.  D.  394  (1877):  Head 
V.  Tattersall,  L.  R  7  Exch.  7  (1871); 
Be  Cape  Breton  Co.,  L.  R  29  Ch.  D. 
795  (1885).  The  company  may  rescind 
as  to  part  if  the  transaction  is  sever- 
able. Maturin  v.  Tredinnick,  2  N.  R. 
514  (1863);  S.  C,  4  N.  R  15.  Where 
a  mine  was  sold  to  a  company  for 
$30,000,  the  promoters  representing 
that  they  did  not  have  any  interest 
therein,  and  it  afterwards  was  dis- 
covered that  they  received  $20,000  of 
the  price,  the  corporation  succeeded 
in  having  the  whole  purchase  set 
aside  and  the  $30,000  and  interest 


1280 


en.  XXXIX.]       FRAUDS    OF    DIKECTOES,  PROMOTEES,  ETC. 


[§  G51. 


if  trie  promoter  was  a  promoter  at  the  time  he  purchased  the 
property,  the  company  may  recover  from  the  promoter  the 
profit  made  by  him.^  If  the  promoter  owns  the  property  at 
the  time  of  forming  the  company,  and  sells  it  to  the  company 
at  an  advance  over  its  cost  to  him,  and  then  induces  persons  to 
subscribe  by  stating  that  he  made  no  profit  thereby,  he  is  lia- 
ble in  equity  to  account  to  them  for  the  injury  they  have  sus- 
tained.^ 


and  expenditures  refunded.  St.  Louis 
etc.  Co.  V.  Jackson,  5  Cent.  L.  J.  317 
(1877,  St.  Louis  Ct.). 

1  Re  Cape  Breton  Co.,  L.  R  26  Ck 
D.  221  (1884);  Lydney.  etc.  Co.  v.  Bird, 
L.  R,  33  Cli.  D.  85  (188G),  reversing  L. 
R.  31  Ch.  D.  328;  Tyrrell  v.  Bank  of 
London.  10  H.  L.  Cas.  26  (1862);  Ben- 
son V.  Heathorn,  1  Y.  &  C.  Cli.  326 
(18-12) ;  Emma  Silver  Min.  Co.  v.  Grant, 
L.K.  11  Cli.  D.  918  (1879);  i^e  Am- 
brose Lake,  etc  Co.,  L.  R  ll  CIl  D. 
390  (1880). 

2  Getty  V.  Devlin,  54  N.  Y.  403  (1873) ; 
S.  C,  70  N.  Y.  504  (1877);  Getty  v. 
Donelly,  9  Hun.  G03  (1877);  Brewster 
V.  Hatch,  10  Abb.  N.  Cas.  400  (1881); 
atl'd,  122  N.  Y.  349.  See  also  chs.  IX 
and  XX,  supra.  In  the  important 
case  of  Ex-Mission,  etc.  Co.  v.  Flash, 
97  CaL  610  (1893),  where  persons  pur- 
chased land  at  $5  an  acre  and  sub- 
sequently proceeded  to  organize  a 
corporation  to  purchase  it  at  $25  an 
acre,  representing  to  the  stockhold- 
ers that  $25  an  acre  was  the  lowest 
price  at  which  the  land  could  be  pur- 
chased, it  being  concealed  from  the 
stockholders  that  one  of  their  num- 
ber, a  large  subscriber,  was  interested 
in  the  contract,  and  tliat  the  organ- 
izers of  the  corporation  were  his 
agents,  the  corporation  caused  to  be 
set  aside  a  mortgage  and  foreclosure 
thereof  which  was  given  to  the  pro- 
moters in  part  payment  for  such 
land,  and  the  notes  were  ordered 
canceled.  In  this  case  it  appears 
tliat  the  representation  was  made 
tliat  $25  per  acre  was  the  lowest 


price  for  which  the  land  could  be 
purchased,  and  that  the  subscribers 
came  in  "  on  the  ground  floor  at  bed- 
rock figures."  The  Solicitors'  Jour- 
nal (vol  31,  p.  740)  has  summarized 
the  law  on  tliis  subject:  "Where  the 
promoter  had  originally  bought,  not 
for  himself,  but  for  a  company  to  be 
after%vards  formed,  in  such  a  case  it 
was  an  ordinary  instance  of  purchase 
by  an  agent,  and  the  company  would 
be  entitled  both  to  keep  the  property 
and  to  call  upon  the  promoter  to 
repay  the  profit  he  had  made.  But 
it  is  for  the  company  to  prove  this 
relationship  of  principal  and  agent, 
and  also  that  it  existed  at  the  time 
of  the  original  purchase.  Hence, 
where  this  is  not  shown,  the  above 
rule  does  not  apply,  not  even  al- 
though the  promoter  subsequently 
becomes  a  director  of  the  company. 
In  this  case  it  is  his  duty  to  inform 
the  company  of  the  profit  he  is  mak- 
ing; and  in  default  they  are  entitled, 
if  they  so  choose,  to  a  rescission  of 
the  contract.  But  they  cannot  affirm 
the  contract  and  also  claim  the  prof- 
its; and  if  rescission  of  the  contract 
has  become  impossible,  they  seem  to 
have  no  remedy  at  all"  3  R'y  & 
Corp.  L.  J.  143,  citing  cases.  Where 
a  promoter  to  whom  nearly  the  en- 
tire stock  has  been  issued  sells  a  part 
of  it  on  the  fraudulent  representation 
that  the  stock  belongs  to  the  com- 
pany, and  then  causes  the  company  to 
be  wound  up  and  himself  to  be  re- 
leased from  certain  subscriptions,  and 
the  property  to  be  sold  by  a  tnistee 


81 


1281 


§  G51.] 


FKAUDS   OF   DIKECTOES,  PKOMOTEKS,  ETC.       [cH.  XXXIX. 


Second,  a  promoter  may  commit  a  breach  of  trust  by  accept- 
ing a  commission  or  bonus  from  a  person  who  sells  property 
to  the  corporation.  The  company  may  compel  a  promoter  to 
turn  his  profit  into  the  corporate  treasury,"  or  the  company 
may  rescind  its  purchase  of  the  property.' 


named  by  him,  the  court  will  appoint 
a  receiver  at  the  instance  of  the  party 
so  defrauded,  for  the  purpose  of  recov- 
ering back  the  property  of  the  com- 
pany.    Du   Pay   V.   Transportation, 
etc.  Co.,  33  Atl.  Rep.  889  (Md.,  1896). 
Where   the   promoters    represented 
that  property  cost  them  $'23,000,  at 
which  price  they  turned  it  in  to  the 
corporation,  and  as  a  fact  it  cost 
them  $13,000,  they  are  each  liable  for 
the  $10,000  profit,  even  tliough  they 
did  not  personally  make  the  repre- 
sentations, a  conspiracy  being  shown. 
Foimtain,  etc.  Co.  v.  Roberts,  GO  N.  W. 
Eep.  399  (Wis.,   189G).    Where  pro- 
moters have  a  right  to  purchase  land 
for  §31,000,  and  induce  persons  to 
join  with  them  to  form  a  corpora- 
tion to  purchase  the  land  at  $.55,000, 
and  represent  to  such  persons  that 
$55,000  is  what  the   land    actually 
costs,  the  persons  so  induced  to  sub- 
scribe may  liave  the  pvircliase  of  the 
land  rescinded.    Hebgen  v.  Koeffler, 
72  N.  W.  Rep.  745  (Wis.,  1897).  Where 
a  promoter  misrepresents  to  subscrib- 
ers the  cost  of  property  which  is  to 
be  and  is  sold  to  the  corporation  for 
cash,  the  corporation  may  rescind. 
Limited  Inv.  Assoc,  v.  Glendale  Inv. 
Assoc,  74  N.  W.  Rep.  633  (Wis.,  1898). 
In  Franey  v.  Wauwatosa  Park  Co., 
74  N,  W.  Rep.  548  (Wis.,  1898),  the 
subscription  was  held  to  be  binding, 
although  the  promoters  were  indi- 
vidually liable  to  the  subscribers  for 
the  profit  made  by  the  promoters. 
Where  promoters  represent  that  the 


territorial  rights  which  they  sell  to 
a  corporation  cost  a  certain  sum, 
wlien  in  fact  one-half  of  tliat  sum 
went  to  them,  the  corporation  may 
compel  them  to  pay  to  it  such  one- 
lialf.  Cook  V.  Southern,  etc.  Ca,  21 
S.  Rep.  795  (Miss.,  1897).  Statements 
that  a  large  part  of  the  capital  stock 
had  been  taken  by  tlie  parties  them- 
selves, and  that  tlie  parties  them- 
selves would  continue  the  manage- 
ment of  the  concern ;  concealment  of 
the  fact  that  a  largo  quantity  of  the 
stock  was  to  be  issued  for  the  good- 
will of  the  business:  and  statements 
leading  to  tlie  conclusion  that  all 
subscribers  for  stock  stood  on  an 
equal  footing, —  constitute  material 
misrepresentations,  and  will  sustain 
a  rescission  of  the  subscription  if  un- 
true. Such  statements  and  conceal- 
ments made  to  agents  or  brokers 
who  are  selling  stock  are  the  same 
as  though  made  to  the  subscribers 
for  the  stock.  Walker  v.  Anglo-Am. 
etc.  Trust  Co.,  72  Hun,  334,  341  (1893). 
Where  partners  organize  a  corpora- 
tion to  take  over  their  business,  each 
of  the  partners  is  liable  for  misrep- 
resentations and  concealments  of  the 
others  committed  wliile  engaged  in 
promoting  and  bringing  out  the  en- 
terprise. Tliey  are  liable  as  promot- 
ers. Walker  v.  Anglo- Am.  etc.  Trust 
Co.,  72  Hun,  334,  341  (1893). 

1  Where  the  promoters  receive  pay 
from  the  contractor,  such  pay  being 
in  excess  of  their  disbursements,  tlie 
company  may  comi^el  them  to  turn 


2Munson  u  Syracuse,  etc.  R  R.,  Hurd,  L.  R.  5  P.  C.  221  (1874);  Bag- 
103N.  Y.  58  (1886);  Erlanger  u  New  nail  v.  Carlton,  L.  R  6  Ch.  D.  371 
Sombrero  Co.,  L.  R.  3  App.  Cas.  1218  (1877).  Cf.  Smith  v.  Sorby,  L.  R.  3 
(1878);    Lindsay    Petroleum    Co.    v.    Q.  B.  D.  552,  n.  (1875). 

1282 


CH.  XXXIX.]      FEAUDS    OF   DIRECTOES,  PEOMOTEES, 


ETC. 


[§  C51. 


If  the  commission  or  bribe  paid  to  the  promoter  consisted  of 
shares  of  stock,  then  the  company  may  recover  from  him  the 
amount  received  by  him  upon  a  sale  of  the  shares  and  all  divi- 
dends previously  received,  together  with  interest;^  or,  if  he 
still  holds  the  shares,  the  company  may  recover  the  highest 
price  which  the  shares  of  the  company  have  touched  in  the  in- 
terval between  the  gift  and  the  action,  together  with  interest.^ 


in  the  amount  to  the  company,  al- 
though all  the  stockholders  and  di- 
rectors  knew   of    the    transaction. 
Mann  v.  Edinburgh,  etc.  Co.,  [1893] 
A-   C.  69;    Hichens  v.  Congreve,  4 
Russ.  562  (1828);  Beck  v.  Kantorowicz, 
3  K  &  J.  230  (1857);  Phosphate  Sew- 
age Co.  V.  Hartmont,  L.  R.  5  Ch.  D. 
394  (1877);  Baguall  v.  Carlton,  L.  R.  6 
Ch.  D.  371  (1877);  Emma  Silver  Min. 
Co.  V.  Grant,  L.   R.   11   Ch.   D.  918 
(1879);  Whaley  Bridge,  etc.   Co.  v. 
Green,  L.  R  5  Q.  B.  D.  109  (1879), 
holding  also  that,  if  the  bonus  has 
not  yet  been  paid  to  the  promoter, 
the  company  may  claim  it  from  the 
person  contracting  with  it.    Cf.  Ark- 
wright  V.  Newbold,  L.  R  17  Ch.  D. 
301,  319  (1881);  Lydney,  etc.  Co.  u 
Bird,  L.  R  33  Cli.  D.  85  (1880),  revers- 
ing L.  R  31  Ch.  D.  328;  Albion,  etc. 
Co.  V.  Martin,  L.  R.  1  Ch.  D.  580  (1875). 
The  promoter  is  allowed  a  reasonable 
sum  for  disbm-sements.    Lydney,  etc. 
Co.  V.  Bird,  L.  R  33  Ch.  D.  85  (1886). 
Cf.  Emma  Silver  ]Min.  Co.  v.  Grant, 
L.  R  11  Ch.  D.  918  (1879);  Bagnall  v. 
Carlton,  L.  R  6  Ch.  D.  371  (1877); 
South  Durham  Iron  Co.  v.  Shaw,  14 
"W.  N.  159  (1879).   The  promoter  must 
disgorge,  though  by  his  efforts  the 
company  paid  for  the  property  less 
than  it  was  worth.    Emma  Silver 
Min.  Co.  V.  Grant,  L.  R  11  Ch.  D.  918 
(1879).     Tlie  statute  of  limitations 
bars  the  suit.    Metropolitan  Bank  v. 
Heiron,  L.  R  5  Exch.   D.  319,  325 
(1880).    But  only  from  the  time  when 
the  facts  are  known  to  the  directors, 
or,  if  the  directors  are  also  implicated, 
to  the  stockholders.    Re  Fitzroy,  etc 


Co.,  50  L.  T.  144  (1884).  "V\liere  pro- 
moters, in  collusion  with  the  owner 
of  a  mine,  pay  him  §20,000  therefor, 
and  cause  him  to  transfer  it  to  a  cor- 
poration for  §100,000  of  the  capital 
stock,  and  then  induce  third  persons 
to  buy  such  stock  at  par  on  repre- 
sentations that  the  mine  cost  the 
promoters  §90,000,  and  then  receive 
from  the  owner  of  the  mine  the  pro- 
ceeds from  the  sale  of  the  stock,  less 
the  $20,000,  the  corporation  may  com- 
pel them  to  pay  over  the  profits  to  it. 
Pittsburg  Min.  Co.  v.  Spooner,  74  Wis. 
307  (1889). 

lEmma  Silver  Min.  Co.  v.  Lewis, 
L.  R  4  C.  P.  D.  396  (1879). 

2  McKay's  Case,  L.  R  2  Ch.  D.  1 
(1875);  Pearson's  Case,  L.  R.  4  Ch.  D. 
222,  L.  R  5  Cli.  D.  336  (1877);  Re  Fitz- 
roy,  etc,  Co.,  50  L.  T.  144  (1884);  Nant- 
y-glo,  etc.  Co.  v.  Grave,  L.  R  12  Ch. 
D.  738  (1878);  and  see  g  650,  supra; 
Chandler  v.  Bacon,  30  Fed.  Rep.  538 
(1887),  where  promoters  were  com- 
pelled, at  the  option  of  the  corpora- 
tion, to  transfer  stock  back  to  it  or 
pay  over  the  amount  received  by 
them  for  stock  sold,  or  to  pay  to  it 
the  market  value  of  stock  which  they 
as  promoters  had  received  from  him 
to  whom  all  the  capital  stock  had 
been  issued  in  payment  for  a  patent. 
The  agent  of  the  person  who  deals 
with  the  corporation  may  recover 
his  compensation  from  that  person, 
but  he  cannot  recover  compensation 
for  improperly  influencing  the  agents 
of  the  corporation  to  make  the  con- 
tract. Lydney,  etc.  Co.  v.  Bird,  L.  R 
31  Ch.  D.  328  (1885);  Arkwright  v. 


1283 


§  652.]  FKAUDS    OF   DIEECTORS,  TEOMOTEKS,  ETC.       [CH.  XXXIX. 

The  subscriber  for  stock  may  sue  the  directors  for  fraudulent 
representations  if  they  knew  that  the  promoter  was  secretly 
receiving  large  illegal  profits.'  Bondholders  cannot  complain 
of  promoters  in  the  same  way  that  the  corporation  may.- 

A  plaintiff  may,  upon  the  trial,  be  compelled  to  elect  whether 
he  sues  to  hold  the  promoters  liable  for  fraud,  or  whether  he 
sues  in  behalf  of  all  stockholders  and  fur  the  benefit  of  the  cor- 
poration.* 

A  compromise  and  settlement  of  suits  between  promoters 
and  the  corporation  will  be  upheld  by  the  court.* 

§  G52.  Sales  ofiyropcrtij  hy  corporate  officers  to  the  corpora- 
tion.—  It  is  well  said  in  the  case  of  Michoud  v.  Girod'  that  a 
person  cannot  legally  purchase  on  his  own  account  that  which 
his  duty  or  trust  requires  him  to  sell  on  account  of  another,  nor 
purchase  on  account  of  another  that  which  he  sells  on  his  own 
account.  lie  is  not  allowed  to  unite  the  two  opposite  char- 
acters of  buyer  and  seller.  Especially  is  this  the  rule  with  cor- 
porate directors.  If  they  make  sales  to  the  corporation  they 
may  be  compelled  to  pay  over  to  the  corporation  the  profit 
realized  by  such  S3,les,®  or  the  corporation  may  refuse  altogether 

Newbold,  L.  R  17  Ch.  D.  301  (1881);  representations.      Teachout  v.   Van 

Davison  v.  Seymour,  1  Bosw.  (N.  Y.)  Hoesen,76  Iowa,  113  (1888).    See  also 

88  (1857),where  the  court  said:  "There  cli.  XX,  siqyra.     Cf.  Glasier  v.  RolLs, 

was  secrecy,  applications  to  Individ-  L.  R  42  Ch.  D.  43G  (1889),  where  merely 

uals,  a  concealed  promise  of  compen-  deceit  was  involved. 

sation,  and  utter  ignorance  and  reck-  2  Banque,  etc.  v.  Brown,  34  Fed.  Rep. 

lessness  as  to  the  competency  of  the  102,  196  (1888).     Cf.  g^  42,  43,  mjiva, 

party  whose  cauce  he  was  promoting  and  §  735.  infra. 

and  whose   reward  he  was  to    r&-  3  Brewster  v.  Hatch,  123  N.  Y.  319 

ceive."  (1890). 

1  Persons  induced  to  subscribe  by  *  Cobum  v.  Cedar  Valley,  etc.  Co., 

a  prospectus  stating  that  a  certain  138  U.  S.  196  (1891). 

price  was  paid  for  a  business,  when  *  4  How.  503  (1846). 

in  fact  a  large  part  of  that  price  went  6  Where  the  directors  buy  property 

as  a  bonus  to  promoters,  may  sue  the  for  $2,500  and  sell  it  to  the  comi>any 

directors  for  fraudulent  misrepresen-  for  $8,000,  they  can  collect  only  $2,500 

tations.    Capel  v.  Sim's,  etc.  Co.,  58  from  the  corporation,  although  the 

L.  T.  Rep.  807  (1888).    Where  a  pro-  corporation  has    sold  tlie   land  for 

moter  induces  a  person  to  subscribe  $17,000.    Higgins    v.    Lansingh,   154 

and  pay  for  stock  by  representing  111.  301  (1895);  Albion  Steel,  etc.  Co. 

that  property  conveyed  by  the  pro-  v.  Martin,  L.  R  1  Ch.  D.  580  (1875), 

moter  to  the  company  cost  the  pro-  holding  the  director  liable  to  refund 

moter  $20,000,  when  in  fact  it  cost  profits  on  contracts  made  subsequent 

him  $14,000,  the  subscriber  may  sue  to  incorporation,  but  not  on   those 

the  promoter  for  damages  for  false  made     previous    to    incorporation; 

1284 


CU.  XXXIX.]       FKAUDS    OF   DIEECTOKS,  FKOMOTEES,  ETC. 


[§  C52. 


to  complete  the  contract.^  Generally  the  director  has  pur- 
chased the  property  for  the  express  purpose  of  selling  it  to  the 
corporation.  When  such  is  the  case  the  company  may  ratify 
and  confirm  the  transaction,  or  it  may  keep  the  property  and 
recover  from  the  director  the  profit  realized  by  him,  or  the 
company  may  repudiate  the  whole  transaction,  return  the  prop- 
erty, and  recover  back  the  purchase-money.^    "Where  the  presi- 


Dunne  v.  English,  L.  R  18  Eq.  524 
(1874),  where  two    brokers,  having; 
agreed  to  divide  the  profits  on  a  mine 
to  be  bought  by  one  and  sold  by  the 
other,  the  former  compelled  the  lat- 
ter to  divide  a  secret  profit  which 
the  latter  had  obtained;   Benson  v. 
Heathorn,  1  Y.  &  C.  (Ch.)  32G  (1842), 
t5  630,  supra,  and  other  cases  therein. 
Concerning  the  right  of  the  corpora- 
tion to  confirm  the  sale  and  sue  the 
director  at  law  or  in  equity  for  the 
profit  made  by  him,  see  "The  reme- 
dial rights  of  corporations  against 
tlieir  directors,"  by  Judge  Fenn,  3 
Yale  L.  J.  111.    See  also  §  GGO,  infra. 
1  Coleman  v.  Second  Ave.  R.  R,  38 
N.  Y.  201  (18GS).    A  contract  by  a 
corporation  to  buy  land  of  a  director 
is  not  enforceable  by  the  latter  where 
it  was  authorized  by  only  three  out 
of  five  directors,  and  two  of  those 
three  were  interested  in  the  contract. 
Hill  V.  Rich  Hill,  etc.  Co.,  119  Mo.  9 
(1893).     Cf.  Be  Cape  Bret6n  Co.,  19 
W.  N.  54  (1884),  where,  however,  the 
court  declined  to  hold  a  director  re- 


Nav.  Co.  V.  Keuka  Nav.  Co.,  37  Hun, 
9  (1885).     Directors  cannot  piirchase 
machinery  and  then  sell  it  to  the 
company  at  an  advance.    Redmond 
V.  Dickerson,  9  N.  J.  Eq.  507  (1853). 
In  Great  Luxembourg  Ry  v.  Magnay, 
25  Beav.  586  (1858),  where  the  director 
purchased  for  the  corporation  prop- 
erty secretly  owned  by  himself,  the 
court  refused  to  interfere  after  the 
corporation  had  resold  the  property 
without  loss.     Under  the  above  prin- 
ciple of  law  the  court  refused  to  en- 
force a  contract  by  a  director  to 
furnish  railway  chairs  to  his  corpo- 
ration.   Aberdeen  R'y  v.  Blakie,  1 
Macq.  461  (1854).    And  in  Flanagan 
V.  Great  Western  R'y,  L.  R  7  Eq.  116 
(1868),  the  court  refused  to  enforce 
a  corporate  agreement  to  lease  pro]> 
erty  to  a  director.    A  stockholder's 
bill  does  not  lie  to  enjoin  an  execu- 
tion sale  of  the  corporate  franchise 
and  property  on  a  judgment  obtained 
against  the  corporation  by  a  director 
for  property  sold  to  it  by  him,  there 
being  no  actual  fraud,  nor  proof  of 


sponsible  for  profits  made  by  a  sale    directorship  at  the  time  of  the  sale 
of  property  from  himself  to  the  com-    Ward  v.  Salem  St.  R'y,  108  Mass.  333 


pany,  and  declined  to  rescind  the  sale, 
since  the  coi-poration-  could  not  re- 
store the  property.  Where  the  corpo- 
ration is  insolvent,  a  director  cannot 
turn  in  his  property  in  payment  of  his 
debt  due  to  the  corporation.  White, 
etc.  Co.  V.  Pettes,  etc.  Co.,  30  Fed.  Rep. 
864  (1887).  A  piu-chaser  of  corporate 
assets  at  a  receiver's  sale  cannot 
claim  a  leasehold  which  the  president 


(1871).  Scheol  directors  may  be  en- 
joined from  selling  their  property  to 
the  district.  Witmer's  Appeal,  15 
AtL  Rep.  428  (Pa.,  1888). 

2  Parker  v.  Nickerson,  112  Mass.  195 
(1873),  where  the  directors  were  held 
liable  for  the*  profit  on  a  price  paid 
by  the  corporation  for  a  boat  pur- 
chased from  another  corporation,  in 
which  the  directors  were  also  the  di- 


holds  to  premises  winch  were  used    rectors  and  sole  stockholders     They 
by  the  corporation.    Crooked  Lake    were  held  liable  to  refund  all  profit 

1285 


652.] 


FEAUDS    OF   DIEECTOKS,  PEOMOTEES,  ETC. 


[CU.  XXXIX. 


dent  of  a  railroad  corporation  secretly  owns  land  in  the  name 
of  another  person,  and  causes  the  corporation  to  purchase  it 
and  issue  stock  and  bonds  in  pajnnent,  without  disclosing  his 
interest  in  the  land,  he  is  liable  to  the  corporation  for  the  dif- 
ference between  the  actual  market  value  of  the  stock  and  bonds 
and  the  actual  value  of  the  land.^ 

"Where,  however,  the  directors  sell  to  the  corporation  at  a 
profit  to  themselves,  but  with  a  full  and  fair  disclosure  thereof 
to  the  stockholders,  and  without  participating  in  the  accept- 
ance of  the  property  by  the  corporation,  and  no  objection  is 
made,  the  transaction  cannot  be  impeached  afterwards.'* 


above  the  cost  of  the  boat  to  the 
vendor  corporation.  If  the  corpora- 
tion has  made  improvements  on  land 
purchased  from  the  director,  it  can- 
not compel  him  to  take  the  land  and 
pay  it  the  price  paid  him  and  also 
the  cost  of  the  improvements.  Paine 
V.  Irwin,  16  Him,  390  (1878).  Where 
the  corporation  secretly  agrees  to 
give  a  subscriber  extra  stock  if  he 
will  subscribe  for  a  certain  amount, 
and  he  subscribes  and  intends  that 
his  subscription  shall  be  used  to  in- 
duce others  to  subscribe  without 
knowledge  of  the  secret  gift,  and 
they  do  subscribe,  lie  cannot  receive 
from  the  corporation  such  extra 
stock.  The  contract  is  void  as  against 
public  policy.  Nickerson  v.  English, 
143  Mass.  267  (1886).  A  sale  of  mort- 
gaged property,  vmder  a  power  to 
sell,  by  the  mortgagee,  to  a  newly- 
formed  corporation  in  which  he  holds 
stock,  does  not  invalidate  the  sale, 
though  he  could  not  sell  to  himself. 
Farrar  v.  Farrars,  L.  R.  40  Ch.  D.  395 
(1888).  The  president  of  a  stockyard 
company,  who  takes  a  lease  of  proi> 
erty  in  his  own  name,  and  then  as- 
signs the  lease  to  the  company  on  a 
guaranty  of  a  large  stockholder  in 
the  corporation  that  said  president 
shall  have  one-fifth  of  the  profits 
from  the  use  of  the  property,  cannot 
enforce  that  guaranty.  Robinson  v. 
Jewett,  14  N.  Y.  St.  Rep.  223;  aff'd, 
116  N.  Y.  40  (1889).    A  director  can- 


not be  a  partner  with  the  corporation 
in  sharing  profits.  Rudd  v.  Robinson, 
54  Hun.  339  (1889).  It  is  illegal  for 
directors  to  buy  from  themselves  lot3 
for  the  corporation.  Landis  v.  Sea 
Isle,  etc.  Co.,  53  N.  J.  Eq.  654  (1895). 

1  Danville,  etc.  R  R.  v.  Kase,  39  AtL 
Rep.  301  (Pa.,  1898  >. 

2  Where  a  director  sells  a  plant  to 
the  corporation,  and  the  sale  is  rati- 
fied unanimously  at  a  stockholders' 
meeting,  a  stockholder  cannot  subse- 
quently caase  it  to  be  set  aside,  espe- 
cially where  a  great  majority  of  the 
stockholders  still  object  to  its  being 
set  aside.  The  terms  of  the  sale 
were  held  by  the  court  to  be  reason- 
able. Barr  v.  Pittsburgh  Plate-Glass 
Co.,  57  Fed.  Rep.  86  (1893).  A  director 
who  assigns  a  contract  to  the  com- 
pany at  a  profit  of  $40,000  to  himself 
must  refund  his  profit  to  the  com- 
pany, but  will  be  allowed  such  stims 
as  he  paid  out  for  commissions.  It 
is  immaterial  that  all  of  the  directors 
knew  all  of-  the  facts  and  assented  to 
the  transaction.  Re  George  Newman 
&  Co.,  [1895]  1  Ch.  674.  Even  though 
a  director  sells  property  to  the  com- 
pany and  ovei-values  it,  yet  if  the 
company  caused  an  independent  val- 
uation to  be  made,  and  for  three  yeai-s 
acqviiesced  in  the  purchase,  it  cannot 
then  complairu  Stetson  v.  Northern 
Inv.  Co.,  73  N.  W.  Rep.  869  (Iowa, 
1898);  Chesterfield,  etc.  Co.  v.  Black, 
37  L.  T.  Rep.  740  (1877;,  where  the 


1286 


oil.  XXXIX.]      FEiCDS   OF   DIKECTOES,  PBOMOTEKS,  ETC.  [§  C52. 

Moreover,  it  is  witliin  the  power  of  the  majority  of  the  stook- 
holdei-s  to  ratify  and  confirm  such  a  transaction  y^ere  ttere  is 
no  actual  fraud  iuTolved.  The  fraud  is  not  an  «oto«i  one  J  the 
director  sold  at  a  fair  price  and  did  not  use  '"^  P»'"  ^^■ 
duce  tlie  corporation  to  purchase.  Such  a  sale  however,  is 
always  a  constructive  fraud,  and  unless  legally  ratified  is  void- 
able at  the  option  of  any  director  or  stockholder. 

There  is  some  difBculty  in  determming  what  will  constitute 
a  confirmation  of  such  a  transaction.    If  a  majority  of  the  di- 
rectors and  of  the  stockholders,  without  counting  the  votes  con- 
trolled by  the  director  who  is  interested,  favor  a  confirmation 
of  he  transaction,  a  dissenting  stockholder  cannot  bring  suit 
to  set  it  aside  unless  he  can  show  the  existence  of  some  fraud 
other  han  the  mere  fact  that  the  vendor  was  a  director  when 
he  made  the  sale.    If,  however,  a  majority  of  the  stockholders 
excluding-  the  votes  owned  directly  or  mdirectly  by  the  guilty 
parties  a°e  in  favor  of  bringing  the  du-ectors  to  an  accounting 
Cte    difliculty  arises.    The  weight  of  authority  holds  that 
fhe  votes  of  the  director  as  a  stockholder  are  to  be  counted.    If, 
however,  actual  fraud  is  involved,  this  question  is  immaterial, 
Le  no  majority,  however  large,  can  ratify  actual  fraud.' 

court  refused  to  hold  liaWe  for  proEts  atta*  hi.  P-;i- JtT« 
a  director  and  a  promoterwhere  they  Thousand  ete^  ,  ^^^^^^  ^^ 
had  purchased  a  --  etore  inco^-  ^'^^  a  ^rlpany  to' aise  the  ob- 
poration  and  had  »  d  .t  to  the  com  ^^^  ^^^  ^^^^^^^  ^^^ 

pany  at  a  proSt,  it  bem,   cleariy    J  j^  ji^ctors.    Farnham 

stated  to  the  company  that  a  prott  ^  ^^"-^  °™  °  ™  g^t,  68  L.  T.  Eep. 
was  being  made  but  the  amoun^o^  ^O^S)  The  vice-president  and 
that  profit  not  bemg  d.vulged  Ba^  ^^^^^  ^^  perty  to  the 
teUe  ...  Northwestern,  etc.  Co.,  87    ^™^Ser       ,  ^^^^^  ^^^ 

5Iinn.89a887)  InSt.Lou,s,eo  B^  LTt'  t^e  corporation,  where 
B.  V.  Tiernan,  37  Kan.  606  (188,),  it>s  'ease  »  f^;^  ^^<i  the  other  olHcers 
held  tliat  a  sale,  by  the  directors,  o£  a  the  lease  ^'''i.^ue  etc  EV  v.  Gar- 
road-bed  to  the  corporation  is  lega  approve.  Loms""%  "•  ^  ^^^ 
where  all  the  facts  -e  tao-i  to  aU  ^^^J^fJ^^J,,,  .epresenta- 
e^cept  a  tew  nommal  ^"M^^rs  jt  ['^^"f^^^  j^e  corporation  to  buy 
stoct  Butapartia  d,sclosure^,sm-  fo-^-;--^'  ^^Jl,,  ,  mi„„,ity 
sutacient    taper.aU  etc.  Assoc  .^.    P  J^  J^^^  ,,„,,  the  purclmse 

Coleman,  L.  E.  6  H.  L.  183  (1»^-).  ^    ^,en  though  all  had 

revVL.ROCh.App.  0.8.  Wher^  '"ninted  to  the  purchase.  Gerry  t.. 
upon  foreclosure  of  corporate  prol>  ^°»^™';!^ 'g^^^ "  ^^  p^c  Eep.  810 
erty,the  president  -<1  ™-ser;f  f,^-»  °^g,f|"eeaIsoch.XLIV,^^^^^^^ 
the  corporation  purchases  the  prop^    (JloM  , 

ertv  at  its  full  value,  other  judgment         See  fe  60.,  m/ro. 
creditors  of  the  corporation  <=^™°' 


G53.] 


FKAL'DS    OF    DIRECTORS,  PROMOTERS,  ETC.       [cil.  XXXIX, 


§  653.  Sales  of  property  hy  tlie  corporation  to  corporate  offi- 
cers, and  purchases  hy  corporate  ojjicers  at  Jhreclosure  and  exr- 
ciition  sales. —  One  of  the  most  frequent  fi-aiuls  perpetrated 
upon  a  corporation  and  its  stockholders  is  where  one  or  more 
of  the  directors  purchase  property  from  the  corporation  directly 
or  indirectly,  or  participate  in  the  ])rorits  of  such  a  purchase. 
The  law  is  well  settled  that  a  director's  purchase  of  property 
from  the  corporation  is  voidable  at  the  option  of  the  corpora- 
tion, even  though  the  directors  paid  fully  as  much  as  or  more 
than  the  property  is  worth.  This  principle  of  law  was  fully 
established  by  the  cases  of  Cumberland  Coal  Company  against 
Sherman  ^  and  Hoffman  Steam  Coal  Company  against  Cumber- 
land Coal  and  Iron  Company.^ 


1 30  Barb.  553  (1859).  The  court  also 
held  that  the  purchase  by  the  direct- 
ors could  be  ratified  only  by  the 
unanimous  vote  of  all  the  stockhold- 
ers, and  that  a  ratification  by  proxy 
would  not  bind  the  stockholder  him- 
self. Cumberland  Coal  Co.  v.  Sher- 
man, 20  Md.  117  (1863). 

-  IG  Md.  456  (1860),  where  a  minority 
of  the  directors  purchased  part  of  the 
corporate  property  at  an  undervalu- 
ation and  then  sold  it  to  the  Hoffman 
Company,  in  which  they  were  large 
stockholders.  The  court  held  that 
the  latter  was  chargeable  with  notice 
of  the  voidable  act.  This  case  and 
the  preceding  one  grew  out  of  the 
same  transaction.  See  also  Buell 
V.  Buckingham,  16  Iowa,  284  (1864), 
holding  that  the  purchase  is  void- 
able, but  not  void.  It  may  be  avoided, 
however,  without  proving  any  actual 
fraud  on  the  part  of  the  director  or 
injury  to  the  corporation.  It  is  fraud- 
ulent per  se.  See  also  Jones,  etc.  Co. 
V.  Arkansas,  etc.  Co.,  38  Ark.  17  (1881), 
involving  a  scheme  where  a  director 
purchased  at  a  foreclosure  sale  and 
reorganized.  A  stockholder  who  did 
not  come  in  caused  the  purchase  to  be 
set  aside.  See  also  Dennis  v.  Ken- 
nedy, 19  Barb.  517  (1854).  Where  the 
directors  had  purchased  corporate 
property  after  its  sale  on  a  lien,  and 


the  purchase  by  them  was  held  to  be 
fraudulent,  the  passive  connivance 
of  a  director  renders  him  liable  the 
same  as  though  ho  participated. 
Weetjen  v.  Vibbard, 5  Ilun,  205 (IbT'i '. 
A  sale  of  corporate  bonds  to  a  syndi- 
cate of  which  three  of  the  directors 
are  members  is  valid,  the  price  being 
adequate.  Du  Pont  i\  Northern  Pac. 
R.  R.,  18  Fed.  Rep.  407  (1883).  Where 
a  director  takes  for  himself  the  right 
of  the  corporation  to  subscribe  for 
new  stock  he  i.s  liable  in  damages. 
Greenfield  Sav.  Bank  v.  Simons,  133 
Mass,  415  (1882).  But  corporate  cred- 
itors cannot  have  set  aside  an  old 
sale  of  land  by  the  corporation  to  the 
directors  through  "dummies,"  even 
though  the  sale  was  at  a  totally  in- 
adequate price.  Graham  v.  Railroad 
Co.,  102  U.  S.  148  (1880).  And  a  sale 
of  an  insolvent  corporation's  proj> 
erty  to  a  director  for  its  full  value  is 
upheld  when  bona  fide  and  advanta- 
geous to  all.  Ashhurst's  Appeal,  GO 
Pa.  St.  291  (1869).  A  director  may  be 
the  trustee  in  a  trust  deed  executed 
by  his  corporation.  Bassett  v.  Monte 
Christo,  etc.  Co.,  15  Nev.  293  (1880>. 
Although  a  company  is  insolvent,  a 
lease  of  its  property  to  a  director  on 
fair  terms  is  legal,  especially  wliere 
for  many  years  there  is  no  complaint. 
Pneumatic  Gas  Co.  v.  Berry,  113  U.  S. 


1288 


CH.  XXXIX.]      TKAUDS    OF    DIKECTOKS,  PROMOTEKS,  ETC. 


[§  653. 


'WTiere  all  the  stockholders  and  directors  assent  to  a  lease  of 
corporate  property  to  a  director,  a  receiver  appointed  at  the 
instance  of  a  foreclosing  mortgagee  cannot  have  the  lease  de- 
clared void,  it  not  being  shown  that  he  represents  creditors 
or  is  vested  with  equities  to  maintain  the  suit.  Leases  to  a 
director  "  will  be  sustained  if  they  are  fair,  and  have  been  en- 
tered into  in  good  faith,  and  no  advantage  has  been  taken  of  the 
fiduciary  relation."  ^  More  difficult  questions  arise  in  regard 
to  a  director's  purchases  of  corporate  property  at  foreclosure 
sale  thereof.  The  old  rule  was  that  he  could  not  be  a  pur- 
chaser, either  directly  or  indirectly,  at  the  foreclosure  sale. 
This  was  the  rule  whether  the  foreclosure  was  instituted  by 

109  Mo.  297  (1892).  A  receiver  may 
replevy  corporate  personalty  fraudu- 
lently sold  to  a  director.  Mish  v. 
Main,  81  Md.  36  (1895). 

1  Tyler  v.  Hamilton,  63  Fed.  Rep. 
187  (1894).  Where  the  directors  of  an 
insolvent  corporation  lease  the  prop- 
erty to  themselves,  they  must  account 
to  corporate  creditors  for  the  profits, 
but  the  creditors  cannot  claim  ma- 
terial which  the  directors  have  pur- 
chased and  manufactured  by  means 
of  the  property.    Hutchinson  v.  Bid- 
well,  2-1  Oreg.  219  (1893).     A  corpora- 
tion cannot  hold  the  directors  liable 
on  stock  which  the  corporation  issued 
to  them  for  services,  being  taken  by 
the  dii-ectors  at  five  cents  on  the  dol- 
lar in  lieu  of  salary,  where  all  the 
stockholders  assented  thereto,  such 
stock  so  issued  to  them  being  treas- 
ury stock,  that  is,  stock  which  was 
issued  for  property  as  full  paid  and 
then  donated  to  the  corporate  treas- 
ury.   The  evidence  showed  that  the 
stock  represented  a  patent-right  and 
was  purely  speculative  and  had  no 
market  value.     Divine  v.  Universal, 
etc.  Co.,  38  N.  W.  Rep.   93    (Tenn., 
1896).    A  deed  from  the  corporation 
to  the  president's  firm  is  not  void.  It 
is  voidable  by  the  corporation  or  its 
stockholders  only.   Fudickar  v.  East, 
etc.  Dist.,  109  Cal.  29  (1895).    See  also- 
Nye  V.  Storer,  168  Mass.  53  (1897). 


332  (1885).    A  sale  of  the  property  of 
•an  insolvent,  foreign  corporation,  for 
an  insufficient  consideration,  by  the 
executive  committee  to  two  of  the 
trustees,  is  void.    Third  Nat.  Bank  v. 
Elliott,  43  Hun,  121  (1886);  aff'd,  114 
N.  Y.  623.    See  also  Reilly  v.  Oglebay, 
35  W.  Va.  36  (1884).    Where  a  sale  of 
land  is  made  by  the  corporation  to  a 
director,  in  order  to  raise  funds  to 
pay  debts  due  to  mismanagement, 
the    corporation    itself    may  subse- 
quently cause  the  sale  to  besetasida 
Crescent  City,  etc.  Co.  v.  Flanner.  44 
La.  Ann.  23  (1892).  Wliere  a  director 
buys  land  of  the  corporation  at  one- 
tenth  of  its  value,  a  stockholder  may 
cause  the  transaction  to  be  set  aside. 
Woodroof  V.  Howes,  88  Cal.  184  (1891). 
Where  a  contract  is  made  by  a  cor- 
poration to  sell  coal  to  one  of  its  di- 
rectors, and  the  corporation  does  not 
fulfill,  the  director  cannot  recover 
damages  where  the  money  for  the 
coal  was  to  pay  a  personal  debt  of 
the  president,  and  the  director  has 
relieved  the  corporation  from  liabil- 
itv.  Main  Jellico,  etc.  Co.  v.  Lotspeich, 
20  S.  W.  Rep.  377  (Ky.,  1892).     A  cor- 
poration having  a  leasehold  with  the 
privilege  of  purchasing  the  fee  may 
sell  the  latter  to  a  director  where  the 
company  has  neither  the  money  nor 
credit    to    exercise    such    privilege. 
Hannerty  v.  Standard  Theater  Co., 


1289 


§  G53.] 


FKAUDS    OF   DIRECTORS,  PROMOTERS,  ETC.       [CH.  XXXIX. 


those  interested  in  the  corporation  or  by  third  parties.  If  the 
director  purchased  at  such  a  foreclosure  sale  he  held  the  prop- 
erty as  trustee  for  the  benefit  of  the  corporation  and  the  stock- 
holders. Upon  being  repaid  the  price  he  gave  therefor,  he  was 
bound  to  make  over  the  property  to  the  corporation.^    The 


1  Harts  V.  Brown,  77  111.  22G  (1875). 
To  same  effect,  Hope  v.  Valley  City 
Salt  Co.,  25  AV.  Va.  789  (1885).  where 
the  directors  resold  the  property  at 
three  times  its  cost  to  himself.  See 
also  Jackson  v.  Ludeling,  21  "VValL 
616,  625  (1874),  where  the  directors 
were  part  of  those  who  purchased  at 
a  foreclosure  sale  of  the  corporate 
property;  also,  Muiison  v.  Syracase, 
etc.  Ry,  29  Hun,  76  (1883),  where  the 
directors  purchased  for  the  purpose 
of  reorganizingthe  corporation;  S.  C, 
103  N.  Y.  58  (1886),  where  Munson  was 
a  director  in  an  insolvent  railroad 
corporation,  and  also  a  director  in  a 
corporation  that  wished  to  purchase 
said  railroad,  and  in  behalf  of  the 
latter  company  contracted  to  p\u*- 
chase  the  said  railroad  from  the  bond- 
holders after  the  latter  should  pur- 
chase the  same  at  a  foreclosure  sale. 
The  court  refused  to  enforce  the  con- 
tract; Raleigh  v.  Fitzpatrick,  43  N. 
J.  Eq.  501  (1887),  where  the  directors 
of  a  corporations  owning  land  sub- 
ject to  a  mortgage  allowed  a  fore- 
closure to  be  made,  and  then  pur- 
chased at  the  sale.  See  Foster  v. 
Oxford,  etc.  R'y,  13  C.  B.  200  (1853). 
See  also  Allen  v.  Jackson,  122  111.  567 
(1887),  holding  a  director  who  had 
purchased  corporate  property  at  a 
foreclosure  sale  liable  to  former  pur- 
chasers of  that  property  from  the  cor- 
poration, subject  to  the  mortgage. 
Where  a  director  purchases  property 
from  an  insolvent  corporation,  "it 
devolves  on  the  directors  to  show 
that  the  transaction  was  made  in 
good  faith,  and  that  the  sale  produced 
the  full  value  of  the  property.  If 
they  fail  to  show  these  facts,  credit- 
ors are  entitled  to  compel  them  to 


account  for  the  full  value  of  the  prop- 
erty." Wilkinson  v.  Baucrle,  41  N. 
J.  Eq.  635  (1886).  A  sale  of  property 
to  a  syndicate,  of  which  a  director  is 
a  member,  will  not  be  set  aside  when 
the  full  value  was  received  by  the 
coi-poration,  and  the  sale  was  made 
in  order  to  protect  the  parties  who 
were  sureties  for  the  price  to  bo  paid 
by  the  corporation  for  the  property. 
Hill  V.  Ni-sbet,  100  Ind.  341  (1884).  In 
Twin  Lick  Oil  Co.  v.  I^Iarbury,  91  U.  S. 
587  (1875),  a  director  loaned  money 
to  the  corporation,  took  bonds  there- 
for, and  had  the  bonds  secured  by  a 
mortgage  running  to  a  third  person 
as  a  trustee,  and  upon  a  sale  by  the 
trustee  the  director  purchased  for 
himself.  Laches  barred  any  remedy. 
Directors  may  purchase  at  a  fore- 
closure sale,  under  some  circum- 
stances. Saltmarsh  v.  Spaulding,  147 
Mass.  224  (1888).  A  director  may  own 
bonds  and  may  purchase  at  the  fore- 
closure sale.  The  sale  is  valid  even 
though  allowed  by  the  directors  from 
corrupt  motives,  and  this  was  known 
to  the  pm-chasing  trustee.  At  least 
the  stockholders  must  offer  to  re- 
deem before  they  can  do  anything. 
Harpending  v.  Munson,  91  N.  Y.  650 
(1883).  The  president  of  the  com- 
pany may  purchase  at  the  foreclosure 
sale.  He  does  not  thereby  become  a 
trustee  for  the  bondholders.  Credit 
Co.  etc.  V.  Arkansas  Cent.  R.  R.,  15 
Fed.  Rep.  46  (1882).  Seven  years' 
delay  in  complaining  that  the  di- 
rectors issued  bonds  to  themselves 
for  no  consideration,  and  then  fore- 
closed and  bought  the  road  in,  is 
fatal.  Burgess  v.  St.  Louis  County 
R.  R.,  99  Mo.  496  (1889).  At  a  re- 
organization sale  a  director  may  pur- 


1290 


en.  XXXIX.]       FRAUDS    OF   DIEECTOKS,  PKOMOTEES,  ETC. 


[§  653. 


supreme  court  of  the  United  States,  ho-wever,  has  recently  held 
in  regard  to  the  president  that  if  the  foreclosure  is  not  brought 
about  by  the  president  "  in  violation  of  his  duties  as  an  officer 
of  the  company,  his  official  relations  to  the  company  prior  to  the 
f oreciosiu'e  did  not  prevent  him  from  bidding  for  the  property 
or  from  being  interested  in  its  purchase  "  by  another.^ 

Again,  it  has  been  held  that  where  the  directors  find  it  neces- 
sary to  extend  the  plant  in  order  to  meet  competition,  and 
the  cost  is  greater  than  expected,  and  bonds  are  offered  to  the 
stockholders  and  not  taken,  and  the  directors  loan  money  to 
the  company  on  the  bonds  at  par,  and  therfon  foreclosure  buy 
in  the  property,  their  purchase  will  be  upheld,  there  being  no 
actual  fraud  in  the  transaction.^  In  Michigan  it  is  held  that 
as  against  a  stockholder  a  director  ma}'-  purchase  the  prop- 
erty at  foreclosure  sale.'  Judgment  creditors  cannot  complain 
where,  upon  the  foreclosure  sale  of  the  corporate  property,  the 
president  purchases  the  projjprty  at  its  full  value.*  "Where  the 
directors  are  sureties  on  corporate  notes  secured  by  mortgage, 
they  may  buy  in  the  property  at  the  foreclosure  sale  for  their 


cliase  in  behalf  of  a  part  of  the 
stockholders,  and  the  transaction  will 
be  upheld  if  the  price  is  a  fair  one. 
Hayden  v.  Official,  etc.  Co.,  42  Fed. 
Rep.  875  (1890).  A  director's  pur- 
chase for  the  creditors  and  certain 
mortgage  bondholders  of  the  mort- 
gaged property  at  a  foreclosure  sale 
cannot  be  set  aside  by  a  stockholder 
five  years  after  the  sale,  where  the 
road  was  sold  for  all  it  was  worth, 
and  was  badly  in  debt,  and  required 
large  expenditures,  and  there  was  no 
possible  means  of  raising  more  money, 
and  the  stockholders  knew  of  the 
condition  of  things,  but  made  no  ef- 
fort to  prevent  a  sale,  and  the  director 
offered  to  allow  the  stockholders  to 
come  into  a  reorganization,  and  of- 
fered to  resell  the  property  for  less 
than  what  he  paid  for  it.  This  is  the 
rule  even  though  the  property  sub- 
sequently becomes  very  valuable.  Os- 
borne V.  Monks,  21  S.  W.  Rep.  101 
(Ky.,  1893).  Where  a  contractor  tak- 
ing stock  and  bonds  in  payment  for 

1291 


work  subcontracts  the  work  for  the 
stock,  and  then  forecloses  the  mort- 
gage and  buys  the  property  in,  tlie 
subcontractor  cannot  hold  him  liable 
for  the  stock.  McLane  v.  King,  144 
U.  S.  2G0  (1892).  An  insurance  com- 
pany cannot  refuse  payment  of  a  loss 
on  the  ground  that  the  insurer  was 
a  director  and  had  bought  the  cor- 
porate property  at  a  foreclosure  sale. 
Cavalier  v.  Royal  Ins.  Co.,  63  Hun,  83 
(1892). 

iMcKittrick  v.  Arkansas  Central 
R'y,  152  U.  S.  473,  497  (1894).  See  also 
cases  in  preceding  note.  As  to  the 
purchase  of  the  property  by  the  presi- 
dent and  others  on  a  foreclosure,  with 
a  view  to  reorganization,  see  clx.  LII, 
infra.  • 

=^  Foster  v.  Belcher's,  etc.  Co.,  113 
Mo.  238  (1893). 

3  Lucas  V.  Friant,  69  N.  W.  Rep.  735 
(Mich.,  1897). 

^Inglehart  v.  Thousand  Island 
Hotel  Co.,  109  N.  Y.  454  (1888). 


§  C53.] 


FKAUDS    OF    DIKECTOKS,  PEOMOTEKS,  ETC.       [CU.  XXXIX. 


own  protection.^  There  is  a  limit,  however.  Thus,  where  a 
director  who  practically  controlled  the  board  of  directors  caused 
all  the  earnings  of  the  railroad  to  be  used  in  improving  tho 
property,  thereby  preventing  a  payment  of  interest  on  the  cor- 
porate indebtedness  and  bringing  about  a  foreclosure  of  the 
mortgage,  the  director  himself  having  purchased  the  bonds  se- 
cured by  the  mortgage  and  having  purchased  the  railroad  at 
the  foreclosure  sale,  the  court  held  that  the  purchase  at  the  fore- 
closure sale  by  the  director  was  voidable.  Upon  repayment  to 
him  of  the  purchase  price  he  was  compelled  to  retransfer  the 
property  to  the  corporation,  even  though  another  foreclosure 
would  be  the  result.  Third  persons  who  had  purchased  the 
road  from  him  with  notice  stood  in  no  other  position  than  the 
director  himself.'^ 

The  same  general  rules  apply  to  execution  sales.  A  director 
is  disqualified  from  purchasing  corporate  property  sold  under 
execution.^  Where  g,  director  causes  the  property  to  be  sold  on 


1  College,  etc.  Line  v.  Ide,  40  S.  W. 
Rep.  G4  (Tex.,  1897). 

2  Covington,  etc.  R.  R.  v.  Bowler,  9 
Bush  (Ky.),  468  (1872).  In  Kitchen 
V.  St.  Louis,  etc.  R'y, '69  Mo.  224 
(1878),  the  court  said:  "Whatever 
is  sufficient  to  put  a  person  on  in- 
quiry is  notice;  that  is,  when  a  man 
has  sufficient  information  to  lead 
him  to  a  fact,  he  shall  be  deemed 
cognizant  of  it."  So  also  wlaere  a  di- 
rector agrees  to  redeem  from  ail  ex- 
ecution sale  certain  corporate  prop- 
erty, on  an  understanding  that  he 
does  it  for  the  corporation,  and  his 
payment  is  to  be  a  preferred  corpo- 
rate debt,  the  corporation  may  re- 
deem long  subsequently,  even  though 
the  director  had,  after  a  time,  treated 
the  property  as  his  own.  AVasatch 
Min.  Co.  V.  Jennings,  5  Utah,  243,  385 
(1887).  Where  a  corporation  is  liable 
to  an  officer  on  a  debt,  the  officer 
may  purchase  at  a  foreclosure  sale 
property  upon  which  the  corporation 
has  a  subsequent  lien;  may  pay  the 
prior  lien  out  of  the  corporate  funds; 
and  may  hold  the  title  to  secure  the 


debt  due  him.    Smith  v.  Lansing,  22 
N.  Y.  520  (18G0). 

3  Hoyle  V.  Plattsburgh,  etc.  R.  R.,  54 
N.  Y.  314  (1873).  Wliere  the  presi- 
dent and  a  director  purchase  the  cor- 
porate property  at  an  execution  sale, 
and  agree  to  convey  it  to  the  cor- 
poration upon  repaj'ment  of  the 
amount  paid,  the  coqjoration  may  re- 
deem it  long  subsequently  upon  pay- 
ment and  reimbursement  for  im- 
provements made.  Wasatch  Min.  Co. 
V.  Jennings,  5  Utah,  243,  385  (1888). 
Where  in  a  joint-stock  company  one 
member  buys  all  the  company's  prop- 
erty at  an  execution  sale,  though  he 
owes  the  company  more  than  tlie 
price  paid,  the  company  is  entitled 
to  the  property  and  an  accounting 
lies.  Bradbury  v.  Barnes,  19  Cal.  120 
(18G1).  Where  the  director  of  an  in- 
solvent coi-poration  buys  its  property 
at  an  execution  sale  to  which  he  is 
not  a  party,  he  is  liable  to  the  corpo- 
ration for  the  value  of  the  property 
less  the  amount  he  paid  for  it.  Tobin 
Canning  Co.  v.  Fraser,  81  Tex.  407 
(1891).    The  pui-chase  of  a  boat  at 


1292 


CH.  XXXIX.]      FRAUDS    OF   DIKECTOKS,  PKOMOTEKS,  ETC. 


[§  ^^^ 


an  execution  issued  on  his  own  debt,  and  buys  in  the  property, 
he  must  allow  other  creditors  to  participate  in  the  price  paid  at 
the  execution  sale.^  He  cannot  be  interested  in  the  purchase 
of  corporate  property  sold  for  the  non-payment  of  taxes.^  The 
corporation  may  reclaim  the  property  upon  payment  to  the 
director  of  the  amount  he  paid  therefor.  A  similar  rule  applies 
where  a  director  allows  or  brings  about  a  forfeiture  of  a  lease 
which  the  company  holds  as  lessee,  and  then  takes  a  new  lease 
of  the  same  property  in  his  own  name.'  But  a  corporate  of- 
ficer may  purchase  property  at  an  execution  sale  where  he  does 
so  in  good  faith  and  pays  the  full  value  of  the  property.*  The 
disability  of  directors  to  purchase  property  from  the  corpora- 
tion may  restrict  their  right  to  subscribe  for  unissued  stock  of 
the  corporation.*    There  is  some  difficulty  in  determining 


judicial  sale  by  the  manager  of  the 
corporation  owning  such  boat,  for 
himself  and  other  stockholders,  may 
not  cut  oflf  the  maritime  lien  of  an- 
other person.  Crosby  v.  Tlie  Lillie, 
42  Fed.  Rep.  237  (1890).  Where  a  di- 
rector and  treasurer  buys  corporate 
land  at  an  execution  sale  brought 
about  by  himself,  he  cannot  maintain 
an  action  of  forcible  entry  and  de- 
tainer against  the  company.  Hoff- 
man V.  Reichert,  147  111.  274  (1893), 
aff'g31  IlL  App.  558.  Where  a  director 
purchases  for  $8,400  property  of  the 
company  sold  on  an  execution  on  a 
judgment  obtained  by  him  against 
the  company,  and  within  a  year  sells 
the  property  for  $23,000,  he  must  pay 
over  the  profit  to  the  company.  Re 
Iron,  etc.  Mfg.  Co.,  19  Ont.  Rep.  (Can.) 
113  (1889).  Where  the  president  tvims 
over  claims  against  the  corporation 
to  his  wife,  even  for  value,  and  the 
corporate  property  is  sold  out  to  her 
on  judgments  on  the  notes,  although 
\he  corporation  was  doing  a  good 
business  and  in  no  danger,  the  court 
will  set  the  transaction  aside.  J.  W. 
Butler,  etc.  Co.  v.  Robbins,  151  IlL  588 
(1S94). 

1  Kittel  V.  Au.gusta,  etc.  R  R.,  78 
1\m1.  Rep.  855  (1897). 


2  Smith  V.  Fagan,  17  Cal.  178  (1800). 

3  Bengley  v.  Wheeler,  45  Midi.  493 
(1881);  Smith  v.  Bank  of  Victoria,  41 
L.  J.  (P.  C.)  34  (1872).  In  the  latter 
case  the  director  reorganized  and 
allowed  part  of  the  old  stockholders 
to  come  in.  A  dissenting  stock- 
holder caused  the  whole  transaction 
to  be  set  aside. 

^Horbach  v.  Marsh,  37  Neb.  22 
(1893). 

5  Where  the  directors  cause  treas- 
ury stock  to  be  sold  to  themselves  at 
less  than  its  real  value,  and  for  the 
purpose  of  carrying  an  election,  the 
court  will  set  the  transaction  aside 
as  fraudulent.  Hilles  v.  Parrish,  14 
N.  J.  Eq.  380  (1862;.  Where,  long  after 
the  company  has  commenced  busi- 
ness, it  has  disjDosed  of  its  property 
and  is  ready  to  declare  a  five  per  cent 
dividend,  the  directors'  issuance  to 
themselves  at  par  of  that  part  of  the 
original  capital  stock  which  never 
had  been  issued  is  a  fraud  on  the 
remaining  stockholders.  Arkansas, 
etc.  Soc.  V.  Eichholtz,  45  Kan.  16.4 
(1891).  Where  a  director  issues  to 
himself  at  par  stock  belonging  to  the 
corporation,  and  which  is  worth  more 
than  par,  the  transaction  is  voidable; 
but  if  aU  the  stockholders  acquiesce 


1293 


§  653.]  FRAUDS    OF   DIKECTOES,  PROMOTEKS,  ETC.       [CH.  XXXIX. 

whether  this  disqualification  of  a  corporate  officer  to  purchase 
property  from  the  corporation  extends  to  officci's  other  than 
the  president  and  directors.  It  has  been  held  to  affect  the 
treasurer  of  the  corporation '  and  also  the  cashier  of  a  bank.- 
It  has  also  been  intimated  that  a  superintendent  of  the  corpo- 
ration is  under  the  same  disability.'  A  stockholder,  however, 
even  though  he  owns  a  majority  of  the  stock  of  the  corporation, 
may  at  a  public  sale  of  its  property  buy  such  property.  "  lie 
has  his  own  interests  to  protect,  and  is  not  charged  with  the 
care  of  the  interests  of  the  other  stockholders.  They  act  for 
themselves."* 

An  insurance  company's  secretary  has  no  right  to  insure  in 
the  company  his  own  property,  unless  other  officers  properly 
approve  of  it.* 


therein  for  a  long  time,  the  acquies- 
cence of  the  executors  of  a  deceased 
stockholder  binds  the  estate.  St. 
Croix  Lvmiber  Co.  v.  Mittlestadt,  43 
Minn.  91  (1890).  But  see  Sims  v.  Street 
R.  R.,  37  Ohio  St.  556  (1883).  See 
also  §§  65,  70,  286,  614,  siiprcu  Cf. 
Charleston  Ins.  &  T,  Co.  v.  Sebring,  5 
Rich.  Eq.  (S.  C.)  342  (1853),  where  the 
directors  purchased  from  the  corpo- 
ration stock  which  the  corporation 
had  previously  issued  and  liad  pur- 
chased for  itself.  See  also  Parker  v. 
McKenna,  L.  R.  10  Ch.  .A  pp.  96(1874) 
and  York,  etc.  R'y  v.  Hudson,  16 
Beav.  485  (1853),  holding  that  upon 
an  increase  of  the  capital  stock  the 
directors  have  no  right  to  make  a 
secret  profit  in  its  disposaL 

1  McAUen  v.  "Woodcock,  60  Mo.  174 
(1875),  holding  that  the  treasurer's 
piu'chase  of  the  corjDorate  property 
at  an  execution  sale  thereof  is  a  pur- 
chase for  the  benefit  of  the  corpora- 
tion. See  also  Parker  v.  Nickerson, 
112  Mass.  195  (1873). 

2  First  Nat.  Bank  v.  Drake,  29  Kan. 
311  (1883);  Torrey  v.  Bank  of  Orleans, 
9  Paige,  649  (1842);  affd,  Bank  of  Or- 
leans V.  Torrey,  7  Hill,  260. 

s  Cook  V.  Berlin  Woolen  Mill  Co., 


43  "Wis.  433  (1877).  In  this  case  tlie 
superintendent's  purchase  was  ille- 
gal, inasmuch  as  one  of  the  directors 
was  a  secret  partner  in  the  purchase. 
A  corporation  may  set  aside  an  exe- 
cution sale  fraudulently  concealed  by 
its  agent,  who  was  interested  in  the 
judgment,  wliich  fact  the  purchaser 
knew.  Lang  Syne,  etc.  Co.  v.  Ross, 
20  Nev.  127  (1888).  The  superintend- 
ent and  surveyor  of  a  rural  cemetery 
association  may  purchase  from  it  a 
large  number  of  lots  in  the  cemeterj-, 
although  he  intends  to  resell  them. 
Palmer  v.  Cj-press  Hill  Cemetery,  122 
N.  Y.  429  (1890). 

4  Price  V.  Holcomb,  89  Iowa,  123 
(1893);  Mickles  v.  Rochester  City 
Bank,  11  Paige,  118  (1844). 

5  Pratt  V.  Dwelling,  etc.  Ins.  Co., 
130  N.  Y.  206  (1891).  Wliere  the  sec- 
retary, who  is  also  general  manager, 
buys  in  the  corporate  property  at  an 
execution  and  tax  sale,  he  must  yield 
it  up  to  the  company  upon  payment 
of  the  amount  for  wliich  it  was  sold, 
and  his  grantee,  who  is  also  in  a  fidu- 
ciaiy  relation,  mvist  do  the  same. 
San  Francisco  Water  Co.  v.  Pattee, 
86  CaL  023  (1890). 


1294 


CU.  XXXIX.]       FKAUDS    OF   DIKECTORS,  PEOMOTEES,  ETC.       [§§  654-5. 

§  654.  Reorganization  of  coiyorations. —  This  subject  is  con- 
sidered elsewhere.^ 

§  655.  Issue  of  "  ivatered  "  stocTc  and  ofbonds  at  a  discount — 
Division  of  assets  leaving  creditors  unpaid. —  The  general  sub- 
ject of  the  legality  of  issues  of  stock  ^  and  of  bonds '  at  less 
than  their  par  value  is  considered  elsewhere.  The  fact  that 
such  issues  are  made  to  directors  instead  of  to  the  public  is  im- 
material, unless  actual  fraud  is  involved.  As  will  be  shown 
hereafter,  bonds  may  legally  be  issued  to  directors,*  and  such 
issues  may  be  at  less  than  par.*  A  corporate  creditor  cannot 
complain  that  a  company  sold  its  bonds  to  some  of  the  direct- 
ors at  a  discount  of  twenty-five  per  cent.^  ITevertheless,  al- 
though none  of  the  stockholders  and  creditors  of  a  company, 
which  is  in  difficulties,  object  to  a  new  issue  of  bonds  and  stock 
for  contract  work,  a  part  of  the  bonds  and  stock  being  given 
to  the  stockholders  and  bondholders  as  a  bonus,  yet  where  the 
intention  is  to  have  outside  people  invest  in  the  bonds  and 
stock  of  the  company,  the  scheme  is  illegal  and  the  directors 
are  liable.^  As  between  the  directors  and  the  stockholders  the 
rule  invalidating  contracts  between  the  corporation  and  its  di- 
rectors ^  would  apply  to  the  sale  of  bonds  at  a  price  which  is 
unfair.  The  stockholders  may  sue  the  directors  for  gross  mis- 
management, and  for  damages,  where  fraudulent  mortgages 
have  been  placed  by  them  on  the  corporate  property.'  A  di- 
vision of  the  assets  of  a  corporation  leaving  its  creditors  unpaid 
has  already  been  considered.^**  A  stockholder  cannot  secure  a 
transfer  from  the  corporation  to  himself  of  the  property  of  the 
corporation  so  as  to  deprive  a  corporate  creditor  of  the  pay- 
ment of  his  debt.  "Where  he  does  so  through  legal  proceedings 
fraudulently  and  by  conspiracy,  the  property  may  be  reached.^^ 
The  receiver  of  an  insolvent  corporation  which  has  been  ren- 
dered insolvent  by  reason  of  its  assets  having  been  absorbed 
by  another  corporation  may  hold  its  directors  liable  for  the 

*  See  ch.  LII,  infra,  '  London  Trust  Co.  v.  Mackenzie,  68 
2  See  ch.  Ill,  supra.                              L.  T.  Rep.  380  (1893). 

>  See  ch.  XLVI,  infra.  «  See  §.^  649,  652,  siipra. 

*  See  i:§  660,  661,  ivfra,  ^  Landis  v.  Sea  Isle,  etc.  Co.,  53  N.  J. 

*  Du  Pont  V.  Northern  Pac.  R  R,    Eq.  654  (1895). 

18  Fed.  Rep.  467  (1883).  ^^  See  ch.  XL,  infra, 

6  Bank  of  Toronto  v.  Cobourg,  etc.  "  Angle  v.  Chicago,  etc.  R'y,  151 
R'y,  10  Ont.  Rep.  (Can.)  376  (1885).  U.  S.  1  (1894). 

1295 


§  656.]  FRAUDS    OF   DIKECTOKS,  PROMOTERS,  ETC.       [cil.  XXXIX. 

loss,  and  liis  suit  may  be  at  law  or  in  equity.'  Although  one 
company  owns  a  majority  of  the  stock  of  another  company,  and 
the  property  of  the  latter  company  is  leased  to  the  former  at  a 
fixed  rental,  the  rent  to  be  paid  to  bondholders  of  the  latter,  a 
judgment  creditor  of  the  latter  cannot  have  the  lease  set  aside 
unless  he  can  show  tliat  the  income  of  the  latter  company  is 
more  than  sufficient  to  pay  the  rental,  tliere  being  no  proof 
that  the  rental  was  unfair,  and  there  being  proof  that  the  rental 
is  more  than  the  company  earned.  The  principle  that  tlie 
owner  of  a  majority  of  the  stock  will  not  be  permitted  to  de- 
fraud stockholders  or  creditors  docs  not  apply.-  As  against 
corporate  creditors  the  company  cannot  trade  off  all  its  assets 
for  other  property,  where  the  latter  property  is  not  of  a  char- 
acter to  be  used  to  pay  debts,  even  though  ultimately  it  will 
probably  be  very  valuable,  such  trade  being  with  the  general 
manager  of  the  company.' 

§  G5G.  Stoclihohhrs'  actions  af/aiiist  persons  other  than  di- 
rectors  for  frauds,  etc.,  against  the  corporation. —  Ordinarily, 
where  third  persons  have  defrauded  a  corporation,  and  have 
defrauded  it  by  collusion  with  the  corporate  officers,  the  stock- 
holder's action  is  against  both  the  officers  and  the  third  per 
sons,  all  being  joined  as  parties  defendant.  When  such  is  the 
case  the  cause  of  action  comes  under  some  one  of  the  sections 
of  this  chapter.*    Where  the  dii'ectors  have  turned  over  the 

1  Mason  v.  Hemy,  152  N.  Y.  529  erly  sars  "  that  whenever  the  tnistee 
(189^^-  has  been  guilty  of  a  breach  of  trust, 

2  Sidell  V.  :Missouri  Pa&  R'y,  78  Fed  and  has  transferred  the  trust  prop- 
Rep.  724  (1897)*.  erty  by  sale  or  otherwise  to  any  tliird 

3  Levins  v.  Peeples,  eta  Ck).,  38  S.  W.  party,  the  cestui  que  trust  has  a  full 
Rep.  733  (Tenn.,  1896).  right  to  follow  such  property  into 

*Thus,  where  a  railroad  has  been  the  hands  of  such  tliird  party,  unless 
leased  to  another  railroad  company  he  stands  in  the  situation  of  a  l>ona 
under  a  certain  agreement  of  the  fide  purchaser  for  value  without  no- 
latter  guaranteeing  a  fixed  sum  to  the  tice."  See  also  Imperial,  etc.  Assoc 
former,  and  the  lessee  railroad  com-  v.  Coleman,  L.  R  6  H.  L.  189  (1873). 
pany  refuses  to  fulfill  its  contract  A  person  receiving  corporate  money 
andhas  control  ofthe  lessor  railroad,  in  compromise  of  his  suit  against 
a  stockholder  of  the  latter  may  guilty  directors  may  be  compelled  to 
bring  suit  against  the  former  to  pay  it  back  to  the  corporation.  Erie 
remedy  the  wrong.  March  v.  Eastern  Ry  v.  Yanderbilt,  5  Hun.  123  (1875). 
R  R,  40  N.  H.  548  (1860).  And  the  A  person  sued  on  a  contract  by  a 
case  of  Lewis  v.  St.  Albans,  etc.  corporation  cannot  claim  that  the 
Works,  50  Yt  477  (1878),  very  prop-  contract   is    unenforceable  because 

1296 


CH.  XXXEX.]      FEATTDS    OF   DIEECTOKSj  PKOMOTEKS,  ETC.  [§  656. 

property  to  an  assignee  to  pay  illegal  debts,  the  stocMiolders 
may  file  a  bill  to  set  the  transaction  aside.^  A  stockholder  wiU 
be  allowed  to  intervene  and  defend  a  suit  pending  against  the 
corporation  on  a  note  where  he  alleges  that  the  note  is  fraudu- 
lent, and  the  directors,  by  a  conspiracy,  do  not  intend  to  de- 
fend.2  An  attorney  who  receives  money  from  a  company  for 
a  specific  purpose  cannot  retain  it  and  set  it  off  against  his  fees.' 
A  stockholder  in  a  trust  company  may  file  a  bill  in  equity  to 
enjoin  the  company  from  paying  an  illegal  income  tax  to  the 
federal  government.* 

Another  class  of  cases  arises  when  third  persons  commit 
frauds  against  the  corporation  without  the  collusion  of  the  cor- 
porate oflBcers,  but  the  latter  neglect  or  refuse  to  institute  a 
suit  to  rectify  the  wrong.  The  right  of  the  stockholder  is  then 
not  so  clear.  It  is  ordinarily  within  the  discretion  of  the  cor- 
porate oflBcers  to  enforce,  compromise,  or  abandon  claims  which 
the  corporation  may  have  against  third  persons.  GeneraUy 
this  exercise  of  discretion  cannot  be  questioned  or  remedied  by 
the  stockholders,  except  by  electing  at  a  subsequent  election 
directors  more  in  accord  with  the  stockholders'  views.  It  is 
possible,  however,  that  cases  may  occur  where  the  judgment  of 
the  directors  is  so  palpably  and  iujuriously  wrong  that  the 
courts  will  sustain  a  stockholder's  action  herein.  This  subject 
is  treated  elsewhere.* 

another  of  the  parties  thereto  was  a  as  trustee,  the  court  will  compel  him 

director  of  the  corporation.   Stewart  to  administer  the  trusts  for  the  ben- 

V.  Lehigh  Valley  R.  R.,  38  N.  J.  L.  505  efit  of  the  company.    Tulleys  r.  Kel- 

(1875).    In  Beach  v.  Cooper,  72  CaL  ler,  45  Neb.  220  (1895). 

99  (1887),  in  a  stockholder's  sxnt  to  i  People's  Sav.  Bank  v.  Colorado, 

hold  oflBcers  liable  for  paying  .$315,000  etc.  Co.,  8  Colo.  App.  354  (1896). 

for  a  few  months' loan  of  .$140,000,  2  Majors   v.  Taussig,   20    Colo.  44 

the  court  held  that  the  act  was  not  (1894). 

a  fraud  per  se,  and  that  it  was  pos-  '  lie  3Iid-Kent  Fruit  Factory,  [1896] 
sibletliat  the  directors  might  explain  1  Ch.  567.  Where  bonds  are  issued 
it.  See  §  73S,  infra.  The  fact  that  by  a  corporation  to  a  director  or  of- 
an  officer  of  the  company  took  part  ficer  for  a  certain  purpose,  he  cannot 
in  a  swindling  scheme  does  not  de-  retain  them  on  the  ground  that  the 
prive  the  company  of  its  right  to  re-  company  owes  him  money.  Green- 
cover  back  moneys  of  which  it  was  ville  Gas  Co.  v.  Reis,  54  Ohio  St.  549 
wrongfully  deprived  by  such  scheme.  (1896). 

Farrow  r.  Holland  TriLst  Co.,  74  Hun,  <  Pollock  v.  Farmers'  L.  &  T.  Co, 

5.S-5  (1893).    Where  trust  deeds  to  a  157  U.  S.  429  (1895). 

trust  company  run  to  the  president  ^See  g  750,  infra, 
83                                            1297 


§  657.] 


FEAUDS    OF   DIRECTORS,  PROMOTERS,  ETC.       [cn.  XXXIX. 


§  657.  Salaries  or  compensation  to  corjwrate  officers. —  A  fre- 
quent fraud  upon  corporations  and  stockholders  is  perpetrated 
by  the  corporate  funds  being  used  to  pay  salaries  and  compen- 
sation to  corporate  officers  and  assistants.  It  is  well-established 
law  that  a  director  is  not  entitled  to  any  pay  for  his  services 
to  the  corporation  as  a  director  where  there  has  been  no  agree- 
ment in  advance  that  he  shall  have  a  salary.*  Hence  a  salary 
or  back  pay  voted  to  a  director  after  the  services  have  been 

1  American  Cent.  R'y  v.  Miles,  52    jointly.    Dallas  r.  Columbia,  etc.  Co., 


'lU.  174  (1869);  Illinois  Linen  Co.  v. 
Hough,  91  111.  G3  (1878);  Citizens' Nat 
Bank  v.  Elliott,  55  Iowa,  104  (1880); 
Smith  V.  Putnam,  Gl  N.  H.  633  (1883). 
The  president  cannot  claim  a  salary 
for  services  after  dissolution.  Mason 
V.  Pewabic  Min.  Co.,  66  Fed.  Rep.  391 
(1894).  A  president  who  is  a  large 
stockholder,  and  who  of  his  own  ac- 
cord renders  services  to  advance  its 
interests,  cannot  afterwards  recover 
a  salary  or  even  his  personal  ex- 
penses, the  claim  of  the  president  in 
this  case  being  $1,000,000.  McMuUen 
V.  Ritchie,  64  Fed.  Rep.  353  (1894). 
The  vice-president  of  a  bank  is  not 
entitled  to  a  salary  where  none  had 
been  agreed  upon.  Blue  v.  Capital 
Nat.  Bank,  145  Ind.  518  (1890).  In  a 
suit  by  a  director  for  reasonable  com- 
pensation the  company  may  show  its 
practice  in  regard  to  salaries;  also 
the  holdings  of  the  director  as  a 
stockholder,  and  also  any  agreement 
between  the  original  incorporators 
that  no  salaries  be  paid.  McCarthy 
V.  Mt.  Tecarte,  etc.  Co.,  Ill  CaL  328 
(1896).  Where  one  company  sells  out 
to  another,  and  the  president  of  the 
former  goes  into  the  employ  of  the 
latter,  the  presumption  is  that  his 
salary  as  president  ceases.  Simonson 
V.  New  York  City  Ins.  Co.,  141  N.  Y. 
12  (1894).  "Where,  by  agreement  be- 
tween the  corporation  and  its  cred- 
itors, the  corporate  affairs  are  man- 
aged by  a  committee  of  the  creditors, 
the  committee  may  collect  for  their 
services.    The  committee   may  sue 


158  Pa.  St.  444  (1S93).  In  Danville, 
etc.  R.  R.  v.  Kase,  39  AtL  Rep.  301 
(Pa.,  1898),  where  the  covirt  compelled 
the  president  of  the  company  to  re- 
fund a  back  salary  which  had  been 
voted  and  paid  to  him,  the  court 
nevertheless  said:  "Kase  for  years, 
from  the  inception  of  the  enterprise 
to  its  close,  performed  most  arduous 
duties  and  rendered  the  most  drudg- 
ing service  to  the  company.  He  was, 
in  one  sense,  the  company,  and  with- 
out him  there  would  have  been  no 
railroad.  Some  of  his  acts  were  reck- 
less,  and  perhaps  improvident.  He 
was  strong,  energetic,  and  domineer- 
ing. The  only  one  who  seemed  to 
exercise  any  restraint  upon  him  was 
Mr.  Wolverton,  the  treasurer,  and  he 
often  failed  in  holding  him  to  any- 
thing like  business  methods.  But 
immense  work,  whether  good  or  ill, 
Kase  performed;  and  if  this  work 
had  been  preceded  by  a  contract  for 
reasonable  compensation,  he  would 
be  entitled  to  a  credit  for  the  con- 
tract price."  A  director  who  re- 
ceives a  salary  for  certain  services 
cannot  recover  a  further  sum  for 
other  services,  where  he  was  not  ex- 
pressly employed  to  render  the  latter 
services  and  there  was  no  promise  to 
pay.  Acceptance  of  the  service  is 
immaterial.  Gill  v.  New  York  Cab 
Co.,  48  Hun,  524  (1888).  A  vice-presi- 
dent cannot  recover  for  extra  serv- 
ices where  there  was  no  agreement 
to  pay  him.  Gill  v.  New  York  Cab 
Co.,  48  Hun,  524  (1888). 


1298 


€H.  XXXLX.]      FEAUDS    OF   DIEECTOES,  PEOMOTEES,  ETC. 


[§  657. 


rendered  cannot  be  enforced.    It  is  invalid  and  voidable.    It 
is  the  same  as  giving  away  the  assets  of  tlie  corporation.^ 

"Where  an  illegal  salary  has  been  paid,  with  the  consent,  how- 
ever of  a  majority  of  the  stockholders,  and  a  minority  stock- 


1  Bennett  v.  St.  Louis,  etc.  Co.,  19 
Mo.  App.  349  (1885);  Ogden  v.  Mur- 
ray, 39  N.  y.  202  (1868);  Blatchford 
V.  Ross,  5  Abb.  Pr.  (N.  S.)  434  (1869); 
Jones  V.  Morrison,  31  Minn.  140  (1883); 
Maux  Ferry,  etc.  Co.  v.  Branegan,  40 
Ind.  361  (1872);  Loan  Assoc,  v.  Stone- 
metz,  29  Pa.  St.  534  (1858);  Holder  v. 
Lafayette,  etc.  R'y,  71  IlL  106  (1873), 
where  the  director  even  acted  as 
treasurer;  Gridley  v.  Lafayette,  etc. 
R'y,  71  HI.  200  (1873),  where  the  di- 
rector was  a  member  of  the  execu- 
tive committee.  Directors  are  not 
liable  to  acco\int  for  extra  pay  voted 
to  a  director  for  his  services  as  an 
agent.  Godbold  v.  Mobile  Branch 
Bank,  11  Ala.  (N.  S.)  191  (1847).  The 
majority  of  the  stockholders  cannot, 
on  the  winding  up,  vote  back  pay  to 
directors.  Hutton  v.  West  Cork  R'y, 
L.  R.  23  Ch.  D.  054  (1883);  Northeast- 
ern R'y  V.  Jackson,  19  W.  R.  198  (1870), 
holding  a  director  liable  for  back 
salary  paid  him  by  vote  of  the  direct- 
ors, when  the  statute  required  such 
vote  to  be  by  the  stockholders.  In 
HaU  V.  Vermont,  etc.  R  R.,  28  Vt.  401 
(1856),  compensation  for  taking  sub- 
scriptions had  been  voted  by  the 
stockholders.  After  the  rescinding 
of  that  vote  no  compensation  was  al- 
lowed, and  none  was  allowed  for  lob- 
bjring  the  charter  through  the  legis- 
lature. A  vote  by  the  stockliolders 
of  free  passes  over  the  road  to  a  di- 
rector in  consideration  of  his  efforts 
as  a  promoter  before  incorporation 
may  be  repudiited  at  any  time  by 
the  corjwration.  New  York,  etc.  R.  R. 
V.  Ketchum,  27  Conn.  170  (1858).  But 
see  St.  Louis,  etc.  R  R.  u  Tiernan,  37 
Kan.  606  (1887),  where  back  pay  to 
directors  for  services  in  promoting 
and  launching  the   enterprise  was 


voted  and  upheld.  A  director  can- 
not collect  pay  from  the  company  for 
his  services  on  the  executive  commit- 
tee and  for  his  expenses  in  travel 
where  there  has  been  no  resolution 
passed  previous  to  the  services,  enti- 
tling him  to  the  pay.  Lafayette,  etc. 
Ry.  V.  Cheeney,  87  IlL  446  (1877).  Di- 
rectors cannot  vote  compensation  to 
themselves  after  the  services  have 
been  performed.  Pf eiffer  v.  Lansberg 
Brake  Co.,  44  Mo.  App.  59  (1891),  re- 
viewing at  length  the  cases;  Bums 
V.  Commencement  Bay,  etc.  Co.,  4 
Wash.  St.  558  (1892).  A  director  can- 
not recover  pay  for  past  services,  even 
though  he  devoted  considerable  time 
to  the  affairs  of  the  company  and 
traveled  on  several  occasions  in  its 
behalf,  his  expenses  on  such  occasions 
having  been  paid  by  the  company. 
The  court  held  that  the  rule  that  the 
director  was  entitled  to  pay  for  serv- 
ices rendered  clearly  outside  of  his 
duties  as  director  is  subject  to  the 
condition  "  that  they  were  performed 
under  circumstances  sufficient  to 
show  tliat  it  was  well  iinderstood  by 
the  proper  corporate  officers  as  well 
as  himself  that  the  services  were  to 
be  paid  for  by  the  corporation." 
Brown  v.  Republican,  etc.  Mines,  17 
Colo.  421  (1892).  Where  no  salary  is 
attached  to  the  office  none  can  be  re- 
covered. Field  V.  Union  Box  Co.,  2 
W.  N.  Cas.  426  (1876).  Nor,  when  the 
salary  is  fixed,  wiU  extra  compensa- 
tion "be  aUowed  for  extra  services. 
Carr  v.  Chartiers  Coal  Co.,  25  Pa.  St. 
337  (1855).  And  a  resolution  remuner- 
ating officers  who  have  been  elected 
to  serve  without  compensation  is 
merely  voluntary  and  revocable. 
Loan  Assoc,  v.  Stonemetz,  29  Pa.  St. 
534  (1858).    See  also  note  2,  p.  1306. 


1299 


§  657.]  FRAUDS   OF  DIREOTOES,  PEOMOTEES,  ETC.      [OH.  tyttt. 


holder  files  a  bill  to  compel  repayment,  the  court  may  order 
the  repayment  to  dissenting  stockholders  of  such  part  of  the 
salary  as  they  would  get  if  the  whole  salary  was  repaid  to  the 
corporation  and  a  dividend  made.* 

There  is  authority  to  the  effect  that  directors  cannot  vote  a 
salary  to  themselves  even  in  advance  of  their  services  as  direct- 
ors.^ In  a  recent  English  case  Judge  Lindlcy  said:  "  Directors 
have  no  right  to  be  paid  for  their  services,  and  cannot  pay 
themselves  or  each  other,  or  make  presents  to  tliemselves,  out  of 
the  compan3'''s  assets,  unless  authorized  so  to  do  by  the  instru- 
ment which  regulates  the  company,  or  by  the  shai'eholders  at  a 
properly  convened  meeting." '    Nevertheless,  even  without  any 


1  Brown  v.  De  Young,  47  N.  K  Rep. 
863  (III.,  1897).  In  Eaton  v.  Robinson, 
33  Atl.  Rop.  339  (R.  I.,  1895),  where 
illegal  salaries  had  been  paid,  the 
court  ordered  the  guilty  parties  to 
pay  to  each  stockholder  his  propor- 
tionate part  of  the  money. 

2  A  resolution  that  directors  shall 
receive  pay  for  attendance  in  the 
future  does  not  sustain  an  action 
therefor.  It  is  a  promise  to  give  a 
gratuity,  and  is  not  enforceable  com- 
pulsorily.  Dunston  v.  Imperial  Gas 
Light  Co.,  3  B.  &  Ad.  125  (1832).  Di- 
rectors voting  stock  to  themselves  in 
compensation  for  selling  corporate 
stock  are  liable  for  the  value  of  the 
stock  upon  corporate  insolvency. 
Freeman  v.  Stine,  15  Phila.  37  (1881). 
Stock  issued  to  directors,  on  a  vote 
of  themselves,  in  payment  for  extra 
services,  will  be  ordered  canceled  by 
the  court.  Jones  v.  Johnson,  86  Ky. 
530  (1888);  Collins  v.  Godefroy,  1  B. 
&  Ad.  956  (1831),  where  a  director 
was  not  allowed  to  receive  a  reward 
offered  for  the  recovery  of  stolen 
property;  Kelsey  v.  Sargent,  40  Hun, 
150  (1886),  denying  the  right  of  the 
directors  to  vote  salaries  to  them- 
selves. See  also  cases  in  the  follow- 
ing note. 

^Re  George  Newman  Co.,  [1895]  1 
Ch.  674,  686.  "  The  shareholders,  at  a 
meeting  duly  convened  for  the  pur- 


pose, can,  if  they  think  proper,  re- 
munerate directors  for  their  trouble 
or  make  presents  to  them  for  their 
services  out  of  assets  properly  divisi- 
ble amongst  the  shareholders  them- 
selves. Further,  if  the  company  is  a 
going  concern,  the  majority  can  bind 
the  minority  in  such  a  matter  as  this. 
But  to  make  presents  out  of  profits  is 
one  thing,  and  to  make  them  out  of 
capital  or  out  of  money  borrowed  by 
the  company  is  a  very  different  mat- 
ter." The  court  held  that  even  the 
fact  that  all  the  stockholders  knew 
of  the  transaction  and  acquiesced 
therein  was  not  sufficient.  Re  George 
Newman  &  Co.,  [1895]  1  Ch.  674,  680. 
Cf.  Re  Woods,  etc.  Co.,  02  L.  T.  Rep. 
700  (1890).  Where  directors  are  al- 
lowed a  salary  by  the  charter,  it  may 
be  paid  out  of  the  capital  if  no  profits 
are  made.  Re  Lundy  Granite  Co.,  26 
L.  T.  Rep.  673  (1872).  It  is  legal  for  a 
coi-poration  to  issue  stock  as  full  paid 
to  a  person  in  consideration  of  his 
leaving  an  employment  in  which  he  is 
engaged,  and  of  assuming  the  presi- 
dency of  the  corporation.  Shannon 
V.  Stevenson,  173  Pa.  St.  418  (1896).  A 
resolution  that  the  president  shall  re- 
ceive $5,000  a  year,  which  has  been 
acted  on  for  fifteen  years,  may  be  re- 
lied upon  by  a  new  president,  even 
though  he  does  not  collect  it  for  two 
and  a  half  years.    Farmers'  L.  &  T. 


1300 


en.  XXXIX.]      FKAUDS    OF   DIRECTOKS,  PEOMOTERS,  £T0.  [§  657. 

vote,  a  director  is  entitled  to  pay  for  extra  services  which 
he  performed  as  general  manager  with  the  consent  of  the 
board.^  And  where  a  reasonable  salary  was  drawn  by  a  man- 
aging director  without  the  authority  of  any  resolution,  and 
without  any  specific  notice  to  the  shareholders,  but  the  item 
appeared  in  the  accounts,  and  every  shareholder  either  knew 
or  had  the  means  of  knowing  the  fact,  it  was  held  that  the  di- 
rector was  not  liable  to  account  to  the  company  for  the  money.* 
It  has  been  held  also  that  he  may  recover  reasonable  compen- 


Co.  V.  Housatonio  R.  R,  152  N.  Y.  251 
(1897);  Starbuck  v.  Housatonic  R.  R., 
83  Hun,  584  (1895).  Where  the  board 
consists  of  tlie  president,  his  son,  and 
his  clerk,  and  they  vote  five  years' 
back  pay  to  the  president,  the  act  is 
illegal,  and  notes  issued  therefor  are 
illegal.  Doe  v.  Northwestern,  etc. 
Co.,  78  Fed.  Rep.  62  (1896),  the  court 
saying:  "  The  directors  of  a  corpora- 
tion have  not  the  power  to  fix  their 
own  salaries,  nor  to  bind  the  corpo- 
ration by  a  resolution  to  pay  for  serv- 
ices which  have  been  rendered  in 
their  official  capacity  under  by-laws 
which  contain  no  express  provision 
for  such  compensation."  A  resolu- 
tion of  the  stockliolders  that  a  man- 
aging director  should  receive  a  cer- 
tain salary  up  to  a  certain  date  does 
not  entitle  him  to  a  salary  beyond 
that  date,  and  he  may  be  compelled 
to  repay  it.  Re  Bolt  and  Iron  Co.,  14 
Ont.  Rep.  (Can.)  211  (1887);  aflf'd,  16 
App.  Rep.  397.  Where  the  salary  of 
the  president  has  been  fixed  for  a 
year  by  resolution  of  the  board  of  di- 
rectors, the  board  cannot  rescind  the 
resolution.  It  is  a  contract.  Kim- 
ball V.  New  England,  etc.  Co.,  46  N.  E. 
Rep.  432  (Mass.,  1897).  In  Re  New  Brit- 
ish Iron  Co.,  78  L.  T.  Rep.  155  (1898), 
the  by-laws  provided  that  £1,000  an- 
nually should  be  paid  to  the  board  of 
directors  for  fees,  to  be  divided  as  the 
board  might  direct.  The  contract  to 
pay  the  president  may  be  oral  and 
informal,  and  may  consist  of  conver- 


sations. Bagley  v.  Carthage,  etc.  R.  R, 
25  N.  Y.  App.  Div.  475  (1898). 

'  Eales  V.  Cumberland,  etc.  Co.,  6  H. 
&  N.  481  (18G1).  A  salary  voted  to  a 
director  by  the  directors  for  services 
as  manager  is  not  legal  where  the 
charter  reqtiires  a  vote  of  the  stock- 
holders on  contracts  in  which  a  di- 
rector is  interested.  Re  State  F.  Ins. 
Co.,  36  L.  J.  (Ch.)  634  (1867).  In  Ben- 
son V.  Heathorn,  1  Y.  &  C.  (Ch.)  326 
(1842),  the  court  compelled  a  director 
to  pay  back  a  salary  which  he  had 
received  for  acting  as  "ship's  hus- 
band "  for  the  company,  whose  busi- 
ness was  the  working  of  vessels. 
The  president  cannot  bind  the  cor- 
poration by  an  agreement  to  pay  a 
director  extra  compensation.  Bailey 
V.  Buffalo,  etc.  R'y,  14  Hun,  483  (1878); 
Hodges  V.  Rutland,  etc.  R.  R.,  29  Vt. 
220  (1857).  A  salary  voted  by  a  board 
of  three  directors  to  one  of  their 
number  as  general  manager  is  valid, 
at  least  so  far  as  concerns  a  person 
who  purchases  the  stock  after  the 
salary  lias  been  paid.  Clark  v.  Ameri- 
can Coal  Co.,  86  Iowa,  436  (1892).  A 
director  who  performs  services  as 
general  manager  may  recover  there- 
for. Kiyger  v.  Railway,  etc.  Mfg. 
Co.,  "46  Minn.  500  (1891).  A  director 
may  recover  on  a  quantum  meruit  for 
services  rendered  outside  of  his  duties 
as  director.  Ruby,  etc.  Co.  v.  Pren- 
tice, 52  Pac.  Rep.  210  (Colo.,  1898). 

2  Felix,  etc.,  Ltd.,  v.  Hadley,  77  L. 
T.  Rep.  131  (1897). 


1301 


§  657.] 


FEAUDS    OF   DIKECTOKS,  TKOMOTERS,  ETC.       [CU.  XXXIX. 


sation  for  his  services  as  superintendent,^  or  attorney  in  a  suit; ' 
or  secretary  and  agent; '  or  cashier;  *  but  not  for  services  as  a 
promoter;^  nor  for  acting  as  president  and  master-builder;* 
but  may  recover  for  acting  as  agent  of  the  company.'' 


I A  director  who,  at  the  request  of 
the  president,  superintends  the  con- 
stniction  of  the  road,  may  recover 
pay  therefor.  Henry  v.  Rutland,  etc. 
R.  R.,  27  Vt.  435  (1855);  Chandler  v. 
Monmouth  Bank,  13  N.  J.  L.  255  (1832), 
where  there  was  even  a  charter  pro- 
hibition. A  director  may  recover 
for  services  rendered  as  superintend- 
ent. Severson  v.  Bimetallic,  etc.  Co., 
18  Mont.  13  (1896). 

2  Jackson  v.  New  York  Cent.  R.  R., 
2  Thomp.  &  C.  (N.  Y.)  653  (1874); 
Santa  Clara  Min.  Assoc,  v.  Meredith, 
49  Md.  389  (1878);  Ten  Eyck  v.  Pon- 
tiac,  etc.  R  R.,  74  Mich.  226  (1889). 
An  attorney  may  recover  for  serv- 
ices, even  though  he  is  a  director,  it 
being  agreed  that  he  should  be  paid 
as  soon  as  the  company  was  able,  and 
an  agreement  prior  to  incorporation 
being  ratified.  Arapahoe  Inv.  Co.  v. 
Piatt,  5  Colo.  App.  515  (1895).  A  di- 
rector who  acts  as  attorney  for  the 
company  cannot  collect  fees  therefor 
unless  there  was  an  express  contract 
to  that  effect.  Ee  ^limico,  etc.  Co., 
26  Ont.  Rep.  289  (1895). 

3  Rogers  v.  Hastings,  etc.  R'y>  22 
Minn.  25  (1875).  As  to  secretary,  Tal- 
cott  V.  Olcott  Mfg.  Co.,  11  N.  Y.  Week. 
Dig.  141  (1880).  Contra,  Fraylor  v. 
Sonora  Min.  Co.,  17  Cal.  594  (1861). 
Neither  the  president,  treasurer,  nor 
secretary  can  recover  the  value  of 
their  services,  where  they  are  also 
directors,  unless  there  was  an  express 
contract  to  pay  them  or  the  by-laws 
so  provide.  The  decisions  in  Penn- 
sylvania to  this  effect  control  serv- 
ices there  rendered,  though  suit  is 
brought  elsewhere.  Crumlish  v.  Cen- 
tral Imp.  Co.,  38  W.  Va.  390  (1893).  A 
secretary  may  recover  for  real  serv- 
ices, even  though  he  is  also  a  director. 


Chamberlain  v.  Detroit  Stove  Works, 
103  Mich.  124  (1894). 

*  First  Nat.  Bank  v.  Drake,  29  Kan. 
311  (1883). 

»  Rock  ford,  etc.  R  R  u  Sage,  65  111. 
328  (1872).  See  Eakins  v.  American, 
etc.  Co.,  75  Mich.  568  (1889). 

6  Levisee  v.  Shreveport  City  R  R, 
27  La.  Ann.  641  (1875). 

^  A  director  and  stockholder  who, 
by  contract  with  the  company,  is  en- 
titled to  a  certain  sixlary,  may,  upon 
the  insolvency  of  the  company,  prove 
his  claim  the  same  as  other  credit- 
ors. Re  Dale,  L,  R  43  Ch.  D.  255 
(1889).  A  director  may  collect  a  rear 
sonable  compensation  for  services 
and  materials  given  to  his  company. 
Greensboro,  etc.  Co.  v.  Stratton,  120 
Ind.  294  (1889).  A  bona  fide  holder 
of  a  street  railway  company's  note 
is  protected,  even  tliough  it  was  given 
to  a  director  in  payment  for  services 
in  procuring  the  franchise.  Knee- 
land  V.  Braintree  Street  R'y,  167  Mass. 
161  (1896).  A  director  who  performs 
extra  services  is  entitled  to  pay  there- 
for. Zellerbach  v.  Allenberg,  99  Cal. 
57  (1893).  The  president  may  collect 
a  salary  legally  voted  to  him,  even 
though  he  failed  to  fulfill  his  prom- 
ise to  make  the  basiness  a  success. 
Paducah,  etc.  Co.  v.  Hays,  24  S.  W. 
Rep.  237  (Ky.,  1893).  The  president 
may  collect  pay  for  his  services  if 
they  were  outside  of  his  official 
duties,  and  he  was  actually  employed 
by  the  corporation,  and  the  services 
were  rendered  with  the  knowledge 
and  consent  of  the  corporation.  Out- 
terson  v.  Fonda  Lake  Paper  Co.,  20 
N.  Y.  Supp.  980  (1892).  A  director 
may  recover  for  services  rendered. 
]\IcDowall  V.  Sheehan,  13  N.  Y.  Supp. 
385  (1891)  (rev'd  on  another  point,  120 


1303 


CH.  XXXIX.]      FRAUDS    OF   DIEECTOKSj  PEOMOTEKS,  ETC. 


[§  657. 


A  salary  -which  takes  all  the  profits  and  part  of  the  capital 
stock  is  unreasonable.^  The  voting  of  a  salary'-  or  compensor 
tion  must  be  entirely  free  from  fraud,  actual  or  constructive. 
The  vote  is  illegal  if  it  is  carried  only  by  including  the  vote  of 
the  director  who  receives  the  salary  or  pay.^    A  salary  paid 

N.  Y.  200).    A  salary  payable  when    stockholders  does  not  cure  the  de- 


bonds  are  sold  is  collectible  in  cash 
if  they  are  not  sold  within  a  reason- 
able time.  Indianapolis,  etc.  R  R.  n 
Hyde,  122  Ind.  188  (1890).  In  general, 
see  also  Cheeney  v.  Lafayette,  etc. 
R'y.  68  IlL  570  (1873);  Shackelford  v. 
New  Orleans,  etc.  R  R,  37  Miss.  202 
(1859);  Santa  Clara  Min.  Assoc,  v. 
Meredith,  49  Md.  389  (1878),  where 
a  director  obtained  patents  and  ;nego- 
tiated  their  sale. 

'  Decatur,  etc.  Co.  v.  Palm,  21  S. 
Rep.  315  (Ala.,  1896). 

2  Butts  V.  Wood,  37  N.  Y.  317  (1867), 
where  the  vote  was  set  aside,  although 
the  salary  was  for  services  by  the 
director  as  secretary  and  treasurer; 
Ward  V.  Davidson,  89  Mo.  445  (1880), 
where  increased  pay  was  voted  to 
the  president  of  the  corporation; 
Gardner  v.  Butler,  30  N.  J.  Eq.  702 
(1879);  Jones  v.  Morrison,  31  Minn. 
140  (1883);  Kelsey  v.  Sargent,  40  Hun, 
150  (1886).  The  president,  secretary, 
and  treasurer  cannot  vote  salaries  to 
themselves,  the  company  being  in 
bad  financial  condition.  Hardee  v. 
Sunset  Oil  Co.,  56  Fed.  Rep.  51  (1893). 
Where  the  directors  vote  a  salary  to 
themselves,  partly  for  services,  but 
largely  in  fraud,  the  court  will  com- 
pel them  to  refund  the  whole  salary. 
Eaton  V.  Robinson,  31  AtL  Rep.  1058 
(R  L,  1895).  In  McNulta  v.  Com  Belt 
Bank,  45  N.  E.  Rep.  954  (IlL,  1897),  the 
president  sued  to  recover  a  two  and 
a  half  per  cent  commission  which 
had  been  voted  by  the  directors  to 
him  on  unissued  stock  for  sers'ices. 
The  suit  failed  on  several  grounds  of 
illegality,  particularly  that  his  vote 
was  necessary  to  carry  the  same.  A 
ratification  by  the  same  directors  as 


feet.  A  salary  voted  to  the  president 
by  a  quorum  of  three  directors,  the 
two  other  directors  being  absent,  and 
the  president  being  one  of  the  three, 
is  not  enforceable.  Copeland  v.  John- 
son Mfg.  Co.,  47  Hun,  235  (1888).  Mac- 
Naughton  v.  Osgood,  41  Hun,  109 
(1886),  holds  that  a  stockholder  can- 
not cause  the  vote  of  salary  to  be  set 
aside  and  repayment  made  merely 
by  proving  that  the  officers  voted  it 
to  themselves.  He  must  prove  act- 
ual fraud.  This  decision,  however, 
may  well  be  doubted.  Where  the 
president  presides  over  a  meeting 
which  votes  a  future  salary  to  him- 
self for  life,  the  salary  is  illegal,  al- 
though he  did  not  vote.  Beers  v. 
New  York  L.  Ins.  Co.,  66  Hun,  75 
(1892).  Stock  voted  to  the  president 
as  a  salary  at  a  meeting  where  his 
presence  is  necessary  to  form  a 
quorum  may  be  recovered  back,  but 
acquiescence  for  five  years  is  fatal. 
U.  S.  Ice,  etc.  Co.  v.  Reed,  2  How.  Pr. 
(N.  S.)  253  (1885).  A  stockholder  may 
compel  the  president  to  refund  a  sal- 
ary voted  to  himself  at  an  illegal 
meeting  of  a  part  of  the  directors. 
Back  pay  is  illegal  Where  the  presi- 
dent takes  part  in  the  proceeding,  or 
his  vote  is  essential,  the  vote  of  sal- 
ary to  him  is  illegaL  Wickersham 
V.  Crittenden,  93  CaL  17  (1892).  A 
salary  to  the  president,  his  own  vote 
being  necessary,  is  illegaL  Wick- 
ersham V.  Crittenden,  106  CaL  327 
(1895).  A  salary  voted  by  the  aid  of 
the  vote  of  an  officer  receiving  the 
same  may  be  validated  by  subsequent 
vote  of  the  board.  Wickersham  v. 
Crittenden,  110  CaL  332  (1895).  A 
salary  voted  to  the  president  at  a 


1303 


§  657.]  FKATJDS    OF   DIEECTOKS,  PEOMOTEES,  ETC.       [CH.  XXXIX. 


to  a  director  for  nominal  services  wlien  the  corporation  was 
insolvent  may  be  recovered  back.^ 

"Where  the  board  of  directors  vote  large  pay  to  themselves, 
evidently  in  bad  faith,  and  with  a  view  to  depriving  the  corpo- 
ration of  more  than  a  reasonable  proportion  of  its  net  earnings, 
a  dissenting  stockholder  may  file  a  bill  in  equity  to  have  the 
amount  recovered  back.'    And  where  the  chief  stockholder, 


meeting  at  which  he  presides,  the 
minutes  showing  no  dissenting  vote, 
is  illegal  where  he  had  performed  no 
substantial  service,  even  though  he 
swears  that  he  did  not  vota  Ashley 
V.  Kinnan,  2  N.  Y.  Supp.  574  (1888). 
A  director  cannot  collect  a  salary 
voted  to  him  as  general  manager, 
even  in  advance  of  the  services, 
where  there  were  only  three  direct- 
ors, and  the  other  two  were  voted 
salaries,  one  as  vice-president  and  the 
other  as  assistant  treasurer.  Delay 
in  objecting  thereto  for  some  months 
is  no  bar  to  this  defense.  Mallory  v. 
Mallory-Wheeler  Co.,  61  Conn.  131 
(1891).  Where  a  company  is  prosper- 
ous, the  directors  may  vote  increased 
salaries  to  themselves,  each  one  re- 
fraining from  voting  when  the  res- 
olution aflFecting  himself  is  voted 
upon,  McNab  v.  McNab,  etc.  Co.,  02 
Hun,  18  (1891).  In  Bagaley  v.  Pitts- 
burgh, etc.  Iron  Co.,  146  Pa.  St.  478 
(1893),  a  salary  to  the  president,  fixed 
by  the  president  and  ajiother  di- 
rector, was  upheld  where  the  com- 
pany was  a  close  corporation.  Where 
two  directors,  forming  a  majority  of 
the  board,  vote  themselves  very  large 
salaries,  and  refuse  information  to 
another  director  who  is  the  only 
other  stockholder,  and  refuse  to  de- 
clare dividends,  and  proceed  to  con- 
vey the  property  of  the  company  to 
another  company  controlled  by  them- 
selves, a  court  of  equity  will  set  aside 
the  illegal  conveyance  and  the  reso- 
lutions authorizing  the  salaries,  and 
will  order  the  books  to  be  opened  to 
the  other  director,  and  will  order  divi- 


dends to  bo  declared.  The  court, 
however,  will  not  appoint  a  receiver 
and  enjoin  the  continuance  of  the 
business,  and  will  not  order  a  dis- 
tribution of  the  assets  of  the  com- 
pany. Laurel  Springs  Land  Co.  v. 
Fougeray,  50  N,  J.  Eq.  756  (1893), 
rev'g  Fougueray  v.  Cord,  50  N.  J.  Eq. 
185.  Where  three  out  of  five  direct- 
ors are  present  at  a  board  meeting 
and  vote  one  of  themselves  a  salary 
as  secretary,  it  is  illegal  The  action 
of  the  full  board  subsequently  in 
increasing  the  salary  does  not  vali- 
date the  first  vote.  Martin  i\  Santa 
Cruz,  etc.  Co.,  36  Pac.  Rep.  36  (Ariz., 
1894).  Where  three  persons,  being 
the  owners  of  a  majority  of  the  stock, 
agree  that  they  will  vote  their  stock 
to  elect  as  directors  three  persons  to 
be  named  by  one  of  them  and  two 
persons  to  be  named  by  the  otliers, 
and  that  one  of  them  who  had  re- 
ceived a  salary  of  $2,500  should  re- 
ceive a  salary  of  $5,000,  and  that  two 
of  such  directors  should  receive  a 
salary  of  $500  each,  the  agreement  is 
illegal.  Snow  v.  Church,  13  N.  Y. 
App.  Div.  108  (1897).  A  trustee  hold- 
ing stock  and  electing  himself  the 
president  of  a  company  and  receiv- 
ing a  salary  must  not  allow  his  per- 
sonal interest  in  the  salary  to  con- 
flict with  his  duty  as  a  stockholder 
to  favor  the  sale  of  the  corporate 
property  at  a  high  price.  Elias  v. 
Schweyer.  13  N.  Y.  App.  Div.  336 
(1897);  S.  C,  27  N.  Y.  App.  Div.  69. 

1  Putnam  v.  Gunning,  162  Mass.  553 
(1895). 

2  Where    during    eight   years    all 


1304 


OH,  XXXIX.]      FKATTOS   OF   DIKECTOES,  PEOMOTEES,  ETC.  [§  657. 

who  is  president,  induces  the  directors,  his  "  dummies,"  to  vote 
a  large  salary  to  him,  the  corporation  may  defeat  the  officer's 
action  at  law  to  recover  it.^  It  has  been  held  also,  where 
the  majority  of  the  stock  of  a  corporation  was  held  by  one 
family,  who  voted  away  the  corporate  profits  for  salaries,  that 
the  minority  might  call  upon  a  court  of  equity  to  remedy  the 
fraud.^ 

"Where  for  seven  years  a  stockholder  who  owned  a  majority 
of  the  stock  elected  himself  and  two  of  his  dummies  as  direct- 
ors of  the  company  and  caused  the  board  to  vote  a  large  salary 
to  himself  as  president  and  manager,  and  leased  to  the  com- 
pany his  property  at  a  large  rental,  the  salary  and  rental  are 
illegal  and  voidable.^ 

Where  persons  buying  a  majority  of  the  stock  thereupon 
take  control  and  vote  to  the  retiring  president  a  large  salary 
for  past  services,  he  being  one  of  the  persons  selling  the  stock 
to  them,  and  such  salary  so  paid  is  credited  to  the  vendees  on 
the  purchase  price  of  the  stock,  the  vendees  are  liable  to  re- 


the  profits  of  a  tvimpike  company, 
amounting  to  $20,000,  are  used  to 
pay  exorbitant  salaries  to  the  treas- 
urer and  secretary,  the  court  will 
order  a  repayment  of  the  same  with 
interest.  Wayne  Pike  Co.  v.  Ham- 
mons,  129  Ind  368  (1891);  Blatchford 
V.  Ross,  54  Barb.  43  (1869);  Ziegler  v. 
Hoagland,  52  Hun,  385  (1889),  where 
$86,000  in  salaries  was  voted  to  three 
persons.  In  Hedges  v.  Paquett,  3 
Oreg.  77  (1869),  the  court  refused  to 
interfere,  though  fraud  was  charged, 
in  that  the  directors  credited  large 
bills  to  themselves,  and  paid  them- 
selves large  sums  for  services,  had  de- 
stroyed the  business,  and  had  wasted 
the  funds  and  property.  This  case, 
however,  has  met  with  universal  dis- 
approval, and  must  be  considered  as 
contraiy  to  law. 

1  Davis  V.  Memphis  City  R'y,  22 
Fed.  Rep.  883  (1885).  In  Hubbard  v. 
New  York,  etc.  Co.,  14  Fed.  Rep.  675 
(1882),  wherein  a  person  contracted 
in  advance  to  become  a  director  and 
superintendent  at  a  remuneration  of 


one-third  of  the  profits  of  the  busi- 
ness, the  court  refused  to  uphold  the 
agreement,  and  said  the  contract  is 
to  be  "  construed  in  the  same  man- 
ner as  if  he  was  actually  a  director 
at  the  time  of  its  inception,  and  as  if 
it  was  made  with  him  while  he  was 
a  director. "  The  court  will  scrutinize 
carefully  a  salary  voted  by  the  board 
of  directors  to  one  of  their  number 
as  superintendent,  where  such  vote 
is  by  those  representing  him  in  the 
board,  but  if  the  salary  is  reasonable 
the  court  will  siistain  it.  Harris  v. 
Lemming,  etc.  Works,  43  S.  W.  Rep. 
869  (Tenn.,  1896). 

2  Sellers  v.  Phoenix  Iron  Co.,  13  Fed. 
Rep.  20  (1881). 

3  Where  the  company  had  failed  to 
pay  its  dividends  by  reason  of  such 
acts,  .a  court  of  equity,  upon  the  sviit 
of  another  stockliolder,  ordered  the 
president  to  accovmt,  and  appointed 
a  receiver  of  the  company  and  di- 
rected that  its  affairs  be  wound  up. 
Miner  v.  Belle  Isle  Ice  Co.,  93  Mich. 
97  (1892). 


1305 


§  65Y.]  FKAUDS    OF   DIKECTOKS,  TROMOTEKSj  ETC.       [cn,  XXXIX. 


store  the  money  so  paid.^  The  president  cannot  claim  a  salary 
for  his  services  where  none  was  voted  to  him  before  the  services 
were  rendered.'^ 

A  person  who  is  appointed  and  acts  as  secretary,  and  is 


1  Ellis  V.  Ward,  137  111.  509  (1890); 
S.  C,  20  N.  E.  Rep.  671,  holding  the 
president  not  liable  where  he  knew 
nothing  of  it. 

2  The  president  and  directors  who 
vote  back  pay  to  him  and  cause  cor- 
porate notes  to  be  issued  therefor  are 
liable  to  the  company  therefor,  but 
directors  not  taking  part  in  the  issue 
of  the  notes  are  not  liabla  Metro- 
politan Elev.  R'y  v.  Kneeland,  120  N. 
Y.  134  (1890);  Merrick  v.  Peru  Coal 
Co.,  61  111.  472  (1871);  Holland  v.  Lew- 
iston  Falls  Bank,  53  Me.  564  (1864); 
Barril  v.  Calendar,  etc.  Co.,  50  Him, 
257  (1888);  Commonwealth  Ins.  Co. 
V.  Crane,  47  Mass.  64  (1843),  where 
it  was  even  proved  that  the  former 
president  had  a  salary;  Kilpatrick  v. 
Penrose,  etc.  Co.,  49  Pa.  St.  118  (1865), 
where  both  the  president  and  treas- 
urer sued.  The  salary  of  the  presi- 
dent ceases  upon  the  discontinuance 
of  the  corporate  business  by  a  sale  of 
all  its  property.  Long  Island  Ferry 
Co.  V.  Terbell,  48  N.  Y.  427  (1872).  The 
president  is  not  entitled  to  a  pref- 
erence in  payment  imder  a  statute 
giving  to  "  laborers  "  of  an  insolvent 
coi-poration  such  a  preference.  Eng- 
land V.  Beatty,  etc.  Co.,  41  N.  J.  Eq. 
470  (1886).  A  note  is  not  collectible 
by  a  principal  whose  agent  made  the 
note  as  president  of  a  corporation, 
>7here  the  consideration  therefor  was 
unpaid  salary  of  the  president,  and 
the  note  was  ratified  by  the  corpora- 
tion only  by  the  casting  vote  of  the 
president.  Chamberlain  v.  Pacific, 
etc.  Co.,  54  Cal.  103  (1880).  Under  a 
peculiar  charter  provision  it  was  held 
in  Grundy  v.  Pine  Hill  Coal  Co.,  9 
S.  W.  Rep.  414  (Ky.,  1888),  that  there 
was  an  implied  obligation  of  the  cor- 
poration to  pay  its  president  a  salary. 


A  salary  as  fixed  for  a  preceding 
year  gives  no  right  to  a  salary  for 
prior  years.  Smith  v.  "Woodville,  etc. 
Co.,  66  CaL  398  (1885).  Stock  may  be 
issued  to  the  president  in  payment 
of  past  salary  and  debts.  Reed  v. 
Hayt,  51  N.  Y.  Super.  Ct.  121  (1884); 
aiT'd,  109  N.  Y.  659,  holding  also  that 
though  the  president  himself  was 
one  of  the  three  directors  voting  for 
the  same,  yet  that  long  acquiescence 
cures  any  right  to  object.  A  meet- 
ing of  four  legally-elected  and  three 
illegally-elected  directors  of  a  corpo- 
ration is  not  such  a  meeting  as  sus- 
tains an  action  for  salary  by  the 
president  who  was  elected  by  them. 
Waterman  v.  Chicago,  etc.  R  R.,  139 
IlL  658  (1892).  In  Bowenu.  Carolina, 
etc.  R'y,  34  S.  C.  217  (1891),  the  presi- 
dent of  a  railroad  company  was  al- 
lowed to  recover  from  the  company 
what  the  jiiry  believed  his  services 
to  have  been  worth.  A  president  is 
not  entitled  to  pay  for  his  services 
unless  an  agreement  in  advance  to 
that  effect  is  made.  Martindale 
V.  Wilson-Cass  Co.,  134  Pa.  St.  348 
(1890);  Barril  v.  Calendar,  etc.  Co., 
50  Hun,  257  (1888).  The  president 
may  be  entitled  to  compensation  for 
extra  services  performed  with  the 
knowledge  of  the  directors,  although 
a  former  resolution,  of  which  he  had 
no  knowledge,  prohibited  pay,  un- 
less voted  in  advance.  Bartlett  v. 
Mystic  River  Corp.,  151  ;Mass.  433 
(1890).  A  mutual  life  insurance  com- 
pany having  no  capital  stock  cannot 
make  a  contract  to  pay  its  retiring 
president  a  future  salary  for  Life. 
Beers  v.  New  York  L.  Ins.  Co.,  66 
Hun,  75  (1892).  The  president  can- 
not enforce  the  payment  of  a  salary 
out  of  the  assets  of  the  insolvent  cor- 


1306 


CH,  XXXIX.]       FEAIJDS   OF   DIEECTOES,  PEOMOTEES,  ETC. 


[§  657. 


neither  a  director  nor  a  stockholder,  is  entitled  to  pay  although 
the  corporation  never  agreed  to  pay  him.^ 

Even  though  a  large  stockholder  of  a  corporation  renders 
valuable  services  to  it  for  several  years,  yet  he  is  not  entitled 
to  pay  therefor  from  the  corporation  unless  there  is  a  contract 
to  that  effect,  especially  where  the  circumstances  showed  that 
he  expected  his  pay  from  the  increased  value  of  his  invest- 
ments.^ 

Although  a  treasurer  is  presumed  to  be  entitled  to  compen- 
F.ation,  yet  if  he  is  a  stockholder  and  his  firm  have  the  banking 
business  of  the  company,  and  nothing  has  ever  been  said  about 
compensation,  he  cannot  afterwards  claim  or  obtain  it.' 


poration,  even  though  the  by-laws 
provided  therefor  and  the  salary  had 
been  voted  to  him,  such  vote  having 
been  after  the  services  were  ren- 
dered. Wood  V.  Lost  Lake,  etc.  Co., 
23  Oreg.  20  (1890).  A  salary  voted  to 
the  president  after  the  services  were 
performed  and  the  company  has  be- 
come insolvent  is  not  collectible. 
McAvity  V.  Lincoln  Pulp,  etc.  Co.,  82 
Me.  504  (1890).  See  also  note  1,  p.  1299. 
1  Smith  V.  Long  Island  R.  R,  102 
N.  Y.  190  (1886);  Edwards  v.  Fargo, 
etc.  R'y,  4  Dak.  549  (1887);  Greenleaf 
V.  Norfolk  Southern  R.  R,  91  N.  C.  33 
(1884);  Missouri  River  R.  R.  v.  Rich- 
ards, 8  Kan.  101  (1871).  The  secre- 
tary and  president  cannot,  by  their 
own  votes,  cause  the  board  to  vote 
them  a  salary  for  i)ast  services. 
Graves  v.  Mono  Lake,  etc.  Co.,  81 
CaL  303  (1889).  A  secretary  is  not 
entitled  to  pay  for  his  services  as  sec- 
retary vmless  there  is  an  express  con- 
tract to  that  effect;  but  where  he 
gives  up  his  whole  time  to  the  com- 
pany's business,  one-half  as  secretary 
and  one-half  in  doing  engineering 
work,  he  is  entitled  to  pay.  Talcott 
V.  Olcott,  etc,  Co.,  11  N.  Y.  Week. 
Dig.  141  (1880).  In  England  the  law 
"is  settled  by  a  series  of  decisions 
that  it  is  impossible  for  a  company 
to  ratify  anything  that  is  done  or 
any  contract  that  is  made  before  it 


comes  into  existenca"  Hence  a  con- 
tract as  to  the  secretary's  salary  is 
unenforceabla  He  can  recover  only 
on  a  quantum  meruit.  Be  Dale,  61 
L.  T.  Rep  206  (1889).  The  salary  of  a 
secretary,  where  it  consists  of  a  fixed 
sum  and  also  dividends  on  certain 
stock  not  owned  by  him,  continues 
as  to  both  until  stopped  on  notice. 
Crane,  etc.  Co.  v.  Adams,  142  lU.  125 
(1892).  A  sale  of  all  the  corporate 
property  stops  the  salary  of  the  sec- 
retaiy  where  he  was  subject  to  re- 
moval at  any  time  by  the  directors. 
Union  Compress  Co.  v.  Douglass,  60 
Ark.  591  (1895). 

2  Ritchie  v.  McMiillen,  79  Fed.  Rep. 
522  (1897). 

3  Mather  v.  Eureka,  etc.  Co.,  118 
N.  Y.  629  (1890),  44  Hun,  333  (1887). 
The  question  may  be  one  for  the  jury. 
Pendleton  v.  Empire,  etc.  Co.,  19 
N.  Y.  13  (1859).  A  director  who  is 
also  treasiurer  and  manager  may  re- 
cover compensation  for  his  services 
although  none  has  been  agreed  upon. 
It  is  for  the  jtiry  to  decide  what  is 
reasonable.  Fitzgerald,  etc.  Co.  v. 
Fitzgerald,  137  U.  S.  98,  111  (1890), 
quoting  with  approval  Pew  v.  First 
Nat.  Bank,  130  Mass.  391  (1881).  "  No 
duties,  no  pay."  A  treasurer's  sal- 
ary ceases  upon  the  sale  of  all  of  ita 
assets  even  though  there  is  no  disso- 
lution; but  if  substantial  duties  con- 


1307 


§  658.] 


FRAUDS    OF   DIRECTORS,  PROMOTERS,  ETC.       [CH.  XXXIX. 


A  contract  of  a  director,  officer,  or  president  that  he  will  not 
ask  any  compensation  for  his  services  cannot  be  insisted  upon 
by  the  company  if  it  was  not  a  party  to  the  contract.* 

Yarious  decisions  in  regard  to  other  officers  of  the  company 
are  given  in  the  notes  below.' 

§  658,  Contracts  between  corporations  having  one  or  more  di- 
rectors in  common. —  It  has  been  difficult  to  determine  whether 
a  stockholder  in  one  corporation  could  cause  to  be  set  aside  a 
contract  or  agreement  between  two  corporations  having  one  or 


tinue,  the  salary  continues.  Rodney 
V.  Southern  R.  R.  Assoc,  3  N.  Y.  St 
Rep.  564  (1886),  distinguishing  Long 
Island  Ferry  Ck>.  v.  Terbell,  48  N.  Y. 
427  (1872). 

1  An  agreement  among  the  officers 
to  reduce  their  siilaries  cannot  be  in- 
sisted upon  by  the  corporation.  It 
was  not  a  party  to  the  agreement. 
Thompson  Co.  v.  Brook,  14  N.  Y.  Supp. 
370  (1891).  An  agreement  of  the 
president  with  certain  creditors  that 
he  would  not  take  a  salary  until 
other  claims  were  paid  cannot  be  en- 
forced by  the  receiver.  The  presi- 
dent may  come  in  as  a  creditor. 
Snow  V.  r!ussel  Coe,  etc.  Co.,  58  Hun, 
134  (1890).  Lambert  v.  Northern  R'y, 
18  W.  R  180  (1869),  holds  that  a  prom- 
ise by  directors  to  perform  their  du- 
ties gratuitously  is  nudum  pactum, 
and  does  not  prevent  them  from  re- 
covering upon  a  previous  binding 
agreement  for  salaries.  Where  the 
vendor  of  property  agrees  by  contract 
with  the  vendee  and  accepted  by  the 
company  that  he,  the  vendor,  will 
for  five  years  give  his  personal  super- 
vision to  the  business  of  the  com- 
pany, he,  the  vendor,  cannot  recover 
compensation  from  the  company  for 
such  services.  Wetmore  v.  Wetmore 
Co.,  113  CaL  321  (1896). 


officers  are  to  be  paid  for  their  serv- 
ices, and  at  the  end  of  the  year  a 
note  is  given  for  services  to  the  su- 
perintendent, who  is  also  a  director, 
he  may  collect  it.  Stewart  v.  St. 
Louis,  etc.  R  R,  41  Fed.  Rep.  736 
(1887).  Where  tlie  vice-president  sues 
for  services  as  general  manager,  he 
miLst  prove  services  clearly  outside 
of  his  duties  as  an  officer,  and  that 
there  was  no  contrary  agreement 
(citing  many  cases).  Toponce  v.  Co- 
rinne,  etc.  Co.,  6  Utah,  439  (1890).  Un- 
paid salaries  voted  to  its  officers  by 
an  insolvent  corporation  which  has 
never  made  any  profits  cannot  be 
offset  as  against  the  stockholders' 
liability  to  creditors.  Bums  v.  Beck, 
etc.  Co.,  83  Ga.  471  (1889).  The  con- 
duct of  an  officer  may  be  such  as  to 
preclude  the  idea  that  he  was  to  have 
a  salary.  Simonson  v.  New  York  City 
Ins.  Co.,  25  N.  Y.  Week.  Dig.  90  (1886). 
A  conti-act  with  directors  for  their 
services  ceases  upon  the  winding  up 
of  the  company,  Frames  v.  Bulfon- 
tein  Min.  Co.,  [1891]  1  Ch.  140.  \Vhere 
there  are  no  duties,  or  the  duties  cease, 
there  is  no  pay.  Long  Island  Ferry 
Co.  V.  Terbell,  48  N.  Y.  427  (1872).  Cf. 
Rodney  v.  Southern  R  R  Assoc,  3 
N.  Y.  St.  Rep.  564  (1886).  For  the 
services  of  ordinary  clerks,  etc.,  the 


2  The  president  may  employ  the    corporation  is  of  course  liable.    Le- 


vice-president,  his  brother,  to  do  work 
for  which  the  company  will  pay  him. 
]\IcDowell  V.  New  York,  etc.  R.  R.,  12 
N.  Y.  St.  Rep.  877  (1887).  When  it  is 
understood  by  the  directors  that  the 


grand  v.  Manliattan,  etc.  Assoc,  80 
N.  Y.  638  (1880);  Pollok  v.  Shultze,  1 
Hun,  320  (1874);  Bard  v.  Banigan,  39 
Fed.  Rep.  13  (1889);  Gowen  Marble 
Co.  V.  Tarrant,  73  la  608  (1874). 


1308 


CH.  XXXIX.]      PEATIDS    OF   DIEECTOES,  PEOMOTEES,  ETC.  [§  658. 


more  directors  in  common.  As  a  rule,  even  thongL.  the  boards  of 
directors  of  two  corporations  are  the  same,  and  one  buys  out  the 
property  of  the  other,  yet  the  transaction  is  not  void,  and  will 
not  be  set  aside  at  the  instance  of  a  stockholder  unless  he  shows 
damage.^  A  contract  between  two  corporations  will  not  be  de- 
clared invalid  because  the  corporations  have  common  directors, 
where  its  fairness  is  manifest.^  But  a  contract  between  corpo- 
rations having  directors  in  common  must  be  "  open  and  free 
from  any  suspicion  of  secret  dealing  in  favor  of  one  principal 
while  acting  as  the  representative  of  the  other." '  A  mortgage 
by  an  insolvent  corporation  to  a  creditor  corporation,  the  two 
corporations  having  a  majority  of  their  directors  in  common, 
has  been  declared  to  be  illegal.*  A  guaranty  where  there  are 
directors  in  common  is  voidable.'  Such  contracts  as  these  cer- 
tainly are  not  void,  and  they  may  be  validated  by  a  unanimous 
vote  of  the  stockholders.*    If,  however,  the  minority  stockhold- 


1  Smith  V.  Ferries,  eta  R'y,  51  Pac 
Rep.  710  (CaL,  1897). 

2Evansville,  etc.  Co.  v.  Bank  of 
Commerce,  144  Ind.  34  (1896). 

3  Mercantile,  etc.  Co.  v.  Pittsbiirgh, 
etc.  Assoc,  173  Pa.  St.  30  (1890). 

<  Sutton  Mfg.  Co.  V.  Hutchinson,  63 
Fed.  Rep.  496  (1894). 

5  Barr  v.  New  York,  etc.  R  R,  125 
N.  Y.  263  (1891);  Metropolitan  Elev. 
R'y  V.  Manhattan  R'y,  15  Am.  &  Eng. 
R  R  Cas.  1  (1884).  A  contrary  con- 
clusion was  readied  by  the  federal 
court  on  the  same  facts.  Flagg  v. 
Manhattan  R'y,  10  Fed.  Rep.  413 
(1881).  For  other  cases  connected 
vrith  this  litigation,  see  Metropolitan 
Elev.  R'y  v.  Manhattan  R'y,  14  Abb. 
N.  Cas.  152,  n.  (1884);  ]\lanliattan  R'y 
V.  New  York  Elev.  R'y,  29  Hun,  309 
(1883),  rev'g  N.  Y.  D.  Reg.,  Dec.  2, 
1882;  People  v.  ^letropolitan  Elev. 
R'y,  26  Hun,  82  (1881);  Harkness  v. 
Manhattan  R'y,  54  N.  Y.  Super.  Ct.  174 
(1886).  See  also  St.  James's  Church 
V.  Church  of  Redeemer,  45  Barb.  356 
(1865),  where  one  religious  corpora- 
tion gratiiitously  conveyed  property 
to  another,  the  directors  being  com- 
mon.   A  consolidation  of  two  relig- 


ious corporations  having  a  director  in 
common  is  illegal  and  may  be  set 
asida  Stokes  v.  Phelps  Mission,  47 
Hun,  570  (1888). 

6  If  the  stockholders  unanimously 
ratify  a  contract  between  two  corpo- 
rations having  directors  in  common, 
the  contract  is  legaL  Coe  v.  East, 
etc.  R  R,  52  Fed.  Rep.  531  (1892).  A 
sale  of  property  by  one  corporation 
to  another,  all  of  the  directors  except 
one  being  in  common,  is  legal  where 
such  sale  is  subsequently  ratified  by 
a  meeting  of  the  stockholders.  Grant 
V.  United,  etc.  R'y,  L.  R.  40  Ch.  D.  135 
(1888).  A  sale  of  property  by  one  cor- 
poration to  another  is  not  fraudulent 
merely  because  there  was  one  di- 
rector common  to  both,  where  the 
directors  and  stockholders  assented 
thereto.  Leathers  v.  Janney,  41  La. 
Ann.  1120  (1889).  A  lease  of  one  rail- 
road to  another,  ratified  by  the  stock- 
holders as  required  by  the  statute,  is 
legal,  even  though  the  same  persons 
were  directors  in  both  companies. 
Jones  V.  Concord,  etc.  R.  R,  30  AtL 
Rep.  614  (N.  H.,  1892).  Where  a  land 
company  agreed  to  pay  a  railroad 
company  a  certain   sum  in  instal- 


1309 


§  658.] 


FRAUDS    OF   DIEECTOES,  PEOMOTEES,  ETC.       [CH.  XXXIX. 


ers  object  to  the  contract,  the  court  will  consider  it,  and  will 
sustain  it  if  fair,  and  set  it  aside  if  unfair.^ 


ments,  if  the  railroad  company  would 
extend  its  road  to  the  land  company's 
land,  it  is  immaterial  that  four  of  the 
five  directors  of  the  land  company 
were  also  directors  of  the  railroad 
company,  it  being  shown  that  all  acts 
of  the  directors  were  expressly  rati- 
fied at  a  stockholders'  meeting,  and 
it  being  also  shown  that  the  railroad 
had  been  constructed  and  a  part  of 
the  instalments  paid.  San  Diego, 
etc.  R.  R.  V.  Pacific  Beach  Co.,  113 
CaL  53  (1890). 

1  Where  a  rolling-stock  company  by 
its  board  of  five  directors  makes  a  con- 
tract with  a  railroad  company  having 
thirteen  directors,  five  of  whom  are 
the  same  as  the  directors  of  the  roll- 
ing-stock company,  and  the  railroad 
company  makes  the  contract  at  a 
meeting  of  eight  directors,  two  of 
whom  are  of  the  five,  and  for  two 
years  the  railroad  company  lives  up 
to  the  contract,  it  cannot  then  repu- 
diate. The  majority  of  its  directors 
were  not  in  common,  and  it  should 
have  objected  before.  U.  S.  RoUing- 
Stock  Co.  V.  Atlantic,  etc.  R.  R,  34 
Ohio  St.  450  (1878).  Cf.  Bill  v.  West- 
ern Union  TeL  Co.,  16  Fed.  Rep.  14 
(1883),  where  the  illegality  was  clear, 
since  the  directors  common  to  both 
corporations  constituted  a  majority 
of  the  directors  of  one  of  them.  In 
Fitzgerald  v.  Fitzgerald,  etc.  Co.,  41 
Neb.  374  (1894),  where  the  same  per- 
sons formed  a  majority  of  the  boards 
of  directors  of  a  construction  com- 
pany and  also  of  a  railroad  company, 
to  which  latter  company  the  con- 
struction company  had  agreed  to 
turn  over  the  stock  of  another  rail- 
road company;  and  where,  by  the  con- 
tract between  Jthe  two  companies 
having  a  majority  of  the  board  of  di- 
rectors in  common,  the  railroad  com- 
pany was  to  transport  freight  at  a 
certain  price,  and  to  deliver  to  the 


construction  company  its  bonds  to  a 
certain  amount;  and  where  subse- 
quently this  contract  was  changed 
so  as  to  reduce  the  amount  going  to 
the  construction  company  by  ujv 
wards  of  $700.000,— it  was  held  that 
the  minority  stockholders  and  di- 
rectors of  the  construction  company 
might  file  a  bill  on  behalf  of  the  con- 
struction company  and  compel  the 
railroad  company  to  pay  to  the  con- 
struction company  the  amount  men- 
tioned abova  It  was  also  held  that 
where  these  directors  controlled  both 
boards,  and  sold  a  part  of  the  bonds 
going  to  the  construction  company 
to  themselves  at  ninety  cents  on  the 
dollar,  when  the  bonds  were  worth 
par,  the  construction  company  could 
hold  the  railroad  company  liable  for 
the  loss.  This  decision  was  modified  in 
44  Neb.  463  (1895),  reducing  the  decree 
to  $300,900.33.  An  appeal  to  the  su- 
preme court  of  the  United  States  was 
dismissed  in  Missouri  Pac.  R'y  v.  Fitz- 
gerald, 160  U.  S.  556  (1896).  The  fact 
that  a  minority  of  the  directors  are 
directors  in  another  contracting  com- 
pany does  not  render  a  contract  void- 
able at  the  instance  of  one  of  the 
comi:)anies  or  of  a  dissenting  stock- 
holder. Ziegler  v.  Lake  Street  EL 
R  R.,  69  Fed.  Rep.  176,  182  (1895).  A 
receiver  of  an  insolvent  bank  may  file 
a  bill  in  equity  to  compel  its  presi- 
dent and  another  bank  to  pay  back 
the  price  of  stock  in  the  insolvent 
bank  which  the  latter,  through  the 
instrumentality  of  its  president,  who 
was  also  cashier  of  the  other  bank, 
had  purchased  of  the  other  bank  on 
the  eve  of  the  insolvency  of  the  for- 
mer. Bridgens  v.  Dollar  Sav.  Bank, 
66  Fed.  Rep.  9  (1895).  The  fact  that 
a  railroad  company  and  a  construc- 
tion company  have  mainly,  though 
not  entirely,  the  same  oflftcers  and 
stockholders,  does  not  render  them 


1310 


OH.  XXXIX.]       FEATJDS   OF   DIKECTOES,  PEOMOTEKS,  ETO.  [§  059. 


§  659.  Foreclosure  of  mortgage  on  corporate  property^  and 
collusion  with  directors^  where!)}/  no  defense  is  made  to  the  fore- 
closure.—  This  subject  is  considered  elsewhere.^ 


legally  identical,  but  merely  requires 
a  more  careful  scrutiny  of  their 
dealings  with  each  other  where  the 
interests  of  outside  parties  are  af- 
fected. Hence  a  contract  by  which 
the  construction  company  takes 
stock  and  bonds  and  agrees  to  do  cer- 
tain work  will  be  upheld  if  it  is  a 
reasonable  and  fair  contract,  and  the 
construction  company  may  enforce 
claims  against  the  railroad  company. 
Davidson  v.  Mexican  Nat.  R.  R.,  58 
Fed.  Rep.  653  (1893).  A  mortgage  by 
one  corporation  to  another  is  not 
void  because  they  have  the  same 
president.  Ray  v.  Scott,  etc.  Co.,  11 
Wash.  399  (1895).  An  insurance  pol- 
icy issued  by  an  agent  to  a  corpora- 
tion in  which  he  is  an  officer  is  not 
enforceable.  Greenwood,  etc.  Co.  v. 
Georgia,  etc.  Ins.  Co.,  72  Miss.  46 
(1895).  A  sale  of  iron  by  one  corpo- 
ration to  another  which  is  fair  is  not 
illegal  simply  because  the  company 
has  directors  in  common-  Biirden  v. 
Burden,  8  N.  Y.  App.  Div.  160  (1896). 
In  Hart  v.  Ogdensburg,  etc.  R.  R.,  89 
Hun,  316  (1895),  where  two  railroads 
having  directors  in  common  were 
consolidated,  the  court  held  that  the 
minority  stockholders  could  not  ob- 
ject, inasmuch  as  the  act  was  not  so 
clearly  against  the  interest  of  the 
minority  as  to  be  a  wanton  and  fraud- 
ulent destruction  of  their  rights,  nor 
a  clear,  substantial,  flagrant  violation 
thereof.  Moreover  the  court  held 
that  six  years'  delay  in  suing  was 
fatal.  A  city  is  liable  on  a  gas  con- 
tract although  the  same  man  is  mayor 
and  is  also  president  of  the  gas  com- 
pany. Capital,  etc.  Co.  v.  Yoimg,  109 
CaL  140  (1895).  In  Santa  Fe  Elec- 
tric Co.  V.  Hitchcock,  50  Pac.  Rep. 
832  (N.  M.,  1897),  the  court  held  a 


lease  to  be  void  between  two  com- 
panies having  the  same  directors, 
there  being  actual  fraud.  A  note  by 
one  corporation  to  another  is  valid 
although  the  same  person  is  presi- 
dent of  both.  St.  Joe,  etc.  Co.  v.  First 
Nat.  Bank,  50  Pac.  Rep.  1055  (Colo., 
1897).  Where  a  town  board  of  three 
are  authorized  to  make  a  grant  to  a 
railroad,  and  two  of  them,  one  being 
a  director  of  the  railroad,  made  the 
grant,  the  court  will  set  it  aside.  San 
Diego  V.  San  Diego,  etc.  R.  R.,  44  CaL 
106  (1872).  The  fact  that  two  direct- 
ors out  of  eight  of  one  packet  com- 
pany are  also  directors  out  of  six 
directors  of  a  competing  packet  com- 
pany does  not  render  them  liable 
for  fraud,  although  the  former  com- 
pany loans  the  latter  company  much 
money  and  takes  a  chattel  mortgage 
and  closes  out  its  property.  Booth  v. 
Robinson,  55  Md.  419  (1880).  In  Eng- 
land contracts  between  companies 
having  directors  in  common  are  void 
by  statute,  unless  they  are  ratified  by 
vote  of  the  stockholders,  and  may  be 
so  ratified,  although  the  by-laws  pro- 
hibit the  directors  from  making  con- 
tracts in  which  they  are  interested- 
Grant  V.  United,  etc.  R'y,  L.  R.  40 
Ch.  D.  135  (1888);  Ernest  v.  NichoUs, 
6  H.  L.  Cas.  401  (1857).  Of.  Griffin  v. 
Inman,  57  Ga.  370  (1876),  where  the 
town  officers  merely  executed  bonds 
to  a  railroad  company  of  which  they 
were  directors.  The  bonds  were  held 
to  be  valid.  In  Wallace  v.  Long 
Island  R.  R.,  12  Hun,  460  (1877),  held, 
that  a  dissenting  stockholder  could 
not  sue  to  set  aside  a  lease  made  be- 
tween two  railroads  having  directors 
in  common,  but  that  a  majority  of  the 
stockholders  might  have  objected. 
A  conveyance  of  all  the  property  of 


1  See  §  848,  ch.  XLIX,  infra. 
1311 


§  660.]  FKAUDS    OF   DIKECTOES,  PEOMOTEKS,  ETC.       [CH.  XXXIX. 


§  6G0.  Directors^  ptircliases  ofi^roiierty  needed  ly  the  corpo- 
rallon,  and  imrcliases  of  outstanding  delis  or  claims  against 
the  corporation. —  It  is  an  abuse  of  trust  for  a  corporate  director 
to  purchase  property  which  he  knows  the  corporation  will  need, 
and  then  to  sell  the  same  to  the  corporation  at  an  advanced 
price.  This  generally  occurs  where  the  director  purchases  in 
his  own  name  land  which  the  corporation  must  i>urchase  for 
its  enterprise,  or  over  which  it  will  need  a  right  of  way.* 


an  insolvent  corporation  to  one  of  its 
creditors,  a  corporation  having  two 
directors  in  common  with  the  insolv- 
ent corporation,  such  conveyance 
being  to  secure  the  latter  coi-pora- 
tion's  debt,  is  prima  facie  fraudulent 
and  voidabla  If  free  from  actiial 
fraud,  and  if  reasonable,  it  is  sus- 
tained. Sweeny  v.  Sugar  Ref.  CJo.,  30 
W.  Va.  443  (18S7).  The  fact  of  hav- 
ing  stockholders  in  common  is  im- 
material. Warfield  v.  Marshall,  etc 
Co.,  73  Iowa,  6G6  (1887).  The  fact  that 
a  consti-uction  contract  is  assigned 
by  the  contractor  to  a  corporation 
having  directors  in  common  with 
the  railroad  does  not  render  the  con- 
tract fraudulent  per  se.  Union  Pac. 
R  E.  V.  Credit  Mobilier,  135  Mass.  3G7 
(1883).  A  contract  between  two  cor- 
porations having  directors  in  com- 
mon is  voidable,  but  equity  will  cause 
Buch  payments  to  be  made  for  work 
done  as  are  just,  irrespective  of  the 
written  contract.  Thomas  v.  Peoria, 
etc.  R'y,  36  Fed.  Rep.  808  (1888). 
Where  one  director  is  a  director  also 
in  another  company  with  which  a 
contract  is  being  made,  he  cannot  be 
counted  in  making  up  a  quorum. 
Metropolitan,  etc.  Co.  v.  Domestic, 
etc.  Co.,  44  N.  J.  Eq.  568  (1888).  A 
contract  between  corporations  hav- 
ing common  directors  is  voidable, 
not  void.  If  it  is  fair  it  will  not  be 
disturbed.  Manvifacturers'  Sav.  Bank 
V.  Big  Muddy  Iron  Co.,  97  Mo.  38  (1889) ; 
Alexander  v.  Williams,  14  Mo.  App. 
13  (1888).  A  lease  of  one  railroad  to 
another  by  directors  who  are  direct- 


ors in  both  companies  is  invalid. 
Thouron  v.  East,  etc.  R'y,  5  R'y  &. 
Corp.  L.  J.  77  (Tenn.,  188S).  .  In  Pear- 
son V.  Concord  R  R,  62  N.  H.  537 
(1883),  the  court,  in  setting  aside  a 
contract  made  by  corporations  hav- 
ing common  directors,  said:  "Stock- 
holders and  creditors  are  entitled  not 
only  to  the  vote  of  a  director  in  the 
board,  but  to  his  influence  and  ar- 
gument in  discussion." 

1  Blake  v.  Buffalo  Creek  R  R,  56 
N.  Y.  485  (1874).  See  Buffalo,  etc.  R 
R  V.  Lampson,  47  Barb.  533  (18G7); 
Blair,  etc.  Co.  v.  Walker,  50  Iowa,  376 
(1879);  Taylor  v.  Salmon.  4  MyL  &  C. 
134  (1838),  where  the  corporate  agent 
took  in  his  own  name  a  lease  wliich 
the  company  desired  and  had  in- 
structed liim  to  obtain  for  itself.  See 
also  Mitchell  v.  Reed,  61  N.  Y.  123 
(1874).  The  corporate  treasiirer  can- 
not purchase  stock  at  a  discount  and 
sell  to  the  corporation  at  par,  where 
such  stock  is  needed  by  the  corpora- 
tion to  fulfill  its  contracts.  East 
New  York,  etc.  R  R  r.  ELtnore,  5 
Hun,  214  (1875).  Where  the  presi- 
dent is  directed  to  buy  the  boats  of 
a  rival  company,  and  does  so  by  buy- 
ing them  for  anotlier  corporation 
which  he  controls,  and  credits  liim- 
self  with  an  advance,  he  may  be 
made  to  refund.  Ward  v.  Davidson, 
89  Mo.  445  (1886).  A  treasurer  is  not 
liable  for  profits  in  coal  sold  by  him- 
self to  the  corporation,  where  he  pur- 
chased the  coal  with  no  int  nt  of 
selling  to  the  company.  Parker  v. 
Nickerson,  137  Mass.  487  (1884).    A 


1313 


OH.  XXXIX.]       FRAUDS    OF    DIRECTOKS,  PKOMOTEKS,  ETC.  [§  6G0. 

Where,  however,  the  cUrector  offers  the  land  to  the  corpora- 
tion at  the  price  which  he  paid  for  it,  and  the  corporation  re- 
fuses it,  he  cannot  long  subsequently  be  compeUed  to  accept 
that  price.^    A  director  may  construct  works  to  compete  with 
the  works  of  the  corporation  in  which  he  is  a  director     He  is 
not  disqualified  from  so  aoing.^    Directors,  who  are  also  oih- 
cers,  of  a  manufacturing  corporation,  if  acting  m  positive  good 
faith  towards  the  corporation  and  their  co-stockholders,  are  not 
precluded  from  engaging  in  the  building  and  operation  of  other 
distinct  works  in  the  same  general  business;  and  they  do  not 
stand,  in  respect  to  said  works,  in  any  trust  relation   o   he  cor- 
poration.'    But  where  the  president  takes  a  renewal  of  a  cor 
porate  lease  in  his  own  name,  and  admits  that  he  takes  it  for 
L  company,  he  cannot  claim  any  of  the  profits  arising  from 
it,  even  though,  in  order  to  get  the  leasefromhim,a  contract  is 
made  that  he  have  a  part  of  the  profits.^    A  director  cannot 
Take  a  contract  in  his  own  name  for  himself  where  such  con- 
tract really  should  belong  to  the  corporation. 

It  i    a  fraud  on  the  corporation  and  on  corporate  creditors 

for  the  directors  to  buy  up  at  a  discount  t^-.^-^^^^^^^f/^^^ 
eral  debts  of  the  corporation,  and  compel  it  to  pay  them  the 

director  who  takes  to  himself  an  as-       [^^f^^^^^ ptstden^and tl'I 
signn^ent  of  a  patent  tha^  ougU^    ^fJd^tslL^.s.^enU^or 

have  been  ^^^^S^^.^J^^^^^^^.^^.'^^  I  railroad  company,  and  allow  it  to 

tiou  must  account  for  all  prohts  tnai  c*                           mrchase  price,  and 

hehasreceive<L_  A-i^^^Barber  P  ^  ^  f,^^^^^^^^^^^ 

N.  Y.  Supp.  2...  (Ib89)     A  d   ec  or  «  /       ^^^^     ^,3  i^  repaid,  are  ha- 

cannot  take  a  contract  in  his  own  u  e  p               i                company  the 

name  for  himself  where  such  con-  ble  *«  ^^^^^^/^j  ^^  ^^  ,^4h  is  in 

tract  really  should  belong  to  the  cor-  --^-^^^^;f  V^^^^^^^^    SterUng,  16 

poration.    The  president  of  a  packet  ^^^^^^^^J^^^^^^^ 

^.upany  may  take  a  contract  ^^  ^Jf  ^^  plisburgh.  etc.  Co.,  51 

sri;^Se^;i^-;h^:  ^.^^^^ 

ing  endeavored  first  to  get  Uie  -^    467  £88).^^^  Pittsburgh,  etc.  Co.,  57 
tract  for  the  company.    I^^okuk^tc^  86(1893),aff'g5lFed.Eep.33 

neU  V.  Clark.  104  N.  Y.  451  (1880.    (1890). 
See  also  p.  652,  supra,  on  sales  by  di- 
rectors to  the  corporation. 

83  ^^^^ 


§  660.] 


FEAUDS    OF    DIRECTORS,  PROMOTERS,  ETC.       [cil.  XXXIX. 


full  face  value  thereof.  In  such  a  case  the  directors  may  be  com- 
pelled to  turn  over  to  the  corporation  the  evidences  of  indebt- 
edness upon  being  paid  the  money  wliich  they  gave  for  tlic  same.' 
But  directors  may  buy  corporate  bonds  from  third  parties  at 
a  discount  and  enforce  them  at  par,  where  there  are  no  special 
equities  against  such  a  purchase,  and  no  present  duty  in  re- 
gard to  them  from  him  as  a  director.  JMorcover,  the  corpora- 
tion must  claim  the  benefit  at  once,  if  at  all.^ 


'  Quoted  and  approved  in  Bonney 
V.  Tilley,  109  Cal.  340  (1895).    A  stock- 
holder who  is  also  a  director  cannot 
buy  up  claims  against  the  insolvent 
company  and  oir.set  them  at  their 
face  value.     Bulkley  v.  Whitcoinb, 
121  N.  Y.  107  (1800);  Duncomb  v.  New 
York,  etc.  R.  R,  84  N.  Y.  190,  202 
(1881);  Be  Imperial  Land  Co.,L.  R.  4 
Ch.  D.  566  (1877).    See  also  Davis  v. 
Rock   Creek,  etc.   Co.,  55    CaL  359 
(1880),  where  a  mortgage  given  to  a 
director  to  secure  debts  purchased  by 
him  at  a  discount  was  defeated  in 
foreclosure.     If  tlie  corporate  man- 
agers buy  up  corporate  debts  with 
corporate  funds,  a  corporate  cred- 
itor may  compel  them  to  give  up 
the  claims  so  purchased.    Thomas  v. 
Sweet,  37  Kan.  183  (1887).    Directors 
who  authorize  acts  by  the  corpora- 
tion infringing  on  a  patent  cannot 
afterwards  buy  the  patent  and  en- 
force the  riglit  to  damages.    New 
York,  etc.  Co.  v.  Buffalo,  etc.  Co.,  24 
Fed.   Rep.   604  (1885).    A  corporate 
creditor  cannot  complain  tliat  a  di- 


Connell,  etc.  Co.,  93  Tenn.  377  (1894). 
Payment  of  corporate  notes  by  a  di- 
rector  may  entitle  liim  to  preference 
in  the  distribution  of  the  assets.  At- 
kinson's Appeal.  11  Atl.  Rep.  239  (Pa., 
1887).  Where  the  directors  issued 
bonds  as  collateral  to  the  company's 
note,  and,  upon  the  sale  of  the  bond.s 
by  the  pledgee  for  non-payment  of 
the  note,  purchased  the  bonds  at  five 
cents  on  tlie  dollar,  a  foreclosure 
based  chiefly  on  such  bonds  will  bo 
set  aside.  James  v.  Railroad  Co.,  G 
Wall.  752  (1867).  Englisii  debentures 
may  be  issued  to  directors  at  a  dis- 
count. Campbell's  Case,  L.  R.  4  Ch. 
D.  470  (1870).  Where  a  corporation 
is  without  funds,  its  president  may 
purchase  for  himself  its  overdue  bond, 
and  may  agree  with  the  corporation 
that  the  rate  of  interest  of  the  bond 
shall  be  increased.  There  was  no 
proof  tliat  he  purchased  at  a  dis- 
count. Bradly  v.  Marine,  etc.  Co..  3 
Hughes.  26  (1879);  S.  C,  3  Fed.  Cas. 
1172.  The  law  is  clear,  however,  that 
any  device  by  which  a  director  or 


rector  has  purchased  property  needed    officer  of  an  insolvent  corporation 


by  the  corporation.  Cornell  v.  Clark, 
104  N.  Y.  451  (1887).  Where  an  in- 
surance company  absorbs  another 
company  ultra  vires  and  gives  notes 
therefor,  and  the  president  acquires 
and  collects  the  notes,  he  may  be 
compelled  to  refund.  McClure  v. 
Levy,  147  N.  Y.  215  (1895).  Where  a 
company  has  assigned,  and  its  di- 
rectors have  bought  claims  at  a  dis- 
count, a  suit  to  compel  them  to  turn 
in  the  claims  at  cost  should  be  insti- 
tuted bv  the  assignee.    Jloultou  v. 


1314 


obtains  a  preference  in  the  payment 
of  his  debt  is  illegal.  See  §  001,  infra. 
Also  Lingle  v.  National  Ins.  Co.,  45 
Mo.  109(1809);  Holland  v.  HevTnan,  00 
Ga.  174  (1878),  holding  thatthe  pur- 
chased claims  are  good  only  for  the 
amount  paid.  Officers,  moreover, 
occupy  a  quasi-fiduciary  relation  to 
the  corporation,  and  cannot  profit  by 
purchasing  claims  against  it.  Hill 
V.  Frazier,  22  Pa.  St.  320  (1853). 

2  Seymour  v.  Spring  Forest  Cem. 
Assoc,  144  N.  Y.  333  (1895).    See  also 


CH.  XXXIX.]       FKAUDS    OF   DIKECTOKS,  PKOMOTEKS,  ETC.       [§§  OGl-2. 

An  attachment  and  execution  sale  of  railroad  bonds  on  a 
iudo-ment  obtained  by  a  director  was  disregarded  and  declared 
void,  where  the  director  himself  purchased  at  the  sale,  and  the 
whole  transaction  was  tainted  with  a  fraudulent  control  exer- 
cised  by  the  director  over  the  company.^ 

§  G61.  Loans  ly  directors  to  the  corporation;  mortgages  ly 
the  corporation  to  the  directors,  and  the  right  of  an  insolvent 
corporation  to  give  a  mortgage  or  assignment  of  its  property  to 
a  director  in  order  to  prefer  the  payment  of  his  deht— These 
questions  are  considered  elsewhere.^ 

§  662.  Frauds  hy  a  majority  of  the  stocMolders  on  the  mi- 
noriti/  — Directors  owning  stoclc  in  another  corporation  with 
2vhich  a  contract  is  made-Stochliolders'  ratification  of  the 
voidable  acts  of  directors  —  One  corporation  voting  stoclc  m  an-- 
other  competing  corporation.-^lt  often  happens  that  a  conso  i- 
dation,  lease,  sale,  or  contract  between  two  corporations  is  made 
6  655  «:»ra.  In  Higgins  v.  Lansingh,  and  aU  its  property  has  been  sold,  a 
!MnSTl89^,thfcouvtsaidthatif  director  -^^^y^^^^^^ 
a  director  acts  fairly  and  for  the  in-    it,  and  participate  m  the  distiibu 

«     tol^ome  the  purchaser  and    treasurer  may  buy  up  outstaudmg 

the  purpose  of  ^^/^f    hem  in   r^  c      p     y             ^^     ^^.^^^  ^^^  ^^^ 

organization  is  not    ^^-^^^^^^^^  ZaTol  directors^  a   majority  of 

breach  of  his  duty,  he  havmS  P^^^  ^^^       ^^^  ^^  relatives,  contract  to 

aU  that  the  -^'^^f^'^^'ZTt'  7mZ^.Ze  company's  coal  to  him 

^Tlo"i::^dtJndUVo.,°100N.Y.    ^ 

454  (1888),  32  Hun,  377,  the  assignee    f^^l^^l^'^^J^^^^^        witTa 

^^n^'T^^^tTditotf:;    a-    noti::l    not  protected.    Davis., 
purchase.!  it  at  a  f^'^^\^\^^^    Gemmell,  70  Md.  356  (1889). 
lowed  to    enforce    it    for   tiie    lun 

amount.     After  the  corporation  has        -  See  fe§  69.,  bJJ,  ^nJra, 
assigned  for  the  benefit  of  creditors,^  ^ 

lolo 


§  G62.]  FKAUDS    OF    DIRECTOKS,  PKOilOTEES,  ETC.       [CH.  XXXIX. 


where  the  directors  of  one  of  the  corporations  are  largely  in- 
terested in  the  stock  of  the  otlier.  There  then  is  likely  to 
arise  a  conflict  between  interest  and  duty.  Such  contracts  as 
these  are  investigated  very  closely  by  the  courts.  They  are 
not  necessarily  void,  and  are  not  constructively  fraudulent. 
But  if  there  is  actual  fraud,  or  if  there  has  been  an  undue  ad- 
vantage taken  or  an  unconscionable  bargain  made,  the  court 
will  set  it  aside.  If  the  transaction  is  fair  the  coui't  will  sus- 
tain it;  if  it  is  unfair  the  court  will  undo  it.' 


1  Quoted  and  approved  in  Hill  v. 
Gould,  129  Mo.  lOG  (1S95),  where  a 
sale  of  coal  was  upheld,  although  at 
about  cost,  and  a  majority  of  the  di- 
rectors were  elected  by  and  repre- 
sented the  railroad  company  that 
bought  the  coal.  The  use  of  a 
"dummy"  corporation  docs  not 
change  the  law.  Thus,  where  the  di- 
rectors let  a  conti'act,  and  then  the 
contractor  assigns  his  rights  to  a  cor- 
poration the  majority  of  whose  stock 
is  owned  by  the  directors,  the  court 
will  not  aid  the  contractor  as  a  stock- 
holder in  the  second  corporation. 
Warden  v.  Union  Pac.  R.  R.,  103  U.  S. 
fijl  (1880).  See  §  649,  sitpra.  Where 
the  directors  of  a  railway  company 
enter  into  a  contract  with  third  per- 
sons, whereby  a  new  company  is  or- 
ganized, franchises  secured,  and  a 
road  built  and  leased  to  the  old  com- 
pany, and  the  profits  realized  from 
the  transaction  are  equally  divided 
between  the  directors  and  the  third 
persons,  the  latter  are  not  liable  for 
their  profits,  even  though  exorbitant, 
on  a  suit  by  the  stockliolders  of  the 
old  company,  unless  the  contract  of 
lease  is  rescinded  and  the  road  re- 
stored to  the  new  company.  Hitch- 
cock V.  Barrett,  50  Fed.  Rep.  653 
(1892).  Although  a  lessee  railroad 
company  has  directors,  a  minority  of 
whom  are  largely  interested  in  the 
stock  and  bonds  of  the  lessor  railroad, 
and  such  bonds  and  stock  are  largely 
"  water,"  yet  this  does  not  necessarily 
vitiate  the  lease.    The  com-t  wUl  not 


set  the  lease  aside  if  no  undue  ad- 
vantage was  taken  and  no  actual 
fraud  involved.  Jesup  t;.  Illinois 
Cent  R.  R.,  43  Fed.  Rep.  483  (1890). 
Where  a  gas  company  is  under  con- 
tract to  furnish  gas  to  several  con- 
cerns, and  its  business  is  so  man- 
aged as  to  favor  a  concern  in'  which 
the  officers  are  interested,  there 
being  an  insufficient  supply  of  gas, 
a  minority  stockholder  may  com- 
plaiiL  Clark  v.  Pittsburgh,  etc.  Co., 
39  AtL  Rep.  86  (Pa.,  1898).  Although 
certain  persons,  being  directors  and 
owners  and  in  control  of  a  railroad 
company,  cause  it  to  make  a  con- 
struction contract  with  a  company 
which  they  also  control,  j'et,  if  all 
stockholders  assent,  subset pient  con- 
solidated bondholders  cannot  object 
that  a  part  of  the  old  issue  of  bonds 
was  issued  below  par  and  was  fraud- 
ulently and  illegally  issued.  Coe  v. 
East.  etc.  R  R.,  52  Fed.  Rep.  531  (1892). 
An  agreement  of  persons  holding  a 
majority  of  the  stock,  they  being  di- 
rectors also,  that  a  person  purchasing 
stock  from  them  sliall  be  general 
manager,  and  may  at  the  end  of  two 
years  sell  the  stock  back  to  them  at 
a  stated  price,  is  contrary  to  public 
policy  and  void.  The  vendors  need 
not  repurchase.  The  arrangement 
is  unfair  to  the  corporation.  Wilbur 
V.  Stoepel,  82  :Micli.  314  (1890).  It  is 
illegal  for  directors  to  be  stockhold- 
ers in  a  construction  company  to 
which  a  construction  contract  is  let. 
Gibnan,  etc.  R.  R  r.  Kelly,  77  IlL  426 


1316 


CH.  XXXIX.]       FRATTDS    OF   DIKECTORSj  PEOMOTEES,  ETC. 


[§  GG2. 


Unless  actual  fraud  is  shown,  a  court  of  equity  will  not,  at 
the  instance  of  minority  stockholders  in  a  corporation,  enjoin 
that  corporation  from  taking  a  lease  of  another  railroad,  even 
though  the  same  persons  are  the  officers  and  majority  stock- 

(1875).    Where  the  officers  and  own-  ing  to  themselves,  as  directors,  spe- 

ers  of  a  majority  of  the  stock  of  a  cial  rates  and  privileges,  it  was  pos- 

company  vote  as  stockliolders  and  sible  to  build  up  their  own  business 

officers  to  lease  its  property  to  an-  at  the  expense   of   rivals,   thereby 

otlier  corporation,  all  of  whose  stock  practically  depriving  the  public  of 

they  own,  the  minority  stockholders  free  competition  in  the  particular 

in  the  first  corporation  may  cause  it  brandies  of  industry  on  the  one  hand. 


to  be  set  aside.  Meeker  v.  Winthrop 
Iron  Co.,  17  Fed.  Rep.  48  (1883).  See 
also  Brewer  v.  Boston  Theater,  104 
Mass.  378  (1870):  Fitzgerald  v.  Fitz- 
gerald, etc.  Co.,  41  Neb.  374  (1894). 
In  England  it  seems  that  under  the 


and  cheating  their  fellow-stockhold- 
ers on  the  other  hand,  by  lessening 
by  so  much  the  possibilities  of  in- 
come, and  consequently  the  fre- 
quency or  size  of  dividends. 
"  It  was,  moreover,  possible  for  the 


In  Jingiana  ii  seems  mai/  um^iii  i/wv^  -.- , ,  i.  «     n 

statutory  power  of  one  company  to    directors  to  form  companies  of  all 
sell  out  to  another,  the  sale  may  be    kinds  for  the  purpose  of  supplying 


for  cash,  and  the  minority  are  bound, 
even  though  the  majority  own  the 
purchasing  company.  But  all  the 
cash  must  be  paid,  and  not  merely 
tlie  part  that  goes  to  the  minority. 
Hoist  V.  Lydney,  etc.  R  y,  69  L.  T.  Rep. 
133  (1893).  A  contract  of  a  corpora- 
tion that  a  patentee  shall  have  forty- 
eight  per  cent  of  an  increase  of  stock 
does  not  apply  to  the  capital  stock 
of  a  consolidated  company,  although 
the  former  corporation  is  one  of  those 
entering  into  the  consolidation.  Ein- 
stein V.  Rochester,  etc.  Co.,  146  N.  Y. 
53  (1895). 

Professor  Edmvmd  J.  James,  in  his 
pamphlet  on  "The  Railway  Ques- 
tion," says  in  regard  to  this  subject: 
"  It  was  found  again  that  the  di- 
rectors of  the  railroads,  even  where 
they  have  been  constructed  with 
some  reference  to  honesty  and  econ 


the  parent  company  with  supplies, 
or  of  doing  certain  kinds  of  business 
for  it,  and,  in  their  capacity  as  di- 
rectors of  the  parent  companies, 
awarding  to  themselves  as  directors 
of  the  barnacle  companies  fat  con- 
tracts of  all  sorts,  which  increased 
the  expenses  of  the  road,  raised  the 
charges  of  service,  thus  cheating  the 
public  on  the  one  hand,  and  the 
stockholders  on  the  other. 

"  It  was  also  found  that  directors 
could  grant  special  rates  to  men  who 
brought  business  to  the  railroad  on 
condition  that  the  latter  would  pay 
them  handsomely  as  individuals  for 
using  their  poAver  as  dh-ectors  or  offi- 
cials for  their  benefit. 

"  This  power  of  fixing  the  rates  at 
pleasure  led  to  all  sorts  of  privileges 
to  individuals,  or  families,  or  com- 
munities,  which  by  the  very  fact  of 


oiny,  uau  luteicoi/  _^^,„    „^.„+^^^f  i-nrlnc^frv  in  which  it  was  ab- 


necessarily  the  same  as  those  of  the 
rest  of  the  corporation  or  of  the  pub- 
1  ic.  For  example,  the  directors  were 
often  interested  in  manufacturing 
or  trading  entei-pnses  where  it  was 
necessary  to  resort  to  the  railroads  in 
the  course  of  their  business.    By  giv- 


stateof  industry  in  which  it  was  ab- 
solutely impossible  for  an  enterpriser 
to  estimate  the  probable  profits  of  a 
business  until  he  had  come  to  terms 
with  the  managers  of  one  or  more 
railroads  to  give  him  some  special 
tariff.    This  system  led  to  all  sorts  of 


1317 


§  662.]  FKAUDS    OF    DIKECTOES,  TKOMOTEKS,  ETC.       [cH,  XXXIX. 

tolders  in  both  companies.     Moreover,  the  court  cannot  pre- 
scribe the  terms  of  a  lease.     It  can  merely  enjoin  a  fraudulent 
or  ultra  vires  one.     The  court  held  that  no  actual  fraud  was 
proven  in  this  case.^     Again,  wliere  one  corporation  buys  out 
another,  a  stockholder  of  the  former  cannot  complain,  even 
though  a  large  amount  of  watered  stock  was  issued  in  payment, 
and  even  though  the  directors  of  the  purchasing  company  were 
personally  interested  in  the  selling  company  and  had  made 
large  profits  in  the  construction  of  the  work,  it  a})pearing  that 
the  purchasing  company  had  no  property  at  all  at  the  time  of 
the  purchase.     In  such  a  case  no  damage  is  done  to  the  stock- 
holder, and  hence  suit  by  him  does  not  lie.^    But  where  a  lease 
is  made,  and  the  directors  of  the  lessee  railroad  company  are 
also  directors  of  the  lessor  company,  and  own  a  majority  of  the 
stock  of  both  companies,  a  stockholder  of  the  lessee  company 
alleging  that  the  lease  is  at  an  exorbitant  rent  and  unlawfully 
depletes  the  funds  and  earnings  of  the  lessee  company,  and  in- 
jures him  as  a  stockholder,  and  alleging  also  that  the  directors 
have  unlawfully  paid  large  sums  to  themselves  on  account  of 
alleged  loans,  may  by  a  bill  in  equity  compel  them  to  account.^ 
Where  the  officers  of  a  lessee  corporation,  which  has  leased 
the  property  of  the  lessor  corporation,  control  a  majority  of  the 
stock  of  the  latter,  and  conspire  to  compel  the  minority  to  sell 
their  stock  by  refusing  to  pay  the  rent  due  on  the  lease,  a  court 
of  equity,  on  the  application  of  the  minority,  will  compel  a  pay- 
ment of  the  rent.*    The  question  as  to  the  liability  of  a  director 

bargains,  and  put  in  the  place  of  the  certain  locality  and  then  place  a  sta- 

8kill  or  industry  of  the  manager  the  tion  there  so  as  to  enhance  the  value 

grace  of  some  railroad  corporation  as  of  their    property;    or  where  they 

the  deciding  factor  of  industrial  sue-  charge  more  in  the  neighborhood  of 

cess  or  ruin.     As  examples  of  the  a  large  city  for  a  fare  to  a  near  sta- 

deals  within  the  railway  itself,  none  tion  where  they  do  not  own  laud 

were  more  common  than  for  some  of  than  to  a  more  distant  one  where 

the  directors  of  a  railroad  to  build  tliey  do  own  real  estate  which  they 

a  branch  railroad,  and  then,  after  are  eager  to  sell" 

stocking  and  bonding  it  heavily,  sell  i  Shaw  v.  Davis,  78  Md.  308  (1894). 

It  out  to  the  parent  road  at  a  high  2  Smith  v.  Ferries,  etc.  R'y,  51  Pac. 

valuation.   Among  the  minor  though  Rep.  710  (Cal.,  1897). 

most  common  forms  of  this  kind  of  s  Sage  v.  Culver,  147  N.  Y.  241  (189.-)).' 

illegitimate  manipulating  sliould  be  <  Barr  v.  New  York,  etc  R.  R.,  9G 

mentioned  that  by  wliich  the  direc^  N.  Y.  444  (1884). 
ors  of  a  road  buy  up  real  estate  in  a 

1313 


CH.  XXXIX.]       FRAUDS    OF   DIRECTORS,  PROMOTERS,  ETC. 


[§  662. 


who  is  interested  as  a  stockholder  in  a  contracting  construction 
company  is  considered  elsewhere.^ 

A  lease  to  a  director  is  not  necessarily  illegal,  even  though 
a  stoclvholder  objects  thereto,  where  a  majority  of  the  stock- 
holders have  ratified  the  lease.^ 

Where  a  director  has  sold  his  property  to  the  corporation,  or 
lias  committed  some  other  act  which  is  voidable  and  not  void, 
and  where  a  majority  of  the  stock  can  ratify  and  validate  that 
act,  it  being  not  actually  fraudulent,  but  merely  voidable  at 
the  option  of  the  stockholders,  the  important  question  arises 
whether,  in  taking  the  vote  of  the  stockholders  on  such  a  ques- 
tion, the  stock  held  by  the  director  himself  is  to  be  counted. 
The  well-settled  rule  is  that  his  stock  is  to  be  counted,  even 
though  the  vote  would  have  failed  if  his  stock  had  not  been 
voted/ 


1  See  §  649,  supra. 

2  TUe  court  refused,  at  the  instance 
of  a  dissenting  stockholder,  to  set 
aside  such  a  lease,  in  the  case  of  Nye 
V.  Storer,  46  N.  E.  Rep.  403  (:\Iass., 
1897). 

3  A  director  may  sell  property  to 
the  corporation  where  the  purchase 
is  adopted  at  a  meeting  of  the  stock- 
holders. Such  director  may  vote  in 
favor  of  such  purchase  all  the  stock 
that  he  owns;  but  if  the  resvilt  is  "so 
detrimental  to  the  interests  of  the 
corporation  itself  as  to  lead  to  the 
necessary  inference  that  the  interests 
of  the  majority  of  the  shareholders 
lie  wholly  outside  of  and  in  opposi- 
tion to  the  interests  of  the  corpora- 
tion and  of  the  minority  of  the  share- 
holders, and  that  their  action  is  a 
wanton  or  fraudulent  destruction- of 
the  riglits  of  such  minority,''  then  a 
court  of  equity  will  set  the  act  aside. 
Gamble  v.  Queen's,  etc.  Co.,  123  N.  Y. 
91  (1890).  The  court  said:  "In  such 
cases  it  may  be  stated  that  the  ao- 

'tion  of  the  majority  of  the  share- 
holders may  be  subjected  to  the 
scrutiny  of  a  court  of  equity  at  the 
Buit  of  the  minority  shareholders." 


And  in  Northwest  Transp.  Co.  n 
Beatty,  L.  R.  12  App.  Cas.  589  (1887), 
in  which  the  same  thing  was  held,  it 
was  said,  in  effect,  that  in  such  case 
the  ratification  must  not  be  brought 
about  by  unfair  or  improper  means, 
nor  be  illegal  or  fraudulent  or  op- 
pressive toward  those  shareholders 
who  oppose  it.  A  rule  excluding 
stockholders  from  the  right  to  vote, 
merely  because  they  might  be  per- 
sonally interested  to  vote  in  a  par- 
ticular way,  contrary  to  the  interests 
of  the  other  stockholders,  would  be 
likely  to  lead  to  great  confusion. 
Beatty  v.  Northwest  Transp.  Co.,  5 
Can.  L.  T.  277  (1885)  (rev'g  S.  C,  4 
Can.  L.  T.  85),  holding  that  a  pur- 
chase by  the  directors  of  a  vessel 
from  one  of  the  directors  could  not 
be  set  aside  by  a  dissenting  stock- 
holder where  a  majority  of  the 
stock  had  ratified  the  purchase,  even 
though  the  director  himself  held  and 
voted  that  majority.  A  purchase  of 
a  steamboat  from  one  who  is  a  di- 
rector and  owns  a  majority  of  the 
stock  is  valid  where  ratified  by  a 
majority  vote  at  a  stockholders' 
meeting.    The  director  may  vote  his 


1319 


§  GC2.]  FKAUDS    OF    DIRECTORS,  PROMOTERS,  ETC.       [CU.  XXXIX. 


Another  phase  of  this  subject  arises  where  the  majority  of  the 
stockholders  in  a  corporation  are  interested  in  another  corpora- 
tion with  which  a  contract  is  being  made.  The  Law  requires 
of  the  majority  of  the  stocldiolders  the  utmost  good  faith  ia 
their  control  and  management  of  the  corporation  as  regards  the 


stock.  Northwest  Transp.  Co.  v. 
Beatty,  L.  R  13  App.  Cas.  5S9  (1887). 
A  stockliolder  may  vote  to  ratify  a 
purchase  of  property  from  a  corpora- 
tion by  the  directors,  although  such 
stockholder  is  a  director  himself. 
The  court  said:  "The  fact  that  he 
may  have  a  personal  interest  separate 
from  the  others  or  from  that  of  the 
corporation  in  the  matter  to  be  voted 
upon  does  not  affect  his  right  to  vota 
It  is  not  to  be  understood  that  the 
majority  stockholders  may  use  their 
power. of  voting  for  the  purpose  of 
defrauding  the  minority."  Bjorn- 
gaard  v.  Goodhue  County  Bank,  49 
Minn.  483  (1892);  Foss  v.  Ilarbottle,  2 
Hare,  461  (1843),  where  the  directors 
sold  their  property  to  the  corpora- 
tion. Inasmuch  as  the  majority  of 
stockholders  could  ratify  the  pur- 
chase, the  court  refused  to  entertain 
a  stockholders'  suit  until  they  had 
voted.  Where  a  person  fraudulently 
misrepresented  a  mine  in  its  sale  to 
the  company  for  shares  of  stock,  a  suit 
by  the  company  against  him  does 
not  lie  where  a  majority  of  the  stock 
Totes  against  the  suit,  although  the 
shares  obtained  by  the  vendee  were 
voted  by  him  and  were  necessary  to 
make  the  majority,  and  although  he 
was  a  director  of  the  company  at 
the  tima  East,  etc.  Co.  v.  Merry- 
weather,  2  Hem.  &  M.  254  (1854).  This 
case  goes  much  farther  than  the 
modern  rule  would  uphold.  See  Ma- 
son V.  Harris,  L.  R.  11  Cla.  D.  97  (1879), 
holding  explicitly  that  where  a  di- 
rector is  guilty  of  fraud  as  a  promoter, 
a  dissenting  stockholder  may  bring 
him  to  an  accounting,  although  the 
director  controls  the  directorate  and 
a  majority  of  the  shares  of  stock. 


Also  Atwool  V.  Merryweather,  L,  R. 

5  Eq.  4G4,  note  (13G7),  where  a  dissent- 
ing stockholder  sued  to  set  aside  a 
sale  of  property  to  the  company  by 
the  defendant,  wlio  divided  the  prof- 
its with  one  of  the  directors.  Al- 
though a  majority  of  the  stockholders 
had  voted  not  to  bring  the  action, 
yet  this  majority  was  made  up  by 
counting  the  stock  of  the  guilty  par- 
ties, and  hence  was  not  binding.  In 
a  stockholders'  vote  ratifying  the 
acts  of  directors,  a  stockholder  has 
no  right  to  vote  stock  which  he  has 
transferred  to  others,  even  though 
it  still  stands  in  his  name  on  the 
books.  Graves  v.  Mono  Lake,  etc.  Co., 
81  Cal.  803  (1889).  A  creditor  who  is 
also  a  stockholder  may  vote  his  stock 
in  favor  of  a  mortgage  to  himself. 
Rittenhouse  v.  Winch,  11  N.  Y.  Supp. 
122  (1890).  Works  built  by  a  director 
in  opposition  to  the  corporation  may 
be  purchased  by  the  latter  and  new 
stock  issued  therefor.  Such  a  trans- 
action is  certainly  legal  where  a  ma- 
jority of  the  minority  stockltolders, 
not  including  the  parties  interested, 
vote  in  favor  of  it.  Barr  v.  Pitts- 
burgh, etc.  Co.,  51  Fed.  Rep.  33  (1892). 
In  Cumberland  Coal  Co.  v.  Sherman, 
30  Barb.  553  (1859).  the  court  held 
that  a  unanimous  vote  of  the  stock- 
holders was  necessary  to  confirm.  A 
ratification  by  the  stockholders  of 
directors'  acts  cannot  be  made  by  a 
general  resolution  ratifying  "  all  of 
the  acts  of  the  oflficers."    Farmers'  L. 

6  T.  Co.  V.  San  Diego,  etc.  Co.,  45  Fed. 
Rep.  518  (1891),  holding  also  that  the 
directors  holding  a  majority  of  the 
stock  cannot  by  its  vote  ratify  a  pref- 
erence to  them  by  the  corporation, 
which  is  insolvent. 


1320 


CH.  XXXIX,]      FEAUDS    OF   DIKECTOKS,  PKOMOTERS,  ETC.  [§  662, 

minority,  and  in  this  respect  tlie  majority  stand  in  mucli  the 
same  attitude  towards  the  minority  that  the  directors  sustain 
towards  all  the  stockholders.  Hence,  where  the  majority  are 
interested  in  another  corporation,  and  the  two  corporations 
have  contracts  between  them,  it  is  fraudulent  for  that  majority 
to  manage  the  affairs  of  the  first  corporation  for  the  benefit  of 
the  second.  A  court  of  equity  will  intervene  and  protect  the 
minority  upon  an  application  by  the  latter.^ 

The  New  York  court  of  appeals  has  well  said  that  where  "  a 
majority  of  the  stock  is  owned  by  a  corporation  or  a  combina- 
tion of  individuals,  and  it  assumes  the  control  of  another  com- 
pany's business  and  affairs  through  its  control  of  the  officers 
and  directors  of  the  corporation,  it  would  seem  that  for  all 
practical  purposes  it  becomes  the  corporation  of  which  it  holds 
a  majority  of  stock,  and  assumes  the  same  trust  relation  to- 
wards the  minority  stockholders  that  a  corporation  itself  usu- 
ally bears  to  its  stockholders."  ^ 

The  principle  of  law  has  been  clearly  laid  down  that  "  when 
a  number  of  stockholders  combine  to  constitute  themselves  a 
majority  in  order  to  control  the  corporation  as  they  see  fit, 
they  become  for  all  practical  purposes  the  corporation  itself, 
and  assume  the  trust  relation  occupied  by  the  corporation  to- 
wards its  stockholders." ' 

1  Quoted  and  approved  in  the  case  sale  of  its  bonds  at  execution  on  nine 
of  Farmers'  L.  &  T.  Co.  v.  New  York,  cents  on  the  dollar,  and  executes  a 
etc.  R*y>  150  N.  Y.  410,  430  (1896).  mortgage  and  controls  the  business, 

2  Farmers'  L.  &  T.  Co.  v.  New  York,  all  for  the  benefit  of  the  former  cor- 
eta  R'7,  150  N.  Y.  410,  430  (1896).  poration,  he  and  the  dummy  direct- 
*'  There  are  circumstances  under  ors  and  third  persons  may  be  joined 
which  the  majority  stockholders  oc-  in  a  bill  filed  by  a  minority  stock- 
cupy  substantially  the  same  relation  holder  to  enjoin  their  acts  and  ob- 
of  trust  towards  the  minority  as  the  tain  a  personal  judgment.  Gray  v. 
board  of  directors  would  occupy  to-  Fuller,  17  N.  Y.  App.  Div.  29  (1897). 
wards  the  stockholders  it  represent?."  ^  Ervin  v.  Oregon  R.  &  Nav.  Co.,  27 
Farmers'  L.  &  T.  Co.  v.  New  York,  etc.  Fed.  Rep.  625  (1886) ;  S.  C,  20  Fed.  Rep. 
R  y,  150  N.  Y.  410,  434  (1896).  This  577.  In  Lowe  v.  Pioneer  Threshing 
decision  was  followed  in  a  stock-  Co.,  70.Fed.  Rep.  646  (1895),  the  court 
holders'  suit  in  the  federal  court  to  enjoined  the  company  from  trans- 
remedy  the  same  wrong  in  De  Neuf-  ferring  nearly  all  of  its  property  to  a 
ville  V.  New  York,  etc.  R'y,  81  Fed.  few  stockholders  in  purchase  of  their 
Rep.  10  (1897).  Where  a  person  in  stock,  but  the  court  refused  to  ap- 
control  of  a  company  obtains  control  point  a  receiver.  Where  a  majority 
of  a  rival  company  and  allows  judg-  of  the  stock  of  a  railroad  company  is 
ments  against  the  latter,   and  the  held  by  another  company,  and  the 

1321 


§  6G2.]  FKAUDS    OF   DIKECTORS,  PKOMOTERS,  ETC.       [CU.  XXXIX- 

Thus,  the  majority  of  stockholders  cannot  cause  the  corporate 
property  to  be  sold  to  them  at  private  sale  at  a  price  agreed 
upon  by  them  and  the  directors  whbm  they  placed  in  ollice. 
The  minority  are  entitled  to  a  public  sale.* 

"Where  two  stockholders  own  two-thirds  of  the  capital  stock, 
and  they  cause  the  directors  to  soil  all  the  corporate  property 
to  a  person  who  buys  for  them,  the  owner  of  the  other  one-third 
may  cause  the  sale  to  be  set  aside,  even  though  a  stockholders' 
meeting  has  authorized  it.* 

Where  a  stockholder  is  under  contract  to  carry  along  the  cor- 
porate debt,  and  instead  of  doing  so  obtains  control  of  the  board 
of  directors,  and  causes  a  mortgage  to  be  given  to  a  confeder- 
ate, and  thereby  causes  the  corporate  property  to  be  foreclosed 
and  sold,  and  wrecks  the  corporation,  he  is  liable  in  damages  to 
other  stockholders.' 

Where  the  majority  stockholders,  through  directors  who  are 
their  tools,  having  sold  property  to  the  corporation  and  agreed 
to  pay  a  mortgage  on  such  property,  afterwards  cause  the  cor- 
poration to  assume  and  pay  the  mortgage,  the  minority  stock- 
holders may  have  the  transaction  set  aside.* 

Where  a  person  controls  a  majority  of  the  stock  of  a  ferry 

latter  company  vises  its  control  to  ac-  profits  under  a  contract  which  are 
quire  all  the  property  of  the  former  possible,  and  to  sell  the  property  at  a 
company  fraudulently,  a  minority  large  price,  all  for  the  purpose  of  de- 
stockholder  may  bring  the  latter  predating  the  pledged  stock  and  thus 
company  to  account  therefor.  Pon-  obtain  the  stock  himself,  the  pledgor 
dir  V.  New  York,  etc.  R.  R.,  72  Hun,  may  call  the  pledgee  to  account  for 
S84  (1893).  the  loss  suffered  from  this  conspiracy 

1  Mason  v.  Pewabic  Min.  Co.,  133  and  \vrong.  The  court  held  also  that, 
V.  S.  50  (1890).  See  also  §  608,  infra,  altliough  the  damage  was  directly  to 
A  corporation  owning  a  majority  of  the  corporation,  yet  that,  indirectly, 
the  stock  of  anotlier  company  may  it  was  a  damage  to  the  pledgor,  and 
legally  take  the  latter's  bonds  at  a  that  hence  the  pledgor  could  sue  in 
fair  price,  ninety  cents  on  the  dollar  his  own  behalf  alone,  and  that  the 
in  this  case.  Gloninger  v.  Pittsbiirgh,  measure  of  damage  is  the  difference 
etc.  R.  R.,  139  Pa.  St.  13  (1891).  between  the  market  value  at  the  time 

2  Chicago  Hansom  Cab  Co.  v.  Yer-  of  smt  and  what  it  would  have  been 
kes,  141  111.  320  (1892).  if  the  conspiracy  had  not  been  set  on 

3  Hanley  v.  Balch,  94  Mich.  315  foot.  The  court  held,  however,  in  the 
(1892).  In  Ritchie  v.  McMullen,  79  case  before  it,  that  the  proofs  did  not 
Fed.  Rep.  523  (1897),  the  court  held  sustain  the  allegations. 

that  if  a  pledgee,  being  in  control  of  *  Wood  roof  v.  Howes,  88  CaL  184 
the  corporation,  refuses  to  develop  (1891),  holding  also  that  where  the 
the  property  and  to  accept  subsidies  majority  stockholders  cause  the  di- 
which   are    offered,  and  to   accept    rectors  to  purchase  stock  of  them  for 

1333 


CH.  XXXIX.]       FKAUDS    OF   DIEECTOES,  PEOMOTEES,  ETC. 


[§  662. 


and  also  a  railroad  company,  and  puts  Ms  "  dummies  "  in  as 
directors,  and  leases  all  the  property  of  the  former  to  the  latter 
at  an  unfair  price,  the  court  will  set  the  lease  aside  at  the  in- 
stance of  a  minority  stockholder.^ 


the  corporation  at  a  price  higher  than 
the  market  price,  the  minority  may- 
cause  the  transaction  to  be  set  aside. 
1  :Meyer  v.  Staten  Island  R'y,  7  N.  Y. 
St.  Rep.  245  (1887).  Where  a  lessor 
and  a  lessee  company  are  controlled 
by  the  same  person,  and  the  lessor 
company  is  insolvent,  and  the  lessee 
company  is  advancing  large  sums  of 
money  to  pay  interest  on  the  bonds 
of  the  lessor  company,  with  no  hope 
of  repayment,  the  minority  stock- 
holders of  the  lessee  company  may 
enjoin  such  payments.  Jeans  v.  Pitts- 
burgh, etc.  R'y  (Com.  PL  Ohio,  1885), 
stated  in  Moran  v.  Pittsburgh,  etc. 
R'y,  32  Fed.  Rep.  882  (1885).  See  also 
Menier  v.  Hooper's  TeL  "Works,  L.  R. 
9  Ch.  350  (1874).  See  also  Peabody  v. 
Flint,  88  Mass.  52  (1863),  where,  how- 
ever, laches  barred  the  remedy;  Gor- 
ham  V.  Gilson,  28  Cal.  479  (18G5),  Avhere, 
however,  the  action  failed  because 
the  stockholders  sued  to  compel  a 
conveyance  to  each  of  his  propor- 
tionate part.  Where  the  majority 
of  the  stockholders  vote  to  make  a 
lease  of  the  whole  corporate  prop- 
erty to  themselves,  a  dissenting  stock- 
holder may  have  the  lease  set  aside. 
Meeker  v.  Winthrop  Iron  Co.,  17  Fed. 
Rep.  48  (1888);  Rice's  Appeal,  79  Pa- 
St.  168,  204  (1875).  Where,  however, 
corporate  property  has  been  sold  and 
the  proceeds  retained  by  one  stock- 
holder, another  stockholder  cannot 
sue  him  for  money  had  and  received. 
The  action  must  be  in  equity  and  for 
the  benefit  of  the  corporation.  Hods- 
don  V.  Copeland,  16  Me.  314  (1839). 
Equity  will  set  aside  a  lease  which 
the  directors  make  of  a  mine  to  the 
minority  stockholders  in  order  to 
take  it  from  the  control  of  incoming 
directors  who  were  elected  by  the 


majority.  Mahoney  Min.  Co.  v.  Ben- 
nett, 5  Sawyer,  141  (1878);  S.  C,  16 
Fed.  Cas.  497.  The  mere  fact  that 
a  person  owtis  a  majority  of  the 
stock  does  not  raise  a  legal  inference 
that  he  dominates  the  board  of  di- 
rectors. Porter  v.  Pittsburg,  etc.  Co., 
120  U.  S.  649,  670  (1887).  The  sale 
of  all  corporate  assets  to  the  ma- 
jority, where  others  offer  a  higher 
price,  is  fraudulent.  Wilson  v.  Cen- 
tral Bridge,  9  R.  L  590  (1870);  Greg- 
ory V.  Patchett,  33  Beav.  595  (1864), 
where  a  sale  of  all  the  corporate  as- 
sets to  two  of  the  stockholders  on 
the  purchase  of  their  stock  by  the 
company  was  set  aside  as  a  fraud  on 
the  remaining  stockholders.  Where 
the  stockholders  enter  into  a  con- 
tract by  which  they  give  a  certain 
amount  of  their  stock  to  a  per- 
son who  agrees  to  do  certain  work 
for  the  corporation  in  consideration 
of  the  stock,  the  remedy  for  a  breach 
of  contract  on  his  part  is  an  action 
for  damages,  unless  by  the  contract 
the  stock  was  to  be  returned  in  case 
of  non-paj-ment.  Gillett  v.  Bowen, 
23  Fed.  Rep.  625  (1885).  If  the  action 
is  to  recover  back  the  stock,  the  cor- 
poration is  a  proper  party  in  order  to 
obtain  a  transfer.  Johnson  v.  Kirby, 
65  Cal.  482  (1884).  See  also  Gates  v. 
Sparkman,  73  Tex.  619  (1889);  §.^  334^ 
350,  supra.  Where  a  branch  corpo- 
ration faithfully  performs  its  duty 
as  agent,  the  contract  of  agency  can- 
not be  set  aside  on  the  ground  that 
individuals  supposed  to  be  hostile  to 
the  principal  own  a  majority  inter- 
est in  a  corporation  which  in  turn 
owns  a  majority  interest  in  the  agent 
corporation.  Brush  Electric  Co.  v. 
Brush-Swan,  etc.  Co.,  49  Fed.  Rep.  8 
(1892).    Minority  stockholders  cannot 


1  on  ■> 


§  6G2.] 


FEAUDS    OF    DIRECTORS,  PROMOTEKS,  ETO.       [cil,  XXXIX. 


A  contract  by  Avliich  a  purchaser  of  a  majority  of  the  stock  of 
three  corporations  agrees  that  the  corporations  should  cjiiplov 
the  seller  of  the  stock  at  a  fLxed  salary  for  a  certain  time,  an«l 
after  a  certain  time  should  give  him  a  salary  and  allow  him  to 
name  one-half  of  the  directors,  is  illegal,  and  cannot  be  enforced 
by  the  vendor  as  against  the  vendee,  even  though  the  stock  has 
been  delivered  and  paid  for  under  such  agreement.'    Keverthe- 
less,  although  a  person  holds  a  majority  of  the  stock  and  causes 
his  friends  to  be  made  directors,  he  may  sell  property  to  the 
corporation  and  take  stock  in  payment,  if  the  transaction  is  a  fair 
one.2    And  the  fact  that  the  holders  of  a  majority  of  the  stock 
are  stockholders  in  another  contracting  corporation  does  not 
render  the  contract  voidable.'   "  There  is  no  knv  which  makes  it 
impossible  for  a  majority  stockholder  to  enter  into  a  contract 
with  his  company."  *    Where  a  lease  of  its  property  is  made 
by  a  corporation,  it  is  legal  for  the  lessee  to  pay  secretly  to  ono 
of  the  stockholders  of  the  lessor  a  sum  of  money  to  induce  such 
stockholder  to  favor  the  lease.'    A  stockholder  has  a  right  to 
sell  his  stock  at  any  time  unless  he  has  specifically  agreed  other- 
wise.^ 


have  an  accoxinting  on  the  ground 
that  the  company  is  managed  in  the 
interest  of  one  stockholder,  wlio  owns 
a  majority  of  the  stock;  also  that 
the  coi-poration  is  insolvent,  and  that 
imder  different  management  it  would 
be  profitable,  no  fraud  being  alleged. 
Wheeler  v.  Pullman  Iron,  etc.  Co., 
143  la  197  (1892).  A  majority  of  the 
members  of  a  corporation  organized 
not  for  profit  cannot  vote  a  part  of 
the  assets  to  themselves.  Another 
member  may  prevent  it.  Ashton  v. 
Dashaway  Assoc,  84  CaL  61  (1890). 
Damages  may  be  recovered  by  a  cor- 
poration for  a  fraud  practiced  upon 
it,  even  though  an  agent  of  the  cor- 
poration who  aided  in  the  perpetra- 
tion of  the  fraud  was  a  stockholder 
in  the  corporation.  Grand  Rapids, 
etc.  Co.  V.  Cincinnati,  etc.  Co.,  45  Fed. 
Rep.  671  (1891). 

1  Fennessy  v.  Ross,  5  N.  Y.  App. 
Div.  343  (1896).  On  this  subject,  see 
ch.  XXXVII,  supra. 


1324 


2  Russell  V.  Rock.  etc.  Co.,  39  AtL 
Rep.  21  (Pa.,  1898). 

3  Ziegler  v.  Lake  Street  EL  R  R, 
69  Fed.  Rep.  176,  182  (1895). 

<  Central  Trust  Co.  v.  Bridges,  57 
Fed.  Rep.  753,  767  (1893). 

5  But  where  subsequently  the  stock- 
holder becomes  a  director  and  takes 
part  in  reducing  the  rent  paid  to  the 
corporation,  it  was  his  duty  to  dis- 
close the  extra  price  which  he  was 
continually  receiving,  and  for  failure 
so  to  do  he  must  account  to  the  cor- 
poration and  pay  over  an  equal  per- 
centage of  his  secret  profit  subse- 
quently received,  it  being  presumed 
that  a  reduction  on  his  secret  profit 
would  have  been  made  to  the  benefit 
of  the  corporation.  Bird,  eta  Co.  v. 
Humes,  157  Pa.  St.  278  (1893). 

fi"  We  do  not  understand  that  one 
stockholder  is,  by  virtue  of  his  own- 
ership of  stock,  bound  to  continue  iu 
the  holding  of  it  in  order  to  allow 
another  stockholder  to  make  a  profit 


CH.  XXXIX.]       FRAUDS    OF    DIEECTOES,  PEOMOTEES,  ETC.  [§  063. 

WTiere  two  companies  in  litigation  pass  under  the  same 
control,  the  court  will  no  longer  retain  the  case,  inasmuch  as 
the  same  parties  control  both  sides,  but,  in  order  to  protect  the 
minority  stockholders,  the  case  will  be  left  open.^ 

Where  on  a  winding  up  the  court  decrees  a  sale  of  the  cor- 
porate mining  property  at  public  sale,  any  one  or  more  of  the 
stockholders  may  bid,  and  the  court  will  not  readily  set  the 
sale  aside  on  the  ground  that  after  the  property  was  struck  off 
some  one  offered  a  higher  price.'^ 

Sales  of  property  by  a  corporation  may  be  valid,  although 
made  at  the  instigation  of  stockholders  whose  stock  really  be- 
longs to  others.^ 

A  corporate  creditor  cannot  complain  of  the  acts  specified 
above  to  the  same  extent  that  a  stockholder  may  complain.* 

§  6G3.  ^^ Dummy''-  coriwrations  —  The  courts  ivill ignore  the 
corporate  existence  where  it  is  fraudulently  used  to  do  ivhat  the 
stoclcholders  cannot  legally  do. —  A  corporation  is  in  law  a  per- 
son or  entity  entirely  distinct  from  its  stockholders  and  officers. 
It  may  become  insolvent  and  yet  not  make  them  insolvent.  It 
may  commit  fraudulent  or  ultra  vires  acts  and  yet  they  be  not 
liable  therefor.  It  may  do  acts  which  its  stockholders  as  in- 
dividuals may  be  under  contract  not  to  do,  and  the  stockholders 
may  do  acts  which  the  corporation  cannot  do.     The  disabilities 

out  of  the  negotiations  then  pend-  its  property  buy  such  property.  "  He 

ing.    .   .    .    We  do  not  understand  has  his  own  interests  to  protect,  and 

that  a  stockholder  is  under  obliga-  is  not  charged  with  the  care  of  the 

tions,  legal  or  moral,  to  sacrifice  liis  interests  of  the  other  stockholders, 

personal  interests  in  order  to  seciire  They  act  for  themselves."    Price  v. 

the  welfare    of  the  corporation  of  Holcomb,  89  Iowa,  123  (1893). 

which  he  is  a  stockholder,  or  to  en-  »  Gottfried  v.  Miller,  104  U.  S.  521 

able  another   stockholder  to  make  (1881). 

gains   and  profits."     Farmers',  etc.  *See  §  735,  infra.    A  company  is 

Co.  V.  Chicago,  etc.  R'y,  1G3  U.  S.  31  not  liable  for  the  contracts  of  a  per- 

ng96),  son  who  makes  a  construction  con- 

1  South  Spring,  etc.  Co.  v.  Amador,  tract  with  it,  even  though  that  per- 

etc.  Co.,  145  U.  S.  300  (1892).  son  is  the  principal  stockholder  and 

2Pewabic  Min.  Co.  v.  Mason,  145  dominates  and  controls  the  action 

U.  S.  349  (1892).    A  stockholder  may  of  the  corporation.    Although  other 

bid  for  the  property  at  a  public  sale,  stockholders,  bondholders,  or  thecor- 

even  though  he  owns  a  majority  of  poration  itself  might  question  such 

the  stock.    Wilson  v.  Central  Bridge,  a  contract,  yet  subcontractors  can- 

9  R  L  590  (1870).    The  person  owning  not.    Central  Trust  Co.  v.  Bridges,  57 

a  majority  of  the  stock  of  a  failing  Fed.  Rep.  753  (1893). 
corporation  may  at  the  public  sale  of 

1325 


§  CG3.] 


FKAUDS    OF   DIRECTORS,  PROMOTERS,  ETC.       [cn.  XXX I. \'. 


of  the  corporation  are  not  disabilities  of  the  stockhoklers,  nor 
are  the  disabilities  of  the  stockholders  the  disabilities  of  the 
corporation.  Hence  it  is  that  a  corporation  is  often  organized 
to  act  as  a  "  cloak  "  for  frauds.  Sucli  cases  as  these  are  becom- 
ing common,  and  the  courts  are  becoming  more  and  more  in- 
clined to  ignore  the  corporate  existence,  when  necessary,  in 
order  to  circumvent  the  fraud.*  Tlius,  it  has  been  held  that, 
where  a  person  has  contracted  that  he  will  not  do  a  certain 
act,  he  cannot  form  and  control  a  corporation  and  have  the  cor- 
poration do  that  act.'^  The  mere  fact,  however,  tliat  a  pcrs<jn 
has  contracted  to  sell  a  patent-right  does  not  affect  tlie  title  of 
a  corporation  to  whom  he  transfers  such  patent.'  Lut  wliero 
a  patentee  is  under  obligation  to  assign  his  patent,  a  corpora- 

1  See  §  6,  s^tpra. 

2  Beal  V.  Chase,  31  Mich.  490  (1875). 
When  a  person  sells  a  trade-mark 
and  then  sells  an  infringement  upon 
it  to  a  corporation  organized  and 
controlled  by  himself,  the  latter  may- 
be enjoined  from  using  it.  Le  Page 
Co.  V.  Russia  Cement  Co.,  51  Fed.  Rep. 
941  (1893).  Unless  there  is  a  positive 
allegation  and  proof  that  the  corpora- 
tion was  fraudulently  formed  to  vio- 
late the  individual  contract,  the  suit 
will  fail.  Moore,  etc.  Co.  v.  Towers 
Hardware  Co.,  87  Ala.  206  (1888).  A 
contract  by  a  person  to  sell  all  lumber 
manufactured  by  him  through  cer- 
tain agents  cannot  be  evaded  by  his 
forming  a  corporation  and  manufact- 
uring and  selling  through  it.  Hagy 
V.  McGuire,  147  Pa.  St.  187  (1892). 

3  Davis,  etc.  Co.  v.  Davis,  etc.  Co., 
20  Fed.  Rep.  699  (1884);  Averill  v.  Bar- 
ber, 6  N.  Y.  Supp.  255  (1889).  See  also 
§  727,  infra,  on  Notice.  The  vendor 
of  a  good-will  who  agrees  not  to  en- 
gage in  the  same  business  again  in  a 
certain  territory  cannot  evade  his 
agreement  by  becoming  a  stock- 
holder in,  or  organizing,  or  managing 
a  competing  corporation;  but,  there 
being  other  stockholders  in  the  cor- 
poration, an  injunction  will  not  be 
granted  against  the  corporation  or 
such    other    stockholders.     Kramer 


V.  Old,  25  S.  R  Rep.  813  (N.  C,  1896). 
A  foreign  corporation  cannot  prevent 
a  domestic  corporation  from  usimj 
tlie  same  name,  especially  whore 
the  latter  was  incorporated  first, 
even  though  the  public  may  be  mis- 
led. In  this  case  a  party  sold  out 
to  individuals,  but  did  not  sell  any 
trade-marks.  He  then  incorporated 
a  company  under  the  name  of  the 
trade-mark.  Ilazelton  Boiler  Co.  r. 
Hazelton,  etc.  Co.,  143  IlL  494  (1892). 
In  Gornuilly,  etc.  Co.  v.  Bretz,  64  Fed. 
Rep.  613  (1894),  where  a  firrn,  being 
imder  contract  to  manufacture  and 
sell  only  certain  bicycle  patents  and 
machines,  formed  a  corporation  to 
manufacture  and  sell  other  machine?, 
the  court  held  that  if  the  holdings 
of  stock  showed  that  the  two  con- 
cerns were  practically  one,  then  that 
the  corporation  would  be  enjoined. 
See  also  Pratt  v.  Wilcox  Mfg.  Co.,  64 
Fed.  Rep.  589  (1894).  Where  a  per- 
son contracts  to  give  to  another  per- 
son a  fourth  interest  in  any  mines 
which  the  former  may  buy,  the  for- 
mer must  give  the  latter  a  fourth  of 
stock  which  the  former  purchases 
in  a  mining  company.  Dennison  v. 
Chapman,  105  CaL  447  (18951  See 
also  Fitzgerald  i\  Fitzgerald,  etc.  Co., 
41  Neb.  374  (1894),  to  the  effect  that 
the  corporation  is  liable  for  the  fraud 


1326 


CH.  XXXIX.]       FEAUDS    OF   DIKECTOKS,  PlgOMOTEES,  ETC.  [§  663. 

tion  wholly  owned  by  him  is  not  protected  as  a  lonafide  pur- 
chaser of  the  patent  from  him.^  Although  a  lessee  corporation 
has  a  right  to  payment  for  improvements,  if  the  lessor  does  not 
renew,  such  payment  need  not  be  made,  if  the  new  lease  is  to 
a  new  corporation  organized  by  the  same  stockholders  as  are 
in  the  old.-  Where  it  would  be  illegal  for  two  or  more  corpo- 
rations to  unite  in  regulating  the  production  and  price  of  an 
article,  it  is  illegal  to  accomplish  that  result  by  placing  all  the 
shares  of  stock  of  those  corporations  in  the  hands  of  trustees 
and  thereby  securing  co-operating  boards  of  directors.^ 

There  are  many  other  instances  in  which  the  corporate  ex- 
istence will  not  suffice  to  evade  liabilities,  disabilities,  and 
frauds.  A  partnership  cannot  transfer  all  its  property  to  a  cor- 
poration for  shares  of  stock  and  thereby  defraud  the  creditors 
of  the  partnership.'*  The  officers  and  agents  of  a  corporation 
who  cause  the  corporation  to  defraud  its  creditors  or  subscrib- 
ers to  its  stock  by  means  of  fraudulent  misrepresentations  are 
liable  to  the  persons  so  defrauded.*  The  stocldiolders  and  offi- 
cers of  a  corporation  which  was  not  properly  organized  may 
be  liable  as  partners  for  all  of  its  debts,"  but  this  liability  is 
not  based  on  fraud. 

The  lower  English  courts  recently  held  that  where  a  mer- 
chant transfers  all  his  busmess  to  a  corporation  formed  for  that 
purpose,  and  continues  to  carry  on  the  business  in  the  name  of 
the  corporation,  he  being  practically  the  only  stockholder,  he 
is  liable  for  the  corporate  debts  on  the  theory  of  principal  and 
asrent :  but  the  House  of  Lords  reversed  all  this  and  held  that 
he  is  not  liable.''    A  few  cases  hold  that  a  corporation  incorpo- 

of  its  board  of  directors  against  an-  other  company  to  which  the  princi- 

other  corporation  which  the  same  pal  again  assigns  his  patent  may  sue 

board  controlled.  the  former  company    for  infringe- 

1  National,  etc.  Co.  v.  Connecticut,  ment.    Yoimg,  etc.  Co.  v.  Young,  etc. 

etc.   Co.,    73  Fed.   Rep.    491    (1896).  Co..  73  Fed.  Rep.  63  (1896). 

Where  an  attorney  in  fact  for  the  2  ^^^  York,  etc.  Ferry  Co.  v.  New 

sale  of  a  patent  causes  his  friends  to  York,  146  N.  Y.  145  (1895). 

organize  a  corporation,  and  then  sells  3  gee  ch.  XXIX,  supra. 

the  patent  to    the    corporation  on  *  See  §  675,  ivfra. 

terms  entirely  beyond  his  authority,  5  gee  §  48 ;  also  chs.  IX  and  XX,  and 

his  principal  may  repudiate  the  sale,  §  243,  supra. 

and  the  company  is  not  a  bona  fide  <*  See  ch.  XIII,  supra. 

purcliaser,  inasmuch  as  its  projector  ^  Salomon  v.  Salomon  &  Co.,  [1897] 

and  organizer  was  the  attorney.    An-  A.  C.  23. 

1327 


§  6G4:.']  FRAUDS    OF   DIEECTORS,  PROMOTERS,  ETC.       [CH.  XXXIX. 

rated  in  one  state  for  the  purpose  of  doing  all  its  business  in 
another  state  is  a  fraud  on  the  law,  and  is  only  a  partnership; 
but  the  weight  of  authority  holds  otherwise'  If  the  promoters 
or  officers  or  a  majority  of  stockholders  defraud  the  corpora- 
tion itself  or  the  minority  stockholders,  a  court  of  equity  will 
give  full  and  ready  relief.^  Where  persons  in  control  of  a  cor- 
poration use  that  control  to  defrauil  persons  with  whom  they 
have  contracted  in  reference  to  stock,  a  coui't  of  equity  will  aid 
the  persons  so  defrauded.'  The  stockholders  of  a  corporation 
are  distinct  from  the  corporation  itself,*  and  may  of  course 
transact  business  irrespective  of  its  contracts  or  obligations; 
but  an  injunction  against  their  doing  a  specified  act  is  violated 
if  they  cause  or  aid  the  corporation  to  do  that  act.' 

"Where  a  corporation  secures  a  rebate  from  a  railroad  com- 
pany, not  only  on  shipments  made  by  the  former,  but  on 
Bhipnicnts  made  by  other  parties,  the  active  agents  of  such  cor- 
porations recei^^ng  such  moneys  may  be  held  personally  liable 
for  them.  The  court  said  that  inasmuch  as  the  company  "  was 
organized  by  the  promoters,  the  defendants,  simply  for  the 
purpose  of  consummating  tne  illegal  agreement,  and  shielding 
themselves  from  the  consequences  of  receiving  the  illegal  ex- 
actions made  under  it,  the  act  of  incorporating  can  be  of  no 
avail  to  them  as  a  defense."  ® 

The  subject  of  the  personal  liability  of  officers  and  directors 
of  corporations  is  more  fully  considered  elsewhere.^ 

§  664.  "  Dummif "  corporations  —  An  individual  or  corpora- 
tion oirniuff  all  the  stocic  of  another  corporation  is  not  ordina- 
rily Halle  for  the  debts  of  the  latter.—  The  Kew  York  court  of 
appeals  has  laid  down  the  general  rule  as  follows :  "  In  no  legal 
sense  can  the  business  of  a  corporation  be  said  to  be  that  of  its 
individual  stocldiolders.    It  is  true  that  they  have  an  interest 

1  See  §g  237-239,  siipra.  ration  under  threat  of  foreclosure. 

2  See  the  previous  sections  of  this  Martin  v.  New  Rochelle  Water  Co.,  11 
chapter  for  many  instances  of  such    N.  Y.  App.  Div.  177  (1896). 

fiai^iiis.  *See§709,  tn/ro. 

3  See  §  850,  sxipra,  and  the  notes  sSee  King  v.  Barnes,  113  N.  Y.  476 
thereto.    A  stockholder  who  desires    (1SS9). 

to    have   the  corporation   purchase        6  Brundred  v.  Rice,  49  Ohio  St.  &40 

certain    property  may    purchase    a    (1892). 

mortgage  against  that  property  and        7  See  §  682,  infra, 

compel  the  owner  to  sell  to  the  corpo- 

1328 


CH.  XXXIX.]       FRAUDS    OF   DIEECTOES,  PEOMOTEKS,  ETC. 


[§  6Gi. 


in  the  business  carried  on,  and  an  influence  in  controlling  its 
conduct;  but  they  have  created  a  legal  entity  to  prosecute  such 
business,  make  its  contracts,  and  be  responsible  for  its  obliga- 
tions, and  that  entity  is  alone  responsible  to  persons  dealing 
with  it  for  the  conduct  of  such  business."  ^  This  rule  is  funda- 
mental. It  is  the  explanation  and  cause  of  the  marvelous  in- 
crease of  corporations  in  modern  times.  The  stockholders  are 
not  liable  on  the  contracts  of  the  corporation.  The  separate 
existence  and  entity  of  the  corporation  is  recognized  and  pre- 
served. The  courts  will  refuse  to  ignore  the  corporate  exist- 
ence, even  though  all  the  stock  is  owned  by  one  person  or  by 
another  corporation.'^ 


1  People  V.  American  Bell  TeL  Co., 
117  N.  Y.  241,  255  (1889).  The  fact 
that  the  stockholders  in  two  corpo- 
rations are  the  same,  or  that  one  cor- 
poration exercises  a  control  over  the 
other  through  ownership  of  its  stock 
or  through  the  identity  of  the  stock- 
holders, such  corporations  being  sepa- 
rately organized  under  distinct  char- 
ters, does  not  make  either  the  agent 
of  the  other,  nor  merge  them  into 
one  so  as  to  make  a  contract  of  one 
corporation  binding  upon  the  other. 
Such  is  the  syllabus  in  Richmond, 
etc.  Co.  V.  Richmond,  etc  R  R.,  68 
Fed.  Rep.  105  (1895). 

2  A  railroad  company  owning  all 
the  stock  and  bonds  of  another  com- 
pany does  not  OAvn  the  property  of 
the  latter  and  cannot  sue  on  a  cause 
of  action  belonging  to  the  latter. 
Fitzgerald  v.  Missoiiri  Pac.  R'y,  45 
Fed.  Rep.  812  (1891).  Although  one 
corporation  owns  all  the  stock  of  an- 
other corporation,  the  property  of  the 
latter  is  not  subject  to  a  mortgage 
given  by  the  former,  but  an  inde- 
pendent first  mortgage  may  be  given 
by  the  latter  company.  Central 
Trust  Co.  V.  Kneeland,  138  U.  S.  414, 
423  (1891);  Toledo,  etc,  R.  R.  u  Hamil- 
ton, 134  U.  S.  296,  304  (1890);  National, 
etc.  Co.  V.  Kansas  City,  78  Fed.  Rep. 
423  (1896).     Cf.  "Williamson  v.  New 


Jersey  Southern  R.  R.,  28  N.  J.  Eq.  277 
(1877);  aff'd,  29  N.  J.  Eq.  311  (1878). 

A  bridge  owned  by  a  bridge  corpo- 
ration is  not  to  be  taxed  as  railroad 
property,  even  though  its  stock  is 
owned  by  the  stockholders  in  a  rail- 
road corporation,  and  the  stock  has 
been  pledged  to  such  railroad!  corpo- 
ration and  the  bridge  itself  leased  to 
the  latter.  St.  Louis,  etc.  Ry  v.  "Wil- 
liams, 53  Ark.  58  (1890).  Although  a 
new  railroad  corporation  is  clearly  a  • 
"  dummy  "  corporation,  its  incorpo- 
rators and  officers  being  officers  in 
another  railroad  corporation,  and  its 
expenses  being  paid  by  the  latter 
company,  still  it  is  a  legal  corporar 
tion.  Southern  Kansas,  etc.  R.  R.  u 
Towner,  41  Kan.  72  (1889);  Atchison, 
etc,  R.  R.  V.  Cochran,  43  Kan.  225 
(1890).  Although  one  railroad  owns 
or  controls  all  the  stock  of  another 
railroad,  yet  the  former  is  not  per- 
sonally liable  for  the  negligence, 
debts,  etc.,  of  the  latter.  Atchison, 
etc,  R.  R  v.  Cochran,  43  Kan.  225 
(1890)."  The  fact  that  one  corporation 
owns  a  large  amoimt  of  stock  in  an- 
other corporation  does  not  affect  the 
identity  of  the  two.  Ex  parte  Fisher, 
20  S.  C.  179  (1883).  The  fact  that  two 
irrigation  companies  have  the  same 
officers  and  the  same  stockholders 
and  the  same  purposes,  except  that 


84 


1329 


§  m.-] 


FRAUDS   OF   DIKEOTOES,  PEOMOTEES,  ETC.       [OH.  XiXIX. 


This  principle  of  law  is  particularly  applicable  to  the  plan  of 
a  parent  company  owning  all  or  a  majority  of  the  shares  of 
stock  of  numerous  subsidiary  companies,  such  subsidiary  com- 
panies bemg  local  in  their  operations  for  the  purpose  of  divid- 
ing the  responsibilities,  liabilities,  and  scope  of  the  business,^  or 
for  the  purpose  of  regulating  taxes,-  or  for  the  pui'pose  of  exer- 
cising the  power  of  eminent  domain.' 


one  operates  in  one  state  and  the 
other  in  another  state,  does  not  make 
one  of  them  liable  for  the  debts  of 
the  other.  White  v.  Pecos,  etc.  Co., 
45  S.  W.  Rep.  207  (Tex.,  1898).  A 
statutory  lien  which  is  good  against 
a  lessee  mining  company  is  not  good 
against  a  lessor  mining  company, 
even  though  the  stockholders  are 
substantially  the  same.  United  Mines 
Co.  V.  Hatcher,  79  Fed.  Rep.  517  (1897), 
rev'g  Hatcher  v.  United  Leasing  Co., 
75  Fed.  Rep.  368.  A  deed  of  corpo- 
rate property  by  a  person  who  owns 
all  the  stock  does  not  convey  good 
title,  especially  where  he  has  pledged 
some  of  the  stock.  Parker  v.  Bethel, 
etc  Co.,  96  Tenn.  252  (1896).  Even 
though  one  corporation  is  a  stock- 
holder in  another,  yet  a  debt  due 
from  the  latter  to  the  former  may 
be  enforced,  although  one  company 
is  practically  a  branch  of  the  other. 
Alabama,  etc.  Co,  v.  Chattanooga, 
etc.  Co.,  37  S.  W.  Rep.  1004  (Tenn,, 
1896).  Although  a  construction  com- 
pany owns  ail  the  stock  of  a  railroad 
company,  and  a  bank  has  loaned 
large  sums  of  money  to  the  construc- 
tion company,  yet  mortgage  bonds 
issued  by  tbe  railroad  company  have 
priority  over  the  claims  of  the  bank. 
Exchange  Bank  v.  Macon  Const.  Co., 
97  Ga.  1  (1395).  Where  a  failing  bank 
organizes  a  trust  company  and  owns 
all  its  stock,  the  stock  standing  in 
the  names  of  "  dummies,"  and  uses 
the  fimds  of  the  trust  company,  it 
is  a  debtor  of  the  trust  company. 
Fisher  v.  Adams,  63  Fed.  Rep.  674 
(1894).     See  also  the  cases  in  the  pre- 


ceding section  6G3.  A  company  is 
not  liable  for  the  contracts  of  a  per- 
son who  makes  a  construction  con- 
tract with  it,  even  though  that  per- 
son is  the  principal  stockholder  and 
dominates  and  controls  the  action 
of  the  corporation.  Although  otlier 
stockholders,  bondholders,  or  the  cor- 
poration itself  might  question  sudi 
a  contract,  yet  subcontractors  can- 
not Central  Tnist  Co.  v.  Bridges,  57 
Fed.  Rep.  753  (1893).  Where  the  pres- 
ident owns  nearly  all  of  the  stock, 
and  keeps  no  proper  accounts,  and 
mingles  the  business  with  his  own 
business,  and  the  corporation  is  in- 
solvent, a  creditor  of  the  corporation 
may  attach  its  property  on  the  ground 
that  it  is  being  fraudulently  disposed 
of.  Sen  our  Mfg.  Co.  v.  Clarke,  71  N. 
W.  Rep.  883  (Wis.,  1897). 

1  Sucli  is  tlie  case  of  the  Bell  Tele- 
phone Company. 

2  Such  was  the  original  purpose  of 
the  Standard  Oil  Companies. 

3  Such  is  the  case  with  telegraph 
companies,  inasmuch  as  generally 
only  a  domestic  corporation  is  al- 
lowed to  exercise  that  power.  For  a 
careful  and  clear  statement  of  the 
plan  of  having  a  parent  company 
own  stock  in  subsidiary  companies, 
see  People  v.  American  Bell  Tele- 
phone Co.,  117  N.  Y.  241, 244, 255  (1889). 
A  receiver  of  the  parent  company  will 
not  necessarily  be  appointed  receiver 
of  the  branch  coniiDanies.  Evans  v. 
Union  Pac.  R'y,  58  Fed.  Rep.  497 
(1893).  As  to  the  power  of  one  com- 
pany to  acquire  tlie  stock  of  another 
company,  see  ch.  XIX,  supra.  Where 


1330 


OH.  XXXIX.]       FRAUDS    OF   DIKECTOES,  PEOMOTEKS,  ETC.  [§  QQ^' 

This  general  rule,  however,  like  all  general  rules,  has  excep- 
tions, aiid  the  New  York  court  of  appeals  stated  the  exception 
forcibly  as  follows:  "  We  have  of  late  refused  to  be  always  and 
utterly  trammeled  by  the  logic  derived  from  corporate  exist- 
ence where  it  only  serves  to  distort  or  hide  the  truth."  * 

The  chief  application  of  this  statement  of  law  is  in  cases  of 
f raud,2  but  there  is  a  line  of  cases  which  apply  this  rule  where 
there  is  no  fraud,  and  where  the  owner  of  the  stock  is  held  lia- 
ble merely  because  he  owns  all  the  stock  of  the  corporation. 
Thus,  it  has  been  held  that  where  a  railroad  company  causes 
a  telegraph  company  to  be  incorporated,  and  subscribes  to  all  its 
stock,  and  appoints  all  its  officers,  and  holds  it  out  as  the  future 
owner  of  a  telegraph  system  which  the  railroad  owns,  and  then 
sells  that  system  to  someone  else,  a  person  contracting  with 
the  telegraph  company  on  the  faith  of  the  scheme  being  car- 
ried out  may  hold  the  railroad  company  liable  on  the  contract, 
on  the  principle  of  a  principal  being  liable  on  the  contracts  of 
its  agent.=»    It  has  also  been  held  that  Avhere  the  corporation 
does  business  by  organizing  branch  corporations,  and  the  stock- 
holders in  the  latter  are  disregarded,  and  the  main  corpora- 
tion pays  up  the  stock  and  manages  it  without  regard  to  its 
corporate  character,  the  property  of  the  branch  corporation  is 
subject  to  the  debts  of  the  parent  company.*    And  there  are 
other  decisions  to  practically  the  same  effect.* 

a  parent  company,  owning  the  stock  » Where  a  company  leases  all  its 
of  branch  companies,  passes  into  a  property  to  another,  the  stockholders 
receiver's  hands,  and  the  latter  ex-  in  both  companies  being  the  same,  a 
pends  money  in  operating  one  of  the  mechanic's  lien  good  against  the  lat- 
branch  companies,  he  cannot  recover  ter  is  good  also  against  the  former. 
it  as  against  a  mortgagee  of  the  Hatcher  v.  United  Leasmg  Co.,  75 
branch  company.  The  rule  is  other-  Fed.  Rep.  368  (1896).  In  Nebraska  a 
wise  as  to  necessary  improvements.  "  dummy  "  domestic  corporation  can- 
Coupons  paid  by  the  receiver  on  not  condemn  land  for  a  foreign  cor- 
bonds  issued  by  the  branch  road  rank  poration,  Koenig  v.  Chicago  etc. 
next  after  the  bonds  and  other  cou-  R  R,  27  Neb.  699  (1889).  A  rai  road 
pons  are  paid.  Phinizi  u  Augusta,  company  owning  practicaUy  aU  the 
etc  R  R  62  Fed.  Rep.  771  (1894).  stock"  of  another  company  may  lease 

1  Anthony  v.  American  Glucose  Co.,  the  line  of  the  latter  company  to  an- 

146  N  Y  407  (1895).  other  company.    Chicago,  etc.  Ryu 

'seel'663  iuprL  Union  Pac.  R'y,  47  Fed.  Rep.  15  (1891). 

» Interstate  TeL  Co.  v.  Baltimore,  Where  a  bank  buys  wall  paper  at  a 

etc.  TeL  Co.,  51  Fed.  Rep.  49  (1892).  sheriff's  sale  and  organizes  a  corpora- 

*  Day  V.  Postal  TeL  Co.,  66  Md.  354  tion  to  sell  the  paper,  all  the  stock  of 

^gg,.  the  corporation  being  owned  by  tlie 

1331 


§  GG-^."]  FEAUD8   OF  DIKEOTOES,  PEOMOTEES,  ETa      [CH,  XXXIX. 


These  decisions,  however,  being  contrary  to  the  "well-estab- 
lished rule,  are  of  doubtful  value  as  precedents,  and  cannot  be 
commended,  except  for  application  in  cases  of  unusual  equi- 
table considerations. 

The  liability  of  a  corporation  on  the  obli;;ations  of  another 

bank,  and  guarantees  debts  there-    takes  all  the  stock  and  bonds  and 


after  incurred  by  such  corporation, 
the  bank  is  liable  on  such  debts. 
American  Nat.  Bank  v.  National 
Wall-Paper  Co.,  77  Fed.  Rep.  85  (1896). 
Wliere  the  contractor  to  construct 
the  road  is  merely  a  "  dummy  "  for 
the  officers  and  stockholders,  and 
there  is  evidence  that  the  company's 
name  and  credit  were  used  to  con- 
struct the  road,  it  is  for  the  jury  to 
say  whether  the  company  is  liable 
for  the  debts  incurred  by  the  con- 
tractor in  construction.  Ilirsclunann 
V.  Iron  Range,  etc.  R  R.,  97  Mich.  384 
(1893).  Where  a  railroad  company  is 
interested  in  the  construction  of  a 
connecting  line,  it  is  liable  for  the 
services  of  an  attorney  employed  by 
it  in  connection  therewith.  St.  Louis, 
etc.  R.  R  V.  Kirkpatrick,  53  Kan.  104 
(1893).  A  firm,  one  of  the  members 
of  which  owns  all  tlie  stock  of  a  cor- 
poration ^v•hich  owes  money  to  such 
firm,  cannot  participate  with  other 
creditors  of  the  corporation  in  the 
distribution  of  the  latter's  assets, 
where  the  firm  have  treated  the  debt 
as  the  individual  debt  of  that  mem- 
ber of  the  firm.  Pott  v.  Schmucker, 
84  Md.  535  (1897).  A  contract  be- 
tween three  local  companies,  by 
which  one  runs  over  the  tracks  of  an- 
other for  a  consideration  paid  to  the 
third,  is  legal  as  to  the  second  corpo- 
ration where  such  second  corporation 
is  a  mere  dummy  of  the  third  corpo- 
ration and  the  earnings  of  both  cor- 
porations went  together.  Union,  etc. 
R'y  V.  Chicago,  etc.  R'y,  163  U.  S.  564, 
592  (1896).  Under  the  usual  contract, 
by  which  a  construction  company 


does  all  the  work,  and  the  railroad 
company  is  dormant  until  the  road 
is  finished,  a  creditor  of  the  construc- 
tion company  may  file  a  lien,  under 
the  statute,  the  same  as  though  he 
furnislied  the  labor  and  materials  to 
the  railroad  company  itself.  McDon- 
ald V.  Charleston,  etc.  R  R,  93  Tenn. 
281  (1893).  If  one  person  buys  all  the 
stock  of  another  company,  it  thereby 
becomes  dormant,  and  he  is  liable  for 
the  debts  incurred  thereafter,  except 
as  to  those  debts  which  were  incurred 
on  the  credit  of  the  company  only. 
Louisville  Banking  Co.  v.  Eisenman, 
94  Ky.  83  (1893).  Under  a  constitu- 
tional provision  that  conveyances  to  a 
corporation,  a  majority  of  the  stock  of 
which  is  held  by  aliens,  shall  be  void, 
the  attorney-general  may  commence 
suit  to  have  certain  conveyances  de- 
clared void,  even  though  a  majority 
of  the  stock  was  owned  by  citizens 
at  the  time  of  the  conveyance,  such 
majority  having  since  that  time 
passed  into  alien  hands  State  v. 
Hudson  Land  Co.,  52  Pac.  Rep.  574 
(Wash.,  1898).  A  domestic  corpora- 
tion cannot  obtain  a  patent  to  a  min- 
ing claim  imder  the  federal  statutes 
unless  all  of  its  stockliolders  are  cit- 
izens of  the  United  States,  and  are 
severally  and  individually  qualified 
and  competent  to  make  the  location. 
Thomas  v.  Chishohn,  13  Colo.  105 
(1889).  As  to  the  power  of  one  cor- 
poration to  buy  the  stock  of  other 
corporations,  see  §§  315-317,  supra. 
On  this  general  subject  see  also  g  709, 
infra. 


1333 


€H.  XXXIX.]       FKAITDS    OF   DIKECTOES,  PKOMOTERS,  ETC.       [§§  665-6. 

corporation  whose  entire  assets  it  purcliases  at  private  sale,* 
or  at  judicial  sale,^  is  considered  elsewhere,  such  a  purchase 
being  different  from  a  purchase  of  the  stock  of  such  other  cor- 
poration. 

§  665.  Tartidimtion^  ratification,  and  ladies  as  a  har  to  stock- 
holders^ comiilaints. —  This  subject  is  considered  elsewhere.' 

§  Q>Q>Q.  Parties,  pleadings,  etc. —  This  subject  also  is  consid- 
ered elsewhere.* 

1  See  §  672,  infra.  »  See  ch.  XLIV,  infra, 

2  See  §  890,  infra,  *  See  ch.  XLV,  infra, 

1833 


CHAPTER  XL. 

ULTRA  VIRES  ACTS  AND  CONTRACTS  — IN  OTHER  WORDS,  ACTS 
AND  CONTRACTS  WHICH  ARE  IN  EXCESS  OF  THE  CHARTER 
POWERS  OF  THE  CORPORATION,  DIRECTORS,  OR  STOCK- 
HOLDERS. 


667.  Meaning   of  the  term  ultra 

vires. 

668.  Method  of  treatment  of  the 

subject 

669.  A  stockholder  may  object  to 

an  ultra  vires  act. 

670t  Neither  the  directors  nor  a 
majority  of  the  stockhohl- 
ers  have  power  to  sell  all 
the  corporate  property  as 
against  the  dissent  of  a 
single  stockholder,  unless 
the  corporation  is  in  a  fail- 
ing condition. 

671.  Sale  of  corporate  property  to 
another  corporation  in  ex- 
change for  stock  and  bonds 
of  the  latter  —  Distribution 
of  such  stock  and  bonds. 

673.  Corporate  creditors'  rights 
where  the  corpoiration  sells 
all  its  property  to  another 
corporation  for  stock  of  the 
latter. 

673.  A  corporation  taking  over  all 
the  property  of  another  cor- 


poration may  bo  liable  for 
the  debts  of  tlie  latter. 
§  674.  Rights  and  Uabilities  of  mort- 
gagees of  a  corporation  that 
purcliases  property  and  is- 
sues stock  in  payment  there- 
for. 

675.  Sale  of  partnership  or  indiAnd- 

ual  property  to  a  corpora- 
tion for  stock  of  the  latter. 

676,  677.  Consolidations,  leases,  and 

sales  of  railroads. 

678.  A  corporation    cannot  be    a 

partner  in  a  partnership, 
imless  specially  authorized 
by  statute. 

679.  A  corporation  cannot  be  an 

executor  or  administrator. 

680.  Stockholder's  right  to  prevent 

the  corporation  from  under- 
taking a  new  business. 

681.  Miscellaneous      ultra      vires 

acts  —  Enforcement  of  ultra 
vires  contracts. 

682.  Personal  liability  of  the  direct- 

ors and  officers  for  ultra 
vires  acts. 


§  667.  Meaning  of  the  term  ultra  vires. —  The  term  ultra 
vires,  as  used  in  this  treatise,  means  any  act  of  a  corporation 
which  the  corporation  is  not  authorized  to  do,  either  by  its  ex- 
press or  implied  powers.  This  term  has  been  objected  to  as 
having  no  fixed  and  clear  meaning,  and  to  some  extent  the 
objection  is  reasonable.  There  is  no  other  term,  however,  that 
has  acquired  the  significance,  general  use,  and  peculiar  mean- 
ing that  are  attached  to  the  words  ultra  vires;  and  consequently 
the  term  probably  has  acquired  a  permanent  place  in  the  vo- 
cabulary of  corporation  law.* 

»"The  contracts  of  corporations  taking  not  within  the  scope  of  their 
are  said  to  be  ultra  vires  when  they  charter,  which  is  their  rule  of  corp.  .- 
involTe  some   adventure  or  under-    rate  action."    LesUe  u  Lorillard,  11-) 

1334 


OH.  XL.] 


ULTRA    VIEES    ACTS    AND    CONTKACTS. 


[§  QQS. 


§  668.  Metliod  of  treatment  of  the  siihjcct. —  There  lias  been 
extreme  difficulty  and  confusion  in  defining  tlie  validity,  effect, 
rights,  and  remedies  of  an  ultra  vires  act.  The  attempt  to 
formulate  general  rules  on  this  subject  has  only  added  to  the 
confusion.^    Accordingly,  the  plan  of  explanation  pursued  in 


N.  Y.  519  (1888).  For  various  defini- 
tions of  the  words  ultra  vires,  see 
Pierce,  Railroads  (2d  ed.),  p.  516;  Tay- 
lor V.  Chichester,  etc.  R'y>  L-  R.  3 
Exch.  356,  378  (1867);  Bissellu  Mich- 
igan, etc.  R.  R  Cos.,  22  N.  Y.  258,  293 
(1860);  National  Pemberton  Bank  v. 
Porter,  125  Mass.  333  (1878);  Whit- 
ney Arms  Co.  v.  Barlow,  63  N.  Y.  63 
(1875);  Shrewsbury  v.  North  Stafford- 
shire Ry.  35  L.  J.  (Ch.)  166  (1865); 
Nassau  Bank  v.  Jones,  95  N.  Y.  115 
(1884);  Green's  Brice,  Ultra  Vires  (2d 
ed.),  35;  Miners'  Ditch  Co.  v.  ZeUer- 
bach,  37  CaL  543,  579  (1869);  McPher- 
son  V.  Foster,  43  Iowa,  48,  64, 65  (1876); 
Ashbury,  etc.  Co.  v.  Riohe,  L.  R.  7 
H.  L.  653,  673  (1875);  3  Kent's  Com. 
*300  (12th  ed.),  note.  Two  difficulties 
have  arisen  in  agreeing  upon  a  defi- 
nition of  this  term.  First,  the  term 
ultra  vires  was  often  used  to  desig- 
nate not  only  acts  beyond  the  express 
and  implied  powers  of  the  corpora- 
tion, but  also  acts  which  are  con- 
trary to  public  policy,  and  are  void 
whether  done  by  corporations  or  in- 
dividuals. Such  acts  when  done  by 
corporations  are  now  termed  "ille- 
gal "  acts,  and  the  term  ultra  vires  is 
not  used  so  as  to  include  them.  Sec- 
ond, the  term  ultra  vires  has  been 
applied  to  acts  which  are  beyond  the 
powers  of  the  directors,  but  within 
the  powers  of  the  majority  of  the 
stockholders.  This  use  of  the  term, 
however,  is  now  discarded,  and  it  is 
used  to  designate  acts  which  are 
beyond  the  powers  of  a  majority  of 
the  stockholders  as  against  a  minor- 
ity; or  are  beyond  the  powers  of  the 
stockholders  acting  vmanimously  as 
against  the  state.  In  Taylor  v.  Chi- 
chester, etc  R'y,  L.  R  3  Exch.  356, 


378  (1867),  Blackburn,  J.,  said:  "I 
think  it  very  vmfortunate  that  the 
same  phrase  of  ultra  vires  has  been 
used  to  express  both  an  excess  of 
authority  as  against  the  sharehold- 
ers, and  the  doing  of  an  act  illegal 
as  being  -malum  prohibitum;  for  the 
two  things  are  substantially  differ- 
ent; and  I  think  the  use  of  the  same 
phrase  for  both  has  produced  con- 
fusion." 

1  For  instance,  the  general  rule  that 
"  any  ambiguity  in  the  terms  of  the 
grant  miist  operate  against  the  cor- 
poration and  in  favor  of  the  public, 
and  the  corporation  can  claim  noth- 
ing that  is  not  clearly  given  by  the 
law,"  etc.  (Perrine  v.  Chesapeake,  etc. 
Co.,  9  How.  173  — 1850),  is  sound  law, 
and  has  been  enounced  in  many 
cases;  but,  as  a  matter  of  fact,  this 
principle  gives  little  light  or  satis- 
faction to  the  bench,  bar,  or  layman. 
Each  case  turns  largely  on  its  own 
facts.  Moreover,  the  decision  turns 
largely  on  who  sues,  who  is  sued, 
what  relief  is  sought,  and  whether 
the  act  has  been  performed  by  one 
side  or  not.  General  rules  cannot 
clearly  make  the  distinctions.  The 
old  ideas  have  been  changed.  Indeed, 
it  is  refreshing  to  hear  from  that 
great  judge,  Mr.  Justice  Miller,  such 
sound  sense  as  this:  "The  truth  is, 
that,  with  the  great  increase  in  cor- 
porations in  very  recent  times,  and 
in  their  extension  to  nearly  all  the 
business  transactions  of  life,  it  has 
been  found  necessary  to  hold  thern  re- 
sponsible for  acts  not  strictly  within 
their  corporate  powers,  but  done  in 
their  corporate  name,  and  by  corpo- 
ration officers  who  were  competent 
to  exercise  all  the  corporate  powers." 


1335 


§  669.]  ULTEA   VIRES    ACTS    AND    CONTEACTS.  [CH.  XL. 

this  work  is  to  state  those  acts  which  have  been  adjudged  iiltra 
vires,''-  and  also  those  acts  which  have  been  adjudged  to  bo 
intra  vires?  It  must  be  borne  in  mind  that  nearly  every  cor- 
porate act  is  ultra  vires  or  intra  vires  in  a  broad  sense.  It  was 
from  this  standpoint  that  Professor  Brice's  work  on  Ultra  Vires 
was  written.  The  plan  of  this  book,  however,  has  been  to  divide 
the  subject  into  other  and  more  practical  headings,  such  as  "  pre- 
ferred stock  "  and  the  various  chapter  headings,  rather  than  to 
group  everything  under  the  heading  of  idtra  vires  or  intra  vires. 
Most  corporate  acts,  whether  ultra  vires  or  intra  vires,  have 
been  or  will  be  considered  in  other  parts  of  this  book.  Hence 
only  such  subjects  are  treated  here  as  are  not  extensive  enough 
or  important  enough  for  sc^^arate  chapters. 

In  general,  it  remains  to  add  that  at  common  law  an  ultra 
vires  act  might  be  objected  to  b}'"  the  state,  a  stockholder,  the 
corporation,  or  the  person  contracting  with  the  corporation; 
and  since  often  one  of  these  parties  may  still  sustain  the  objec- 
tion, where  the  others  would  not  be  allowed  so  to  do,  it  is 
necessary  to  consider  always  the  four  questions:  Who  brings 
the  suit;  who  is  sued;  what  act  is  complained  of;  and  what 
performance  has  already  been  had.  It  rarely  happens  that  the 
state  objects  to  an  ultima  vii^es  act.  That  it  has  a  right  to  o1> 
ject  by  quo  warranto  is  undoubted.'  The  question  of  when  and 
whether  the  stockholder  must  first  apply  to  the  directors  or 
stockholders  to  remedy  the  wrong  before  he  brings  suit,  and 
also  the  question  of  when  a  ratification  of  the  act  by  the  other 
stockholders  is  a  bar,  is  considered  elsewhere.* 

The  tendency  is  to  limit  the  application  of  the  doctrine  of 
ultra  vires,  especially  in  regard  to  partially  executed  contracts. 
In  this  respect  the  New  York  court  of  appeals  is  in  conflict 
with  the  supreme  court  of  the  United  States.* 

§  669.  A  stocliliolcler  may  object  to  an  ultra  vires  act —  That 
a  charter  constitutes  a  contract  between  the  corporation  and  its 
stockholders  is  a  principle  of  law  that  has  become  firmly  im- 

Salt  Lake  City  v.  Hollister,  118  U.  S.  2  This  is  the  subject  of  the  follow- 

256  (1886).    See  also  Pennsylvania  E,  ing  chapter,  XLI. 

R  V.  Keokuk,  etc.  Co.,  131  U.  S.  371,  3  See  §  635,  mprcu 

384,  389  (1889);  Stourbridge  Canal  v.  ^See  §  740,  infra, 

Wheeley,  2  Barn.  &  Ad.  792  (1831).  5  See  §  681,  infra. 
1  This  is  the  subject  of  this  chapter. 

1336 


CH.  XL.]  TJLTEA   YIRES    ACTS    AND    COXTEACTS.  [§  670. 

bedded  in  the  jurisprudence  of  modern  times.  Upon  this 
principle  of  law  rest  the  stability,  permanence,  and  honesty  of 
management  of  many  corporations,  particularly  those  of  rail- 
roads, and  from  it  arises  much  of  the  confidence,  safety,  and 
protection  of  the  stockholder  himself.  It  was  first  promulgated 
in  America,  in  1820,  in  Livingston  v.  Lynch,^  and  was  applied 
to  corporations  in  Hartford  &  'New  Haven  Eailroad  Company 
V.  Croswell,^  and  in  England,  in  1824,  in  ISTatusch  v.  Irving.' 
These  cases  have  beeen  followed  by  a  long  list  of  supporting 
decisions.  They  were  the  first  to  establish  clearly  the  doctrine 
that  any  act  or  proposed  act  of  the  corporation,  or  of  the  direct- 
ors, or  of  a  majority  of  the  stockholders,  which  is  not  within  the 
express  or  implied  powers  of  the  charter  of  incorporation  or  of 
association  —  in  other  words,  any  tdtra  vires  act  —  is  a  breach 
of  the  contract  between  the  corporation  and  each  one  of  its 
stockholders,  and  that  consequently  any  one  or  more  of  the 
stockholders  may  object  thereto  and  compel  the  corporation  to 
observe  the  terms  of  the  contract  as  set  forth  in  the  charter.* 
§  670.  Neither  the  directors  nor  a  majority  of  the  stochhold- 
ers  have  power  to  sell  all  the  corjyorate  property  as  against  the 
dissent  of  a  single  stochholder,  unless  the  corporation  is  in  a 
failing  condition. —  Ever  since  the  case  of  Abbot  v.  American 

1 4  Johns.  Ch.  573.  Natusch  v.  Irving  would  have  been 

2  5  Hill,  383  (1843).  differently  decided." 

3  2  Cooper's  Ch,358,  bvLordEldon;  *  A  stockholder  may  file  a  bill  to 
also  reported  in  Gow  on  Partnersliip,  enjoin  or  set  aside  an  ultra  vires  act, 
398.  Thus,  Lord  Chancellor  Camp-  even  though  every  other  stockholder 
bell,  in  Simpson  v.  Westminster,  etc.  is  opposed  to  him.  Hoole  v.  Great 
Co.,  8  H.  L.  Cas.  712  (18G0),  said:  "I  Western  R'y,  L.  R  3  Cli,  App.  262 
bow  to  the  authority  of  Natusch  v.  (1867);  Beeman  v.  Rvifford,  1  Sim. 
Irving.  .  .  .  The  funds  of  a  joint-  N.  S.  550  (1851),  where  a  majority  of 
stock  company  established  for  one  the  stockholders  had  even  voted  to 
undertaking  cannot  be  applied  to  ratify  the  illegal  act;  Bagshaw  v. 
another.  If  an  attempt  to  do  so  is  Eastern  Union  R'y,  19  L.  J.  (Ch.)  410 
made,  this  act  is  ultra  vires;  and,  al-  (1850) ;  Hare  v.  London,  etc.  R'y,  30 
though  sanctioned  by  all  the  directors  L.  J.  (Ch.)  817,  829  (1861);  Winch  v. 
and  by  a  large  majority  of  the  share-  Birkenliead,  etc.  R'y,  16  Jur.  1035 
holders,  any  single  shareholder  has  a  (1852).  A  stockholder  in  a  trust  corn- 
right  to  resist  it,  and  a  court  of  equity  pany  may  file  a  bill  in  equity  to  en- 
will  interpose  on  his  behalf  by  in-  join  the  company  from  paying  an 
jimction."  In  Pickering  v.  Stephen-  illegal  income  tax  to  the  federal 
son,  L.  R.  14  Eq.  322  (1872),  the  covirt  government.  Pollock  v.  Farmers'  L. 
said:  "It  is  diflicult  to  conceive  any  &  T.  Co.,  157  U.  S.  429  (1895). 
svstem  of  jurisprudence  in  which 

1337 


670.] 


ULTKA    VIRES    ACTS    AND    C0NTKACT8. 


[cn.  XL. 


Hard  Rubber  Company '  the  law  has  been  clearly  established 
in  this  country  that  a  dissenting  stockholder  may  prevent  the 
sale  of  all  the  corporate  property  by  the  directors  or  by  a  ma- 
jority of  the  stockholders,  where  the  corporation  is  a  solvont, 
ffoino*  concern.^    And  even  where  a  dissolution  is  the  purpose 


133  Barb.  578  (18G1).  See  also 
Abbot  V.  American  Uunl  Rubber  Co., 
4  Blatchf.  489  (18G1);  S.  G,  1  Fed. 
Cas.  13. 

2  People  V.  Ballard,  134  N.  Y.  2G9 
(1892),  reviewing  the  cases  (rehearing 
denied,  136  N.  Y.  039);  Be  Sovereign 
L.  Ass.  Co.,  L.  R.  42  Ch.  D.  5 10  (1889). 
See  also  Smith  v.  New  York,  etc. 
Co.,  18  Abb.  Pr.  419,  435  (1  nr,);  Rol- 
lins r.  Clay,  33  Me.  132  (1831);  Shel- 
don, etc.  Co.  V.  Eicknieyer,  eta  Co.,  56 
How.  Pr.  70  (1878);  Barclay  r.  Quick- 
silver Min.  Co.,  9  Abb.  Pr.  (N.  S.)  283 
(1870);  Copeland  v.  Citizens'  Gas  Light 
Co.,  61  Barb.  60  (1871);  Conro  v.  Port 
Henry  Iron  Co.,  12  Barb.  27  (1851); 
Astor  V.  Westchester  Gas  Light  Co., 
33  Hun,  333  (1884);  Bird  v.  Bird's,  etc. 
Co.,  L.  R.  9  Ch.  App.  358  (1874);  Adri- 
ance  v.  Roome,  52  Barb.  399  (1868); 
Brady  v.  New  York,  16  How.  Pr.  432 
(1857);  Middlesex  R.  R.  v.  Boston,  etc. 
R.  R.,  115  Mass.  347  (1874).  Cf.  Dana 
V.  Bank  of  U.  S.,  5  Watts  &  S.  (Pa) 
223,  247  (1813);  Union  Bank  v.  EUi- 
cott,  6  Gill  &  J.  (Md.)  363  (1834).  See 
also  Sheldon,  etc.  Co.  v.  Eickemeyer, 
etc.  Co.,  90  N.  Y.  607  (1882):  Balliet  v. 
Brown,  103  Pa.  St.  546  (ll'S3);  Gray 
V.  New  York,  etc.  Steamship  Co.,  5 
Thomp.  &  C.  224  (1875).  But  see 
Hutchinson  v.  Green,  1  R'y  &  Corp. 
L.  J.  18  (Mo.,  1886),  and  Mills  v.  Hurd, 
29  Fed.  Rep.  410  (1887),  relative  to  un- 
incorporated associations.  A  stock- 
holder of  a  manufacturing  company 
may  enjoin  a  lease  of  all  its  prop- 
erty and  business  to  another  corpora- 
tion for  twenty-five  years  at  a  rental 
equal  to  one-half  of  the  profits  of  the 
business.  Small  v.  Minneapolis,  etc. 
Co.,  45  Minn.  264  (1891)  A  sale  of  all 
the  corporate  property  to  an  indi- 


vidual who  purchases  in  good  faith 
cannot  be  set  aside  by  the  corpora- 
tion as  iiltra  vires.  Miners'  Ditch  Co. 
V.  Zellerbacli,  37  Cal.  543  (1869).  An  in- 
junction against  transferring  all  the 
projierty  to  another  corporation  will 
not  be  granted  where  only  a  leasing 
of  part  of  the  property  is  contem- 
plated. Small  V.  Minneapolis,  etc. 
Co.,  10  N.  Y.  Supp.  456  (1890).  A 
vendee  of  all  the  property  of  a  cor- 
poration cannot  avoid  the  purchase 
on  the  ground  that  the  stockholders 
had  not  assented  thereto.  Stokes  r. 
Detrick,  75  Md.  256  (1892).  A  char- 
ter cannot  be  assigned.  Only  the 
shares  of  stock  can  be  assigned. 
Welcli  V.  Old  Dominion,  etc.  Co.,  10 
N.  Y.  Supp.  174  (1800).  Directors  who 
are  merely  vested  with  the  ordinary 
powers  of  executive  management 
cannot  radically  affect  the  chartered 
rights  of  stockholders  (Baker's  Ap- 
peal, 109  Pa.  St.  461  (1885),  42  Leg.  Int. 
226);  and  hence  have  no  authority  to 
dispose  of  the  corporate  plant  by  lease, 
sale,  or  otherwise  Martin  v.  Conti- 
nental, etc.  R'y,  14  Phila.  10  (1880).  A 
secession  of  the  majority,  canying 
corporate  funds  to  a  new  corporation, 
is  a  fraud  on  the  old  corporation. 
Tomlinson  v.  Bricklayers'  Union,  87 
Ind.  308  (1882).  Where  all  the  property 
of  the  corporation  is  sold,  together 
with  the  stock  of  the  company,  the 
directors  cannot  subsequently  act  as 
a  board,  they  no  longer  being  stock- 
holders, as  required  by  the  statute. 
Orr,  etc.  Co.  v.  Reno  Water  Co.,  17 
Nev.  166  (1882).  In  Citizens'  Street 
R  R  u  Robbins,  144  Ind.  671  (1896), 
the  administratrix  had  illegally  sold 
stock  to  a  party,  who  then  caused 
the  corporation  to  sell  all  its  property 


1338 


CH.  XL.] 


ULTRA   YIKES    ACTS   AND    CONTRACTS. 


[§  6T0. 


in  view,  yet,  if  the  corporation  is  a  prosperous  one,  sncli  a  sale 
cannot  be  made.^  Indeed  it  is  very  doubtful  whether  a  disso- 
lution can  ever  be  had  by  a  majority  of  the  stockholders  where 
the  corporation  is  a  going,  prosperous  concern.'^  And  certainly 
if  the  purpose  of  such  dissolution  is  not  the  lona  fide  discon- 
Liance  of  the  business,  but  is  the  continuance  of  that  business 
by  another  new  corporation,  then  the  rule  is  that  a  dissenting 
stockholder  may  prevent  the  sale,  even  though  it  is  made  with 
a  view  to  dissolution  of  the  corporation.  This  is  the  law  as  laid 
down  in  the  well-considered  case  of  Kean  v.  Johnson.''  Such  a 
dissolution  is  practically  a  fraud  on  dissenting  stockholders.  It 
seeks  to  do  indirectly  what  cannot  legally  be  done  directly." 

If,  however,  the  corporation  is  an  unprofitable  and  failing 
enterprise,  then  a  sale  of  all  the  corporate  property  with  a  view 
to  dissolution  may  be  made.** 


to  another  corporation.  A  subse- 
(luent  administrator  sued  to  set  aside 
the  sale  of  the  corporate  property  or 
for  damages.  The  court  held  that,  as 
the  pm-chasing  corporation  had  ex- 
pressly assumed  the  liabilities  of  the 
vendor  corporation,  it  must  pay  for 
the  value  of  the  stock,  inasmuch  as 
the  vendor  corporation  was  liable  for 
allowing  the  transfer.  It  is  legal  for 
a  person  who  is  endeavoring  to  pur- 
chase all  the  property  of  a  corpora- 
tion to  pay  a  stockholder  for  consent- 
ing tliereto.  Lamkin  v.  Palmer,  24 
N.  Y.  App.  Div.  255  (1897).  The  case 
of  Hirsch  v.  Burns,  74  L.  T.  Rep.  769 
(1897).  was  affirmed  in  77  L.  T.  Rep. 
377,  to  the  effect  that  a  person  having 


other  responsible  company  which 
contracted  to  meet  all  obligations, 
the  court  will  not  necessarily  set  the 
transfer  aside  and  appoint  a  receiver, 
but  will  allow  the  transfer  to  stand, 
if  fair  and  best.  The  minority  are 
not  absolutely  entitled  to  a  receiver- 
ship and  sale.  Baltimore,  etc.  R.  R. 
V.  Cannon,  72  Md.  493  (1890). 

4  Boston,  etc.  R.  R.  v.  New  York, 
etc.  R.  R.,  13  R.  L  260  (1881).  See 
g§  629,  630,  mpra. 

8  Quoted  and  approved  in  Price  v. 
Holcomb,  89  Iowa,  123  (1893).  To  same 
effect,  Doyle  v.  Leitelt,  97  Mich.  298 
(1893);  Latmian  v.  Lebanon  Valley 
R.  R.,  30  Pa.  St.  42  (1858).  Where  the 
business  was  a  losing  one,  a  lease  of 


an  option  to  purchase  the  imissued    all  the  property  by  the  stockholders, 


stock  of  a  company  has  a  claim  for 
damage  in  case  the  company  sells  the 
business  to  another  company  without 
protecting  such  option. 

1  People  V.  Ballard,  134  N.  Y.  269; 
136  N.  Y.  639  (1892). 

2  See  §  629,  supra. 

3  9  N.  J.  Eq.  401  (1853);  Ervin  v. 
Oregon,  etc.  Nav.  Co.,  27  Fed.  Rep. 
625  (1886).  Where  before  the  disso- 
lution of  an  insurance  company  all 
of  its  assets  were  transferred  to  an 


having  wide  powers  by  the  charter, 
was  upheld.  Featherstonhaugh  v. 
Lee,  etc.  Co.,  L.  R  1  Eq.  318  (1865). 
A  dissenting  stockholder  cannot  en- 
join the  corporation  from  selling  all 
its  property  where  its  debts  are  large 
and  a  mortgage  is  about  to  be  fore- 
closed, and  a  sale  is  the  only  means 
of  protecting  the  company,  and  there 
is  no  fraud  involved,  and  a  large  ma- 
jority of  the  stockholders  are  in  favor 
of  the  sale,  and  the  company  will 


1339 


C70.] 


ITLTKA   VIEES    ACTS    AXD    CONTEAOTS, 


[cn.  XL. 


"Wliere  an  insurance  company,  having  authority  to  sell  its 
property,  proceeds  to  sell  to  another  company  which  has  no  au- 
thority to  buy,  the  tran?action  is  illegal,  and  a  stockholder  in 
the  former  who  agrees  to  take  stock  in  the  latter  in  exchange 
for  his  old  stock  is  not  bound  to  carry  out  the  transaction.* 
"Where  a  sale  of  all  the  corporate  assets  is  set  aside,  and  a  re- 
ceiver is  authorized  to  borrow  money  to  repay  the  money 
received  on  the  sale,  the  loan  made  by  him  is  legal.^ 

By  the  unanimous  consent  of  the  stockholders  it  is  always 
legal  to  sell  all  the  property  of  a  private  corporation,*  proper 


have  the  proceeds  of  the  sale  in  its 
treasury  to  continue  business.  Sew- 
ell  V.  East,  etc.  Co.,  50  N.  J.  Eq.  717 
(189;}).  A  manufacturing  corporation 
jna.j,  for  the  purpose  of  protecting  its 
shareholders  from  further  loss,  dis- 
continue its  operations  when  unprof- 
itable, and  may  sell  or  lease  the  prop- 
erty. Skinner  v.  Smith,  134  N.  Y.  210 
(1892).  To  discontinue  a  failing  busi- 
ness and  proceed  to  sell  the  property 
and  pay  the  debts  is  not  a  breach  of 
trust.  Rothwell  v.  Robinson,  44  Minn. 
538  (1890).  A  sale,  however,  of  all  the 
corporate  assets  for  stock  in  another 
company  is  not  legal,  even  though 
the  vendor  corporation  is  insolvent, 
where  the  intent  is,  not  to  wind  up 
the  insolvent  company,  but  to  hold 
the  stock  indefinitely  in  the  names  of 
trustees.  Byrne  v.  Schuyler,  etc.  Co., 
65  Conn.  336  (1895).  By  a  vote  of  the 
board  of  directors  and  a  majority 
of  tiie  stockholders,  in  a  meeting 
assembled,  a  rubber-manufacturing 
company  may  lease  its  entire  busi- 
ness to  another  rubber-manufactur- 
ing company,  the  financial  condition 
of  the  leasing  company  being  de- 
pressed and  its  business  not  profitable 
for  want  of  capital,  and  the  lease 
being  the  best,  if  not  the  only,  means 
of  preventing  insolvency,  and  there 
being  no  fraud  in  the  case.  Barthol- 
omew V.  Derby  R.  Co.,  38  Atl.  Rep. 
45  (Conn.,  1897).  In  New  Jersey  a 
failing  corporation  cannot  sell  out 


all  its  assets  to  another  corporation, 
inasmuch  as  the  statutes  authorize  a 
dissolution  by  a  failing  coqioration, 
and  the  sale  can  be  made  in  connec- 
tion with  such  dissolution.  Hunt  v. 
American,  etc.  Co.,  81  Fed.  Rep.  533 
(1897).  If  the  corporation  is  finan- 
cially embarrassed,  a  majority  of  the 
stockholders  may  authorize  the  di- 
rectors to  sell  all  its  property  at  pub- 
lic auction,  and  a  reorganization 
committee  representing  a  part  of  the 
stockholders  may  buy  it  in,  the  price 
paid  being  a  fair  one.  Hayden  v. 
Official,  etc.  Co.,  42  Fed.  Rep.  875 
(1890).     See  30  S.  E.  Rep.  567. 

1  Dougan's  Case,  28  L.  T.  Rep.  60 
(1873). 

2  St.  Paul  Trust  Co.  v.  St.  Paid  Globe 
Pub.  Co.,  60  IMinn.  105  (1895). 

'A  corporation  may  convey  its 
property  with  the  consent  of  stock- 
holders. State  V.  Western,  etc.  Co., 
40  Kan.  96  (18S8).  Where  the  direct- 
ors own  all  the  stock  of  a  corpora- 
tion, they  may  authorize  its  president 
to  sell  its  assets;  and  the  fact  that  the 
authority  was  not  given  at  a  regular 
directors'  meeting  is  immaterial.  Jor- 
dan V.  Collins,  107  Ala.  572  (1895).  A 
sale  by  a  corporation  of  all  its  proj)- 
erty  does  not  entitle  the  vendee  to 
stock  in  the  corporation  which  the 
corporation  itself  has  purchased  on  a 
sale  for  a  delinquent  assessment  and 
not  re-issued,  Tulare,  etc.  Dist.  v. 
Kaweah,  etc.  Co.,  44  Pac.  Rep.  662 


1340 


en.  XL.] 


T7LTEA   VIEES    ACTS    AND    CONTKACTS. 


[§  CTO. 


provision  being  made  for  the  protection  of  corporate  creditors.^ 
This  rule  does  not  apply,  however,  to  railroads  and  certain  other 
quasi-public  corporations.  The  state  has  an  interest  in  their 
continuance,  and  they  cannot  sell  their  property  except  upon 
the  express  consent  of  the  state.^ 

Where  the  by-laws  of  a  private  corporation  authorize  a  sale 
of  all  its  property,  such  sale  may  be  made  even  against  the 
^vjshes  of  a  minority  of  the  stockholders.'  So  also,  where  the 
charter  expressly  authorizes  such  a  sale,  it  is  legal.*  A  hotel 
company  may  sell  its  hotel  and  with  the  proceeds  purchase  an- 


(CaL,  189G).  The  new  company  may 
enforce  the  right  of  the  old  one  to 
indemnity.  Miller  v.  Lancaster,  5 
Coldw.  (Tenn.)  514  (1868).  Or  may 
settle  a  suit  against  the  old  one. 
Paine  v.  Lake  Erie,  etc.  R.  R,  31  Ind. 
383  (1869).  In  general,  see  Slattery 
V.  St.  Loiiis,  etc.  Co.,  91  Mo.  217  (188G). 
The  incorporation  of  a  reorganized 
company,  giving  it  all  the  rights,  etc., 
of  the  old  company,  does  not  give  it 
title  to  a  judgment  obtained  by  the 
old  company.  Wilmington,  etc.  R.  R. 
V.  Downward,  14  Atl.  Rep.  720  (Del., 
18S8).  Sometimes  the  stock  as  well 
as  the  property  is  delivered.  Pendery 
V.  Carleton,  87  Fed.  Rep.  41  (1898). 

1  See  §  672,  infra. 

-  See  ch.  LIII,  infra. 

3  It  is  legal  for  the  by-laws  to  pro- 
vide that  the  company  may  sell  out 
all  of  its  property  at  any  time.  Cot- 
ton V.  Imperial,  etc.  Corp.,  [1892]  3 
Ch.  454.  The  by-laws  may  provide 
that  the  company  may  sell  out  its 
entire  business.  Republican,  etc. 
Mines  v.  Brown,  58  Fed.  Rep.  644 
(1893),  reversing  Brown  u  Repub- 
lican, etc.  Mines,  55  Fed.  Rep.  7. 

*  See  §  892,  notes,  infra.  The  prin- 
ciple that  the  board  of  directors  has 
no  power  to  sell  out  the  entire  prop- 
erty does  not  apply  where  the  statute 
under  which  it  was  incorporated  au- 
thorized such  a  sale.  St.  Louis  v.  St. 
Louis  Gaslight  Co.,  70  Mo.  69, 98  (1879). 
Under  the  English  statutes  authoriz- 


ing the  holders  of  the  securities  to 
reorganize  or  modify  the  original 
plan,  provided  the  court  approves  the 
same,  the  plan  may  be  amended  so 
that  dissenting  security-holders  be 
paid  in  cash  their  proportion  of  the 
assets  as  they  then  exist.  Foreign, 
etc.  Trust  Co.  v.  Sloper,  [1894]  3  Ch. 
716,  rev'g  [1893]  2  Ch.  96.  Where  a 
waterworks  company  has  power  to 
sell  its  entire  property,  and  the  sale 
has  been  authorized  by  a  vote  of 
1,100  shares  out  of  1,350  shares,  the 
court  will  not  enjoin  the  sale  at  the 
instance  of  the  minority  stockhold- 
ei's,  on  the  ground  that  the  price  is 
inadequate.  Peabody  v.  Westerly 
Waterworks,  37  Atl.  Rep.  807  (R.  L, 
1897).  In  Re  Buenos  Ayres,  etc.  Co., 
66  L.  T.  Rep.  408  (1892),  a  sale  of  the 
company's  enterprise  to  the  govern- 
ment upon  terms  which  paid  some- 
thing to  the  preferred  stockholders, 
but  left  nothing  for  the  common 
stockholders,  was  sustained.  Power 
to  sell  to  a  company  does  not  au- 
thorize a  sale  to  an  individual.  Bird 
V.  Bird's,  etc.  Co.,  L.  R.  9  Ch.  App.  358 
(1874). .  In  Clinch  v.  Financial  Corp., 
L.  R.  5  Eq.  450  (1808),  the  company 
had  power  to  consolidate  with  an- 
other company  if  the  Liabilities  of  the 
stockholders  were  not  increased.  A 
stockholder  enjoined  a  consolidation 
in  which  such  liabilities  would  be  in- 
creased. 


1341 


§  G71.]  TJLTEA   VIKES    ACTS    AND    C0NTEACT3.  [CH.  XL. 

other  hotel.^  And  in  any  case  the  right  of  a  dissenting  stock- 
holder to  object  may  be  lost  by  laches  or  ratification.^ 

The  subject  of  the  reorganization  of  corporations  upon  fore- 
closure is  considered  elsewhere.' 

§  6Y1.  Sale  of  corporate  lyropertij  to  another  corporation  in 
exchanrjefor  stocic  and  honds  of  the  latter — Distribution  of  such 
stock  and  honds. —  In  addition  to  the  objections  to  a  sale  of  all 
the  corporate  property  to  another  corporation,  referred  to  in 
the  preceding  section,  there  often  is  involved  the  question  of 
whether  the  sale  may  be  for  the  bonds  and  stock  of  the  vendee 
company.  In  these  days  of  consolidations,  reorganizations,  and 
mergers  of  corporations  it  frequently  happens  that  the  purchase 
price  is  paid  in  the  stock  and  bonds  of  the  purchasing  company. 
The  question  then  arises  whether  the  selling  company  lias 
power  to  take  stock  and  bonds  in  payment,  and  whether  it  may 
compel  its  stockholders  to  accept  such  stock  and  bonds  u})on  a 
distribution  of  the  assets  of  such  selling  company.  The  law 
seems  to  be  settled  that  the  stock  of  the  vendee  company  re- 
ceived by  the  vendor  company  in  payment  for  the  property 
cannot  be  forced  upon  dissenting  stockholders  of  the  vendor 
company  in  a  distribution  of  its  assets.  They  are  entitled  to 
money.  Such  of  them  as  do  not  voluntarily  join  the  new  cor- 
poration are  entitled  to  the  value  of  their  shares  in  the  old 
corporation  in  cash,  and  may  have  an  injunction  until  they  are 
secured.*    To  compel  the  stockholders  of  the  old  corporation 

1  Freeman  v.  Sea  View  Hotel  Co.,  issue  share  for  share  of  stock  in  tlie 
40  AtL  Rep.  219  (N.  J.,  1898).  old,  a  stockholder  who  assented  can- 

2  See  ch.  XLIV,  infra;  Banks  v.  not  now  refuse  to  take  the  new  stock. 
Judah,  8  Conn.  145  (1830),  liolding  Glymont  Imp.  etc.  Co.  v.  Toller,  SO 
that  long  delay  of  a  dissenting  stock-  Md.  278  (1894). 

holder  in  bringing  suit  will  bar  his  3  Qqq  ch.  LII,  infra. 

remedy.    This,  perhaps,  is  the  first  « state  v.  Bailey,  16  Ind.  46  (1861); 

reorganization    case  that    is   to  be  Kelly  v.  Mariposa  Land,  etc.  Co.,  4 

found  in  the  books.    The  wliole  busi-  Hun,  632  (1875).    Cf.  New  Jersey  Zinc 

ness  of  the  corporation  cannot  be  Co.  u  New  Jersey  Franklinite  Co.,  13 

sold  out  except  by  imanimous  con-  N.  J.  Eq,  322  (1861);  S.  C,  15  N.  J.  Eq. 

sent  of  the  stockholders,  but  a  stock-  418  (1862).     Contra,  Sawyer  v.  Du- 

holder  who  acquiesces  in  it  cannot  buque    Printing    Co.,  77  Iowa,  2-1  i 

afterwards   complain.     Feld  v.  Ro-  (1889).    Where  a  corporation  sells  its 

anoke  Inv.  Co.,  123  Mo.  609  (1894).  business  for  stock  in  another  coni- 

Where  a  part  of  a  charter  is  illegal,  pany,  it    may  distribute  the  stock 

and  a  new  corporation  is  formed  to  among  those  of  its  stockholders  wlio 

take  over  the  property  and  debts  and  are  willing  to  take  it ;  but  any  stock- 

1343 


CH.  XL,] 


ULTKA   VIEES    ACTS    AND    CONTEACTS. 


[§  G71. 


to  accept  tlie  stock  of  the  new  corporation  in  payment  for  their 
interest  in  the  old  would  be  in  effect  to  compel  them  to  join 
the  new  corporation,  or,  what  is  the  same  thing,  compel  them 
to  consent  to  a  consolidation.^  At  this  point  another  serious 
difficulty  arises  if  payment  is  in  stock.  The  only  way  to  as- 
certain the  real  value  of  the  property,  if  the  sale  is  to  a  new 
corporation  in  which  the  majority  of  the  old  stockholders  are 
interested,  is  by  a  public  sale  of  the  property.  The  dissent- 
ing stockholders  may  insist  upon  this,  in  such  a  case.  The 
supreme  court  of  the  United  States  have  so  decided.  The  major- 
ity of  stockliolders  have  no  right,  upon  dissolution,  to  sell  the 
corporate  property  to  a  new  corporation  for  stock  in  the  latter, 
and  then  say  to  the  minority,  "  We  have  formed  a  new  company 
to  conduct  the  business  of  this  old  corporation,  and  we  have 
fixed  the  value  of  the  shares  of  the  old  corporation.  We  pro- 
pose to  take  the  whole  of  it  and  pay  you  for  your  shares  at  that 
valuation,  unless  you  come  into  the  new  corporation,  taking 
shares  in  it  in  payment  of  your  shares  in  the  old  one."  ^  At  the 


holder  may  demand  money  instead- 
If  he  accepts  the  stock,  however,  he 
cannot  afterwards  complain.  Feld 
V.  Roanoke  Inv.  Co.,  123  Mo.  603 
(1894).  In  Farmers',  etc.  Co.  v.  To- 
ledo, etc.  R.  R,  54  Fed.  Rep.  759  (1893), 
the  court  held  that  where  one  rail- 
road company  is  authorized  by  stat- 
ute to  sell  its  railway  property  and 
franchises  to  another  company,  it 
may  receive  in  payment  therefor 
shares  of  stock  in  the  vendee  com- 
pany, and  its  stockholders  are 
obliged  to  accept  payment  in  stock. 
Judge  Taft  dissented  from  this  con- 
clusion. Taylor  v.  North  Star,  etc. 
Co.,  79  CaL  285  (1889),  holds  that 
laches  may  bar  the  stockholders' 
right  to  object.  Although  a  corpora- 
tion is  authorized  by  its  charter  "  to 
take  stock  "  in  other  corporations,  this 
does  not  authorize  it  to  sell  all  its 
property  to  another  corporation  in 
payment  for  stock  of  that  corpora- 
tion to  be  distributed  among  the 
stockholders  of  the  vendor  corpora- 
tion. Elyton  Land  Co.  v.  Dowdell, 
113  Ala.  177  (1896). 


1  Ex  parte  Bagshaw,  L.  R.  4  Eq.  341 
(1867);  McCurdy  v.  Myers,  44  Pa.  St. 
535  (1863);  Frothingham  v.  Barney,  6 
Hun,  366  (1876) ;  Lauman  v.  Lebanon 
Valley  R  R,  30  Pa.  St.  43  (1858).  A 
single  stockliolder  may  enjoin  his 
company  from  selling  substantially 
all  its  property  to  another  company 
for  shares  of  stock  in  the  latter.  Car- 
ter V.  Producers',  etc.  Co.,  164  Pa.  St. 
463  (1894). 

2  Mason  v.  Pewabic  Min.  Co.,  133 
U.  S.  50  (1890).  The  result  of  this 
Pewabic  Mining  Company  litigation 
was  that  the  original  sale  of  the 
property  for  $50,000  was  set  aside,  and 
the  property  then  sold  for  $710,000. 
See  Mason  v.  Pewabic  Min.  Co.,  66 
Fed.  Rep.  391  (1894).  Cf.  Treadwell 
V.  Salisbury  Mfg.  Co.,  73  Mass.  393 
(1856).  See  also  Buford  v.  Keokuk, 
etc.  Co.,  3  Mo.  App.  159  (1876);  Black 
V.  Delaware,  etc.  Canal  Co.,  22  N.  J. 
Eq.  130,  415  (1871);  S.  C,  24  N.  J.  Eq. 
455  (1873);  Lauman  v.  Lebanon  Val- 
ley R  R,  30  Pa.  St.  42  (1858). 


1343 


§  671.] 


ULTRA    VIEES    ACTS   AND    CONTKACTS. 


[CU.  XL. 


public  sale  the  majority  stockholders  may  buy  in  the  property;  * 
but  they  have  no  right  to  buy  it  at  private  sale  at  a  price  which 
they  themselves  put  upon  it.  Wliere,  however,  the  price  is  a 
fair  one,  and  all  stockholders  are  allowed  to  participate,  it  is 
not  likely  that  a  court  would  order  a  public  sale,  there  beino* 
no  tangible  prospect  of  benefit  from  such  a  public  sale.'  As  to 
a  sale  of  the  corporate  property  for  purchase-money  bonds  in 
payment,  this  is  equivalent  to  a  sale  for  money  payable  in  the 
future,  and  hence  the  transaction  is  not  open  to  the  same  ob- 
jections as  in  the  case  of  stock.  Actual  fraud,  however,  will  of 
course  always  invalidate  such  a  sale.'  Frequently  the  statutes 
provide  for  buying  out  dissenting  minority  stockholders  at  the 
appraised  value  of  their  stock.'*  Such  a  statute  exists  in  New 
York.*    Sometimes  a  more  formal  condemnation  is  authorized.' 


1 A  reorganization  committee  rep- 
resenting a  part  of  the  stockholdors 
may  buy  in  the  property  at  a  iiublic 
sale  by  the  directors,  the  business 
being  financially  embarrassed,  and 
the  price  being  a  fair  one.  Hayden 
V.  Official,  etc.  Co.,  42  Fed.  Rep.  875 
(1890).    See  also  ch.  LII,  infra. 

2  See  §  662,  supra,  and  §  893,  infra. 

3  See  §  881,  infra. 

*  Under  the  English  Companies  Act 
all  the  property  of  a  company  may 
be  sold  to  another  comj^any,  but  pro- 
vision is  made  for  the  protection  of 
the  minority  by  paying  him  the  value 
of  his  shares.  Re  London,  etc.  Bread 
Co.,  62  L.  T.  Rep.  224  (1890).  In  Eng- 
land it  seems  that  under  the  statu- 
tory power  of  one  company  to  sell 
out  to  another,  the  sale  may  be  for 
cash,  and  the  minority  are  bound, 
even  though  the  majority  own  the 
purchasing  company.  But  all  the 
cash  must  be  paid,  and  not  merely 
the  part  that  goes  to  the  minority. 
Hoist  V.  Lydney,  etc.  R'y,  69  L.  T. 
Rep.  133  (1893).  Where,  upon  the 
voluntary  dissolution  of  a  corpora- 
tion, a  reorganization  scheme  is  car- 
ried out  by  which  the  property  is 
turned  over  to  a  new  company  for 
its  shares,  and  a  reasonable  time  is 


fixed  within  which  the  old  stockhold- 
ers must  exercise  thcr  option  to  take 
stock  or  have  it  sold  by  the  liqui- 
dator, a  stockholder  cannot  exercise 
his  option  after  tliat  time,  although 
he  was  ignorant  of  the  whole  matter, 
nor  can  he  have  the  scheme  sot  aside. 
Postlethwaite  v.  Port  Pliillip,  etc. 
Co.,  L.  R  43  Cli.  D.  453  (1889);  Wes- 
ton V.  New  Guston  Co.,  63  L.  T.  Rep. 
275  (1889);  S.  C,  60  L.  T.  Rep.  805; 
aff'd,  64  L.  T.  Rep.  815.  Wliere  an 
appraisal  of  the  stock  of  a  dissenting 
stockholder  is  made  under  a  statute 
authorizing  a  consolidation,  and  there 
is  no  market  value  for  the  stock,  the 
award  is  like  an  unliquidated  ac- 
count and  bears  interest  only  after 
the  appraisers  repox-t.  Trask  v.  Peeks- 
kill  Plow  Works,  6  Hun,  236  (1875). 
Where,  according  to  contract,  stock 
sold  to  the  corporation  is  appraised 
by  the  corporation,  and  the  appraised 
price  is  actually  paid  to  and  received 
by  the  stockholder,  he  cannot  main- 
tain a  bill  to  obtain  a  larger  price, 
but  must  either  rescind  or  sue  at  law. 
Tuttle  V.  Batchelder,  etc.  Co.,  49  N. 
E.  Rep.  640  (Mass.,  1898). 
5  See  Laws  1893,  ch.  63a 
5See§896,  tn/ro. 


1344 


CH.  XL.] 


ULTRA  YIPwES    ACTS    AND    COXTKACTS. 


[§  671. 


A  question  may  also  arise  as  to  whether  the  selling  corporar 
tion  has  power  to  acquire  the  stock  and  bonds  of  another  cor- 
poration; but  it  seems  that  where  all  the  stockholders  of  the 
company  accepting  the  stock  assent,  no  one  else  can  object. 


1  Although  a  corporation   cannot 
purchase  or  deal  in  stocks  of  other 
corporations  unless  expressly  author- 
ized by  law  so  to  do,  yet  it  may  take 
stock  in  payment  for  a  debt.    And 
where  all  the  stockholders  of  a  man- 
ufacturing corporation  consent  to  the 
sale  of  aU  its  property  to  another  cor- 
poration m  exchange  for  stock  in  the 
latter,  even  though  the  former  cor- 
poration was  forbidden  by  statute  to 
purchase  the  stock  of  other  corpora- 
tions, the  corporation  may  then  sell 
the  stock,  and  the  vendee  cannot  set 
up  ultra  vires  on  the  part  of  the 
vendor.    Holmes,  etc.  Co.  v.  Hohnes, 
etc.  Co.,  127  N.  Y.  252  (1891).    A  con- 
tract whereby  a  corporation  agrees 
to  sell  aU  its  property  to  another  cor- 
poration for  bonds  and  stock  of  the 
latter  company  cannot  be  enforced, 
nor  be  the    basis    of  damages   for 
breach,  inasmuch  as  one  corporation 
has  no  power  to  buy  the  stock  of  an- 
other corporation.   Easun  v.  Buckeye 
Brewing  Co..  51  Fed.  Rep.  156  (1892). 
An  offer  of  a  corporation  to  sell  out, 
in  consideration  of  stock  in  another 
corporation,  the  latter  to  pay  all  ex- 
isting debts,  is  not  enforceable  by  the 
former  company,  where  the   latter 
company  accepted  the  offer  on  con- 
dition that  the  debts  should  not  ex- 
ceed a  certain  amount.    Not  even  the 
assent  of  the  president  of  the  former 
company  to  the  condition  is  suffi- 
cient   Bi-Spool,  etc.   Co.    V.    Acme 
Mfg.  Co.,  153  Mass.  404  (1891).    The 
stockholders  of  a  corporation  may, 
together  with  the  directors,  cause  the 
corporate  property  to  be  sold  to  a 
new  corporation  in  exchange  for  the 
stock  of  the  latter.    A  pledgee  of 
^tock  in  the  former  coriwration  can- 
not after  the  sale  undo  the  sale  or 


hold  the  latter   corporation  liable. 
His  remedy  is  against  the  pledgor 
and  the  first  corporation.    Leathers 
V.  Janney,  41  La.  Ann.  1120  (1889), 
holding  also  that  a  purchasing  cor- 
poration is  not  boxmd  to  see  that  the 
selling  corporation  distributes    the 
stock  of  the  former  legally  among 
the  stockholders  of  the  latter  corpo- 
ration.   Where  a  consolidation  is  ef- 
fected by  one  company  buying  aU  the 
stock  of  another  company,  and.  just 
before  the  transaction  is  completed, 
the  company  whose  stock  is  thus 
sold  issues  a  dividend  of  interest- 
bearing  securities  in  order  to  defraud 
the  pm-chasing  company,  the  latter 
may,  by  a  bill  in  equity,  have  such 
seciirities  canceled.    Bailey  v.  Citi- 
zens' Gaslight  Co.,  27  N.  J.  Eq.  196 
(1876).    A  corporation  organized  to 
deal  in  the  stock  of  a  stockyard  cor- 
poration and  hold  personal  and  real 
estate   may  buy  competing   stock- 
yards; and  may  buy  the  stock  of  a 
contemplated  competing  company; 
also  buy,  guarantee,  and  sell  the  bonds 
of  such  competing  company;  also  pay 
money  to  settle  suits  against  the  first- 
named  stockyard  company,  and  to 
bind  stockyard  men   not  to    erect 
competing  yards  for  a  specified  term 
of  years  within  a  certain  territory; 
and  may  seU  any  oir  all  of  the  above 
property  and  right  to  the  first-named 
company.    Ellerman  v.  Chicago,  etc. 
Co.,  49  N.  J.  Eq.  217  (1891).    A  Michi- 
gan capsule  company  has  no  right  or 
power  to  sell  aU  its  property  to  a  New 
Jersey  capsule  company  — a  combi- 
nation company  — in  exchange  for 
or  payment  of  stock  of  such  ^ew 
Jersey  company.    The  agreement  so 
to  do  cannot  be  enforced,  even  though 
every    stockholder   assented   to   it. 


85 


1345 


§  671.] 


ULTRA   VIRES    ACTS    AND    CONTRACTS. 


[CH.  XT, 


By  unanimous  consent  it  is  legal  for  two  companies  to  sell  all 
their  property  to  a  third  company,  take  its  stock  in  pay  men  t,^ 
and  divide  the  stock  among  the  stockholders,  all  creditors  being 
paid.^ 


Merz  Capsule  Co.  v.  U.  S.  Capsule 
Co.,  G7  Fed  Rep.  414  (1895).  Even 
though  it  be  illegal  for  an  irrigation 
company  to  subscribe  for  the  stock 
of  a  land  company,  yet  wliere  it  does 
so  subscribe  and  tvirns  in  property  in 
payment,  and  the  stock  is  taken  in 
the  name  of  its  secretary  individ- 
ually and  not  as  secretary,  the  com- 
pany may  compel  him  to  turn  over 
the  stock,  even  tliough  he  lias  jiledged 
it  for  his  personal  debt,  the  i)lodgee, 
however,  liaving  taken  with  knowl- 
edge of  all  the  facts.  Bear  River, 
etc.  Co.  V.  Hanley,  50  Pac.  Rep.  611 
(Utah,  1897). 

»Kohl  V.  Lilienthal,  81  CaL  378 
(1889).  See  also  §  548,  sitj^ra,  and 
§  763,  infra.  Unless  some  statute 
prohibits  it,  or  some  one  objects,  a 
corporation  may  declare  a  dividend 
out  of  its  capital  stock.  Tlie  com- 
mon-law liability  for  so  doing  re- 
mains of  course.  People  v.  Barker, 
141  N.  Y.  251  (1894).  Where  a  com- 
pany leases  its  property  to  another 
company  at  a  nominal  rental,  and 
the  stockholders  of  the  first  company 
transfer  their  stock  to  the  second 
company  in  exchange  for  stock  of 
the  latter,  no  dividend  is  involved, 
and  a  tax  on  dividends  of  the  first 
corporation  does  not  attach-  Alle- 
gheny V.  Pittsbm-gh,  etc.  R  R,  179 
Pa.  St.  414  (1897).  Practically,  there 
was  a  division  of  the  corporate  assets 
among  the  stockholders  in  the  case 
of  Boston,  etc.  Co.  v.  Bankers',  etc.  Co., 
36  Fed.  Rep.  288  ;aff'ds?(&??om.  United 
Lines  Tel.  Co.  v.  Boston,  etc.  Co.,  147 
U.  S.  431  (1893).  In  this  case  tlie  usual 
and  simple  process  of  one  company 
Belling  aU  its  property  to  the  other 
company,  and  taking  piu'chase-money 
mortgage  bonds  in  payment,  and 
then  distributing  the  bonds  among  its 

1346 


stockholders,  was  not  adopted,  but  tho 
mortgage  was  given  by  the  vendor 
comj  any,  the  object  being  not  to 
have  the  mortgage  cover  existing 
property  of  tho  vendee  company. 
The  vendee  company  at  tlie  same 
time  agreed  to  construct  new  lines 
and  place  them  under  the  mortgage. 
The  whole  sclieme  was  awkward,  and 
was  sustained  by  the  courts  only 
after  prolonged  litigation.  In  a  suit 
to  compel  stockiiohlors  of  a  foreign 
corporation  to  discover  and  account 
for  corporate  property  illegally  di- 
vided among  tliem,  the  property  must 
be  defijiitely  described.  Service  on 
the  corporation  by  publication  is  in- 
sufficient.  King  v.  Sullivan,  93  Ga. 
621  (1894).  If  the  stockholders  and 
corporate  creditors  wlio  are  preju- 
diced thereby  do  not  object,  a  going 
cori)oration  may  sell  all  its  property 
to  another  corporation,  i)a\Tnent 
being  by  the  issue  of  stock  of  tho 
latter  corporation  to  the  stockhold- 
ers of  the  former  corporation,  to- 
gether with  the  right  to  such  stock- 
holders to  subscribe  for  additional 
stock  in  the  purchasing  corpora- 
tion. Dissenting  stockholders  who 
under  protest  subscribe  for  the  new 
stock,  and  then  wait  eighteen  months 
before  commencing  legal  proceed- 
ings, are  estopped  from  objecting. 
Post  V.  Beacon,  etc.  Co.,  84  Fed.  Rep. 
371  (1898).  Where  a  railroad  is  sold, 
the  proceeds  cannot  be  distributed 
among  the  stockholders  without  pay- 
ing creditors.  Where  bonds  are  re- 
ceived in  payment,  and  distributed 
among  the  stockholders  and  income 
bondholders,  the  general  creditors 
may  reach  such  bonds.  Chattanooga, 
etc.  R  R  u  Evans,  66  Fed.  Rep.  809 
(1895). 


CH.  XL.] 


TJLTEA   YIEES   ACTS   AND    CONTEACTS. 


[§  672. 


"Where  one  corporation  sells  out  to  another  for  stock  of  the 
latter,  a  stockholder  in  the  former  may  sue  the  purchasing  cor- 
poration for  his  part  of  such  stock,  it  not  having  been  deliv- 
ered.^ 

§  672.  Corporate  creditors*  rights  ivliere  the  corporation  sells 
all  its  property  to  another  corporation  for  stock  of  the  latter. — 
"Where  a  corporation  sells  all  its  property  for  cash  there  is  no 
difficulty  in  regard  to  creditors,  the  sale  being  an  honest  one, 
inasmuch  as  the  cash  must  be  applied  to  the  corporate  debts 
before  any  distribution  is  made  among  the  stockholders.  But 
where  the  property  is  sold  for  stock  a  more  difficult  question 
arises.  A  creditor  of  the  corporation  then  has  several  reme- 
dies open  to  him.  He  may  subject  the  stock  to  the  payment 
of  his  debt;  ^  and  if  the  stockholders  have  distributed  the  stock 


1  The  court  said:  "  We  have  of  late 
refused  to  be  always  and  utterly 
trammeled  by  the  logic  derived  from 
corporate  existence  where  it  only 
serves  to  distort  or  hide  the  truth." 
Anthony  v.  American  Glucose  Co.,  146 
N.  Y.  407  (1895).  Where  one  company 
is  sold  out  to  another  company  on  the 
basis  of  the  latter  company  issuing 
its  stock  share  for  share  for  the  stock 
of  the  former  company,  a  stockliolder 
of  the  former  company  may  sue  the 
latter  company  for  his  stock  without 
joining  the  old  company  or  any  of 
the  old  stockholders.  Fletcher  v. 
Newark,  etc.  Co.,  35  AtL  Rep.  903 
(N.  J.,  1896).  Although  a  new  com- 
pany with  the  same  name  and  capi- 
tal stock  buys  out  the  old,  yet  a 
stockholder  in  the  old  cannot  compel 
a  transfer  of  his  stock  on  the  books 
of  the  new.  Huggins  v.  Milwaukee 
B.  Co.,  10  Wasli.  579  (1895).  Where 
the  sale  of  one  company  to  another 
was  induced  by  fraud,  the  vendor 
may  rescind,  even  though  the  stock 
of  the  vendor  was  canceled  as  a 
part  of  the  sale.  Texas,  etc.  Assoc,  v. 
Dublin,  etc.  Co.,  38  S.  W.  Rep.  404 
(Tex.,  1896).  Where  the  vendor  of  a 
majority  of  the  stock  of  a  corpora- 
tion agrees  that  the  company  owes 
no  debts  except  certain  speciHc  ones, 


the  vendee  may  recover  back  any  ex- 
cess of  debts  over  those  specified. 
Wliere  the  debts  of  one  class  were 
not  to  exceed  a  certain  sum,  but  did 
exceed  that  sum,  the  vendee  may  re- 
cover the  difference,  even  though  the 
debts  of  another  class  were  less  than 
a  s\un  specified  in  the  contract  of 
sale.  Chicago,  etc.  R'y  v.  Hoyt,  89 
Wis.  314  (1895).  Where  the  assets  of 
a  corporation  are  turned  over  to  a 
new  corporation  and  all  the  stock- 
holders exchange  their  stock  for  new 
stock,  they  cannot  afterwards  claim 
that  a  sui-plus  of  the  old  corporation 
should  have  been  divided.  Boynton 
V.  Roe,  72  N.  W.  Rep.  257  (Mich., 
1897). 

2  Corporate  creditors  may  object 
to  the  company  selling  out  all  its 
property  to  another  corporation  and 
receiving  pay  in  the  stock  of  the  lat- 
ter corporation.  Such  stock  may  be 
subjected  by  the  creditors  to  their 
debts,  er  the  conveyance  may  be  set 
aside  and  the  company  wound  up  as 
insolvent.  Vance  v.  McNab,  etc.  Co., 
93  Tenn.  47  (1892);  Fort  Payne  Bank 
V.  Alabama  Sanitarium,  103  Ala.  358 
(1894).  Where  the  corporation  sells 
all  its  assets,  and  the  purchasing  cor- 
poration gives  its  bonds  to  the  stock- 
holders of  the  former,  such  bonds  be- 


1347 


§  672.] 


TJLTKA    VIRES    ACTS    AND    CONTRACTS. 


[cH.   XL. 


among  themselves  without  paying  the  corporate  debts,  he  may 
compel  them  to  return  the  stock  and  apply  it  to  his  debt; '  or 
he  may  levy  an  attachment  or  execution  upon  the  property 
which  was  transferred;  ^  or,  after  obtaining  an  unsatisfied  judg- 


long    to    the    corporate    creilitors. 
Peters  v.  Fort  Madison  Const.  Co., 
73  Iowa,  405  (1887).    Where  a  rail- 
road is  sold,  the  proceeds  cannot  be 
distributed  among  the  stockholders 
without    paying    creditors.    Where 
bonds  are  received  in  payment  and 
distributed  among  the  stockholders 
and  income  bondliolders,  the  general 
creditors    may   reach    such    bonds. 
Chattanooga,  etc.  R.  R  u.  Evans,  G6 
Fed.  Rep.  809  (1895).  Where  the  stock- 
holders distribute  the  assets  of  the 
corporation  among  themselves,  leav- 
ing enougli,  as  they  suppose,  to  pay 
the  debts  of  the  company,  and  it 
turns  out  that  the  amount  left  is  not 
suificient,  tlie  stockholders  must  pay 
back  enough  to  liquidate  such  debts. 
Grant  v.  Ross,  37  S.  W.  Rep.  263  (Ky., 
1896).   A  treasurer  cannot  interplead 
between  the  stockholders  and  a  cor- 
porate creditor  who  is  seeking  to 
reach  bonds  received  by  the  corpora- 
tion in    payment  for  its  property. 
Stone  V.  Reed,  152  Mass.  179  (1890). 
Where  the  officers  of  a  bank  use  its 
funds  to  buy  property,  which  they 
then  turn  in  to  a  corporation  in  pay- 
ment for  stock,  the  property  is  im- 
pressed with  a  tnist  and  may  be  fol- 
lowed-   The   fact   that   they   were 
officers   of   the  corporation  also  is 
sufficient  to  give  it  notice.  The  bank 
may  follow  the  stock  or  the  property, 
at  their  option-    Farmers',  etc.  Bank 
V.  KimbaU  MUing  Co.,  1  S.  D.  388 
(1890).    Where  a  mortgagee  in  pos- 
session of  the  property  leases  it  with 
other  property  and  takes  stock  in 
payment,  he   must  accoxmt  to  the 
mortgagor  for  the  dividends  received 
on  the  stock  representing  the  mort- 
gaged property.     The  stock  is  im- 
pressed with  a  trust  character.    En- 


tries on  the  stock  ledger  and  corporate 
books  are  competent  evidence  of  the 
issue.  Chapman  v.  Porter,  69  N.  Y. 
276  (1877). 

'  Where  the  stockholders  distriljute 
the  assets  among  themselves,  a  cred- 
itor may  follow  the  assets.  Pan- 
handle Nat.  Bank  v.  Emerj-,  78  Tex. 
498  (1890).  Creditors  may  reach  stock 
which  the  corporation,  which  be- 
comes insolvent,  has  distributed  witli- 
out  a  dividend.  McKusick  v.  Sey- 
mour, etc.  Co.,  48  Minn.  173  (1892). 
Where  a  company  is  reorganized  by  a 
new  company  l>uying  the  property  of 
the  old,  and  giving  the  stock  of  the 
new  company  to  the  old  company  in 
paj-ment  therefor,  the  transaction 
being  carried  out  by  160,165  shares 
out  of  164,211  shares,  over  4,000  shares 
not  being  represented,  the  old  com- 
pany cannot  distribute  the  stock 
among  the  stockholders  unless  the 
company  is  dissolved.  Kohl  v.  Lilien- 
thal,  81  CaL  378  (1889).  The  company 
may  distribute  the  assets,  provided 
all  creditors  are  paid.  Rorke  v. 
Thomas,  56  N.  Y.  559  (1874).  See,  to 
same  effect,  cases  in  §  671,  supra.  A 
corporate  creditor  cannot  maintain 
a  bill  to  enjoin  the  declaration  of  a 
dividend  out  of  the  capital  stock. 
Mills  V.  Northern  R'y,  L.  R.  5  Ch.  App. 
621  (1870).     C/.  ch.  XXXII,  siqjra. 

2  A  creditor  of  an  insolvent  corpora- 
tion may  attach  its  property  which 
has  been  transferred  by  it  to  another 
corporation  in  payment  for  the  whole 
capital  stock  of  the  latter  corpora- 
tion. McVicker  v.  American  Opera 
Co.,  40  Fed.  Rep.  861  (1889).  A  judg- 
ment creditor  of  an  insolvent  corpo- 
ration may  levy  on  and  sell  under 
execution  the  property  of  the  corpo- 
ration which  lias  been  conveyed  to  a 


1348 


en.  XL.] 


TJLTEA   VIEES   ACTS    AND   CONTKACTS. 


[§«' 


ment  against  the  corporation,^  lie  may  file  a  bill  in  equity  to  set 
aside  the  sale  as  being  in  fraud  of  creditors  ;2  or  under  some 
circumstances  he  may  hold  liable  the  corporation  that  purchased 


new  company,  under  a  reorganiza- 
tion plan  to  which  all  of  the  old 
stockholders  and  most  of  the  credit- 
ors have  assented.  Montgomery  Web 
Co.  V.  Dienelt,  133  Pa.  St.  585  (1890). 
A  creditor  of  the  corporation  that 
sells  out  all  its  property  to  another 
corporation  for  stock  in  the  latter 
may  levy  an  execution  on  the  prop- 
erty on  the  ground  that  it  is  con- 
veyed in  fraud  of  creditors.  Couse 
V.  Columbia,  etc.  Co.,  33  AtL  Rep.  297 
(N.  J.,  1895). 

1  A  corporate  creditor  seeking  to 
reach  the  assets  of  the  company 
which  have  been  distributed  among 
the  stockholders,  upon  a  sale  of  all 
the  property  of  the  company,  cannot 
file  a  bill  in  equity  for  that  purpose 
until  he  has  first  obtained  judgment 
against  the  company.  Swan,  etc.  Co. 
V.  Frank,  148  U.  S.  603  (1893);  Central 
R.  R.  V.  Pettus,  113  U.  S.  116  (1885). 
A  creditor  of  a  stockholder  cannot 
complain  that  all  the  corporate  Tpvop- 
erty  was  sold  to  the  stockholders  for 
their  stock-  Wagner  v.  Marple,  10 
Tex.  Civ.  App.  505  (1895). 

2  Wliere,  in  a  foreclosure  suit  and 
before  sale,  the  corporation  and  the 
bondholders  agree  to  rent  the  rail- 
road to  another  company,  and  do  so 
rent  it  at  a  rental  which  meets  the 
interest  but  leaves  nothing  for  the 
unsecured  creditors,  the  latter  may 
have  the  railroad  subjected  to  the 
payment  of  their  debts.  Farmers', 
etc.  Co.  V.  Missouri,  etc.  R'y»  21  Fed. 
Rep.  264  (1884).  Where  a  brewery 
company  is  dissolved  in  order  that 
its  assets  may  be  sold  and  consoli- 
dated with  other  breweries,  a  person 
who  had  a  bottling  contract  with  it 
may  follow  its  assets  and  subject 
them  to  his  claim.  Schleider  v.  Diel- 
nian,  44  La.  Ann.  462  (1892).  Where 
a  creditor  of  a  corporation  seeks  to 


reach  property  which  has  been  fraud- 
ulently conveyed  away  by  the  com- 
pany, he  need  not  make  the  corpora- 
tion a  party  defendant  to  the  suit 
which  he  brings  against  the  party 
who  received  the  property.    Blanc  v. 
Paymaster  Min.  Co..  95  CaL  524  (1892). 
The  formation  of  a  new  corporation 
and  a  transfer  to  it  of  all  the  assets 
of  the  old  one  may  be  a  fraud  on  the 
creditors  of  the  old  corporation.    San 
Francisco,  etc.  R.  R  v.  Bee,  48  CaL  398 
(1874).    It  is  legal  for  a  coal  corpora- 
tion, wuth  the  assent  of  all  its  stock- 
holders, to  sell  all  its  property  to  its 
president,  and  for  him  to  pay  therefor 
in  cash  and  by  a  mortgage  on  the 
property  so  ptirchased,  he  also  agree- 
ing to  pay  all  the  debts  of  the  com- 
pany. Payment  was  made  directly  to 
the  stockholders,  and  they  transferred 
their  stock  to  him  in  addition  to  the 
transfer  of  the  property.    A  subse- 
quent creditor  of  the  company  who 
knew  all  of  the  facts  cannot  com- 
plain. Parke,  etc.  Co.  v.  Terre  Haute, 
etc.  Co.,  129  Ind.  73  (1891).   A  creditor 
whose  claim  for  $1,000  is  contested 
cannot  have  a  conveyance  of  all  the 
coi-porate  property  to  another  corpo- 
ration set  aside.    Missoiu-i,  etc.  Co.  v. 
Reinhard,  114  Mo.  218  (1893).    Con- 
tract creditors  cannot  cause  a  bona 
fide  sale  of  all  the  property  of  a  cor- 
poration to  be  set  aside  merely  be- 
cause the  corporation  —  a  going  con- 
cern—is  insolvent.      Chattanooga, 
etc.  R.  R.  V.  Evans,  66  Fed.  Rep.  809 
(1895).  The  Tennessee  statute  against 
liens   prior   to   labor   and    damage 
claims  does  not  give  such  claims  a 
lien  ahead  of  an  out-and-out  bona 
fide  sale  of  the  property.    Chatta- 
nooga, etc.  R  R.  V.  Evans,  66  Fed. 
Rep.  809  (1895).    Where  all  the  stock 
of  a  corporation  is  sold  to  a  vendee, 
who  then  takes  possession  of  the  cor- 


1349 


§  672.] 


ULTKA   VIEES    ACTS    AND    CONTRACTS. 


[CII.   XL. 


tlie  property  from  the  corporation  that  is  indebted  to  liiin.^ 
But  any  unreasonable  delay  on  the  part  of  the  creditor  in  ap- 
plying for  relief  will  be  fatal  to  his  application.-  "Whore  all 
the  property  of  a  tclegTai)h  company  is  sold  and  the  proceeds 
distributed  among  the  stockholders,  a  creditor  of  the  company 
may,  by  a  bill  in  equity,  compel  the  stockholders  to  pay  the 
claim  against  the  corporation,  the  proceeds  being  a  trust  fund.' 
Although  a  corporation  sells  all  its  property  to  an  individual 
for  purchase-money  mortgage  bonds,  and  distriljutes  these  bonds 
among  its  stockholders  without  paying  the  creditors,  neverthe- 
less a  honafide  purchaser  of  such  bonds  is  protected  as  against 
the  corporate  creditors.*    Even  though  a  sale  of  ail  the  corpo- 


porate  assets  and  ignores  the  corpo- 
rate existence,  the  court  may  construe 
this  as  a  sale  of  the  corporate  assets. 
Cusick  V.  Bartlett,  39  Atl.  Kep.  497 
(Me.,  1898).  An  insolvent  Oliio  cor- 
poration may  transfer  all  its  assets 
to  a  New  Jersey  corporation  wiiich  as- 
sumes all  the  debts.  The  bondhold- 
ers of  the  Ohio  corporation  cannot 
object.  Such  bondliolders  become 
creditors  of  the  New  Jersey  corpora- 
tion. Blake  v.  Domestic,  etc.  Co.,  38 
Atl.  Rep.  241  (N.  J.,  1897).  Even 
though  a  railroad  company  has  guar- 
anteed the  bonds  of  another  railroad 
company,  and  then  sells  all  its  prop- 
erty to  a  third  railroad  company, 
yet  the  guaranteed  bondholders  can- 
not have  a  receiver  appointed  of  the 
price  received  on  such  sale,  nor  can 
they  prevent  a  distribution  of  the 
price  among  the  stockholders  of  the 
selling  company,  unless  it  is  shown 
that  thereby  the  guarantor  is  made 
insolvent.  Gixilmartin  v.  Middle  G. 
&  A.  R'y,  29  S.  E.  Rep.  189  (Ga.,  1897). 

1  See  §  673,  infra. 

2  Seven  years'  delay  on  the  part  of 
an  alleged  creditor  of  the  old  com- 
pany is  fatal  to  any  relief.  Town- 
send  V.  St.  Louis,  Sandoval,  etc.  Co., 
159  U.  S.  21  (1895).  Where  the  cor- 
porate creditor  delays  and  allows  the 
corporation  taking  over  the  property 
to  incur  debts,  he  cannot  then  com- 


plain. Vaughn  v.  Comet,  etc.  Co., 
21  Colo.  54  (1895).  Corporate  credit- 
ors of  an  insolvent  corporation  may 
set  aside  a  sale  of  all  its  property  to 
another  corporation  for  bonds  of  the 
latter,  the  bonds  being  then  distrib- 
uted among  stockholders  of  the 
former,  even  though  such  creditors 
knew  of  and  acquiesced  in  the  sale 
at  the  time.  Fort  Payne  Bank  v. 
Alabama  Sanitarium,  103  Ala.  358 
(1894).  Creditors  who  assent  to  a 
corporation  turning  overall  its  assets 
to  a  partnership  and  agree  to  accept 
the  partnership  as  their  debtor  can- 
not afterwards  complain  of  the  trans- 
action. Tenney  v.  Ballard,  etc.  Co., 
43  S.  W.  Rep.  296  (Tex.,  1897). 

'Baltimore,  etc.  TeL  Co.  v.  Inter- 
state, etc.  TeL  Co.,  54  Fed.  Rep.  50 
(1893). 

<A  former  decree  in  a  court  of 
equity  against  the  trustee  of  the 
mortgage  in  regard  to  the  matter 
does  not  bind  the  bondholders,  al- 
though a  suit  at  law  against  the 
trustee  would  have  bound  them.  Le- 
beck  V.  Fort  Payne  Bank,  22  S.  Rep.  75 
(Ala.,  1897).  It  is  a  disposal  of  prop- 
erty for  the  purpose  of  hindering  and 
delaying  creditors,  within  the  mean- 
ing of  the  second  section  of  the  stat- 
ute of  frauds,  for  an  insolvent  firm 
to  mortgage  all  their  property  to  a 
trustee  and  take  the  bonds  secured 


1350 


■CH.  XL.]  ULTKA   VIKES    ACTS   AND    CONTEACTS.  [§  G73. 

rate  property  to  an  individual  may  be  invalid  as  to  corporate 
creditors,  yet  a  purchaser  cannot  defend  against  the  price  on  the 
ground  of  such  invalidity.^ 

Where  the  officers  of  the  corporation  have  aided  in  transfer- 
ring its  assets  to  another  corporation,  a  civil  action  for  damages 
for  a  conspiracy  to  defraud  may  lie.^  The  receiver  of  an  in- 
solvent corporation  which  has  been  rendered  insolvent  by  rea- 
son of  its  assets  having  been  disposed  of  by  another  corporation 
may  hold  its  directors  liable  for  the  loss,  and  his  suit  may  be 
at  law  or  in  equity.'  Where  the  purchasing  company  is  a 
mere  "  dummy  "  for  the  selling  company,  a  creditor  of  the  lat- 
ter may  sometimes  disregard  the  identity  of  the  purchasing 
company.*  An  insolvent  corporation  cannot  transfer  all  its 
assets  to  one  of  its  directors  upon  his  guarantee  to  pay  all  the 
debts.  A  creditor  may  file  a  bill  to  set  aside  a  sale  by  such 
director  of  part  of  the  assets  to  one  of  the  creditors  in  dis- 
charge of  a  debt.^  The  agreement  of  a  creditor  of  a  corpora- 
tion to  take  stock  in  a  proposed  reorganized  company  may  be 
revoked  by  the  creditor  at  any  time  before  actual  performance.^ 
The  creditor  of  a  corporation  may  garnishee  a  person  owing 
such  corporation  on  a  subscription  for  stock,  even  though  such 
corporation  has  sold  its  assets  to  another  corporation.^ 

§  673.  A  corporation  talcing  over  all  the  property  of  another 
corjwration  may  he  liaUe  for  the  debts  of  the  latter. —  The  gen- 
eral rule  undoubtedly  is  that  a  corporation  which  purchases  all 
the  property  of  another  corporation  is  not  liable  for  the  debts 
of  the  latter.*  Nevertheless  there  are  circumstances  under  which 

by  that  mortgage,  even  though  they  rate  creditors  the  company  cannot 
take,  the  bonds  to  turn  over  to  their  trade  off  all  its  assets  for  other  prop- 
creditors.  But  the  act  is  voidable  erty,  where  the  latter  property  is  not 
only  as  to  those  creditors  who  object  of  a  character  to  be  used  to  pay  debts, 
and  contest  the  matter.  National  even  though  iiltimately  it  will  prob- 
Bank,  etc.  v.  Sprague,  21  N.  J.  Eq.  ably  be  very  valuable,  such  trade 
530  (1870).    See  also  §§  674, 675,  m/m.  being  with  the  general  manager  of 

1  Clapp  V.  Allen,  50  N.  E.  Rep.  587  the  company.  Levins  v.  Peeples,  etc. 
(Ind.,  1898).  Co.,  38  S.  W.  Rep.  733  (Tenn.,  1896). 

2  Russell  V.  Post,  138  U.  S.  425  (1891).  «  Providence,  etc.  Co.  v.  Kent,  etc. 

3  Mason  v.  Henry,  152  N.  Y.  529  Co.,  35  Atl.  Rep.  152  (R.  I..  1896). 

n  897).  ''  Prentice  v.  United  States,  etc.  Co., 

*  See  §§  6,  663a,  supra,  and  §  709,    78  Fed.  Rep.  106  (1897). 

infra.    ^  ^  Gray  v.  National  Steamship  Co., 

5  Berney  Nat.  Bank  v.  Guyon,  111    115  U.  S.  116  (1885).    A  railroad  cor- 

Ala.   491   (1896).    As  against  corpo-    poration  which  purchases  the  prop- 

1351 


§  CT3.] 


ULTRA   VIRES   ACTS    AND    CONTRACTS. 


[on.  XL. 


the  purchasing  corporation  is  liable  for  the  debts  of  the  old 
company.  Thus,  where  the  purchasing  corporation  assumes 
all  liabilities,  a  creditor  of  the  vendor  corporation  may  sue  the 
vendee  corporation  on  his  claim.* 


erty  of  another  railroad  corporation 
is  not  liable,  upon  the  dissolution  of 
the  latter,  for  a  tort  committed  by 
it.    Chesapeake,  etc.  R  R  v.  Griest, 
85  Ky.  619  (1887).     Cf.  Batterson  v. 
Chicago,  etc.  R'y,  53  Mich.  125  (1884). 
See  also  §  890,  infrcu    And,  in  gen- 
eral, that  the  new  corporation  is  not 
liable  for  the  debts  of  the  old,  see 
Port  Gibson  v.  Moore,  21  Miss.  157 
(1849);  Shawr.  Norfolk  County  R  R, 
83    Mass.   407    (18G0);   Pennsylvania 
Transp.  Co.'s  Appeal,  101  Pa.  St.  576 
(1882);  Smith  v.  Chicago,  etc.  Ry,  18 
Wis.   17  (1864);  Neflf  v.  Wolf  River 
Boom  Co.,  50  Wis.  585  (1880);  Hous- 
ton, etc.  R  R  r.  Shirley,  54  Tex.  123 
(1880);  Commercial    Bank   v.  Lock- 
wood,  2  Harr.  (Del.)  8  (1835) ;  Menasha 
V.  Milwaukee,  etc.  R  R,  52  Wis.  414 
(1881);  Lake  Erie,  etc.  R'y  v.  Griffin, 
92  Ind.  487  (1883);  Gilman  v.  Sheboy- 
gan, etc.  R  R,  37  Wis.   317  (1875;; 
Sappington  v.  Little  Rock,  etc.  R  R, 
37  Ark.  23  (1881);  Cook  v.  Detroit, 
etc.  R'y,  43  Mich.  349  (1880).    Where 
property  is  to  be  turned  in  to  a  cor- 
poration for  stock,  but  work  is  to  be 
done  by  the  owners  on  the  property 
before  it  is  so  turned  in,  the  corpo- 
ration is  not  liable  to  third  persons 
for  such  work,  the  deeds  never  hav- 
ing been  made  to  it.    Rathbim  v. 
Snow,  123  N.  Y.  343  (1890).    See  also, 
on  this  subject,  ch.  LII,  infra,  as  to 
the  liability  of  a  purchaser  of  a  rail- 
road at  foreclosure  sale.    Where  two 
banks  are  consolidated  into  a  third 
bank,  the  stock  of  the  new  bank  being 
issued  in  exchange  for  stock  of  the 
old,  the  new  bank  is  not  liable  on  the 
debts  of  either   of  the  old  banks. 
Donnally  v.  Hearndon,  41  W.  Va.  519 
(1895).    A  new  bank  which    takes 
over  a  part  of  the  assets  of  another 


bank  is  not  liable  for  the  debts  of 
the  latter,  even  though  the  individ- 
uals interested  in  both  banks  are 
practically  the  sama  Campbell  v. 
Farmers',  etc.  Bank,  49  Neb.  143 
(1896).  A  purchasing  corporation  is 
not  liable  vmless  it  has  expressly  as- 
sumed such  liability.  Fernschild  v. 
Yuengling  Brewing  Co.,  15  N.  Y.  Apji, 
Div.  29  (1897);  affd,  154  X.  Y.  007. 

1  Tecumseh  Nat.  Bank  v.  Best,  70 
N.  W.  Rep.  41  (Nob.,  1897).  Where 
one  company  buys  out  another  and 
assumes  the  debts  of  the  latter,  a 
creditor  of  the  latter  company  may 
assign  his  claim  as  collateral  secu- 
rity; but  the  pledgee  is  not  bound 
to  institute  suit  to  collect  such  claim, 
and  is  not  liable  for  failure  so  to  do, 
even  though  the  claim  is  finally  lost. 
Sampson  v.  Fox,  109  Ala.  662  (1896). 
A  purchasing  company  may  be  held 
liable  on  the  debts  of  the  vendor 
company  where  the  former  expressly 
agrees  in  the  contract  of  purchase  to 
pay  said  debts.  Noll  v.  Chattanooga 
Co.,  38  S.  W.  Rep.  287  (Tenn.,  1896). 
Where  a  de  facto  corporation  incurs 
debts,  and  subsequently  a  new  corpo- 
ration legally  organized  takes  over 
the  business  and  assumes  the  debts, 
the  creditors  of  the  de  facto  corpora- 
tion may  hold  the  latter  corporation 
liable.  Calumet  Paper  Co.  v.  Stotts 
Liv.  Co.,  96  Iowa,  147  (1895).  Where 
a  corporation  sells  all  its  property  to 
another  corporation  in  pajTuent  for 
stock  of  the  latter,  and  the  new  cor- 
poration assvmaes  all  the  liabilities  of 
the  old  corporation,  a  creditor  of  the 
old  corporation  may  sue  the  new  cor- 
poration on  his  claim.  Friedenwald 
Co.  V.  Asheville  Tobacco  Works,  117 
N.  C.  544  (1,895).  Where  an  insolvent 
corporation  transfers  its  assets  to  a 


1352 


CH.  XL.] 


ULTEA   YIEES   ACTS    AND    CONTEACTS. 


[§  ST3. 


It  is  also  a  principle  of  law  that  a  corporation  buying  all  tlie 
property  of  another  corporation,  and  paying  therefor  in  stock 
of  the  former  corporation  issued  to  the  stockholders  of  the  latter 
corporation,  must  either  pay  the  obligations  of  the  latter  cor- 
poration or  have  the  property  sold  to  pay  such  obligations.^  A 
creditor  of  the  old  company  may  sue  the  new  company  to 
charge  the  assets  taken  over  by  it  with  payment  of  the  old 
company's  debts,  and  may  recover  his  jpro  rata  share  of  the 
value  thereof.^    A  mere  device  by  which  corporate  property  is 


new  corporation,  which  agrees  to  pay 
the  debts  of  the  former,  the  liability 
of  the  latter  may  be  enforced  by 
creditors  of  the  former  corporation. 
Island  City  Sav.  Bank  v.  Sachtleben, 
3  S.  W.  Rep.  733  (Tex.,  1887).   Where 
a    reorganized    company  continues 
and  assmnes  payment  of  a  liability 
of  the  old   company,  and  new  ad- 
vances are  made  thereunder,  the  new 
company  is  Liable  thereon.    Baker  v. 
Harpster,  42  Kan.  511  (1889).    Where 
the  assets  of  a  corporation  are  ti-ans- 
ferred  to  a  party  who  agrees  to  pay 
the  debts,  tlie  creditors  may  enforce 
the  agreement  and  collect  from  him. 
Dimmick    v.  Register,  92  Ala.  458 
(1891).    In  Long   v.  Evening  News 
Assoc,  71  N.  W.  Rep.  492  (Mich.,  1897), 
a  judgment  creditor  of  the  corpora- 
tion that  had  sold  all  its  assets  to 
another  corporation  iu  payment  of  a 
debt  garnished  the  latter  for  his  debt. 
Where  a  corporation  is  formed  to 
take  over  the  business  of  a  loaning 
agent,  and  does  so,  and  carries  on  the 
business  for  five  years  without  any 
new  agreement,  it  is  bound  by  the 
terms  of  the  agreement  between  the 
agent  and  liis  priacipal.    North  Am. 
etc.  T.  Co.  V.  Colonial,  etc.  Co.,  83  Fed. 
Rep.  796  (1897).    A  corporation  may 
give  a  mortgage  to  raise  an  attach- 
ment which  was  levied  on  land  prior 
to  its  purchase  by  the  corporation. 
Leonard,  etc.  Co.  v.  Bank  of  Amer- 
ica, 86  Fed.  Rep.  502  (1898). 

1  Grenell  v.  Detroit,  etc.  Co.,  70  N. 
W.  Rep.  413  (Mich.,  1897).    In  Massa- 

1353 


chusetts  the  remedy  of  a  creditor  of 
a  corporation  which  has  sold  its  as- 
sets to  another  corporation  for  stock 
is  at  law  and  not  in  equity.  The  new 
corporation  is  not  Uable  on  the  debt. 
Ewing  V.  Composite  B.  S.  Co.,  47  N. 
E.  Rep.  241  (Mass.,  1897). 

2  First  Nat.  Bank  v  Chattanooga, 
etc.  Co.,  37  S.  W.  Rep.  8  (Tenn.,  1896). 
Where  an  insolvent  corporation 
causes  land  owned  by  it  to  be  con- 
veyed to  a  new  corporation  formed 
by  its  directors,  and  in  which  its  di- 
rectors subscribed  for  stock,  and  both 
corporations  pass  into  the  hands  of 
receivers,  the  subscriptions  for  stock 
in  the  new  corporation  may  be  col- 
lected for  the  benefit  of  creditors  of 
the  old  corporation.  Butler  v.  Cock- 
riU,  73  Fed.  Rep.  945  (1896).  A  corpo- 
ration may  be  liable  for  the  debts  of 
another  corporation  whose  property 
it  takes,  to  the  extent  that  such  proi> 
erty  is  impressed  with  a  trust.  In 
this  case  all  the  property  of  an  in- 
solvent company  was  leased  to  an- 
other company.  Chicago,  etc.  R'y  v. 
Third  Nat.  Bank,  134  U.  S.  276  (1890). 
Where  railroad  property  purchased 
at  foreclosure  sale  was  transferred 
by  th.e  purchaser  to  a  corporation  for 
the  bonds  and  stock  of  the  latter,  the 
New  York  court  of  appeals  held  that 
such  corporation  "  paid  no  value,  and 
held  the  property  subject  to  any 
equitable  hen  to  which  it  was  sub- 
ject in  the  hands  of  its  grantors." 
Vilas  V.  Page,  106  N.  Y.  439, 465  (1887). 
In  some  cases  the  creditors  of  the 


§  CT3.] 


ULTRA   VIRES    ACTS    AND    CONTRACTS. 


[cn.  XL. 


sold  under  an  execution,  is  purchased  by  a  person  interested  in 
the  corporation,  and  tlien  transferred  to  a  new  corporation 
having  the  same  stockholders  as  the  old  one,  is  void  as  against 
creditors  of  the  first  corporation.  They  may  hold  the  new  cor- 
poration liable  to  the  extent  of  the  value  of  the  property  so 
conveyed.'  The  subject  of  "  dummy  "  corporations  is  consid- 
ered elsewhere.'* 


old  company  may  follow  its  property 
into  the  hands  of  a  new  company  to 
wliich  the  property  is  sold  by  an  or- 
dinary sale.  ^Marshall  v.  Western, 
etc.  li.  R.,  92  N.  C.  322  (1883);  West- 
ern N.  C.  R.  R  V.  Rollins,  82  N.  C.  523 
(1880);  Young  v.  Rollins,  85  N.  C.  485 
(1881),  involving  a  receiver.  A  cred- 
itor Jiolding  an  unpaid  promissory 
note  cannot  by  bill  in  equity  bring 
in  the  directors  to  hold  them  liable 
for  false  representations,  and  also 
claim  that  the  company  was  not 
duly  incorporated,  and  also  bring  in 
a  subsequent  corporation  that  took 
all  the  assets  of  the  first,  and  also 
bring  in  those  persons  who  finally 
obtained  such  assets, —  all  in  one  bill 
brought  to  collect  the  debt  Jeffer- 
son Nat.  Bank  v.  Texas  Inv.  Co.,  74 
Tex.  421  (1889).  Where  a  company 
leases  all  its  property  to  another,  the 
stockholders  in  botii  companies  being 
the  same,  a  mechanic's  lien  good 
against  the  latter  is  good  also  against 
the  former.  Hatcher  v.  United  Leas- 
ing Co.,  75  Fed.  Rep.  368  (1896).  A 
new  corporation  taking  the  assets  of 
an  old  corporation  is  liable  to  cred- 
itors of  the  latter  to  the  extent  of  the 
property  so  taken.  Brum  v.  Mer- 
chants' Mut  Ins.  Co.,  16  Fed.  Rep.  140 
(1883);  Hibernia  Ins.  Co.  v.  New  Or- 
leans Transp.  Co.,  13  Feci  Rep.  516 
(1882);  Hibernia  Ins.  Co.  v.  St  Louis, 
etc.  Co.,  10  Fed.  Rep.  596  (1882).  For 
a  case  where  the  stockholders  of  the 
new  corporation  gave  a  bond  to  pay 
the  debts  of  the  old  one,  see  Planters' 
Ins.  Co.  V.  Wicks,  4  S.  W.  Rep.  172 
(Tenn.,  1887). 

1  Hancock  v.  Holbrook,  40  La.  Ann. 


53  (1888).  See  also  Railroad  v.  How- 
ard, 7  Wall.  392  (18G8).  Where  the 
officers  and  stockholders  of  one  cor- 
jX)ration  form  anotlier,  and  convey 
all  the  property  of  the  former  to  it 
in  fraud  of  creditors,  tlie  latter  cor- 
poration will  be  regarded  as  a  con- 
tinuation of  tlie  former,  and  a  court 
of  equity  will  hold  the  assets  of  the 
latter  liable  for  a  debt  of  the  former, 
tliough  there  has  been  no  recovery 
of  judgment  for  the  debt  Blanc  v. 
Paymaster  Min.  Co.,  95  Cal.  524  (1892). 
A  sale  of  one  railroad  to  another 
may  bo  in  fraud  of  creditors  of  the 
former,  and  even  a  subsequent  fore- 
closure may  be  in  pursuance  of  the 
same  schema  A  suit  against  it  may 
be  at  law  and  the  questions  submit- 
ted to  a  jury.  Houston,  etc.  R'y  v. 
Shirley,  24  S.  W.  Rep.  809  (Tex.,  1894). 
In  Angle  v.  Chicago,  etc  R'y,  151 
U.  S.  1  (1894),  a  contractor  was  har- 
assed and  prevented  from  complet- 
ing his  contract  by  the  company, 
which  had  passed  under  the  control 
of  another  company  that  was  seek- 
ing to  get  a  land  grant  that  had 
been  given  conditionally  to  the  for- 
mer comiKiny.  The  contractor  wa.s 
ruined,  the  road  not  completed,  and 
the  second  company  got  the  land 
grant  by  a  subsequent  legislative  act. 
The  contractor  got  judgment  against 
the  first  company,  and  then  filed  a 
bill  against  the  second  comi  any  to 
reach  the  land,  charging  conspiracy, 
bribery,  and  fraud.  The  court,  over- 
ruling the  decision  below,  held  that 
a  demun-er  to  the  bill  was  not  good- 
See  also  §g  675,  890,  i7ifrcu 
2  See  §§  663,  664,  yupro. 


1354 


CH.  XL.] 


TJLTKA   VIRES    ACTS    AND    CONTEACTS. 


[§  674. 


Sometimes  the  statutes  of  tlie  state  make  tlie  purcliasing  cor- 
poration liable,  and  in  cases  of  consolidation  such  a  statute  is 
vital  to  the  protection  of  creditors  of  the  consolidating  corpo- 
rations.^ 

§  GT-i.  Rights  and  liaMlities  of  mortgagees  of  a  corporation 
that  ]}urcliases  pro2)erty  and  issues  stoclx,  in  payment  therefor. — 
"Where  a  corporation  transfers  all  its  property  to  another  cor- 
poration, and  the  latter  company  immediately  gives  a  mortgage 
on  all  the  property,  a  judgment  creditor  of  the  former  company 
may  cause  the  sale  and  the  mortgage  to  be  set  aside  as  a  fraud 
upon  his  rights,  and  the  property  may  be  subjected  to  the  pay- 
ment of  his  debt.^ 


iSee  cases  in  §  897,  iyifra;  also 
relative  to  consolidation,  ludianola 
R  R  V.  Fryer,  5G  Tex.  609  (1882); 
Louisville,  etc.  R'y  v.  Boney,  117  Ind. 
501  (1888);  Indianapolis,  etc.  R.  R  v. 
Jones,  29  Ind.  405  (1868);  Columbus, 
etc,  R'y  V.  Powell,  40  Ind.  37  (1872); 
Montgomery,  etc.  R  R  v.  Boring,  51 
Ga.  582  (1874);  Thompson  v.  Abbott. 
61  Mo.  176  (1875),  where  the  property 
of  the  old  was  given  by  the  legisla- 
ture to  the  new  corporation  —  a  mu- 
nicipal case.  See  also  Rome,  etc. 
R  R  V.  Ontario,  etc.  R  R,  16  Hun, 
445  (1879).  Where  the  consolidated 
company  is  by  statute  liable  for  the 
debts  of  the  old  company,  a  creditor 
of  one  of  the  latter  who  has  the  right 
to  demand  stock  in  exchange  may 
demand  the  same  of  the  consolidated 
company  and  hold  it  liable  in  dam- 
ages if  it  refuses.  John  Hancock, 
etc.  Co.  V.  Worcester,  etc.  R.  R.,  149 
Mass.  214  (1889).  A  creditor  of  an  old 
corT'oration  may  follow  its  property 
into  the  hands  of  a  consolidated  com- 
pany to  which  it  was  transferred, 
stock  being  therefor  issued  to  the  old 
stockholders.  Martin  v.  Zellerbach, 
38  CaL  300  (1869). 

2A  receiver  will  be  appointed.  Cole 
V.  Millerton  Iron  Co.,  133  N.  Y.  164 
(1892),  A  corporate  creditor  may  at- 
tack a  transfer  of  all  the  corporate 
property  to  another  corporation,  even 


though  the  latter  agrees  to  pay  the 
debts  of  the  former.  A  trustee  of  a 
mortgage  given  by  the  vendee  com- 
pany on  the  property  is  not  bona  fide 
when  the  officers  of  the  two  compa- 
nies are  the  same  and  the  trustee 
knew  tliereof.  The  bondholders  are 
chargeable  with  notice  of  facts 
known  to  the  tnistee.  Cole  v.  Mil- 
lerton Iron  Co.,  59  Hun,  217  (1891). 
Bondholders  who  took  with  notice 
that  the  property  was  received  by 
the  corporation  from  another  corpo- 
ration in  payment  for  stock,  and  that 
the  latter  corporation  was  in  debt, 
cannot  hold  as  against  such  creditors. 
Blair  v.  St.  Louis,  etc.  R  R.,  22  Fed. 
Rep.  36  (1884).  Where  a  corporation 
conveys  all  its  property  to  another 
corporation  in  payment  for  its  stock, 
the  latter  corporation  agreeing  to 
pay  all  the  debts  of  the  former,  a 
mortgagee  of  the  latter  company 
takes  precedence  over  the  judgment 
of  a  creditor  of  the  former  company, 
such  judgment  being  subsequent  to 
the  mortgage.  Blair  v.  St.  Louis,  etc. 
R  r;  25  Fed.  Rep.  684  (1885).  But 
contra,  if  the  mortgagee  took  with 
actual  knowledge.  Blair  v.  St.  Louis, 
etc.  R.  R,  24  Fed.  Rep.  148  (1885).  A 
creditor  of  a  corporation  owning  an 
uncompleted  railroad  cannot  claim 
a  lien  thereon  prior  to  i:hat  of  the 
mortgage  of  a  subsequent  corporar 


1355 


§  675.]  IILTKA   VIRES    ACTS    AND    CONTRACTS.  [CH.  XL. 

"WTiere  a  corporation  issues  stock  for  property  it  is  not  a  lona 
fide  purchaser  of  that  property.^  But  a  claim  against  one  com- 
pany, which  is  assumed  by  another  company  upon  the  latter 
company  buying  out  the  former,  is  not  to  be  paid  out  of  the 
assets  of  the  latter  company  in  preference  to  a  mortgage  upon 
all  of  its  property .2 

Where  property  is  sold  to  the  corporation  for  shares  of  stock, 
and  the  corporation  issues  a  mortgage  on  the  property  and  re- 
fuses to  deliver  the  stock,  the  claim  of  the  vendor  for  damages 
does  not  have  priority  over  the  mortgage.' 

"Where  a  stockholder  of  a  vendor  corporation  sets  aside  the 
sale  of  the  railroad  as  ultra  vires,  a  mortgage  given  by  the 
vendee  corporation  is  void.  The  bondholders  are,  however, 
entitled  to  enforce  payment  from  any  other  property  owned 
by  the  vendee.* 

A  mortgage  by  a  consolidated  railroad  may  not  take  prece 
dence  over  the  unsecured  debts  of  the  constituent  companies,  and 
by  statute  the  consolidated  company  may  be  liable  for  those 
debts,  unless  the  articles  of  consolidation  provide  otherwise.* 

§  675.  Sale  of  jxirtnersMp  or  individual  lyroiyerty  to  a  cor 
jporation  for  stock  of  the  latter. —  The  rules  laid  down  in  the 
preceding  sections  are  applicable  in  most  respects  to  a  sale  by 
a  partnership  of  all  its  property  to  a  corporation  in  exchange 

tion  which  purchased  the  road,  when  <  Knoxville  v.  KnoxviEe,  etc  R.  R., 

there  never  was  any  record  evidence  22  Fed.  Rep.  758  (1884). 

of  any  lien  and  the  subsequent  cor-  5  Compton  v.  Jesup,  167  U.  S.  1  (1897). 

poration  had  no  actual  notice  of  the  Cf.  Tysen  v.  Wabash  R'y,  15  Fed.  Rep. 

claim.    Blair  v.  St.  Louis,  etc.  R.  R,  763  (1883) ;  but  see  Wabash,  etc.  R'y 

27  Fed.  Rep.  176  (1886).    A  sale  of  one  v.  Ham,  114  U.  S.  587  (1885).    The 

railroad  to  another  may  be  in  fraud  case  of  Compton  v.  Wabash,  eta  R'y, 

of  creditors  of  the  former,  and  even  45  Ohio  St.  592  (1888),  passed  upon 

a  subsequent  foreclosure  may  be  in  the  same  bonds,  and  it  was  held  that 

pursuance  of  the  same  scheme.    A  these  bonds  constituted  a  lien  on  the 

suit  against  it  may  be  at  law  and  the  property  of  the  old  company,  and 

questions  submitted  to  a  jury.    Hous-  were  prior  in  right  to  the  mortgage 

ton,  etc.  R'y  v.  Shirley,  24  S.  W.  Rep.  bonds  of  the  consolidated  company; 

809  (Tex.,   1894).     Cf.  §  672,  supra,  refusing  to  foUow  Wabash,  etc.  R'y 

and  §  675,  infra.  u  Ham,  114  U.  S.  587  (1885).    General 

1  Rogers  u  New  York,  etc.  Land  Co.,  creditors  of  a  road  that  is  consoli- 
134  N.  Y.  197  (1892).  Cf  §727,  infra,  dated  with  another  have  no  equita- 
on  notice,  and  §  675,  infra.  ble  lien  on  the  bonds  issued  by  the 

2  Fogg  V.  Blair,  133  U.  S.  534  (1890).  consolidated   company.     Hervey   v. 

3  Farmers',  etc.  Co.  v.  Toledo,  etc.  Illinois  Mid.  R'y,  28  Fed.  Rep.  169 
R.  R.,  54  Fed.  Rep.  759  (1893).  (1884). 

1356 


CH.  XL.] 


TJLTKA   yiKES    ACTS    AIS^D    CONTKACTS. 


[§  075. 


for  stock.  Sucli  sales  often  are  made  in  order  to  mero:e  a  solv- 
ent  copartnership  into  a  corporation.  They  are  also  made 
sometimes  by  an  embarrassed  or  insolvent  firm.  In  such  a 
case  the  creditors  of  the  :^rm  may  object.  They  may  levy  an 
attachment  or  execution  on  the  property,'  or  reach  the  stock,'^ 
or  file  a  bill  in  equity  to  set  the  sale  aside/  or  in  certain  cases 

creditors  of  the  partnership  would, 
secure  more  by  having  the  transac- 
tion stand  than  set  aside.  Where  one 
member  of  a  firm  buys  out  the  other 
member  and  gives  his  note,  and  then 
forms  a  corporation  and  turns  in  the 
property  for  stock,  and  the  corpora- 
tion becomes  insolvent,  the  property 
cannot  be  turned  over  to  the  retir- 
ing partner  in  payment  of  such  note. 
HaU  V.  Goodnight,  37  S.  W.  Rep.  916 
(Mo.,  1896).  Where  an  insolvent  person 
transfers  his  property  to  a  corpora- 
tion for  aU  of  the  stock  of  the  corpo- 
ration, and  tlie  corporation  assumes 
a  certain  debt  of  such  person,  and 
subsequently  conveys  its  property  to 
such  creditor,  the  whole  plan  being 
in  order  to  make  payment  that  way, 
other  creditors  of  the  corporation 
may  object.  Folsom  v.  Detrick,  etc. 
Co.,  85  Md.  53  (1897).  Where  an  in- 
solvent individual  transfers  aU  his 
property  to  a  corporation  for  stock, 
and  his  principal  creditor  acquiesces 
and  loans  money  to  the  corporation, 
and  then  takes  the  notes  of  the  cor- 
poration for  the  old  debt  which  such 
creditor  had  against  the  insolvent 
individual,  the  transaction  is  illegal 
as  against  other  creditors  of  the  cor- 
poration. Craig  V.  California,  etc. 
Co.,  46  Pac.  Eep.  421  (Oreg.,  1896).  A 
transfer  of  a  business  by  an  insolv- 
ent person  to  a  corporation  for  stock 
is  void  under  the  statute  of  Eliza- 
beth as  defeating  and  delaying  cred- 
itors. Re  Carey,  SoL  Jour.,  "June  8, 
1895,  p.  541.  A  receiver  of  the  cor- 
poration was  appointed  in  Bonner  v. 
Villaume,  etc.  Co.,  N.  Y.  L.  J.,  Feb. 
14,  1895  (Com.  PL).  A  conveyance 
of  real  estate  to  a  corporation  for 
57 


1  Booth  V.  Bunce,  33  N.  Y.  139  (1865) ; 
San  Francisco,  etc.  R  R.  v.  Bee,  48 
Cal.  398  (1874).  Creditors  of  an  in- 
solvent individual  who  transfers  his 
property  to  a  corporation  for  stock 
may  attach  the  property  on  the 
ground  that  the  act  hindered  and 
delayed  creditors.  Dolan  v.  Wilker- 
son,  48  Pac.  Rep.  23  (Kan.,  1897). 

2  Where  a  firm  turns  all  its  prop- 
erty into  a  corporation  for  stock,  a 
firm  creditor  cannot  reach  the  stock 
of  one  member  of  the  firm  in  pref- 
erence to  other  creditors  of  that  mem- 
ber. Singer,  etc  Co.  v.  Carpenter, 
125  la  117  (1888).  If  the  partnership 
is  insolvent,  then  the  stock  issued  is 
"  watered,"  and  the  subscribers  are 
liable  as  though  no  payment  was  at- 
tempted. Sayler  v.  Simpson,  45  Ohio 
St.  141  (1888). 

3  The  creditors  of  a  person  may,  by 
bill  in  equity,  set  aside  a  transfer  of 
aU  his  property  to  a  corporation  in 
exchange  for  shares  of  stock.  Strieby 
V.  Clinton,  eta  Co.,  29  AtL  Rep.  589 
(N.  J.,  1894).  Judgment  creditors  of 
an  individual  may  file  a  bill  to  set 
aside  a  transfer  of  his  property  to  a 
corporation  for  stock,  the  stock  hav- 
ing been  distributed  among  his  rela- 
tives. Metcalf  V.  Arnold,  110  Ala. 
180  (1896).  A  judgment  creditor  of 
a  partnership  may  set  aside  a  trans- 
fer of  its  property  to  a  corporation 
in  exchange  for  stock  of  that  corpo- 
ration. Buell  V.  Rope,  6  App.  Div. 
N.  Y.  113  (1896).  In  Tradesmen's  Xat. 
Bank  v.  Young,  15  N.  Y.  App.  Div. 
109  (1897),  the  court  refused  to  set 
aside  a  transfer  of  all  the  assets  of 
an  insolvent  partnership  to  a  corpo- 
ration for  stocli,  inasmuch  as  tlie 

Vc 


§  675.] 


TTLTKA   VIRES    ACTS    AND    CONTKACTS. 


[CH.   XL. 


hold  the  purchasing  company  liable  for  the  debt.^  But  a  cor- 
poration that  has  taken  over  the  property  of  a  partnership  is 
not  liable  for  the  debts  of  the  latter  unless  it  is  shown  that  the 
sale  was  fraudulent  as  to  creditors  ^of  the  latter,  or  that  there 


all  its  shares  of  stock  is  fraudulent 
as  against  a  mechanic's  lien.  Gross 
V.  Daly,  5  Daly,  540  (1875).  Credit- 
ors of  an  insolvent  individual  who 
has  transferred  his  property  to  a  cor- 
poration may  file  a  bill  to  set  aside 
the  sale  and  to  have  the  property 
sold.  Cass  V.  Sutherland,  74  N.  W. 
Rep.  337  (Wis.,  1898).  A  creditor  of 
an  insolvent  individual  may  cause 
to  be  set  aside  a  transfer  of  all  his 
property  to  a  corporation  formed  for 
that  purpose  in  exchange  for  stock. 
Rielle  v.  Reid,  28  Ont.  Rep.  497  (1897). 
In  Ex  parte  Kenmore,  etc.  Co.,  27 
S.  E.  Rep.  C83  (S.  C,  1897),  the  court 
allowed  the  corporate  creditors  to 
participate  with  the  creditors  of  the 
insolvent  debtor  in  the  assets  that 
had  been  turned  over  to  the  corpora- 
tion for  stock.  A  creditor  of  an  in- 
solvent ijerson  may  treat  as  void  a 
conveyance  of  all  his  property  to  a 
corporation  in  exchange  for  its  shares 
of  stoclc  He  may  file  a  bill  to  set 
aside  the  conveyance.  Terhune  v. 
Skinner,  45  N.  J.  Eq.  344  (1889).  In 
an  action  by  a  judgment  creditor  of 
a  partnership  to  set  aside  a  convey- 
ance of  all  its  property  to  a  corpora- 
tion in  consideration  of  its  stock,  the 
corporation,  its  mortgagee,  the  co- 
partners, and  creditors  assenting  to 
the  transfer  are  all  necessary  parties. 
National  Broadway  Bank  v.  Yueng- 
ling,  58  Hun,  474  (1890).  A  judgment 
creditor  of  a  failing  firm  may  set 
aside  an  assignment  of  their  prop- 
erty to  a  corporation  formed  to  take 
over  the  property,  even  though  the 
shares  of  stock  have  been  sold.  Gard- 
ner V.  Keogh  Mfg.  Co.,  63  Hun,  519 
(1892).  Creditors  of  a  firm  that  is 
transformed  into  a  corporation  may 
piirsue  the  fii-m's  assets  so  transferred. 


Williams  v.  Colby,  6  N.  Y.  Supp.  459 
(1889).  Where  partnership  assets  are 
transferred  to  a  corporation  in  pay- 
ment for  its  stock,  and  the  cori)ora- 
tion  pays  part  of  the  debts  of  the 
partnership  and  becomes  insolvent, 
a  member  of  the  partnership  who  in- 
dividually gave  security  for  some  of 
the  partnership  debts  cannot  claim 
a  lien  on  the  coi-porate  assets  in  prior- 
ity to  corporate  creditors.  lie  Warner, 
83  Mich.  624  (1890).  It  is  a  dispo.sal 
of  property  for  the  purpose  of  hin- 
dering and  delaying  creditors,  within 
the  meaning  of  the  second  section 
of  the  statute  of  frauds,  for  an  in- 
solvent firm  to  mortgage  all  their 
property  to  a  trustee  and  take  the 
bonds  secured  by  that  mortgage, 
even  though  they  take  the  bonds  to 
turn  over  to  their  creditors.  But  the 
act  is  voidable  only  as  to  those  cred- 
itors who  object  and  contest  the 
matter.  National  Bank  v.  Sprague, 
21  N.  J.  Eq.  530  (1870).  See  also  g§  672, 
674,  supra. 

1  Under  the  facts  in  Breman,  etc. 
Bank  v.  Branch,  etc.  Co.,  104  Mo.  425 
(1891),  it  was  held  that  a  corporation 
organized  by  a  biisiness  man,  and  to 
which  he  had  conveyed  all  his  prop- 
erty, was  liable  on  his  note,  although 
it  had  not  assumed  any  of  his  debts. 
See  also  Fort  Worth  Pub.  Co.  v.  Hit- 
son,  80  Tex.  216  (1891).  Where  a  pai-t- 
nership  turns  itself  into  a  corporation, 
the  latter  is  not  a  bona  fide  holder  of 
notes  owned  by  the  former.  McEl- 
wee  Mfg.  Co.  v.  Trowbridge,  62  Hun, 
471  (1891).  A  corporation  taking  all 
the  assets  of  a  i^artnership  tmder  an 
agreement  with  tlie  partners  tliat  it 
would  pay  the  liabilities  to  the  ex- 
tent of  the  assets  cannot  be  made 
liable  on  a  debt  due  one  of  the  part- 


1358 


CH.  XL.] 


TLTEA   VIEES    ACTS   AND    CONTEACTS. 


]§  675. 


was  an  express  contract  assuming  sucli  liability,  or  that  the 
transaction  was  a  mere  continuation  of  the  partnership.'  A 
corporation  taking  over  the  business  of  a  partnership  may  as- 
sume any  contract  of  the  latter,  but  the  assumption  of  one  con- 
tract does  not  prove  the  assumption  of  other  contracts.  The 
assumption  of  such  contract  may  arise  by  the  corporation  pro- 
ceeding to  live  up  to  it  and  carry  it  out.^  Even  though  an 
insolvent  partnership  is  turned  into  a  corporation,  and  bonds 
of  the  corporation  are  given  to  a  creditor  of  the  partnership 
for  his  debt,  yet  such  bonds  may  be  legal.^ 

A  solvent  copartnership  may,  by  consent  of  the  whole  firm, 
merge  itself  into  a  corporation,  proper  provision  being  made 
for  the  payment  of  creditors.* 


ners  irntil  it  is  ascertained  that  the 
assets  exceed  the  liabilities  and  until 
it' has  agreed  to  pay  the  liabilities. 
Adams  v.  Empire,  etc.  Co.,  4  N.  Y. 
Supp.  738  (1889).  As  regards  the 
power  of  the  corporation  to  assume 
the  obligations  of  the  copartnership, 
see  McLellan  v.  Detroit  File  Works, 
56  Mich.  579  (1883).  A  corporation 
may  be  liable  for  the  debts  of  the 
partnership  where  it  has  placed  such 
liabilities  on  its  books  as  a  part  of 
the  corporate  liabilities,  and  upon 
becoming  insolvent  the  corporation 
may  give  a  preference  to  such  liabili- 
ties. Sliuf eldt  V.  Smith,  40  S.  W.  Rep. 
887  (INIo.,  1897).    See  also  §  673,  supra. 

1  Austin  V.  Tecumseh  Nat.  Bank,  49 
Neb.  413  (1896).  Cf.  Reed  Bros.  Co. 
V.  First  Nat.  Bank,  46  Neb.  168  (1895). 
See  §  890,  infra. 

2  Hall  V.  Herter,  83  Hun,  19  (1894). 
A  corporation  succeeding  a  firm  may, 
by  carrying  out  a  contract  of  the 
firm,  assume  the  obligation  thereof. 
HaU  V.  Herter,  90  Hun,  280  (1895). 
Where  a  firm  is  turned  into  a  corpo- 
ration, the  latter  may  assume  a  con- 
tract of  the  former  fcr  the  piirchase 
of  lumber,  by  adopting  it  through  its 
manager.  Pratt  v.  Oshkosh  JIatch 
Co.,  89  Wis.  406  (1895).  Where  the 
corporation  assumes  the  debts  of  the 
partnership  wliich  it  buys  out,  its  lia- 
bility is  not  released  by  the  fact  that 


the  partnership  subsequently  gives 
notes  for  such  debts.  Johnston  v. 
Gumbel,  19  S.  Rep.  100  (Miss.,  1895). 

3Seligman  v.  Prince,  [1895]  2  Ch. 
617.  Where  a  corporation  is  in  debt, 
and  in  order  to  enable  it  to  borrow 
money  the  chief  stockholder,  who  is 
also  in  debt,  transfers  valuable  prop- 
erty to  the  corporation,  and  then  the 
corporation  gives  a  mortgage  uix)n 
all  its  property,  including  the  proj)- 
erty  so  transferred,  a  bona  fide  holder 
of  the  bonds  is  protected  as  against  a 
creditor  of  the  stockholder.  Bang  v. 
HoUand  T.  Co.,  8  N.  Y.  App.  Div.  113 
(1896).     Cf.  §§  672,  674,  siipra. 

4  Partners  who  merge  their  part- 
nership into  a  corporation  and  take 
stock  in  payment  thereby  waive  liens 
which  existed  in  the  partnership. 
Francklyn  v.  Sprague,  121  U.  S.  215 
(1887).  A  solvent  mercantile  fiiin 
may  transfer  all  their  assets  to  a  new 
corporation  in  payment  for  stock,  and 
then  pledge  the  stock  to  certain  of 
their  creditors.  Coaldale  Coal  Co.  v. 
State  Bank,  143  Pa.  St.  288  (1891). 
Where  a  person  sells  goods  to.a  cor- 
poration and  agrees  to  take  payment 
in  stock,  he  must  take  the  stock  at 
par,  even  though  its  actual  and 
market  value  is  much  less  than  par. 
Tilkey  v.  Augusta,  etc.  R.  R.,  83  Ga. 
757  (1889).  Where  two  members  of  a 
firm  give  notice  of  a  dissolution  of 


1359 


§§  676-678.]       IJLTKA   VIRES   ACTS    AND    CONTEACTS. 


[cn. 


XL. 


"Where  a  person  wlio  holds  property  which  belongs  to  an- 
other person  sells  the  property  for  stock  in  a  corporation,  the 
latter  person  may  claim  the  stock.^ 

§§  676,  677.  Consolidations,  leases,  and  sales  of  railroads. — 
This  subject  is  considered  elsewhere.^ 

§  678.  A  corimration  cannot  he  a  j^artner  in  a  partnersliip. — 
This  is  an  old  principle  of  law,  but  it  is  subject  to  exceptions. 
It  is  held  to  be  an  ultra  vires  act,  because  the  stockholders  are 
entitled  to  have  their  directors  conduct  the  business  without 
sharing  that  power  with  a  partner.'  But  if  a  partnership  has 
been  formed  with  an  individual,  the  tatter  cannot  throw  the 
business  into  statutory  insolvent  proceedings;*  and  the  corpo- 
ration cannot  avoid  the  payment  of  a  liability  which  the  part- 
nership has  incurred ;  ^  nor  can  an  obligation  to  the  corporation 


the  firm,  and  then  transfer  all  the 
assets  to  a  newly-formed  corporation, 
the  court  will  place  all  the  property 
in  the  hands  of  the  third  member  of 
the  firm  for  the  pvirpose  of  winding 
it  up.  Macdonald  v.  Trojan,  etc.  Co., 
lo'  N.  Y.  Supp.  91  (1890).  AVhere  by 
agreement  a  paiinership  is  merged 
into  a  corporation,  and  then  one  part- 
ner is  refused  his  part  of  the  stock, 
ho  may  sue  for  an  accounting  and 
payment  in  cash.  Crosby  Lumber 
Co.  V.  Smith,  51  Fed.  Rep.  63  (1893). 
Under  a  partnership  agreement  pro- 
viding for  incorporation,  part  of  the 
partners  may  incorporate,  transfer 
the  property  to  the  corporation,  and 
compel  the  other  partners  to  pay  in 
to  the  corporation  the  amounts  of 
money  contemplated  by  the  partner- 
ship agreement  before  the  stock  is 
issued  to  them.  Hennessy  v.  Griggs, 
1 N.  D.  52  (1890).  A  corporation  formed 
to  purchase  the  assets  of  a  firm  may 
sue  on  claims  of  such  firm  'whiclx 
have  been  assigned  to  it,  and  the  firm 
are  not  proper  parties  to  the  suit. 
Lottman,  etc.  Co.  v.  Houston,  etc.  Co., 
38  S.  W.  Rep.  357  (Tex.,  1896).  Al- 
though two  partners  desire  to  incor- 
porate, and  each  to  have  the  same 
interest,  and  a  third  party  to  have  a 
smaller  interest,  thereby  holding  the 


1360 


balance  of  power,  and  such  arrange- 
ment is  carried  out,  and  the  third 
party  is  really  a  dummy  of  one  of  the 
partners,  and  thereby  gives  the  con- 
trol of  the  corporation  to  that  part- 
ner, yet  the  other  partner  has  no 
legal  cause  of  complaint,  notwith- 
standing the  general  vmderstanding 
as  to  the  division  of  contrpl.  Baum- 
garten  v.  Nichols,  69  Hun,  216  (1893). 

1  Chapman  v.  Porter,  69  N.  Y.  276 
(1877) ;  Re  Gilbert,  104  N.  Y.  212  (1887). 

2  See  §§  892-896,  t?i/ra. 

3  "  It  is  a  violation  of  law  for  corpo- 
rations to  enter  into  a  partnership," 
and  their  charters  may  be  forfeited 
for  the  offense.  People  v.  North  River, 
etc.  Co.,  121  N.  Y.  582,  623  (1890).  A 
contract  between  two  companies,  by 
which  one  is  to  name  four  of  the  six 
directors  of  the  other  (and  is  also  to 
sell  the  stock  of  the  latter,  carry  out 
its  contracts,  and  pay  dividends  on 
its  stock),  is  illegal  James  v.  Eve, 
L.  R.  6  H.  L.  335  (1873). 

*Whittenton  Mills  v.  Upton,  76 
Mass.  582  (1858). 

^Catskill  Bank  v.  Gray,  14  Barb. 
471  (1852).  Contra,  Gunn  v.  Central 
R.  R.  etc.  Co.,  74  Ga.  509  (1885),  where 
a  railroad  was  held  not  liable  for  in- 
juries to  a  passenger  sustained  while 
traveling  upon  a  boat  operated  by 


CH.  XL.] 


ULTEA   YIKES    ACTS    AXD    CONTEACTS. 


[§  678. 


be  r  ipudiated  on  that  ground.^  And  if  tlie  corporation  has  but 
one  stockholder,  he  tuslj  make  it  a  partner  in  a  partnership.^ 
Sometimes  the  relationship  is  held  to  be  that  of  principal  and 
agent  instead  of  partnership.  Where  a  corporation  has  been 
a  partner  in  a  partnership,  it  must  account  to  the  other  part- 
ners, even  though  such  partnership  was  illegal.*  A  corporation 
that  has  entered  into  a  partnership  for  a  certain  period  of  time 
cannot  recover  damages  for  the  failure  of  the  other  party  to 
continue  the  partnership  during  that  time.*  There  have  been 
many  dicta  to  the  effect  that  a  corporation  cannot  be  a  part- 
ner;* and  the  question  has  arisen  indirectly  in  many  cases  in- 
volving railroad  traffic  and  pooling  contracts,''  and  in  still  other 
cases  where  illegal  combinations  in  restraint  of  trade  have  been 
made ;  ^  but  there  are  few  authorities  bearing  directly  on  the 
subject.' 


the  road  and  an  individual  as  part- 
ners. But  see  Block  v.  Fitcliburg 
R  R.,  139  Mass.  308  (1885).  A  corpo- 
ration and  a  person  to  whom  it  has 
agreed  to  sell  its  property  may  be 
liable  as  partners  to  creditors  of  the 
former.  Cleveland  Paper  Co.  v.  Cour- 
ier Co.,  67  Mich.  153  (1887). 

1  French  v.  Donohue,  29  Minn.  Ill 
(1882).  A  corporation  cannot  avoid 
liability  for  the  debt  of  a  firm,  in 
which  firm  it  is  a  member,  on  the 
ground  that  it  had  no  power  to  be- 
come a  partner.  Cameron  v.  First, 
eta  Bank,  34  S.  W.  Eep.  178  (Tex., 
1896).  A  corporation  may  enforce 
an  accounting  in  a  partnership  of 
which  it  is  a  member.  Standard  Oil 
Co.  V.  Scofield,  16  Abb.  N.  Cas.  372 
(1885).  Where  in  an  ultra  vires  con- 
tract two  railroads  are  operated  as 
one,  and  more  of  the  income  is  used 
to  repair  one  railroad  than  the  other* 
the  latter  may  sue  the  former  for  re- 
imbursement. Nashua,  etc.  R.  R  v 
Boston,  etc.  R  E.,  164  Mass.  222  (1895)! 
Where  a  national  bank  forms  a  part- 
nership to  operate  a  mill,  it  may  re- 
cover moneys  loaned  by  the  bank  to 
the  partnership.  Although  the  man- 
ager of  the  mill  is  vice-president  of 


the  bank,  yet  the  bank  is  not  liable 
for  his  mismanagement.  The  bank 
as  a  partner  is,  however,  chargeable 
with  notice  of  a  rule  of  its  other 
partner,  a  joint-stock  association,  that 
no  money  should  be  borrowed  except 
by  the  board  of  directors  of  the  lat- 
ter. Cameron  v.  First  Nat.  Bank,  4 
Tex.  Civ.  App.  309  (1893). 

2  Allen  V.  Woonsocket  Co.,  11  R  L 
288  (1876). 

3  Marine  Bank  v.  Ogden,  29  ILL  248 
(1862).  In  Holmes  v.  Old  Colony  R 
R.,  71  Mass.  58  (1855),  where  the  cor- 
poration shared  in  the  profits  only, 
no  partnership  was  held  to  exist. 

*  Boyd  V.  American,  etc.  Co.,  37  AtL 
Eep.  937  (Pa.,  1897). 

5  Sabine,  etc.  Co.  v.  Bancroft,  40 
S.  W.  Rep.  837  (Tex.,  1897).  A  mere 
allegation  that  one  company  is  liable 
for  the  debts  of  another  on  the  ground 
that  they  are  partners  is  an  insuffi- 
cient allegation.  White  v.  Pecos,  etc. 
Co.,  45  S.  W.  Rep.  207  (Tex.,  1898). 

6  New  York,  etc.  Canal  Co.  v.  Ful- 
ton Bank,  7  Wend.  412  (1831).  Cf.  1 
Lindley,  Partn.,  p.  86. 

'  See  ch.  LIII,  infra, 

8Ch.  XXIX,  sifpra. 

9  A  stage  company  may  be  a  co- 


86 


1361 


§  679.] 


ULTRA   VIKES   ACTS   AJSTD   CONTEACTS. 


[CH.  XL. 


§  679.  A  coriioration  cannot  he  an  executor  or  an  adminis- 
trator  unless  specialli/  authorised  l)y  statute. —  The  duties  of 
the  oflBce  are  personal  and  incapable  of  being  delegated  to  an 
agent.  Since  a  corporation  acts  only  through  agents,  it  cannot 
assume  the  duties  of  an  executor.*  The  charter  of  the  corpo- 
ration may,  however,  expressly  authorize  it  to  act  as  executor 
or  trustee. 

The  old  rule  that  corporations  could  not  take  property  in 
trust  for  the  use  of  others  is  now  obsolete.'^  A  corporation  may 
be  a  trustee  to  hold  property  in  trust  for  purposes  within  the 
corporate  power.'  Corporations  cannot,  however,  take  property 
in  trust  where  they  could  not  take  the  same  property  absolutely. 

If  a  corporation  be  incompetent  to  act  as  trustee,  the  devise 


owner  of  a  stage  line  with  an  individ-    See  also  Re  Thompson,  33  Barb.  334 


uaL  Calvert  v.  Idaho  Stage  Co..  25 
Oreg.  412  (1894;.  In  State  v.  Port 
Royal,  etc.  R'y,  79  Fed.  Rep.  397 
(1897),  a  lease  of  a  railroad  seems  to 
have  been  owned  by  a  corporation 
and  an  individual  as  partners.  A 
corporation  owning  water- works  out- 
side of  a  city  may  agree  to  furnish 
water  to  one  inside  the  city,  the  gen- 
eral distribution  of  the  water  to  be 
under  the  joint  control  of  two  agents, 
each  corporation  appointing  one,  and 
the  profits  to  be  divided  equally.  San 
Diego  Water  Co.  v.  San  Diego  Flume 
Co.,  108  CaL  549  (1895).  A  corpora- 
tion may  enter  into  a  land  specula- 
tion with  an  individual,  the  profits 
and  losses  to  be  divided  equally,  if  the 
corporation  is  to  have  entire  control 
of  the  business.  Bates  v.  Coronado 
Beach  Co.,  109  Cal.  160  (1895).  Where 
a  railroad  company  is  interested  in 
the  construction  of  a  connecting  line, 
it  is  liable  for  the  services  of  an  at- 
torney employed  by  it  in  connection 
therewith.  St.  Louis,  etc.  R  R.  v. 
Kirkpatrick,  52  Kan.  104  (1893). 

J  Georgetown  College  v.  Browne,  34 
Md.  450  (1871),  where  it  was  also  held 
that  a  corporation  will  not  be  allowed, 
as  in  England,  to  designate  a  person 
to  administer  with  the  will  annexed. 


(1861). 

2Vidal  V.  Girard,  2  How.  127,  187 
(1844),  where  Mr.  Justice  Story  said : 
"  Where  the  corporation  has  a  legal 
capacity  to  take  real  or  personal  es- 
tate, there  it  may  take  and  hold  it 
upon  trust  in  the  same  manner  and 
to  the  same  extent  as  a  private  per- 
son may  do;  "  Chapin  v.  Winchester 
School  Dist.,  35  N.  H.  445  (1857),  lidd- 
ing that  a  corporation  may  be  trustee 
of  a  charity  if  consistent  with  the 
object  of  its  creation.  See  also  §  694, 
infra;  Phillips  Academy  v.  King,  12 
Mass.  546  (1815),  holding  that  a  cor- 
poration aggregate  may  be  a  trustee; 
Perry,  Trusts,  §  42  et  seq.;  Robertson 
V.  BuUions,  11  N.  Y.  243  (1854),  a  re- 
ligious society.  Re  Howe,  1  Paige, 
214  (1828),  holds  that,  whUe  corpora- 
tions cannot  be  trustees  in  matters 
in  which  they  have  no  interest,  yet 
if  property  be  devised  or  granted  to 
a  corporation  upon  trust,  partly  for 
itself  and  partly  for  another,  it  may 
execute  the  trust.  One  mission  so- 
ciety corporation  may  take  property 
in  trust  for  another  mission  society 
corporation.  Sheldon  v.  Chappell,  47 
Hun,  59  (1888). 

3  White  V.  Rice,  70  N.  W.  Rep.  1024 
(Mich.,  1897). 


1362 


OH.  XL.]  ULTRA   YIKES    ACTS    A^H   CONTKACTS.       [§§  680,  681. 

or  grant  will  not  thereby  become  void;  a  court  of  equity  will 
appoint  a  proper  trustee  to  carry  out  and  execute  the  trust.^ 

§  680.  StocmoJder's  right  to  prevent  the  corporation  from 
underialcing  a  neiv  husiness.-lt  is  ultra  vires  of  a  corporation 
to  undertake  to  carry  on  a  business  which  is  not  fairly  withm 
the  scope  of  the  business  described  in  its  charter.    When  such 
an  attempt  is  made  on  the  part  of  the  directors  or  a  majority 
of  the  stockholders,  a  dissenting  stockholder  may  insist  upon 
the  corporate  business  being  confined  to  the  Hmits  of  the  cor- 
porate charter;  and  he  may  enjoin  or  set  aside  any  acts  which 
do  not  conform  to  those  limits.    Thus,  a  corporation  formed  to 
manufacture  iron  cannot  go  into  the  flour  and  mill  business. 
§  681.  Miscellaneous  ultra  vires  acts  —  Enforcement  of  ultra 
vires  contracts.-  It  has  been  held  that  a  stockholder  in  a  hotel 
company  cannot  enjoin  the  managers  from  leasing  a  part  of  the 
property  for  other  purposes,  there  being  sufficient  accommodar 
tion  left  for  the  hotel.'  And  it  has  been  held  that  a  stockholder 
cannot  enjoin  his  corporation  from  paying  money  to  a  rival 
company  to  induce  the  latter  to  discontinue  business.*   But  any 
misapplication  or  waste  of  the  property  of  a  corporation  may 
be  remedied  by  a  member  thereof.'^  It  is  illegal  for  the  directors 
or  a  majority  of  the  stockholders  to  give  away  the  assets  of  the 
corporation  for  the  promotion  of  other  enterprises.'    Neverthe- 

1  Vidal  V.  Girard,  2  How.  137,  187  party  who  in  consideration  thereof 
(1844)-  Chapin  v.  Winchester  School  agrees  to  remove  a  bam,  etc.,  to  an- 
n-cf  \^  N  H.  445  fl857)  other  location.    Sherman,  etc.  Co.  v. 

2  Cherokee  Iron  Co.  u  Jones.  52  Ga.  Russell,  46  Kai.  382  (1891);  Shennan. 
276  (1874).    See  also  §  681,  infra,  etc.  Co.  u  Fletcher.  46  Kan^  524  (891^ 

3  Simpson  V.  Westminster,  etc  Co.,  A  railroad  cannot  be  held  liable  on 
8  H  L.  Cas.  712  (1860).  its  contract  to  pay  for  the  examma- 

4  Leslie  V.  LoriUard,  110  N.  Y.  519  tion  of  mines  of  which  the  railroad 
..J.J.O.  is   the    outlet     George   v.    Nevada 

Tlrmstrong   v.    Church   Soc.   13  Cent.  R.  R,  22  Nev.  228  (1894).    But 

Grant  Ch.  (U.  C.)  552  (1867).  directors  may  compromise  corporate 

6See^64,^i>ra,  and  §§775.909.  claims.    Frankfort  Bank  u  Johnson. 

infra.    Back  pay  cannot  be  voted  to  24  Me.  490  (1844),  and  ch.XLV,  tn/ra 

the  directors.    It  is  an  iUegal  gift  Directors    cannot    legally    pay    out 

See  ^  657,  «.i>ra.  But  an  educational  money  which  is  not  owed      Salem 

institution  ^y  donate  money  to  the  Bank  v.  Gloucester  Bank.  17  Masa  1. 

construction  of  a  railroad.    Louis-  30(1820).     Directors  should  not  use 

ville  etc  R  R.  v.  St  Rose  Literary  corporate  funds  to  sue  for  a  hbel  on 

Soc  '91  Kv  395  (1891).    A  town-site  themselves  as  directors;  but  where 

coriioration  may  give  away  certain  the  ^^^^^^^f  f  ^,7^^:  ^f  ™t'/ 

lots  and  give  a  sum  of  money  to  a  the  payment  it  will  not  be  disturbed. 


1363 


§  681.] 


IJLTKA   VIEES    ACTS    AND    CONTKACTS. 


[CH.  XL. 


less  a  note  given  hj  an  improvement  company  to  adjust  a  con- 
tract by  which  it  had  agreed  to  give  a  right  of  way,  terminals, 
and  a  bonus  to  a  street  railway  may  be  enforced.^  An  improve- 
ment company  having  wide  powers  may  give  a  part  of  its  stock 
to  a  railway  company,  in  order  to  have  the  road  built  to  the 
property  of  the  improvement  company.  A  stockholder  who 
has  voted  therefor  cannot  afterwards  complain.-  A  street  rail- 
road may  donate  money  to  a  baseball  park.'  And  a  land-im- 
provement company  may  agree  to  pay  one-third  of  the  expense 
of  a  bridge  in  the  public  highway.'*  A  bank  has  no  power  to 
make  a  donation  to  a  paper  mill.'  The  stocldiolder  may  enjoin 
any  act  on  the  part  of  the  state  which  is  in  violation  of  the 
charter  which  it  granted  to  the  corporation. '  It  was  to  enjoin 
a  tax  by  the  state  under  such  cii'cumstances  that  the  case  of 
Dodge  V.  Woolsey  ^  arose. 
Although  a  national  bank  buys  bonds  which  it  has  no  power 


Studdert  v.  Grosvenor,  L.  R  33  Ch. 
D.  528  (188G).  The  money  of  a  city 
cannot  be  used  to  buy  a  gold  chain 
for  the  mayor.  Attorney-General  v. 
Batley,  26  L.  T.  Rep.  393  (1872).  Nor 
to  give  extra  pay  to  a  clerk.  Ex 
parte  MeUish,  8  L.  T.  Rep.  47  (1863). 
Nor  can  lodge  funds  be  given  to  out- 
side charitable  purposes.  Polar  Star 
Lodge  V.  Polar  Star  Lodge,  16  La. 
Ann.  53  (1861).  "Where  a  stockhold- 
ers'  meeting  has  recommended  that 
a  week's  extra  pay,  as  a  gratuity  to 
the  workmen  of  a  manufacturing 
corporation,  be  given,  and  the  direct- 
ors give  it,  a  dissenting  stockholder 
cannot  hold  the  directors  liable  there- 
for. Hampson  v.  Price's,  etc.  Co.,  45 
L.  J.  (Ch.)  437  (1876);  Clarke  v.  Im- 
perial Gas  Light  &  C.  Co.,  4  B.  &  Ad. 
315  (1832),  upholding  a  grant  of  an 
annuity  to  a  disabled  clerk.  A  bank 
may  make  a  gift  to  the  children  of  a 
deceased  superintendent.  Hender- 
son V.  Bank  of  Australasia,  L.  R.  40 
Ch.  D.  170  (1888).  As  against  its  cred- 
itors, a  corporation  cannot  give  away 
any  part  of  its  assets.  Mason  v. 
Fischer,  etc.  Co.,  21  S.  Rep.  5  (Jliss., 
1890). 

1364 


1  Llano  Imp.  etc.  Co.  v.  Pacific  Imp. 
Co.,  66  Fed.  Rep.  526  (1895). 

2  McGeorge  v.  Big  Stone  Gap  Imp. 
Co.,  57  Fed.  Rep.  262  (1893).  A  busi- 
ness corporation  may  donate  money 
to  secure  the  location  of  a  postoffice 
near  its  place  of  business.  B.  S. 
Green  Co.  v.  Blodgett,  159  111.  169 
(1895). 

3  Temple,  etc.  R'y  v.  Helhnan,  103 
CaL  634  (1894). 

<Fort  Worth  City  Co.  v.  Smith 
Bridge  Co.,  151  U.  S.  294  (1894).  The 
directors  may  regulate  the  rates  and 
may  give  away  free  passes  within 
reasonable  limits.  Hasson  v.  Y  enango 
Bridge  Co.,  1  Pa.  Dist.  521  (1893). 

5  Robertson  v.  Buffalo,  etc.  Bank,  40 
Neb.  235  (1894). 

6 18  How.  331  (1855).  Stockholders 
may  enjoin  the  company  from  dis- 
coimting  paper  usxiriously  and  in  a 
manner  contrary  to  its  charter,  i.  e., 
without  the  paper  being  passed  on 
by  the  directors.  The  injunction  lies 
on  the  groxmd  that  the  charter  is  en- 
dangered. Manderson  v.  Commer- 
cial Bank,  28  Pa.  St.  379  (1857). 


CH.  XL.]  TJLTEA   VIKES    ACTS    AIsD    CONTEACTS.  [§  681. 

to  buy,  and  agrees  to  sell  them  back  to  the  vendor  at  a  certain 
price,  yet  it  cannot  set  up  the  plea  of  ultra  vires  when  it  is 
sued  by  the  vendor  for  refusal  to  so  resell.^ 

A  corporation- is  liable  on  its  agreement  to  give  a  percent- 
age of  its  profits  to  a  manufactm-er  of  certain  machinery,  even 
though  other  corporations  have  also  agreed  to  do  the  same.^ 

A  savings  bank  and  trust  company  cannot  be  held  liable  for 
losses  on  Speculations  in  cotton,  although  it  represented  that 
its  orders  were  for  responsible  customers.' 

The  contract  of  a  railroad  company  not  to  oppose  the  pas- 
sage of  a  law  giving  land  to  another  corporation,  the  land  to 
be°divided  subsequently,  is  illegal  and  not  enforceable." 

After  a  land  company  has  purchased  a  stock  of  goods  and 
sold  them,  it  cannot  defeat  an  action  for  the  price  of  the  sale 
to  it  by  the  defense  of  ultra  vires.    The  contract  has  been  exe- 

outed  "^ 

A  manufacturing  corporation  cannot  enforce  a  contract  of 

sale  of  oil  to  it,  which  it  bought  to  resell.^ 

Where  a  manufacturing  corporation  enters  into  a  contract 
with  a  municipality  to  build  conduits,  such  contract  is  ull/ra 
mres,  and  for  a  breach  thereof  by  the  municipality  before  the 
contract  is  carried  out  the  company  cannot  coUect  damages.' 
Although  an  educational  institution  is  operating  a  ferry  with- 
out power  so  to  do,  yet,  if  a  person  is  injured  by  the  ferry,  the 
institution  is  liable  in  damages.^ 

Where  the  lessee  of  a  car-company  plant  repudiates  the  lease 
on  the  ground  of  ultra  vires  and  refuses  to  pay  rent,  and  the 
court  holds  that  it  cannot  be  compelled  to  pay  rent,  the  lessor 
company  may  compel  the  lessee  to  pay  for  the  property  so 
taken,  including  the  value  of  the  contracts  taken  over.^ 

1  Lo-an  County  Bank  v.  Townsend,  '  Safety,  etc.  Co.  v.  Baltimore,  74 
139  U.°S.  67  (1891);  S.  C,  3  S.  W.  Rep.    Fed.  Rep.  363  (1896). 

102  rKv    1887)  SNims   v.  Mount    Hermon    Boys 

2  Good  uDaiand,  121  N.Y.I  (1890).  Sphool  160  Mass.  177  (1893). 

3  Jemison  v.  Citizens'  Sav.  Bank,  9  In  Pullman's  P.  C.  Co.  u  Central 
122  N  Y.  135  (1890);  S.  C, 44  Hun,  412.  Transp.  Co.,  171  U.  S.  138  (1898).  the 

4  Chippewa,  etc.  R'yu  Chicago,  etc.  court  held  that,  where  a  lease  of 
R'y  75  Wis.  224  (1889).  property  was  ultra  vires  and  void, 

6  Sherman    etc.   Co.  v.  Morris,  43  the  only  compensation  for  the  actual 

Kan.  28"  (1890).  ^Q  would  be  for  the  tangible  prop- 

6  Bosshardt,  etc.  Co.  v.  Crescent  Oil  erty,  and  not  for  the  good-will,  pa^ 

Co    171  Pa.  St  109  (1895).  ents,  and  contracts  which  expired 


1365 


§  6S1.]  XJLTKA  VIEES   ACTS   AND   C0NTEACT3.  [CH.  XL. 

A  corporation  receiving  goods  ultra  vires  to  sell  on  commis- 
sion is  nevertheless  liable  for  breach  of  contract  as  to  the  price 
of  the  sale.^ 

An  iron  and  steel  manufacturing  company  has  no  power  to 
operate  a  public  or  private  warehouse.  Hence  warehouse  re- 
ceipts issued  by  the  corporation  on  its  own  property  are  not 
protected  like  the  ordinary  warehouse  receipts,  and  corporate 
creditors  who  hold  such  receipts  are  not  protected  thereby,  and 
the  transaction  may  not  amount  to  a  pledge.* 

Where  one  railroad  company  agrees  to  expend  certain  money 
on  another  railroad,  and  the  repayment  of  the  money  is  guaran- 
teed by  a  third  person,  such  third  person  cannot  repudiate  the 
guaranty  after  the  money  has  been  expended,  on  the  ground 
that  the  act  was  ultra  vires} 

A  banli  sued  as  bailee  for  a  loss  of  a  special  deposit  cannot 
set  up  ultra  vires} 

A  bank  cashier  cannot  buy  boots  and  shoes  for  another  per- 
son in  the  name  of  the  bank,* 

A  party  with  whom  an  iron  company  contracts  to  deliver  ice 
cannot  recover  damages  for  a  breach  of  the  contract.' 

A  warehouse  company  will  not  be  allowed  to  set  up  ultra  vires 
as  a  defense  to  notes  given  by  it  in  payment  for  grain,  the  ar- 
ticles of  incorporation  having  provided  therefor,  although  prob- 
ably illegally  so.'' 

A  land  company  must  pay  for  services  rendered  in  organ- 
izing other  companies  to  rent  and  locate  on  the  land  of  the 
former.' 

during  the  lease.  Accordingly,  where  *  Franklin  Nat.  Bank  v.  Whitehead, 

the  stipulated  rental  was  $264,000  a  49  N.  E.  Rep.  592  (Ind.,  1898). 

year,  the  lower  court  allowed  for  use  '  Alexandria,  etc.  R  R  u  Johnson, 

the  value  of  the  capital  stock  of  the  48  Pac.  Rep.  847  (Kan.,  1897). 

lessor,  inasmuch  as  such  value  had  <  First  Nat.  Bank  v.  Strang,  138  111. 

been  consumed  in  connection  vdth  347  (1891). 

the  lease,  and  such  value  was  fixed  *  North  Star,  etc.  Co.  v.  Stebbins,  2 

at  upwards  of  $2,500,000  and  inter-  S.  D.  74  (1891). 

est,  but  the  supreme  court  reduced  *  Simmons  v.  Troy  Ironworks,  92 

the  compensation  to  $727,000  and  in-  Ala,  427  (1890). 

terest,  being  the  actual  value  of  the  '  Carson  City  Sav.  Bank  v.  Carson 

tangible  property.  City  Elev.  Co.,  90  Mich.  550  (1892). 

1  Union  Hardware  Co.  v.  Plume,  ^  Schurr  v.  New  York,  etc.  Co.,  18 

etc.  Co.,  58  Conn.  219  (1889).  N.  Y.  Supp.  454  (1892). 

1366 


CH.  XL.] 


TJLTKA   VIEES   ACTS   AND    CONTRACTS. 


[§  681. 


Many  other  examples  and  iUustrations  of  ultra  vires  acts  and 
intra  vires  acts  are  given  in  the  notes  hereto.^ 

Out  of  the  various  cases  set  forth  in  this  chapter  a  few  gen- 
eral  rules  may  be  clearly  drawn  and  stated.    First,  there  is  no 


»In  Safety,  etc.  Co.  v.  Mayor,  74 
Fed.  Rep.  363,  370  (1896),  the  court 
said  in  regard  to  ultra  vires  acts:  "It 
is  evident  that  no  general  principle 
can  be  laid  down  whereby,  with  ab- 
solute certainty,  it  can  be  determined 
that  many  transactions  are  or  are  not 
among  the  incidents  to  the  business 
of  a  corporation,  authorized  by  its 
charter.    The  answer  to  the  question 
must  depend  upon  the  facts  of  each 
particular  case."    See  cases  in  §  900. 
Federal  Courts:  See  the  cases  at 
the  end  of  this  section.    A  national 
bank  owning  stock  in  a  savings  bank 
may  defeat  the  statutory  liability  at- 
tached thereto  by  the  plea  of  ultra 
vires.    California  Bank  v.  Kennedy, 
167  U.  S.  362  (1897).     Cf.  Citizens' 
State  Bank  v.  Hawkins,  71  Fed.  Rep. 
369  (1896),  and  Cooper    Ins.   Co.   v. 
Hawkins,  71    Fed.  Rep.   372  (1896). 
Notes  given  by  a  Ivmiber  manufact- 
uring cori)oration  to  pay  for  stock  in 
a  bank  cannot  be  enforced.    S\imner 
V.  ]\Iarcy,  3  Woodb.  &  M.  105  (1847); 
S.  C,  23  Fed-  Cas.  384    A  corpora- 
tion is  presimaed  to  have  power  to 
purchase  a  patent  whose  use  pertains 
to  the  business  indicated  by  the  name 
of  the  corporation.    Dorsey,  etc.  Co. 
V.  I^larsh,  6  Fish.  Pat.  Cas.  387  (1873); 
S.  C,  7  Fed.  Cas.  939.    In  Germania, 
etc.  Co.  v.  Boynton,  71  Fed.  Rep.  797 
(1896),  it  was  held  that  even  though 
every  stockholder  and  director  acqui- 
esces in  corporate  bonds  being  issued 
to  secure  the  private  debt  of  an  offi- 
cer, yet  tliat  a  party  receiving  such 
bonds  with  notice  could  not  enforce 
them.    A  national  bank  may  agree 
that  a  person  going  seciirity  on  an 
attachment  bond  will  be  protected 
by  the  bank,  although  the  bond  is  not 
given  for  the  benefit  of  the  bank 


Seeber  v.  Commercial  Nat.  Bank,  77 
Fed.  Rep.  957  (1897). 

Alabama:  A  mining  company  is 
not  liable  for  the  price  of  goods 
which  it  purchases  to  carry  on  an 
ultra  vires  mercantile  business.  Che- 
wacla  Lime  AVorks  v.  Disraukes,  87 
Ala.  344  (1889).  Where  a  lime  and 
limestone  corporation  engages  in  the 
mercantile  business,  it  is  not  liable 
for  the  price  of  goods  sold  and  deliv- 
ered to  it,  Chewacla  Lime  Works  v. 
Dismukes,  87  Ala.  344  (1889). 

California:  Vandall  v.  South  San 
Francisco  Dock  Co.,  40  CaL  83  (1870), 
holding  that  a  corporation  empow- 
ered to  buy,  improve,  etc.,  real  estate 
may  appropriate  a  portion  of  its 
funds  to  a  railroad  in  consideration 
of  lower  rates  and  more  frequent 
trains.  Where  an  improvement  com- 
pany engages  in  the  hotel  business, 
it  cannot  repudiate  the  liabilities  of 
an  innkeeper  on  the  ground  that  the 
hotel  business  was  beyond  its  powers. 
Magee  v.  Pacific  Imp.  Co.,  98  CaL  678 
(1893). 

Colorado:  Minority  stockholders 
may  complain  when  the  majority 
hold  stockholders'  meetings  out  of 
the  state,  keep  no  office  or  books  in 
the  state,  appropriate  treasury  stock, 
etc.  Jones  v.  Pearl  Min.  Co.,  20  Colo. 
417  (1894). 

DaTcota:  A  party  who  loans  money 
to  a  corporation,  knowing  that  the 
rnoney  is  to  be  used  by  the  company 
to  buy  shares  of  its  own  capital  stock, 
cannot  collect  his  debt,  the  act  being 
ultra  vires.  Adams,  etc.  Co.  v.  Dey- 
ette,  8  S.  D.  119  (1895). 

Georgia:  A  bank  which  buys  in  a 
manufactory  on  an  execution  sale,  in 
order  to  protect  itself,  may  carry  on 
the  business  and  is  liable  for  debts 


1367 


§  G81.] 


ULTRA   VIBES   ACTS   AND   CONTEACrTS. 


[cn.  XL. 


clearly-defined  principle  of  law  that  determines  -whether  a 
particular  act  is  ultra  vires  or  intra  vires.  The  courts  are  be- 
coming more  liberal,  and  many  acts  "which  fifty  years  ago 
would  have  been  held  to  be  ultra  vires  would  now  be  held  to 


incurred  thereby.  Reynolds  v.  Simp- 
son, 74  Ga.  454  (1885).  A  cotton  gin- 
ning company  cannot  defend  a  note 
in  bona^fde  hands,  given  by  the  com- 
pany to  purchase  an  ice  machine,  es- 
pecially where  there  is  no  attempt  to 
rescind.  Towers,  etc.  Co.  v.  Inman, 
96  Ga.  506  (1895).  Where  one  corpo- 
ration sells  its  property  to  another, 
and,  after  part  payment  is  made,  the 
president  of  the  vendee  turna  back 
the  proi^erty,  but  the  vendee  corpo- 
ration sues  for  the  return  of  the  prop- 
erty, such  vendee  corporation  cannot 
afterwards  claim  that  the  transac- 
tion was  ultra  vires.  Steele  Lumber 
Co.  V.  Laurens  Limiber  Co.,  98  Ga.  329 
(1896). 

Illinois:  A  building  corporation 
being  sued  for  breach  of  its  contract 
to  keep  property  insured  cannot  set 
up  that  it  had  no  power  to  insure. 
Chicago  Bldg.  Soc.  v.  Crowell,  65  IlL 
453  (1873).  A  bank  may  establish  a 
savings  department  and  may  pay  in- 
terest on  the  savings  deposits,  and 
may  assign  in  trust  certain  securities 
to  secure  such  deposits.  Ward  v. 
Johnson,  95  IlL  315  (1880).  Having 
enjoyed  the  benefits  of  a  contract,  a 
corporation  cannot  refuse  payment 
of  the  amount  due  on  the  plea  of 
ultra  vires.  So  held  where  a  brew- 
ing company  took  a  lease  of  a  saloon. 
Heims  Brewing  Co.  v.  Flannery,  137 
IlL  309  (1891).  Inasmuch  as  a  na- 
tional bank  cannot  transact  business 
until  authorized  so  to  do  by  the 
comptroller  of  the  currency,  a  lease 
made  before  such  consent  is  void,  and 
the  only  recovery  can  be  for  use  and 
occupation.  McCormick  v.  Market 
Nat.  Bank,  163  IlL  100  (1896). 

Indiana:  Even  though  a  person 
loaning  money  on  the  bonds    and 


mortgage  of  a  corporation  knowa 
that  the  money  is  to  be  used  for  an 
ultra  vires  purpose,  yet  he  may  en- 
force tlie  same.  Wright  v.  Hughes, 
119  Ind.  324  (1889). 

Iowa:  When  the  corporation  sues 
on  a  contract  assigned  to  it,  its 
waut  of  power  to  take  the  assign- 
ment must  be  proved  by  the  defend- 
ant. Wardner,  etc.  Co.  v.  Jack,  83 
Iowa,  435  (1891).  Where  the  statute* 
requires  gas  and  electric-light  fran- 
chises to  be  voted  on  by  the  people, 
an  electric-light  company  is  not  lia- 
ble in  damages  for  failure  to  supply 
the  nvunber  of  lights  called  for  by  its 
contract  with  the  city,  where_the 
people  had  not  voted  on  the  fran- 
chise. Even  though  the  city  had 
paid  for  lights  furnished,  this  is  the 
rule.  Keokuk  v.  Ft.  Wayne  Elec.  Co., 
90  Iowa,  67  (1894). 

Kansas:  A  town-site  company  ma> 
be  liable  for  the  contract  of  its  gen- 
eral agent  with  a  store-keeper  guar- 
anteeing that  a  railroad  would  be 
constructed  to  the  town  site  within 
a  certain  time.  Arkansas  Valley,  etc. 
Co.  V.  Lincoln,  56  Kan.  145  (1895). 

Maryland:  A  contract  by  a  packet 
company  to  pay  for  harbor  improve- 
ments is  ultra  vires  and  not  enforce- 
able. Abbott  v.  Baltimore,  etc.  Co., 
1  Md.  Ch,  543  (1850). 

Massachusetts:  City  Hotel  v.  Dick- 
inson, 73  Mass.  586  (1856),  holds  that 
a  hotel  company  may  let  a  part  of  its 
building  for  shops.  A  ferry  company 
having  a  surplus  boat  may  rent  it. 
Brown  v.  Winnisimmet  Co.,  93  Mass. 
326  (1865).  A  company  engaged  in 
manufacturing  and  selling  glass  may 
purchase  glass  in  order  to  keep  up 
its  stock.  Lyndeborotigh  Glass  Co. 
V.  Massachusetts  Glass  Co.,  Ill  Mass. 


1368 


CH.  XL.] 


ULTEA   VIEES   ACTS   AND    CONTEACTS. 


[§  681. 


be  intra  vires.  The  courts  have  gradually  enlarged  the  im/plied 
powers  of  ordinary  corporations,  until  now  such  corporations 
may  do  almost  anything  that  an  individual  may  do,  provided 
the  state  and  the  stockholders  and  creditors  do  not  object. 

315(1873).    In  Dupeeu  Boston  Water    (1883).      A  person  having  sold  and 


Power  Co.,  114  Mass.  37  (1873),  the  sale 
by  the  company  of  surplus  land,  re- 
ceiving in  payment  stock  of  the  cor-- 
poration  itself,  was  upheld  as  against 
a  dissenting  stockholder's  action.  A 
bank  which  has  bought  in  property 
on  a  foreclosure  sale,  with  a  secret 
agreement  that  it  will  hold  the  proj)- 
erty  in  trust  for  certain  piu-poses, 
cannot  repudiate  the  trust  on  the 
grovmd  that  it  is  ultra  vires.  Whit- 
ney t'.  Leominster  Sav.  Bank,  141 
Mass.  85  (1886),  A  maniifacturing 
corporation  which  runs  a  store  and 
sells  goods  may  collect  for  goods  thus 
sold,  though  the  sales  were  made  by 
its  undisclosed  agent.  Slater  Woollen 
Co.  V.  Lamb,  143  Mass.  420  (1887); 
Chester  Glass  Co.  v.  Dewey,  16  Mass. 
94  (1819).  Stockholders  cannot  enjoin 
an  intra  vires  act  on  the  ground  tliat 
it  was  promised  that  the  corporation 
would  not  enter  into  that  act.  Con- 
verse V.  Hood,  149  Mass.  471  (1889). 
Although  the  charter  of  a  water- 
works company  limits  the  amount 
of  property  which  it  may  hold,  yet, 
if  it  holds  a  greater  amount,  a  mu- 
nicipality cannot  condemn  the  prop- 
erty on  the  basis  of  the  charter  limit. 
Only  the  state  can  object  that  the 
company  holds  more  property  than 
is  allowed  by  law.  West  Springfield 
V.  West  Springfield  Aqueduct  Co.,  167 
Mass.  128  (1896). 

Michigan:  A  person  who  has  taken 
from  a  corporation  an  exclusive  right 
to  manufacture  under  a  patent,  and 
has  so  manufactured,  cannot  defeat 
an  action  for  the  royalties  agreed 
upon  for  the  goods  already  manu- 
factured by  alleging  that  the  con- 
tract was  ultra  vires.  Hall  Mfg.  Co. 
V.  American,  etc.  Co.,  48  Mich.  331 


partly  delivered  an  article  to  a  cor- 
poration which  the  corporation  had 
no  right  to  purchase  may  refuse  to 
complete  delivery,  and  may  sue  for 
the  part  delivered.  Day  v.  Spiral, 
etc.  Co.,  57  Mich.  146  (1885).  A  sub- 
scriber or  donator  of  money  to  a  fac- 
tory cannot  prevent  its  moving  away 
if  it  is  a  losing  enterprise.  Ayres  v. 
Dutton,  87  Midi.  528  (1891).  A  cor- 
pox'ation  that  has  purchased  a  judg- 
ment and  collected  it  cannot  refuse 
to  pay  the  vendor  of  the  judgment 
on  the  ground  of  ultra  vires.  Clem- 
ent, eta  Co.  v.  Micliigan,  etc  Co.,  68 
N.  W.  Rep.  224  (Mich.,  1896). 

Minnesota:  The  admission  that  a 
contract  was  executed  by  a  corpora- 
tion is  an  admission  that  the  corpo- 
ration had  power  to  make  it,  and  the 
ofBcer  had  poAver  to  sign  it.  Baus- 
man  v.  Credit  Guarantee  Co.,  47  Minn. 
377  (1891). 

Mississippi:  A  corporation  may 
ofl!er  a  reward  for  the  detection  of 
criminals  who  have  committed  a 
crime  against  it.  Norwood,  etc.  Co.  v. 
Andrews,71  Miss. 641  (1894).  Although 
two  cotton  compress  companies  have 
agreed  to  consolidate,  and  have  put 
their  property  in  the  hands  of  a  gov- 
erning committee  to  manage  until  a 
new  charter  is  obtained,  yet  either 
corporation  may  withdraw  from  the 
arrangement,  it  being  ultra  vires. 
Greenville,  etc.  Co.  v.  Planters',  etc. 
Co., '70  Miss.  669  (1893). 

Missouri:  A  coal  mining  and  trans- 
porting corporation  may  purchase 
and  use  a  steamboat  for  transporting 
coal  Callaway,  etc.  Co.  v.  Clark,  33 
Mo.  305  (1862).  A  contract  to  convey 
land  for  purposes  of  speculation  to  a 
company  in  consideration  of  a  cer- 


1369 


§  C81.] 


ULTRA   VIEES   ACTS   AlTD   C0NTEA0T8. 


[CH.  XL. 


In  the  case  of  railroads  the  courts  are  more  strict.  The  publio 
are  interested  in  the  acts  and  operations  of  railroads.  Hence, 
ordinarily,  the  courts  will  not  sustain  the  acts  of  railroads  in 
selling,  leasing,  or  mortgaging  their  property,  or  engaging  in  any 


tain  location  of  a  railroad  was  held 
unenforceable  as  against  public  pol- 
icy. Pacific  R  R.  u  Seely,  45  Mo. 
212  (1870).  See  also  §  G50,  sniyra.  A 
private  party  seeking  to  enjoin  a  cor- 
poration from  using  public  property 
whicli  the  city  has  leased  to  such  cor- 
poration cannot  set  up  tliat  the  lessee 
corporation  is  acting  ultra  vires. 
Only  the  state  or  the  stockholders 
can  raise  that  objection.  Belcher, 
etc,  Co.  V.  St.  Louis,  etc.  Co.,  101  Mo. 
192  (1890),  It  is  ultra  vires  for  a  bank 
to  allow  an  overdraft.  Market  Street 
Bank  v.  Stump,  2  Mo.  A  pp.  545  (1876). 
A  pledge  is  not  illegal  though  it  se- 
cures a  greater  amount  than  the 
pledgee  bank  is  entitled  to  loan  to 
one  person.  McClintock  v.  Central 
Bank,  etc.,  24  S,  W.  Rep.  1052  (Mo., 
1894).  See,  in  general,  46  S.  W.  Rep.  593. 

Montana:  A  corporation  having  a 
claim  against  another  corporation 
may  purchase  a  lien  on  the  property 
of  the  latter  corporation  in  order  to 
protect  its  claim.  Mahoney  v.  Butte 
Hardware  Co.,  48  Pac,  Rep.  545  (Mont., 
1897). 

New  Jersey:  Wliile  it  is  true  that  a 
stockholder  may  enjoin  his  company 
from  proceeding  with  its  business,  if 
the  objects  thereof  have  become  un- 
attainable or  illegal,  yet  an  unconsti- 
tutional statute  in  Indiana  forbid- 
ding the  piping  of  natural  gas  to 
places  outside  of  the  state  does  not 
justify  the  suit  of  a  stockholder  in  a 
New  Jersey  construction  company  to 
enjoin  his  company  from  proceeding 
to  construct  a  pipe  line  from  Indiana 
to  Chicago.  Benedict  v.  Columbus 
Const.  Co.,  49  N.  J.  Eq.  23  (1891).  A 
stockholder  may  enjoin  the  company 
from  removing  the  plant  from  the 
state,  where  the  charter  provides  for 

13' 


the  manufacturing  to  be  done  in  the 
state.  Stickle  v.  Liberty,  etc.  Co.,  83 
AtL  Rep.  708  (N.  J.,  1895). 

New  York:  It  is  within  the  power 
of  a  bank  to  receive  special  deposits 
of  bonds,  etc.,  for  safe-keeping,  gra- 
tuitously and  for  mere  accommoda- 
tion, and  the  bank  is  liable  for  tlieir 
loss  by  gross  negligence.  Pattison  v. 
Syracuse  Nat  Bank,  80  N.  Y.  82  (1880). 
A  corporation  and  stockholders 
agreed  to  turn  over  to  defendant  and 
others  the  control,  but  the  latter  were 
to  account  for  rafts  built.  Held,  they 
could  not  set  up  ultra  vires.  Each 
of  the  defendants  is  liable  for  all  as 
to  accounting.  Rider  Life  Raft  Co. 
V.  Roach,  97  N.  Y.  378  (1884).  A  lock 
company  sued  for  the  price  of  locks 
sold  to  it  by  a  company  incorporated 
to  manufacture  fire-arms  cannot  de- 
feat the  suit  by  setting  up  that  the 
latter  corporation  had  no  power  to 
manufacture  such  articles.  Whitney 
Arms  Co.  v.  Barlow,  63  N.  Y.  62  (1875). 
One  director  may  enjoin  other  direct- 
ors from  using  corporate  funds  to 
buy  liabilities  of  an  insolvent  compet- 
ing concern  for  the  purpose  of  suing 
thereon,  and  from  paying  money  to 
prevent  the  rival  concern  getting  its 
work  done.  Colles  v.  Trow,  etc.  Co., 
11  Hun,  397  (1877).  A  manufactiu-- 
ing  corporation  selliii  <  a  store  with 
a  guaranty  of  the  continued  patron- 
age of  its  employees,  or  else  a  fixed 
sum  as  indemnity,  is  liable  thereon. 
De  Groff  v.  American  Linen  T.  Co., 
21 N.  Y.  124  (1860).  A  smelting  corpo- 
ration may  purchase  smelting  works. 
Moss  V.  Averell,  10  N.  Y.  449  (1853). 
Persons  who  with  a  corporation 
jointly  purchase  property  cannot  de- 
fend against  the  price  by  alleging 
that  it  was  ultra  vires  of  the  corpo- 
0 


CH.  XL.] 


ULTRA   VIEES    ACTS   AND    CONTEACTS. 


[§  G81. 


outside  business,  unless  the  public  assent  through  the  legisla- 
ture. But  as  to  the  ordinary  private  corporation  the  rules  of 
ultra  vires  have  been  greatly  relaxed. 

Second,  the  decision  in  any  particular  case  turns  largely  on 


ration  to  purohasa  State  v.  Woram, 
6  Hill,  33  (1843).  In  Lafond  v.  Deems, 
81  N.  Y.  507  (1880),  a  voluntary  be- 
nevolent association,  having  been 
compelled  to  hire  more  room  than  it 
needed,  was  held  to  have  power  to  fit 
up  and  let  the  portion  not  required. 
Temple  Grove  Seminary  v.  Cramer, 
98  N.  Y.  131  (1885),  holds  that  a  serai- 
nary  of  learning  may  let  its  building 
as  a  boarding-house  during  the  sum- 
mer vacation.  A  rura}  cemetery 
company  may  sell  a  large  number  of 
its  lots,  although  the  vendee  intends 
to  resell  them.  Palmer  v.  Cypress 
Hill  Cemetery,  123  N.  Y.  429  (1890). 
A  corporation  organized  to  act  as  a 
broker  in  buying  and  selling  grain  is 
subject  to  the  same  rule  as  regards 
gambling  contracts  that  individuals 
are.  Peck  v.  Doran,  etc.  Co.,  57  Him, 
843  (1890).  Power  to  manufacture 
and  sell  goods  does  not  give  power 
to  buy  and  sell  goods.  People  v. 
Campbell,  144  N.  Y.  IfiO  (1894),  a  tax- 
ation case.  A  receiver  of  a  savings 
bank  may  enforce  a  bond  given  to  it 
by  an  individual  agreeing  to  pay  to 
the  bank  a  certain  sum  if  it  would 
continue  business,  which  the  bank 
did.  Hurd  v.  Green,  17  Hun,  337 
(1879).  A  manufacturing  corpora- 
tion borrowing  bonds  in  order  to  use 
them  as  collateral  to  a  loan  is  liable  to 
the  owner  for  their  return.  Beckwith 
V.  Rochester  Iron,  etc.  Co.,  13  N.  Y. 
Week.  Dig.  528  (1881).  A  brewing 
company  may  guarantee  the  rent  of 
a  saloon  which  uses  its  beer.  Holm 
V.  Claus,  etc.  Co.,  21  N.  Y.  App.  Div. 
204  (1897).    See  also  p.  1373,  suh. 

North  Carolina:  Gruber  v.  Wash- 
ington, etc  R.  R.,  93  N.  C.  1  (1885), 
holds  that  a  lumber  company,  in  pro- 
viding transportation  for  its  product, 
could,  as  incidental  to  its  own  busi- 


ness, carry  the  goods  of  others  and 
also  passengers. 

Oregon:  A  hardware  company  is  lia- 
ble for  lime  purchased,  even  though 
it  was  not  organized  for  the  purpose 
of  dealing  in  that  commodity.  Re 
Pendleton,  etc.  Co.,  24  Oreg.  330  (1893). 

Pennsylvania:  A  stockholder  may 
enjoin  his  company  from  doing  acts 
forbidden  by  statute.  Sparhawk  v. 
Union  Pass.  R'y,  54  Pa.  St.  401,  453 
(1867).  A  corporation  with  power  to 
o^vn  land  and  promote  settlement 
may  build  saw-mills  and  erect  a 
hotel  Watts's  Appeal,  78  Pa.  St.  370 
(1875).  A  corporation  with  power  to 
manufacture  and  supply  gas  may 
deal  in  gas  appliances.  Malone  v. 
Lancaster,  etc.  Co.,  37  Atl.  Rep.  933 
(Pa.,  1897). 

Tennessee:  A  manufacturing  com- 
pany is  Liable  for  goods  purchased  by 
a  store  owned  by  it.  Searight  v. 
Payne,  6  Lea  (Tenn.),  283  (1880),  where 
an  iron  furnace  company  ran  a  store. 
Where  an  insurance  company  has 
issued  a  policy  which  is  not  author- 
ized by  its  charter,  the  policy  cannot 
be  enforced  by  the  party  who  is  in- 
sured. The  court  said  in  a  dictum 
that  his  remedy  is  a  suit  in  disaffirm- 
ance and  for  an  accounting.  Miller 
V.  Insurance  Co.,  93  Tenn.  167  (1893). 

Texas:  The  maker  of  a  note  cannot 
set  up  that  the  payee  corporation  dis- 
counted it  ultra  vires.  Logan  v. 
Texas,  etc  Assoc,  8  Tex.  Civ.  App. 
490  (1894).  Where  a  corporation  has 
taken  a  lease  of  a  wharf  from  a  city, 
it  cannot  avoid  the  payment  of 
rental,  after  xising  the  premises,  on 
the  ground  of  ultra  vires.  Corpus 
Christi  v.  Central,  etc  Co.,  8  Tex.  Civ. 
App.  94  (1894). 

Vermont:  A  manufacturing  com- 
pany is  Liable  for  goods  purchased 


1371 


§  G81.] 


ULTRA   VIKES    ACTS    AND    C0XTEACT3. 


[cn.  XL. 


the  questions  of  who  is  complaining;  against  whom  the  com- 
plaint is  made ;  and  what  relief  is  sought.  The  stockholder's 
action  is  looked  upon  most  favorably  if  he  is  not  guilty  of 
delay.  But  an  action  by  the  state  to  enjoin  the  act  or  to  for- 
feit franchises  is  an  unusual,  extraordinary,  and  somewhat  harsh 
remedy,  and  is  not  favored  by  the  courts.  So,  also,  an  action 
by  the  corporation  itself,  or  by  the  party  contracted  with,  to 
repudiate  an  %dtra  vires  act  is  not  favored  by  the  courts.  Such 
an  action  is  an  attempt  by  a  party  to  evade  the  contract  by 


by  a  store  owned  by  it.  Daucliy  v. 
Brown,  24  Vt.  197  (1852).  As  regards 
the  charter  or  coi-porate  power  to 
confer  a  degree,  see  Townshend  v. 
Gray,  62  Vt.  373  (1890). 

Washington:  A  lumber  company 
may  become  surety  on  a  building 
contractor's  bond  where  it  is  cus- 
tomary for  such  companies  so  to  do 
in  order  to  obtain  business.  Wheeler, 
etc.  Co.  V.  Everett  Land  Co.,  14  Wash. 
630  (1896). 

Wisconsin:  Where  a  river  packet 
company  purchases  grain  and  pays 
partly  therefor,  it  may  recover  back 
the  money  paid,  but  not  damages  for 
refusal  of  vendor  to  deliver.  North- 
western, etc.  Co.  V.  Shaw,  37  Wis. 
655  (1875).  A  corporation  formed  to 
make  and  sell  beer  may  guarantee 
the  rent  of  a  customer.  Winterfield 
V.  Cream  City  B.  Co.,  71  N.  W.  Rep. 
101  (Wis.,  1897). 

England:  A  suit  by  a  copper  trad- 
ing company  for  damages  against  a 
person  who  had  refused  to  accept 
iron  which  he  had  agreed  to  purchase 
of  the  plaintiff  fails.  Copper  Miners 
V.  Fox,  16  Q.  B.  229  (1851).  In  Simp- 
son V.  Westminster,  etc.  Co.,  8  H.  L. 
Cas.  712  (1860),  a  lease  by  a  hotel  com- 
pany of  part  of  its  building  during 
its  completion  was  held  valid.  A 
company  formed  to  work  a  patent 
may  purchase  it.  Leifchild's  Case, 
L.  R  1  Eq.  231  (1865).  Brokers  em- 
ployed by  directors  to  sell  property 
of  the  corporation  cannot  recover 


damages  from  the  directors  for  a 
failure  of  sale,  due  to  the  vendee  al- 
leging that  the  directors  had  no 
power  to  sell,  it  being  proved  by  the 
directors  that  they  did  have  such 
power.  Wilson  v.  Miers,  10  C.  B. 
(N.  S.)  348  (1861).  Where  a  stock- 
holder institutes  a  suit  to  remedy  a 
wrong  to  the  corporation,  and  while 
it  is  pending  new  directors  are 
elected  and  they  proceed  to  carry  on 
the  suit  at  the  corporate  expense, 
any  dissenting  stockholder  may  en- 
join such  use  of  the  corporate  funds. 
To  allow  it  would  be  to  prejudge  the 
suit.  Kernaghan  v.  Williams,  L.  R  6 
Eq.  228  (1868).  The  organization  of 
a  company  to  carry  on  the  lottery 
business  in  foreign  countries  was 
held  legal  in  Macnee  v.  Persian  Corp., 
L.  R  44  Ch.  D.  306  (1890).  A  corpo- 
ration which  holds  stock  in  another 
corporation  may  agree  to  surrender  a 
part  of  such  stock  in  order  to  enable 
the  latter  company  to  proceed  with 
its  business,  and  such  surrender  is 
not  ultra  vires.  Thomson  v.  Trustees, 
etc.  Corp.,  [1895J  2  Ch.  454  Where 
a  company  has  to  give  a  bond,  and 
the  bond  is  given  by  a  director,  the 
company  is  liable  to  him.  Southern 
Counties  Dep.  Bank  v.  Boaler,  73 
L.  T.  Rep.  155  (1895). 

Canada:  A  company  receiving  a 
deposit  ultra  vires  is  nevertheless 
bound  to  repay  it.  Walmsley  v. 
Rent  Guarantee  Co.,  29  Grant  Ch. 
(Can.)  484  (1881). 


1372 


CH.  XL.]  ITLTKA  VIEES   ACTS   AXD   CONTEACTS.  [§  681. 

means  of  principles  of  law  which  both  parties  have  violated. 
The  court  is  not  swift  to  grant  relief  in  such  cases. 

Third,  if  a  contract  or  act  i?,  ultra  vires,  and  has  not  yet  been 
performed,  either  the  corporation  or  the  party  contracted  with 
may  refuse  to  complete  the  contract.  No  damages  can  be  col- 
lected for  such  refiifeal.  So,  also,  if  the  contract  has  been  partly 
performed,  and  the  unperformed  part  is  separable  from  the  rest, 
either  party  may  refuse  to  complete.  But  where  one  party  has 
completely  performed  and  carried  out  its  part  of  the  contract, 
the  other  party  cannot  retain  the  benefits  of  such  performance 
and  refuse  to  f)crform  also.^ 

The  courts  differ  widely  in  their  decisions  on  the  legality  and 
enforceability  of  ultra  vires  contracts.  The  iN'ew  York  court  of 
appeals,  in  a  series  of  consistent  and  ably-reasoned  decisions,  has 
established  the  rule  in  that  state  that  an  ultra  vires  contract  is 
enforceable  if  the  stockholders  have  not  objected  and  the  cred- 
itors have  not  been  injured.*  The  New  York  court  says  that 
"  that  kind  of  plunder  which  holds  on  to  the  property,  but  pleads 
the  doctrine  of  ultra  vires  against  the  obligation  to  pay  for  it, 
has  no  recognition  or  support  in  the  law  of  tiiis  state."  * 

1  Speaking  of  ultra  vires  acts,  tlie  vania  R  R  v.  Keolnik,  etc.  Co.,  131 

New  York  court  of  appeals  said:  "As  U.  S.  371,  384,  389  (1889).     "Every 

artificial    creations,    they   have    no  public  graut  of  property,  or  of  priv- 

powers  or  faculties  except  those  with  ileges  or  franchises,  if  ambiguous,  is 

which  they  were  endowed  when  ere-  to  be  construed  against  the  grantee 

ated;  and  when,  as  is  frequently  the  and  in  favor  of  the  public,"  and  es- 

case,  they  act  in   excess    of   their  pecially  so  as  regards  corporations 

powers,  the  question  will  be,  Is  the  organized  under  general  laws.    Cen- 

act  proMbited  as  prejudicial  to  some  tral  Transp.  Co.  v.  Pullman's  Palace 

public  interest,  or  is  it  an  act  not  un-  Car  Co.,  139  U.  S.  24,  49  (1891). 

lawful  in  that  sense,  but  prejudicial  2  Whitney  Arms  Co.  v.  Barlow,  63 

to  the  stockholders  ?    The  rule,  how-  N.  Y.  63  (1875);  Martin  v.  Niagara, 

ever,  is  well  settled  that  the  plea  of  etc.  Co.,  123  N.  Y.  165  (1890);  Bath 

ultra  vires  should  not  prevail  when  Gas  Light  Co.   v.  Claflfy,   151  N.  Y, 

it  wo\ild  not  advance  justice,  but  on  24,  29-34,  37  (1896),  per  Andrews,  CliT 

the  contrary  would  accomplish  legal  J.,  reviewing  many  cases,  discussing 

wrong."    Leslie  v.  Lorillard,  110  N.  Y.  the  subject  in  an  able  and  exhaiistive 

519  (1888).    See    also    discussion   in  manner,  and  holding  that  past-due 

Camden,  etc.  R  R  u  May's  Landing,  rent  may  be  recovered  on  an  ultra 

etc.  R  R,  48  N.  J.  L.  530  (1886);  Mar-  vires  leasa 

tin  V.  Niagara,  etc.  Co.,  122  N.  Y.  165  3  Seymour  v.  Spring  Forest  Cem- 

(1890);  Oregon  Ry,  etc.  Co.  v.  Oregon-  Assoc.,  144  N.  Y.  333,  341  (1895). 
lan  R'y,  130  U.  S.  1  (1889);  Pennsyl- 

1373 


§  682.] 


ULTKA  VIKES   ACTS   AND   CONTEAOTa. 


[cn.  XL. 


Practically  the  same  conclusion  has  been  reached  in  Massa- 
chusetts ^  and  Wisconsin.' 

In  the  federal  courts,  on  the  contrary,  the  old  rule  against 
ultra  vires  contracts  is  upheld  in  all  its  rigor  and  applied  with' 
all  its  severity.  The  tendency  of  modern  jurisprudence  to  re- 
lax on  that  subject  finds  no  favor  in  the  federal  courts.' 

§  682.  Personal  lidbility  of  the  directors  and  officers  for  ultra 
vires  acts. —  There  can  be  no  doubt  that,  if  the  directors  or  offi- 
cers of  a  company  do  acts  clearly  beyond  their  power,  whereby 
loss  ensues  to  the  company,  or  dispose  of  its  property  or  pay 

1  Chief  Justice  Bigelow,  in  Brown 
V.  Winnisimmet  Co.,  93  Mass.  3'3G,  334 
(1865),  said:  "We  know  of  no  rule  or 
principle  by  which  an  act  creating  a 
corporation  for  certain  specific  ob- 
jects, or  to  carry  on  a  particular 
trade  or  business,  is  to  be  strictly 
construed  as  prohibitory  of  all  other 
dealings  or  transactions  not  coming 
within  the  exact  scope  of  those  des- 
ignated." In  Nims  v.  Mount  Hemion 
Boys'  School,  160  Mass.  177  (1893),  the 
court  said  that  an  ultra  vires  con- 
tract not  yet  executed  will  not  be 
enforced  by  the  courts;  but,  "  on  the 
other  hand,  courts  have  frequently 
held  that  while  such  contracts,  con- 
sidered merely  as  contracts,  are  in- 
valid, they  involve  no  such  element 
of  moral  or  legal  wrong  as  to  forbid 
their  enforcement,  if  there  has  been 
such  action  under  them  as  to  work 
injustice  if  they  are  set  asida  Courts 
have  been  astute  to  discover  some- 
thing in  the  nature  of  an  equitable 
estoppel  against  one  who,  after  enter- 
ing into  such  a  contract,  and  induc- 
ing a  change  of  condition  by  another 
party,  attempts  to  avoid  the  contract 
by  a  plea  of  ultra  vires.  It  is  said 
that  such  a  plea  will  not  avail  when 
to  allow  it  would  work  injustice  and 
accomplish  legal  wrong."  The  court, 
however,  declined  to  pass  upon  this 
principle  of  law. 

2  The  old  rule  of  ultra  vires  has 
been  changed  so  that  now  only  the 
state  or  a  party  interested  in  the  cor- 


poration can  complain.  Farwell  Ca 
V.  Wolf,  70  N.  W.  Rep.  289  (Wis., 
1897). 

3 "The  doctrine  of  ultra  vires,  by 
which  a  contract  made  by  a  corpora- 
tion beyond  the  scope  of  its  corporate 
powers  is  unlawful  and  void,  and 
will  not  support  an  action,  rests,  as 
this  court  has  often  recognized  and 
affirmed,  upon  three  distinct  grounds : 
the  obligation  of  any  one  contracting 
with  a  corporation  to  take  notice  of 
the  legal  Limits  of  its  powers;  the  in- 
terest of  the  stockholders  not  to  be 
subject  to  risks  which  they  have 
never  undertaken ;  and  above  all,  the 
interest  of  the  public  that  the  corpo- 
ration shall  not  transcend  the  powers 
conferred  upon  it  by  law."  McCor- 
mick  v.  Market  Bank,  165  U.  S.  538, 
549  (1897).  See  also  the  cases  in  the 
notes  supra.  In  a  dictum  in  Jack- 
sonville, etc.  R'y  V.  Hooper,  160  U.  S. 
514,  524  ( 1896),  the  court  emphasized 
the  statement  that  no  estoppel  or 
part  performance  can  sustain  a  con- 
tract that  is  forbidden  by  a  char- 
ter or  is  contrary  to  pubUc  policy. 
The  rule  that  the  charter  of  a  corpo- 
ration is  to  be  construed  strictly 
against  the  grantee  does  not  apply  to 
a  case  where  the  corporation  seeks 
to  repudiate  contracts  whereof  it  has 
enjoyed  the  benefits,  or  where  such 
contracts  are  attacked  by  creditors 
after  the  corporation  becomes  insolv- 
ent. Tod  V.  Kentucky  Union  Land 
Co.,  57  Fed.  Rep.  47  (1893). 


1374 


CH.  XL.] 


ULTKA   yiKES    ACTS    AXD    CONTRACTS. 


[§  682. 


away  its  money  without  authority,  they  will  be  required  to 
make  good  the  loss  out  of  their  private  estates.^  Directors  and 
officers  have  been  held  personally  Hable  for  libel  committed  by 
the  company;*  for  infringement  of  trade-mark ; »  for  loaning 
money  in  violation  of  the  charter;*  for  exacting  illegal  rebates 
from  a  raiboad;^  for  false  representations;'  for  borrowing  in 


1  North  Hudson,  etc.  Assoc,  v. 
Childs,  83  Wis.  460  (1893),  citing 
Thompson,  Liab.  Off.  375,  §  16;  Joint 
Stock  Discount  Co.  u  Brown,  L.  R. 
8  Eq.  381  (1869);  Re  Exchange  Bank- 
ing Co.,  L.  R.  31  Ch.  D.  519  (1882); 
Franklin  F.  Ins.  Co.  v.  Jenkins,  3 
Wend.  130  (1829).  See  also  the  cases 
in  §  702,  infra. 

2  See  §  15&,  suprcu 

SThe  directors  of  a  corporation  may 
be  included  as  parties  defendant  in 
a  bill  against  the  corporation  for  in- 
fringement of  a  trade-mark.  They 
may  be  held  liable  so  far  as  they 
took  part  in  the  infringement  Arm- 
strong V.  Savannah  Soap  Works,  53 
Fed.  Rep.  124  (1892);  St.  Louis  Stamp- 
ing Co.  V.  Quinby,  5  Ban.  &  Ard.  275 
(1880);  Goodyear  v.  Phelps,  3  Blatchf. 
91  (1853);  S.  C,  10  Fed.  Cas.  711; 
Smith  V.  Standard,  etc.  Co.,  19  Fed. 
Rep.  826  (1883);  Nichols  v.  Pearce,  7 
Blatchf.  5  (1869);  S.  C,  18  Fed.  Cas.  204 
The  directors  and  officers  of  a  corpo- 
ration which  has  infringed  upon  a 
patent    cannot    be  held  personally 


though  the  corporation  itself  is  not 
within  the  jurisdiction  of  the  court. 
Edison,  etc.  Co.  v.  Packard  Elec.  Co., 
61  Fed.  Rep.  1002  (1803),  holding  also 
that  they  are  liable  personally. 

<  See  §  690,  infrcu  A  national  bank 
may  hold  its  officers  liable  for  mak- 
ing loans  to  an  individual  in  excess 
of  ten  per  cent  of  the  capital  stock 
and  also  for  making  other  loans  in 
violation  of  the  statutes,  and  such 
suit  may  be  in  equity  where  the 
transactions  are  complicated.  The 
statute  of  limitations  does  not  begin 
to  run  imtil  such  officers  have  gone 
out  of  offica  National  Bank,  etc.  v. 
Wade,  84  Fed.  Rep.  10  (1897).  A  stock- 
holder in  a  bank  may  sue  to  compel 
the  president  to  restore  $45,000  which 
ho  caused  the  bank  to  loan  without 
security,  the  money  being  tised  to 
pay  a  debt  due  to  the  president  him- 
self. Wickersham  v.  Crittenden,  93 
CaL  17  (1892). 

5  Where  a  corporation  secures  a  re- 
bate from  a  railroad  company,  not 
only  on  shipments  made  by  it,  but 


hable  for  the  profits  of  such  inf rmge-  on  shipments  made  by  other  parties 
ment.  Mergenthaler,  etc.  Co.  v.  Rid-  the  active  agents  of  such  corporation 
der  65  Fed.  Rep.  853  (1895),  reviewmg  receivmg  such  moneys  may  be  held 
the  cases.  A  general  agent  of  an  personaUy  Hable  to  other  shippers 
infringing  company  is  personally  for  such  money.  The  court  said  that 
liable.  Cramer  v.  Fry,  68  Fed.  Rep.  inasmuch  as  the  company  "  was  or- 
301  (1895).  A  judgment  against  a  ganized  by  the  promoters,  the  de- 
corporation  as  to  the  infringement  fendants,  simply  for  the  purpose  of 


of  a  patent  is  not  binding  on  the 
stockholders  in  subsequent  suits 
against  them,  even  though  they  were 
present  at  the  trial  and  testified. 
Wilgus  V.  Germain,  73  Fed.  Rep.  773 
(1896).  The  officers,  stockholders,  and 
agents  of  a  corporation  may  be  en- 
joined from  infringing  a  patent,  even 

13 


consimimating  the  illegal  agreement, 
and  shielding  themselves  from  the 
consequences  of  receiving  the  illegal 
exactions  made  vmder  it,  the  act  of 
incorporating  can  be  of  no  avail  to 
them  as  a  defense."  Brundred  v. 
Rice,  49  Ohio  St.  640  (1892). 

6  See  chs.  IX  and  XX,  supra.    A 
75 


§  082.] 


TJLTEA   TIEES    ACTS   AKD    CONTRACTS. 


[CH.  XL. 


excess  of  the  company's  poTver;^  for  accepting  "bills  without 
authority ;  ^  or  contracting  for  the  corporation  when  he  had  no 
authority  so  to  do.'  They  are  liable  for  maintaining  a  nuisance,* 
and  for  commencing  business  before  being  authorized  so  to  do.' 
In  an  early  and  important  case  Chancellor  Walworth  sustained 
a  stockholder's  action  to  hold  the  corporate  directors  liable  for 
corporate  funds  lost  by  speculation  in  the  stocks  of  other  cor- 
porations.® The  directors  may  be  liable  for  causing  the  railroad 
company  to  purchase  the  stock  of  another  railroad  company, 


stockholder  may  hold  the  directors 
liable  for  false  representations  induc- 
ing him  to  loan  money  to  the  com- 
pany where  they  told  him  that  the 
company  was  solvent  when  in  fact 
it  was  itsolvent,  and  they  knew  it 
so  to  be.  Kinkier  v.  Junica,  84  Tex. 
116  (1892).  A  director  may  buy  stock 
from  a  stockholder  at  less  than  its 
real  value,  and  there  is  no  fraud  in 
the  fact  that  the  director  knew  the 
real  value  while  the  stockholder  did 
not.  Crowell  v.  Jackson,  53  N.  J.  L. 
656  (1891).  A  stockholder  cannot 
hold  a  director  liable  for  the  stock 
becoming  worthless  by  reason  of  the 
fact  that  the  director  and  others 
sold  their  stock,  amounting  to  tliree- 
fourths  of  the  stock,  to  the  Cotton 
Seed  Oil  Trust,  and  that  the  trust 
then  dissolved  the  corporation  by  a 
three- fourtlis  vote  as  allowed  by  stat- 
ute, although  the  director  as  such 
voted  for  the  dissolution,  Trisconi 
V.  Winship,  43  La.  Ann.  45  (1891). 
For  a  complaint  seeking  to  hold  na- 
tional-bank directors  liable  for  the 
loss  of  money  deposited,  the  deposit 
being  induced  by  erroneous  and 
fraudulent  advertisements  and  re- 
ports as  to  the  condition  of  the  bank, 
see  Prescott  v.  Haughey,  65  Fed.  Eep. 
653  (1895).  A  depositor,  suing  the 
directors  of  a  bank  for  false  state- 
ments inducing  him  to  deposit  in  a 
bank,  must  allege  that  but  for  such 
statements  he  would  have  with- 
drawn his  deposit  before  the  failure. 
Brady  v.  Evans,  78  Fed-   Eep.   558 

1376 


(1897).  Where  a  stockholder  receives 
an  offer  for  his  stock,  and  is  per- 
suaded not  to  sell  by  fraudulent  rejv 
resentations  of  a  director,  he  may 
hold  the  latter  Liable  in  damages. 
Rothmiller  v.  Stem,  143  N.  Y.  581 
(1894). 

1  See  ch.  XLVI,  infra. 

2  See  ch.  XLVI,  infra. 

3  An  officer  who  signs  the  corpo- 
rate name  to  a  contract  to  bear  part 
of  the  expense  of  a  suit  is  personally 
liable  therefor  if  he  had  no  authority 
so  to  do.  Solomon  v.  Penoyar,  89 
Mich.  11  (1891).  Officers  incur  no  per- 
sonal liability  when  avowedly  con- 
tracting on  behalf  of  the  company. 
Beeson  v.  Lang,  85  Pa.  St.  197  (1877). 

*  See  §  156,  supra. 

*  Where  the  directors  commence 
business  before  ten  per  cent  of  the 
capital  is  paid  in,  as  required  by  stat- 
ute, the  directors  are  "personally  lia- 
ble as  agents  transacting  business 
without  authority  from  the  princi- 
pal Trust  Co.  V.  Floyd,  47  Ohio  St. 
525  (1890).     Cf.  §  180,  supra. 

®  Robinson  v.  Smith,  3  Paige,  Ch. 
222  (1832).  See  also  Combination 
Trust  Co.  V.  Weed,  2  Fed.  Rep.  24 
(1880);  Harden  v.  Newton,  14  Blatchf. 
376  (1878);  S.  C,  11  Fed.  Cas.  500; 
Smith  V.  Rathbun,  22  Hun,  150  (1880); 
Land  Credit  Co.  v.  Fermoy,  17  W.  R. 
562  (1869),  where  the  directors  used 
corporate  funds  to  "  rig  the  market," 
i.  e,,  to  piirchase  and  thereby  sustain 
the  market  price  of  the  stock. 


CH.  XL.] 


ULTRA   VIRES    ACTS    AND    CONTRACTS. 


[§  682, 


but  the  six  years'  statute  of  limitations  is  a  bar  to  a  stock- 
holder's suit  to  hold  them  liable,  no  fraud  being  alleged.^  The 
directors  are  personally  liable  where  they  advance  corporate 
funds  to  the  vendee  of  stock  of  the  company  in  order  to  enable 
him  to  purchase  the  stock.^ 

Directors  who  knowingly  authorize  the  issue  of  watered  stock 
are  liable  therefor  to  the  company.'  Directors  are  not  person- 
ally liable  for  damages  due  to  negligence  on  the  part  of  the 
corporation.'*  A  director  is  not  liable  for  failure  to  institute 
legal  proceedings  to  set  aside  the  ultra  vires  acts  of  other  di- 
rectors.^ The  directors  of  a  national  bank  may  be  liable  for 
money  spent  by  the  bank  in  operating  a  mill  in  which  the  bank 
bad  an  interest.^  Where  the  directors,  upon  an  increase  of  the 
capital  stock,  issue  a  part  of  the  stock  for  worthless  notes, 
the  directors,  upon  the  bank  becoming  insolvent,  are  liable  to 
the  receiver  for  the  par  value  of  such  stock,  unless  they  can 
show  the  stock  could  not  have  been  otherwise  issued  or  sold.^ 


1  Whitwam  v.  Watkin,  78  L.  T.  Rep. 
188  (1898). 

2  Green  v.  Hedenberg,  159  III  489 
(1896).  Where  the  treasurer  uses  the 
funds  of  the  corporation  to  pay  for 
stock  in  the  corporation  itself,  which 
he  and  other  stockholders  have  pur- 
chased, he  may  be  compelled,  upon 
coi-porate  insolvency,  to  refund  the 
money,  even  though  he  took  the 
funds  from  the  treasury  with  the 
consent  of  all  the  stockholders.  Re 
Brockway  Mfg.  Co.,  89  Ma  121  (1896). 

3  London  Trust  Co.  v.  Mackenzie, 
68  L.  T.  Rep.  380  (1893),  the  court  say- 
ing, however,  "  If,  acting  fairly,  hon- 
estly, and  reasonably,  directors  mis- 
take the  legal  powers  of  the  company, 
they  may  not  be  made  answerable; 
but  if  they  in  fact  know,  or  with  due 
care  ought  to  have  known,  that  the 
acts  done  are  beyond  the  powers  of 
the  company,  then,  if  they  do  those 
acts  even  in  the  honest  belief  of  ne- 
cessity in  the  interests  of  the  com- 
pany, they  take  the  risk  of  the  conse- 
quences." Where  the  directors  issue 
stock  to  a  mining  expert  at  ninety 
cents  on  the  dollar  in  consideration 


of  an  examination  and  report  by  him, 
they  are  liable  to  the  company  for 
the  remaining  ten  cents  on  the  dollar, 
but  not  for  surplus  value  which  the 
stock  afterwards  acquired.  Hirsche 
V.  Sims,  [1894]  A.  C.  654 

4  Demarest  v.  Flack,  128  N.  Y.  205 
(1891).  A  director  is  not  personally 
liable  for  the  negligence  of  the  cor- 
poration in  the  construction  of  a 
building  where  he  did  not  personally 
take  part,  even  though  it  is  alleged 
that  an  incompetent  man  was  put 
in  charge.  Henry  v.  Brackenridge 
Lvmiber  Co.,  48  La.  Ann.  950  (1896). 
See  also  ch,  XLIII,  infra.  The  di- 
rectors of  an  amusement  company 
are  not  personally  liable,  although 
they  are  a  committee  having  charge 
of  the  construction  of  a  general  stand 
that  falls  and  injures  a  person.  Van 
Antwerp  v.  Linton,  89  Him,  417  (1895). 

5i2e  Lands  Allotment  Co.,  [1894]  1 
Ch.  616. 

eCockrill  v.  Abeles,  86  Fed-  Rep. 
505  (1898). 

^Cockrill  V.  Abeles,  86  Fed-  Rep. 
505  (1898). 


87 


1377 


§  682.]  ULTKA   VIKES   ACTS    AXD    CONTEACTS.  [CH.  XL. 

Where  the  directors  of  a  business  corporation  accept  paper  for 
accommodation,  they  are  personally  liable  for  payments  made 
or  liabilities  incurred  on  such  paper.^  Where  an  officer  causes 
a  manufacturing  company  to  indorse,  for  accommodation,  the 
note  of  a  party,  all  of  whose  goods  it  purchases,  he  is  not  per- 
sonally liable  to  tlie  former  company  unless  it  is  proved  that 
the  directors  and  stockholders  were  ignorant  thereof  and  hence 
did  not  acquiesce  therein.'  The  directors  are  not  personally 
liable  for  errors  of  judgment.'  But  the  stockholders  may  sue 
the  directors  for  gross  mismanagement  and  for  damages  where 
fraudulent  mortgages  have  been  placed  by  them  on  the  corpo- 
rate property.*  The  president  executing  an  ordinary  guarantee 
in  the  name  of  the  corporation  without  authority  is  personally 
liable  thereon.^  The  directors  are  not  personally  liable  for  at- 
torney fees  for  services  rendered  in  a  voluntary  dissolution  of 
the  company.^  A  director  is  not  personally  liable  in  damages 
to  a  property  owner  over  whose  premises  the  company's  road 
runs  without  warrant.'' 

Yarious  instances  of  the  liability  of  directors  and  stockhold- 
ers are  given  in  the  notes  below.^ 

1  Hutchinson  v.  Sutton  Mfg.  Co.,  57  Wliere  the  statute  provides  for  rais- 
Fed.  Rep.  998  (1893).  ing  funds  for  a  mutual  insurance 

2  Willard  v.  Holmes,  142  N.  Y.  493  company  by  assessments,  the  bond  of 
(1894).  the  directors  to  advance  $100,000  to 

8  Symmes  v.  Union  Trust  Co.,  60  the  company  as  needed  is  ultra  vires 

Fed.  Rep.  830  (1894).  and  unenforceable.    Goss  v.  Peters, 

*  Landis  v.  Sea  Isle,  etc  Co.,  53  N.  98  Mich.  113  (1893).    In  Louisiana  it 

J.  Eq.  654  (1895).  is  held  that  where  a  corporation  or- 

5  Nelligan  v.  Campbell,  20  N.  Y.  ganized  to  build  railroads  and  carry 
Supp.  234  (1893).  on  a  plantation  bvisiness  carries  on  a 

6  Drew  V.  Longwell,  81  Hun,  144  store  to  supply  its  employees  with 
(1894).  merchandise,    its    stockholders   are 

7  Lamming  v.  Galusha,  81  Hun,  247  personally  liable  as  to  the  merchan- 
(1894),  where  it  was  also  claimed  that  dise  business  —  that  being  ultra  vires. 
the  incoi-poration  had  been  insuffi-  Lehman  v.  Knapp,  48  La.  Ann.  1148 
cient.  (1896).    In  PoweU  v.  Murray,  3  N.  Y. 

8  A  stockholder  cannot  secure  a  App.  Div.  273  (1896),  where  a  corn- 
transfer  from  the  corporation  to  him-  pany,  formed  to  manufacture  elec- 
self  of  the  property,  of  the  corporation  trie  appliances  and  plant,  issued  stock 
so  as  to  deprive  a  corporate  creditor  in  payment  for  a  license  to  sell  the 
of  the  payment  of  his  debt.  Where  product  of  a  foreign  corporation,  it 
he  does  so  through  legal  proceedmgs  was  held  that  the  parties  so  receiv- 
fraudulently  and  by  conspiracy,  the  ing  the  stock  were  liable  thereon, 
property  may  be  reached.  Angle  v.  under  the  New  York  statute,  as  not 
Chicago,  etc.  Ry,  151  U.  S.  1  (1894).  being  paid-up  stock,  such  contract 

1378 


<5H.  XL.] 


TJLTEA   VIKES    ACTS   AND    CONTRACTS. 


[§  682. 


But  directors  are  not  liable  for  honest  mistakes  as  to  the  legal 
extent  of  their  authority  ;i  nor  are  they  liable  to  the  company 
for  an  ultra  vires  act  which  the  company  has  ratified.^  They 
may  be  liable  where  the  corporation  is  but  a  "  dummy,"  organ- 
ized for  a  fraudulent  purpose.'  But  one  director  is  not  liable 
for  the  others.* 

showing  that  his  ti"ansactions  were 
assented  to  or  even  directed  by  the 
directors.  Directors  and  officers  of 
corporations  are  agents  of  the  corpo- 
ration for  which  they  act,  and  for 
their  unauthorized  transactions  they 
may  be  liable  to  their  principal  just 
as  the  agent  of  an  individual  may  be 
liable  for  the  damage  caused  to  his 
principal  by  his  tmauthorized  acts. 
But  .  .  .  when  the  officers  of  a  cor- 
poration engage  in  an  ultra  vires 
business  for  the  benefit  of  a  corpora- 
tion, and  the  corporation  has  the  act- 
ual benefit  thereof,  and  when  the 
business  is  so  carried  on  with  the  ac- 
quiescence of  the  stockholders  that 
it  actually,  though  illegally,  becomes 
the  business  of  the  coi-poration,  it 
cannot  maintain  an  action  against 
such  officers  for  any  damages  it  has 
suffered  in  such  business.  In  other 
words,  a  corporation  engaged  in  an 
ultra  vires  business  cannot  sue,  for 
damages  suffered  therein,  the  agents 
it  employs  to  carry  on  the  business. 
The  agent  of  the  corporation  in  such 
a  case  would  be  protected  just  as  the 
agent  of  a  copartnership  would  be 
protected  who  did  business  with  the 
express  or  implied  consent  of  the  co- 
partners, which  was  not  authorized 
by  the  articles  of  copartnership." 
Hohnes  v.  WiUard,  125  N.  Y.  75,  79, 
81  (1890). 

3  See  §§  663,  664,  supra. 

4  Although  the  directors  of  a  com- 
pany are  the  agents  of  the  company, 
and  although,  as  a  member  of  the 
company,  each  of  the  directors  is  lia- 
ble for  the  acts  of  its  agents  on  the 
same  ground  as  other  members,  still, 
unless  a  director  has  done  something 

J79 


being  ultra  vires.  An  officer  of  a 
construction  company  who  induces 
a  party  to  buy  stock  owned  by  the 
company  is  not  personally  liable  on 
the  contract  of  the  company  to  allow 
interest  on  instalments  paid  on  such 
stock  in  advance.  Hetfield  v.  Ad- 
dicks,  154  Pa.  St.  1  (1893).  Where  the 
statute  renders  the  officers  and  stock- 
holders of  a  foreign  corporation  liable 
for  doing  business  in  the  state  with- 
out filing  a  certificate,  this  does  not 
prevent  the  company  from  suing  on 
contracts.  The  courts  will  not  ex- 
tend the  penalty.  Kindel  v.  Beck, 
etc.  Co.,  19  Colo.  310  (1893),  stating 
also  that  a  statute  which  shoiild  re- 
strict the  right  of  a  foreign  corpora- 
tion to  deliver  in  the  state  goods 
manufactured  by  the  company  out 
of  the  state  would  be  unconstitu- 
tional Where  an  insolvent  corpora- 
tion turns  over  all  its  property  to  a 
new  corporation  formed  for  that  pur- 
pose, and  the  new  corporation  turns 
over  a  portion  of  its  assets  to  one  of 
the  directors  of  the  old  corporation 
without  consideration,  a  creditor  of 
the  old  corporation  may  hold  the 
directors  personally  liable.  South 
Bend,  etc.  Co.  v.  George,  etc.  Co.,  73 
N.  W.  Rep.  749  (Wis.,  1897). 

1  Beattie  v.  Ebury,  L.  R.  7  Ch,  777 
(1872),  and  L.  R  7  H.  L.  103.  See  also 
§  702,  infra. 

2  "  When  the  directors  and  officers 
of  a  corporation  engage  in  tiltra  vires 
transactions,  and  thus  cause  damage 
to  the  corporation,  they  may  be 
jointly  and  severally  liable  for  such 
damage;  and  when  sued  for  such 
damage,  a  subordinate  officer  cannot 
establish    an    absolute    defense    by 

i: 


§  682.]  ULTEA   TIRES   ACTS   AND    CONTRACTS.  [CH.  XL. 

A  receiver  may  hold  liable  a  director,  where  upon  the  con- 
solidation of  two  companies  large  sums  are  used  out  of  the 
corporate  funds  to  effect  the  consolidation,  and  the  company 
becomes  insolvent.* 

"When  a  contract  is  made  for  the  corporation,  and  this  fact 
appears  in  the  contract,  but  the  oihcer  or  agent  signs  the  con- 
tract, not  in  the  corporate  name,  but  in  his  own  name,  ho  is 
generally  not  liable  on  such  contract;  but  in  some  instances 
he  has  been  held  liable.'  "Where  an  ofRcer  or  agent  of  a  cor- 
poration has  been  instrumental  in  causing  the  corporation  to 
commit  trespass  or  any  other  tort,  then  such  director  or  oflBcer 
is  personally  liable  therefor,'  The  president  of  an  insurance 
company  which  has  not  complied  with  the  law  authorizing  its 
organization  is  liable  to  policy-holders  for  false  representations 
to  them  by  the  insurance  agents  that  the  company  had  so  com- 
plied.* The  president  of  a  corporation  obtaining  credit  for  the 
corporation  by  false  representations  is  liable  personally  there- 
for, and  is  liable  to  arrest.'  A  stockholder  who  is  also  general 
manager  of  a  newspaper  corporation  is  not  liable  criminally 
for  its  criminal  advertisement  of  an  illegal  lottery,  unless  he 
had  actual  knowledge  or  notice  thereof.®  An  officer  is  liable 
who  directs  a  negro  to  be  excluded  from  the  company's  omni- 

to  make  his  co-directors  his  agents  in  company,  and   certain    individuals 

some  other  sense  than  this,  he  is  no  guarantee  that  the  obligations  of  the 

more  liable  for  their  acts  than  any  latter  company  will  be  fulfilled,  and 

other  shareholder.    La  this  respect  di-  the  latter  company  is  "wrecked," 

rectors  are  like  promoters,  each  being  the  guarantors  are  liable.    Mason  v. 

answerable  for  his  own  acts,  and  for  Cronk,  125  N.  Y.  496  (1891). 

the  acts  of  theothers  so  far  as  he  has  2  gee  ch.  XLIII,  §  724,  infra. 

made  them  his  agents,  but  no  fur-  ^xhis  subject  belongs  more  prop- 

ther.    Brown  v.  Byers,  16  M.  &  W.  erly  to  treatises  on  agency  and  on 

252  (1847);  Heraud  v.  Leaf,  5  C.  B.  torts.    An  agent  is  liable  for  aiding 

157  (1847);  Bramah U.Roberts, 3  Bing.  the    corporation  in    perpetrating  a 

N.  Cas.  963  (1837) ;  Londesborough's  breach  of  trust.   Attorney-General  v. 

Case,  4  De  G.,  M.  &  G.  411  (1854);  Leicester,  7  Beav.  176  (1844). 

Walker's  Case,  8  De  G.,  M.  &  G.  607  *  Belding   v.  Floyd,   17   Hun,  208 

(1856).    See  also  Weir  uBamett,L.R.  (1879). 

3  Exch.  D.  32  (1877);  Weir  v.  Bell,  » Phillips  v.  Wortendyke,  31  Hun, 

L.  R  3  Exch.  238  (1878);  Cargill  v.  192  (1883). 

Bower,  L.  R.  10  Ch.  D.  502  (1878).  6  People  v.  England,  27  Him,  139 

iPierson  v.  Cronk,  13  N.  Y.  Supp.  (1882).    See  also  Green's  Brice's  Ultra 

845  (1890).     Where  an  insolvent  in-  Vires,  p.  765. 
Burance  company  buys  out  a  solvent 

1380 


CH.  XL.] 


TLTEA   VIKES    ACTS   AND    CONTEACTS. 


[§  682. 


bus;*  or  vlio  takes  part  in  an  assault ;'  or  who  carries  on  a 
malicious  prosecution.^ 

Where  the  corporation  has  power  to  do  a  certain  act,  but  does 
not  authorize  a  person  or  olficer  to  do  that  act,  then  the  person 
or  officer  doing  such  act  is  liable  personally  therefor.  He  is 
liable  as  an  unauthorized  agent.^ 

If  the  corporation  had  no  charter  power  to  do  the  act  in 
question,  a  more  difficult  question  arises.  In  England  it  seems 
that  the  officer  or  agent  is  not  liable  to  the  third  person.*  In 
America  he  is  liable  to  the  company  for  money  so  lost.^  Al- 
though the  certificate  of  incorporation  fijses  the  amount  of  debts 
which  the  corporation  may  mcur,  yet  the  directors  are  not  lia- 
ble for  an  excess  of  that  amount.' 


1  Peck  V.  Cooper,  112  IlL  192  (1884); 
54  Am.  Rep.  231. 

2  Brokaw  v.  New  Jersey  R.  R.  &  T. 
Co.,  32  N.  J.  L.  328  (1867);  Hewett  v. 
Swift,  85  Mass.  420  (1862);  Moore  v. 
FitcUburg  R  R.,  70  Mass.  465  (1855). 

8  Hassey  v.  Norfolk  Southern  R.  R., 
98  N.  C.  84  (1887). 

<  If  two  directors  without  author- 
ity order  a  bank  to  honor  the  checks 
of  the  manager  of  their  corporation 
and  he  overdraws,  they  are  person- 
ally liable  for  the  overdrafts.  CheiTy 
V.  Colonial  Bank,  L.  R,  3  P.  C.  24 
(1869).  But  see  Beattie  v.  Ebury,  L.  R. 
7  H.  L.  102  (1874),  aff'g  L.  R  7  Ch. 
App.  777,  and  rev'g  L.  R  7  Cli.  App. 
788,  n.  When  the  president  of  the 
bank,  without  authority  from  the  di- 
rectors, sells  $6,000  of  the  bank's  paper 
for  .$5,500,  he  is  liable  to  the  bank  for 
$500  —  the  real  loss.  First  Nat.  Bank 
V.  Lucas,  21  Neb.  280  (1887).  But  a 
corporate  agent  executing  a  security 
in  the  corporate  name  without  au- 
thority is  not  guilty  of  forgery  under 
the  New  York  statute.  Mann  v.  Peo- 
ple, 15  Hun,  155  (1878);  aff'd,  People 
V.  Mann,  75  N.  Y.  484  He  is  liable, 
however,  in  a  civil  action.  See  also 
UnderhiU  v.  Gibson,  2  N.  H.  852  (1821); 
Weare  v.  Gove,  44  N.  H.  196  (1862). 
As  to  the  liabilitv  of  officers  for  tres- 


pass, etc.,  see  Thompson,  Liab.  Offi- 
cers, p.  489. 

6  Eaglesfield  v.  Londonderry,  L.  R 
4  Ch,  D.  693  (1876).  But  see  West,  etc. 
Bank  v.  Kitson,  L.  R  13  Q.  B.  D.  860 
(1884),  where  a  note  was  issued;  Nich- 
oUs  V.  Diamond,  9  Exch.  154  (1853), 
where  an  acceptance  was  made.  The 
secretary  is  not  liable  for  a  represen- 
tation as  to  the  power  of  the  com- 
pany to  issue  debentures  which  had 
been  issued.  Rashdall  v.  Ford,  L.  R 
2  Eq.  750  (1866).  Directors  issiiing 
debentures  in  excess  of  the  amovmt 
allowed  by  statute  are  i)ersonally  lia- 
ble thereon.  Weeks  v.  Propert,  L.  R 
8  C.  P.  427  (1873).  As  to  liability  of 
directors  to  the  company  for  losses 
due  to  their  ultra  vires  acts,  see  Re 
Faure,  etc.  Co.,  L.  R  40  Ch.  D.  141 
(1888).    See  6  R'y  &  Corp.  L.  J.  78. 

^Avistin  V.  Daniels,  4  Denio,  299 
(1847),  where  stock  was  purchased  by 
the  company.  See  also  Franklin  F. 
Ins.  Co.  V.  Jenkins,  3  Wend.  130  (1829), 
and  cases  in  chs.  XXXIX,  XL,  supra, 
and  ch.  XLH,  infra.  A  director  is 
liable  for  money  used,  ultra  vires,  to 
buy  land.  Grimes  v.  Harrison,  26 
Beav.  435  (1859). 

7  Frost  Mfg.  Co.  V.  Foster,  76  Iowa, 
535  (1889).    Cf.  §§  685-688,  infra. 


1381 


CHAPTER  XLI. 


INTRA  VIRES  ACTS  AND  CONTRACTS  — IN  OTHER  WORDS,  ACTS 
AND  CONTRACTS  WHICH  ARE  WITHIN  THE  CHARTER  POW- 
ERS OF  THE  CORPORATION,  DIRECTORS,  OR  STOCKHOLDERS. 


683.  Intra  vires  acts  as  distin- 
guished from  ultra  vires 
acts. 

684  The  discretion  of  the  directors 
or  the  majority  of  the  stock- 
holders as  to  acts  intra  vires 
cannot  be  questioned  by- 
single  stockholders  unless 
fraud  is  involved, 

685-689.  Borrowing  money,  issuing 
bills,  notes,  and  acceptances, 
coupon  bonds,  debentures, 
and  mortgages. 

690.  Loans    generally    cannot    be 

made  by  corporations — Stat- 
utes —  Mortgages —  Usury. 

691.  Preferences  and  assignments 

by  insolvent  corporations  — 
Assignments  by  corpora- 
tions for  the  benefit  of  cred- 
itors—  Preferences  in  such 
assignments  —  Preferences 
by  way  of  mortgages,  etc. 


§  693, 


693. 


Preferences  and  assignments 
by  inisolvent  corporations  ta 
directors,  officers,  or  stock- 
holders— Loans  by  directors 
to  the  corporation  —  Mort- 
gages by  corporations  ta 
directoi*s. 

Preferences  in  favor  of  corpo- 
rate debts  upon  which  the 
directors  are  liable  as  in- 
dorsers  or  otherwisa 

694.  Land  may  be  purchased  by  a 

domestic  corporation. 

695.  Land  may  be  pm'chased,  held,^ 

and  sold  by  a  foreign  as  dis 
tinguished  from  an  alien 
corporation,  if  there  is  no 
statute  of  the  state  to  the 
contr?,ry. 

696.  Foreign  corporations  —  Their 

right  to  do  business  in  the 
various  states. 
697-700.    Foreign    corporations  — 
Restrictions  upon  their  right 
to  do  business. 


§  683.  Intra  vires  acts  as  distinguished  from  ultra  vires 
acts. —  An  ultra  vires  act,  as  already  explained,  is  an  act  be- 
yond the  express  and  implied  powers  of  the  corporation.  An 
intra  vires  act,  on  the  contrary,  is  one  which  is  within  the  ex- 
press or  implied  powers  either  of  the  board  of  directors  or 
of  the  majority  of  the  stockholders  in  meeting  assembled. 
Intra  vires  acts  are  frequently  spoken  of  as  matters  concerning 
the  "  internal  management "  of  the  corporation.  Much  con- 
fusion has  arisen  concerning  these  acts,  owing  to  a  failure  to 
recognize  clearly  the  fact  that  an  act  is  intra  vires  of  a  corpo- 
ration if  it  can  be  legally  carried  out  either  by  the  directors  or 
by  the  majority  of  the  stockholders.  Thus,  a  stockholder  fre- 
quently brings  suit  to  enjoin  or  set  aside  an  act  which  the  ma- 
jority have  power  to  do,  but  which  the  directors  have  don© 
without  power.    It  is  clear  that  a  dissenting  stockholder  has 

1383 


CH.  XLI.]  INTKA    VIRES   ACTS   AND    CONTKACTS.  [§  684. 

no  right  to  carry  such  a  matter  into  the  courts  unless  the  ma- 
jority are  with  him,  since,  if  the  majority  approve  of  the  direct- 
ors' acts,  this  amounts  to  a  ratification  of  the  same. 

In  short,  there  are  three  classes  of  corporate  acts  herein. 
First,  the  stockholder  may  bring  suit  to  remedy  an  act  which 
is  ultra  vires ^  or  beyond  the  powers  of  both  the  majority  of  the 
stockholders  and  of  the  directors.^  Second,  as  to  acts  ^vithin 
the  power  of  the  majority,  but  beyond  the  power  of  the  direct- 
ors, a  stockholder  may  sue  to  enjoin  or  set  them  aside  when 
the  directors  have  performed  them,  and  the  majority  refuse  to 
confirm  their  action.^  As  to  such  acts  the  stockholder  cannot 
sue  if  the  majority  confirm  the  directors  in  their  performance. 
Third,  as  to  acts  within  the  powers  of  the  directors  and  per- 
formed by  them,  or  within  the  powers  of  the  majority  and 
performed  by  the  majority,  the  stockliolders  cannot  complain 
that  they  are  ultrd  vires.  The  second  and  third  classes  of  acts 
are  intra  vires  of  the  corporation.  They  are  matters  of  internal 
arrangement  or  management,  and  cannot  be  controlled  or  ob- 
jected to  by  a  minority  stockholder,  except  as  stated  above." 
The  question  of  what  intra  vires  acts  are  to  be  performed  by 
the  directors,  and  what  ones  can  be  exercised  only  by  the  mar 
jority  of  the  stockholders  in  meeting  assembled,  is  considered 
elsewhere.* 

§684.  The  discretion  of  tlie  directors  or  tlie  majority  of  tlie 
stocliliolders  as  to  acts  intra  vires  cannot  he  questioned  ly 
single  stocliliolders  unless  fraud  is  involved.^— This  proposition 
of  law  is  clearly,  firmly,  and  very  prdperly  established  beyond 

1  Chapter  XL,  supra,  treats  of  this  meeting  of  the  company  could  sano- 
subject.    See  also  §  740,  infra.  tion,  a  bill  by  some  of  the  sharehold- 

2  Exeter,  etc.  R'y  v.  Buller,  11  Jur.,  ers,  on  behalf  of  themselves  and 
Part  I,  527,  532  (1847),  holding  also  others,  to  impeach  that  act,  cannot 
that  where  such  an  action  has  been  be  sustained,  because  a  general  meet- 
instituted  it  will  not  be  defeated  by  ing  of  the  company  might  immedi- 
the  fact  that  subsequently  the  di-  ately  confirm  and  give  validity  to  the 
rectors  obtain  control  of  a  majority  act  of  which  the  bill  complains." 
of  the  votes.  But  there  must  be  clear  See  also  MacDougall  v.  Gardiner, 
proof  that  the  majority  refuse  to  L.  R.  1  Ch.  D.  13  (1875),  and  §  662, 
confii-m.    Thus,  in  Bagshaw  v.  East-  mpra. 

em  Union  R'y,  7  Hare,  114  (1849),  the        ^  gge  note  5  below, 
court  says  that  Foss  v.  Harbottle,  2        *  See  ch.  XLIII,  infra. 
Hare,  461  (1843),  decides  "  that  if  the        *  Quoted  and  approved  in  McMullen 
act,  though  it  be  the  act  of  the  di-    v.  Ritchie,  64  Fed.  Rep.  253  (1894). 
rectors  only,  be  one  which  a  general    "  Questions  of  policy  of  management, 

1383 


§  684] 


INTEA  VIKES  ACTS  AND  CONTRACTS. 


[CH. 


XLI. 


any  question.  "Were  the  rule  otherwise  there  would  be  no 
safety  or  possibility  of  carrying  on  business  through  corpora- 
tions. There  would  be  suits  instituted  by  dissatisfied  stockhold- 
ers on  sliglit  provocation,  and  sometiines  for  the  very  purpose 
of  embarrassing  the  transaction  of  business.  A  partner  in  a 
copartnership  may  prevent  action  which  he  disapproves,  but 
corporations  are  formed  very  largely  to  avoid  that  very  danger 
and  disadvantage.  The  corporate  directors,  so  long  as  they  act 
within  their  powers,  may  use  their  own  discretion  as  to  what 
ought  to  be  done.     Such  also  is  the  rule  with  the  majority  of 


of  expediency  of  contracts  or  action, 
of  adequacy  of  consideration  not 
grossly  disproportionate,  of  lawful  ap- 
propriation of  corporate  funds  to  ad- 
vance corporate  interests,  are  left 
solely  to  the  honest  decision  of  the 
directors,  if  their  powers  are  without 
limitation  and  free  from  restraint. 
To  hold  otherwise  would  be  to  sub- 
stitute the  judgment  and  discretion 
of  others  in  the  place  of  those  deter- 
mined on  by  the  scheme  of  incorpora- 
tion." Ellerman  v.  Chicago  Junction, 
etc.  Co.,  49  N.  J.  Eq.  217  (1891).  Thus, 
in  Bloxam  v.  Metropolitan  R'y,  L-  R- 
3  Ch.  App.  337  (18G8),  the  court  said: 
"The  matters  of  internal  arrange- 
ment which  are  beyond  the  province 
of  the  covui;  were  properly  admitted 
to  be  such  as  are  within  the  scope 
of  the  company's  powers."  And  in 
Gambles  v.  Philadelphia,  etc.  R  R.,  4 
Brewst.  563, 591  (1873) ;  S.  C,  4  Fed.  Cas. 
1089,  the  court  said :  "  So  long  as  those 
who  manage  the  corporation  keep 
within  the  limits  of  its  charter,  and 
commit  or  propose  to  commit  no 
breach  of  their  trust,  he  has  no  right 
to  complain,"  In  Becher  v.  Wells,  etc. 
Co.,  1  Fed.  Rep.  276  (1880),  it  was  said: 
"  A  court  of  equity  will  not  interfere 
with  the  internal  policy  of  a  corpora- 
tion vmless  it  is  manifest  that  the 
proposed  act  is  ultra  vires."  In  Bach 
V.  Pacific  Mail  S.  S.  Co.,  12  Abb.  Pr. 
(N.  S.)  373  (1872),  the  court  said:  "No 
case  can  be  fomid  where  the  general 
management  of  corporate  property 

1384 


has  been  subject  to  the  restrictions 
of  judicial  power,  unless,  indeed,  in 
the  case  of  a  clear  violation  of  ex- 
press law,  or  a  wide  depai"ture  from 
chartered  powers."  In  this  case  the 
stockholder  objected  to  the  securities 
in  which  the  corporate  funds  were 
being  invested.  In  Walker  v.  Mad 
River,  etc.  R.  R.,  8  Ohio,  38  (1837),  it 
was  said  by  the  court:  "When  acts 
requiring  judgment,  science,  and  pro- 
fessional skill  are  confided  to  the  dis- 
cretion of  the  officers  of  a  corpora- 
tion, the  exercise  of  that  discretion 
will  not  be  lightly  disturbed."  See 
also  Tuscaloosa  Mfg.  Co.  v.  Cox,  68 
Ala.  71  (1880).  In  Ramsey  v.  Erie  R'y, 
7  Abb.  Pr.  (N.  S.)  156  (1869),  it  is  said: 
"When  directors  are  only  unwise,  or 
merely  extravagant  or  improvident, 
or  slightly  negligent,  or  merely  mis- 
judge in  the  performance  of  their 
duties,  the  remedy  of  stockholders  is 
to  elect  other  persons  directors  in 
their  places."  In  Bailey  v.  Birken- 
head, etc.  R'y,  13  Beav.  433  (1850), 
where  a  stockholder  sought  to  re- 
strain a  call  as  being  imnecessary, 
the  court  refused  to  entertain  the 
suit,  and  said  that  it  was  not  for  the 
court  "  to  take  upon  itself  to  deter- 
mine a  question  which  might  well 
and  ought  to  be  determined  by  the 
shareholders  themselves  at  general 
meetings."  See  also  Edwards  v. 
Shrewsbury,  etc.  R'y,  2  De  G.  &  Sm. 
537  (1849);  also  §  750,  infra. 


CH.  XLI.]  INTRA   VIRES    ACTS   AND    COXTKACTS.         [§§  685-90. 

the  stockholders  in  meeting  assembled.     An  act  intra  vires ^  and 
without  fraud  is  an  act  of  internal  management,  and  a  mmor- 
ity  of  the  stockholders  are  powerless  to  prevent,  control,  change, 
or  question  that  act.^    Thus,  a  stockholder  has  no  remedy  for 
the  mere  inefficiency  of  a  director,  except  to  turn  him  out  at 
the  next  election  of  the  corporation.     Having  once  been  elected, 
a  director  is  entitled  to  retain  his  position,  even  though  he  is 
grossly  inefficient.    He  cannot  be  removed  from  his  position. 
But  where  there  are  violent  internal  dissensions  in  a  corpora- 
tion, and  two  sets  of  officers  are  attempting  to  act,  and  the  cor- 
porate propertv  is  endangered,  a  court  of  equity  will  interfere 
to  the  extent  of  preserving  the  corporate  property  by  a  tem- 
porary receiver.'    A  court  of  equity  cannot,  however,  restrain 
the  corporation  from  proceeding  with  business  and  using  its 
funds  for  that  pm^pose,  even  though  a  minority  of  the  stock- 
holders can  show  that  sound  business  discretion  and  judgment 
would  dictate  a  different  policy.*    The  question  of  whether  a 
suit  by  a  corporation  shall  be  brought  or  not  is  entirely  withm 
the  discretion  of  the  directors,  in  the  absence  of  fraud.* 

§§  6S5-689.  Borroiring  money,  issuing  Mils,  notes,  and  ac- 
ceptances, coupon  londs,  debentures,  and  mortgages.— These  sub- 
jects are  fully  considered  elsewhere." 

§  690.  Loans  ly  a  corporation,  and  statutes  forUdding  loans 
or  forlldding  the  talcing  of  notes  or  mortgages— Usury.- K 
corporation  cannot  make  loans  of  money  unless  its  regular 

1  Quoted  and  approved  in  Symmes  See  also  Lawrence  ^-Greenwich  F. 
uUnTon  Trust  Co.  60  Fed.  Rep.  830  Ins.  Co.,  1  Paige,  587  (1829) ;  and§746. 
,-,gQn  infra. 

2  See  §  711  infra  *  Fountain  Ferry,  etc.  Co.  v.  Jewell, 

3  Trade  A^iliaiy  Co.  v.  Vickers,  8  B.  Mon.  (Ky.)  140  (1848),  the  court 
L  R.16Eq  303(1873);  Featherstone  saying:  "The  question  of  expediency, 
t,' Cooke  L.  R  16  Eq.  298,  303  (1873),  of  practicability,  of  extravagance,  or 
the  cou^t  saying:  "The  court  vdll  of  prudent  economy,  must  be  left  to 
not  interfere  with  the  internal  affairs  be  decided  by  the  managers  and  the 
of  ioint-stock  companies  imless  they  corporators."  A  stockholder  may  ob- 
are  in  a  condition  in  which  there  is  ject.to  corporate  acts  and  contracts 
no  properly  constituted  governing  which  are  fraudulent  or  ultramres 
bodv  or  there  are  such  dissensions  in  or  mala  in  se.  But  all  other  acts  he 
the  governing  body  that  it  is  impos-  can  con-ect  only  by  the  election  of 
flibe  to  carry  on  the  business  with  new  directors.  Leshe  u  Lorillard, 
advantage  to  the  pai-ties  interested.    110  N.  Y.  519  (1888). 

In  such  a  case  the  court  will  inter-       »  See  §  750,  infra. 
fere,  but  only  for  a  limited  time,  and       «  See  ch.  XLVI,  infra. 
to  as  small  an  extent  as  possibla" 

1385 


§  G90.] 


INTRA   YIEES    ACTS   AND    CONTRACTS. 


[CH.  XLI. 


business  ordinarily  involves  loaning.  In  most  cases  the  busi- 
ness of  a  corporation  is  to  invest  and  use  its  capital,  and  not  to 
loan  it  out.  Accordingly,  it  is  well  settled  that  only  where  the 
business  of  the  corporation  is  such  as  usually  involves  loaning 
does  the  corporation  have  the  right  to  loan  its  funds.^  If  not 
prohibited  by  statute,  a  corporation  may  receive  and  sell  notes 
or  acceptances,  if  this  is  naturally  connected  with  its  business.^ 


1 1  Daniel,  Neg.  Inst,  §  384  It  is 
legal,  however,  for  a  loan  and  trust 
company  to  loan  money  and  take  a 
mortgage  as  security.  Farmers'  L.  & 
T.  Co.  V.  Peny,  3  Sandf.  Ch.  339  (1846) ; 
Farmers'  L.  &  T.  Co.  v.  Clowes,  3  N.  Y. 
470  (1850).  ^plank-road  company 
may  loan  its  funds  to  a  contractor 
who  is  constructing  the  road.  Dictmn 
in  Madison,  etc.  Co.  v.  Watertown, 
etc.  Co.,  5  Wis.  173  (1856).  A  benevo- 
lent association  may  loan  its  funds. 
Western  Boatmen's  Benev.  Assoc,  v. 
Kribben,  48  Mo.  37  (1871).  A  national 
bank  may  purchase  notes  as  well  as 
discount  them.  National  Pemberton 
Bank  v.  Porter,  125  Mass.  333  (1878); 
Attleborough  Nat.  Bank  v.  Rogers, 
125  Mass.  339  (1878).  The  discounting 
of  a  note  by  a  cement  corporation 
contrary  to  law,  done  through  the 
president,  is  presumed  to  have  been 
his  act  and  not  that  of  the  coi'pora- 
tion.  Lawrenceville  Cement  Co.  v. 
Parker,  10  N.  Y.  Supp.  831  (1890).  The 
fact  that  a  manufacturing  company 
extended  its  business  so  as  to  include 
iron  pipe  as  well  as  brass,  and  loaned 
money,  which  loans,  however,  the 
president  was  willing  to  take  up,  and 
had  owned  government  bonds,  is  not 
sufficient  to  entitle  a  stockholder  who 
has  acquiesced  therein  to  demand 
that  all  profits  be  paid  out  in  divi- 
dends. McNab  V.  McNab,  etc.  Co.,  62 
Hun,  18  (1891).  A  deposit  by  a  bank 
in  a  bank  renders  the  latter  liable 
therefor,  though  the  deposit  is  made 
to  enable  the  president  of  the  latter 
to  use  it.    Eastern  Townships  Bank 


V.  Vermont  Nat  Bank,  22  Fed.  Rep. 

186  (1884). 

^  White's  Bank  v.  Toledo  F.  &  M. 
Ins.  Co.,  12  Ohio  St  601  (1801);  West- 
ern Cottage  Organ  Co.  v.  Reddish, 
51  Iowa,  55  (1879);  Pratt  v.  Short,  79 
N.  Y.  437  (1880);  Clark  v.  Titcomb,  42 
Barb.  122  (1864);  Buckley  v.  Briggs, 
30  Mo.  452  (1860),  where  it  was  held 
that  a  corporation,  though  prohibited 
from  dealing  in  commercial  paper, 
could  receive  and  sell  notes  given 
for  the  sale  of  its  lands;  Mclntire  v. 
Preston,  10  IlL  48  (1848).  And  a  note 
received  by  a  corporation  will  be 
presumed  to  have  been  taken  in  the 
course  of  business.  Lucas  v.  Pitney, 
27  N.  J.  L.  221  (1858);  Hardy  v.  Merri- 
weather,  14  Ind.  203  (1860);  Frye  v. 
Tucker,  24  IlL  180  (1860);  Potter  v. 
Bank  of  Itliaca,  5  Hill,  490,  7  Hill,  530 
(1844);  Suydam  v,  Morris  Canal,  etc. 
Co.,  6  Hill,  217  (1843);  Talman  v. 
Rochester  City  Bank,  18  Barb.  123 
(1854);  Gee  v.  Alabama,  etc.  Co.,  13 
Ala.  (N.  S.)  579  (1848);  Bates  v.  Bank 
of  State,  2  Ala.  (N.  S.)  451  (1841); 
Smith  V.  Mississippi,  etc.  R  R.,  14 
Miss.  179  (1846);  Portland  Bank  v. 
Storer,  7  Mass.  433  (1811);  Northamp- 
ton Bank  v.  Allen,  10  Mass.  284  (1813); 
Fleckner  v.  Bank  of  U.  S.,  8  Wheat. 
338  (1833);  Rees  v.  Conococheague 
Bank,  5  Rand.  (Va.)  326  (1827);  Payne 
V.  Baldwin,  11  Miss.  661  (1844 1;  rev'd, 
Baldwin  v.  Payne,  6  How.  332  (1848): 
Akin  V.  Blanehard,  32  Barb.  527  (1860). 
An  insurance  company  cannot  pur- 
chase a  note  for  purposes  of  a  set-off. 
Set-off  defeated.  Straus  v.  Eagle  Ins. 
Co.,  5  Ohio  St  59  (1855). 


1386 


CH.  XU.]  INTKA   VIEES   ACTS   AM)    CONTRACTS.  [§  630. 

But  unless  specially  authorized  they  cannot  make  a  business  of 
discounting,^  nor  engage  in  a  banking  business. 

A  person  ^ho  borrows  money  from  a  corporation  cannot  de- 
feat an  action  for  the  money  by  alleging  that  the  corporation 
had  no  authority  to  make  the  loan.    He  must  pay  back  the 

money  borrowed.'  » 

Although  a  statute  or  charter  forbids  a  corporation  from 
oanino-  more  than  a  certain  amount  of  money,  yet  although  it 
actualfv  has  loaned  more  than  that  amount  the  borrower  cannot 

avo  1  fay--t  °*  ^^^  P^^  °*  ''''  '°'^"'    ^"'°"°    "  " 


1  New  York  F.  Ins.  Co.  v.  Sturges, 
2  Cow.  664  (1824).  In  MitclieU  v. 
Rome  R.  R.,  17  Ga.  574  (1855),  it  was 
held  that  where  power  is  given  to 
"  make  contracts,"  a  note  taken  by 
a  corporation  is  prima  facie  evidence 
of  an  authorized  contract. 

2  State  V.  Granville,  etc.  Soc,  11 
Ohio,  1  (1841);  State  v.  Washington 
Social  Lib.  Co.,  11  Ohio,  96  (1841);  Re 
Ohio  Life,  etc.  Co., 9  Ohio,  291  (1839); 
Blair  V.  Perpetual  Ins.  Co.,  10  Mo.  559 
(1847);  Sumner  v.  Marcy,  3  Woodb. 
&  M.  105  (1847);  S.  C,  23  Fed.  Cas. 
384.  See  also  Central  R.  R  u  Col- 
lins, 40  Ga.  582  (1869),  and  Duncan  v. 
Maryland  Sav.  Inst,  10  GiU  &  J. 
(Md.)  299  (1838). 

3  Gorrell  v.  Home  Life  Ins.  Co.,  63 
Fed.  Rep.  371  (1894) ;  Head  v.  Cleburne, 
etc.  Assoc,  25  S.  W.  Rep.  810  (Tex., 
1893) ;  Steam  Nav.  Co.  r.  Weed,  17  Barb. 
378,  382,  384  (1853);  Union  Water  Co. 
V.  Murphy's  Flat  Fluming  Co.,  23  CaL 
620  (1863);  Mott  v.  U.  S.  Trust  Co.,  19 
Barb.  568  (1855);  Poock  v.  Lafayette 
Bldg.  Assoc,  71  Ind.  357  (1880),  the 
court  saying:  "The  law  may  have 
its  reproaches,  but  this  is  not  one  of 
them."    A  person  making  a  note  to 
a  corporation  cannot  defeat  it  by  the 
defense  that  the  company  had  no 
power  to  loan  money.    Bond  v.  Ter- 
reU,  etc  Co.,  82  Tex.  309  (1891).    In 
Alabama  the  borrower  of  the  money 
from    the   corporation  may  escape 
pavment.    Alabama  Grand  Lodge  v. 
WaddiU,  30  Ala.  313  (1860);  Cham- 


bers V.  Falkner,  65  Ala.  443  (1880), 
where  Masonic  lodges  had    loaned 
money.    See  also  dictum  in  Beach  v. 
Fulton  Bank,  3  Wend.   573    (1829), 
where  an  insurance  company  made 
a  loan;  also  the  decision  in  Life  & 
F.  Ins.  Co.  V.  ]\Iechanic  F.  Ins.  Co.,  7 
Wend.  31  (1831),  denying  the  right  of 
an  insurance  company  to  recover  an 
unsecured  loan  where  its  charter  au- 
thorized loans  on  bond  and  mortgage. 
See  also  New  York  Firemen  Ins.  Co. 
V.  Ely,  5  Conn.  560  (1825),  where,  how- 
ever, the  loan  was  expressly  prohib- 
ited.   In  Waddill  v.  Alabama,  etc.  R. 
R.,  35  Ala.  323  (1859),  an  unauthor- 
ized loan  by  a  raUroad  was  enforced 
on  the  ground  that  the  raHroad  pres- 
ident made  the  loan  without  author- 
ity from  the  directors. 

4  Gold  Min.  Co.  v.  National  Bank,  96 
U  S  640  (1877).    See  also  Silver  Lake 
Bank  V.  North,  4  Johns.  Ch.  370  (1820) ; 
National  Bank  v.  Matthews,  98  U.  S. 
621  (1878);  Ely  v.  Second  Nat.  Bank, 
79  Pa.  St.  453  (1875) ;  AUen  v.  First  Nat. 
Bank,  23  Ohio  St.  97  (1872) ;  Stewart  v. 
National  Union  Bank,  2  Abb.  (U.  S.) 
424  (1869) ;  S.  C,  23  Fed.  Cas.  68,  holding 
that  though  the  loan  may  be  recov- 
ered the  franchise  of  the  bank  may 
be  forfeited.    To  same  effect.  Shoe- 
maker V.  National  iMechanics'  Bank, 
2  Abb.  (U.  S.)  416  (1869);  S.  C,  21  Fed. 
Cas.   1331;    and   Union,   etc   Co.  v. 
Rocky  Mountain  Nat.  Bank,  1  Colo. 
531  (1872);  Elder  v.  First  Nat.  Bank, 
12  Kan.  238  (1873),  holding  that  a  bor- 


1387 


§  090.] 


INTKA   VIEES    ACTS    AXD    CONTKACTS. 


[CH.  XLI. 


quires  a  bank  to  loan  on  bond  and  mortgage,  yet  it  ma}^  recover 
loans  made  on  drafts  or  notes.'  "Where  directors  loan  money 
in  violation  of  the  statute,  they  are  liable  personally  therefor.' 
A  statute  which  prohibits  corporations  from  discounting  notes 
or  bills  unless  expressly  authorized  so  to  do  prevents  the  cor- 
poration from  collecting  a  note  taken  in  violation  thereof ; ' 


rower  cannot  restrain  a  national 
bank  from  negotiating  such  securi- 
ties nor  compel  tlieir  return;  O'Hare 
V.  Second  Nat.  Bank,  77  Pa.  St.  96 
(1874),  holding  that  an  accidental  ex- 
cess does  not  make  the  loan  void. 
Although  the  statute  forbids  loans  to 
directors,  yet  a  loan  so  made  is  col- 
lectible, and  securities  pledged  by 
the  director  are  subject  to  the  loan, 
though  they  were  fraudulently  ob- 
tained by  liim  from  others.  Bow- 
ditch  V.  New  England,  etc.  Ins.  Co., 
141  Mass.  292  (1886).  Where  the  presi- 
dent causes  the  corporation  to  loan 
him  money,  in  direct  violation  of  the 
statute,  he  may  be  sued  for  the  con- 
version thereof,  although  his  collat- 
eral security  has  been  sold  and  the 
whole  transaction  ratified  by  the  di- 
rectors. A.  C.  Nellis  Co.  v.  Nellis,  63 
Hun,  63  (1891). 

1  Allen  V.  Freedman's  Sav.  etc.  Co., 
14  Fla.  418  (1874);  Mott  v.  U.  S.  Trust 
Co.,  19  Barb.  568  (1855);  Little  v. 
O'Brien,  9  Mass.  433  (1812);  Mutual 
Life  Ins.  Co.  v.  AVilcox,  8  Biss.  203 
(1878);  S.  C,  17  Fed.  Cas.  1081;  Davis 
S.  M.  Co.  V.  Best,  30  Hun,  638  tlS83). 
A  loan  for  two  years,  instead  of  one 
as  allowed  by  statute,  is  nevertheless 
enforceable.  Germantown,  etc.  Ins. 
Co.  V.  Dhein,  43  Wis.  420  (1877).  A 
loan  is  collectible  though  for  a  longer 
time  than  allowed,  and  without  the 
required  security,  and  in  excess  of 
the  amount  allowed  by  statute.  Bond 
V.  Central  Bank,  2  Ga.  92  (1847). 

2  Thompson  v.  Greeley,  107  Mo.  577 
(1891);  Dodd  v.  Wilkinson,  42  N.  J. 
Eq.  647  (1887);  Williams  v.  McDonald, 
42  N.  J.  Eq.  392  (1886).  The  treasurer 
and  manager,  turning  in  to  the  corpo- 

1^ 


ration  a  mortgage  not  worth  double 
the  debt  owed  by  him  to  the  corpo- 
ration, is  liable  for  any  loss.  Wil- 
liams V.  Riley,  34  N.  J.  Eq.  398  (1881). 
The  case  of  Williams  v.  McKay,  46 
N.  J.  Eq.  25  (1889),  is  very  full,  ex- 
plicit, and  clear  in  its  adjudication 
and  distribution  of  losses  on  the  pres- 
ident, treasurer,  manager,  officers, 
finance  committee,  secretary,  and  di- 
rectors of  a  savings  bank,  where  those 
officers,  etc.,  had  made  instruments 
conti-ary  to  the  by-laws,  charter,  and 
statutes.    See  also  §  682,  supra. 

3  New  York,  etc.  Co.  v.  Helmer,  77 
N.  Y.  64  (1879),  applying  the  New  York 
act  against  unauthorized  banking; 
Tracy  v.  Talmage,  14  N.  Y.  162  (1856); 
Talmage  v.  Pell,  7  N.  Y.  328  (1852); 
Weed  V.  Snow,  3  McLean,  265  (1843); 
S.  C,  29  Fed.  Cas.  572;  Leavitt  v. 
Palmer,  3  N.  Y.  19  (1849)  (a  certificate 
of  deposit),  and  Hayden  v.  Davis,  3 
McLean,  276  (1813);  S.  C,  11  Fed.  Cas. 
898  (an  acceptance);  Swift  v.  Beers, 
3  Denio,  70  (1846);  Tylee  v.  Yates,  3 
Barb.  222  (1848),  holding  also  that  an 
assignment  of  securities  for  their 
payment  is  also  void,  and  transfers 
no  title  to  the  assignees;  White  v. 
Franklin  Bank,  39  Mass.  181  (1839), 
holding  that,  while  a  time  deposit  is 
within  the  prohibition,  the  money 
may  be  recovered  in  an  action 
brought  before  the  time  has  expired. 
See  also  Slark  v.  Highgate  Archway 
Co.,  5  Taunt.  792  (1814);  Wigan  v. 
Fowler,  1  Starkie,  459  (1816);  Brough- 
ton  V.  Manchester,  etc  Water-works, 
3  B.  &  Aid.  1  (1819) ;  Dockery  v.  MiUer, 
9  Humph.  (Tenn.)  731  (1849);  Ohio 
Life,  etc.  Co.  v.  Merchants'  Ins.  etc. 
Co.,  11  Humph.  (Tenn.)  1  (1850);  Root 
188 


CH.  XLI.] 


INTEA   VIEES    ACTS   AND    CONTEACTS. 


[§  690. 


but  this  does  not  prevent  the  corporation  from  collecting  the 
amount  due.  It  may  disregard  the  note  and  sue  on  the  loan 
itself.i 


I'.  Wallace,  4  McLean,  8  (1845);  S.  C, 
20  Fed.  Cas.  1167,  holding  that  an  in- 
dorsee may  recover  from  the  indorser 
of  a  note  void  for  tiiis  illegality  the 
consideration  paid  for  it;  State  v. 
Urbana,  etc.  Co.,  14  Ohio,  6  (1846), 
holding  that  receiving  a  deposit  of 
money  is  not  a  violation  of  a  charter 
restriction  upon  the  exercise  of  bank- 
ing powers;  New  York  Firemen  Ins. 
Co.  V.  Ely,  5  Conn.  560  (1835  j,  where 
a  corporation  was  not  allowed  to  re- 
cover upon  a  note  because  its  charter 
prohibited  it  from  doing  a  banking 
business;  Farmers'  L.  &  T.  Co.  v. 
Perry,  3  Sandf.  Ch.  330  (1846),  and 
Green  v.  Seymour,  3  Sandf.  Ch.  285 
(1846),  where  the  same  principle  was 
applied  to  mortgages  issued  in  viola- 
tion of  statutory  prohibition;  Safford 
V.  Wyckoff,  4  Hill,  442  (1842),  holding 
also  that  if  the  form  and  appearance 
of  the  rotes  indicate  that  they  were 
intended  to  be  circulated  as  money, 
one  who  takes  them,  being  thereby 
put  upon  his  inquiry,  is  not  a  bona 
fide  holder  and  cannot  recover  upon 
them.  To  same  effect,  Attorney- 
General  V.  Life,  etc.  Lis.  Co.,  9  Paige, 
470  (1842);  Mumford  v.  American, 
etc.  Co.,  4  N.  Y.  463  (1851),  holding 
that  a  certificate  of  deposit  is  not  in- 
cluded in  such  a  prohibition;  Leavitt 
V.  Yates,  4  Edw.  Ch.  134  (1843),  hold- 
ing also  that  a  trust  deed  given  to 
secure  such  notes  was  also  void; 
Hazleton  Coal  Co.  v.  Megargel,  4  Pa, 
St.  324  (1846),  holding  that  the  statute 
cannot  be  avoided  by  issuing  a  docu- 
ment which  is  in  effect,  though  not 
in  form,  a  note ;  Barry  v.  Merchants' 
Exchange  Co.,  1  Sandf.  Ch.  280  (1844); 
Utica  Lis.  Co.  v.  Scott,  19  Johns.  1 
(1821) ;  Montgomery  Branch  Bank  v. 
Crocheron,  5  Ala.  N.  S.  250  (1843), 
holding  that  the  biUs  of  a  corporation 
which    is   prohibited  from    issuing 


them  cannot  be  rendered  legal  by 
being  issued  by  a  bank  under  a  con- 
tract with  the  corporation;  Sackett's 
Harbor  Bank  u  Codd,  18  N.  Y.  240 
(1858),  holding  that  a  statute  pro- 
hibiting the  circulation  of  foreign 
bank  notes  does  not  prevent  their 
sale  and  delivery  for  any  other  pur- 
pose. Payment  of  a  debt  by  a  draft 
which  is  prohibited  by  statute  is  not 
payment,  the  draft  not  having  been 
paid.  Davis  v.  River  Raisin  Bank,  4 
McLean,  387  (1848);  S.  C,  7  Fed.  Cas. 
111.  A  charter  provision  that  no 
director  or  oflBcer  should  boiTOw  from 
the  bank  does  not  apply  to  loans  to  a 
fimi  of  which  the  director  is  a  mem- 
ber. Fisher  v.  Murdock,  13  Hun,  485 
(1878).  A  deposit  made  with  a  cor- 
poration which  is  prohibited  by  stat- 
ute from  doing  a  banking  business  is 
presumed  to  have  been  a  loan,  and  in 
any  case  is  recoverable  back  in  an 
action  for  money  had  and  received. 
Chapman  v.  Comstock,  58  Hun,  325 
(1890). 

1  Oneida  Bank  v.  Ontario  Bank,  21 
N.  Y.  490  (1860);  Pratt  v.  Short,  79 
N.  Y.  437  (1880),  reviewing  New  York 
cases;  Davis  S.  M.  Co.  v.  Best,  30 
Hun,  638  (1883);  Mills  v.  Western 
Bank,  64  Mass.  22  (1852);  Webb  v. 
Heme  Bay  Com'rs,  L.  R.  5  Q.  B.  643 
(1870).  Compare  Faneuil  Hall  Bank 
V.  Bank  of  Brighton,  82  Mass.  534 
(1860),  and  Western  Bank  v.  Mills,  61 
Mass.  539  (1851);  Utica  Lis.  Co.  v.  Kip, 
8  Cow.  20  (1827);  Utica  Lis.  Co.  v. 
CadweU,  3  Wend.  296  (1829),  and 
Utica  Ins.  Co.  v.  Bloodgood,  4  Wend. 
652  (1830);  Planters'  Bank  v.  Union 
Bank,  16  Walk  483  (1872),  holding 
that,  when  an  illegal  contract  has 
been  fully  executed,  the  money  con- 
stituting the  price  for  it  may  be 
looked  upon  as  a  legal  consideration 
for  an  express  or  implied  promise. 


1389 


G90.] 


INTRA   VIKES   ACTS   AND   C0NTEACT8. 


[CH.  XLI. 


But  where  the  statute  prohibits  not  only  the  enforcement  of 
the  note,  but  also  the  enforcement  of  any  contract,  express  or 
implied,  growing  out  of  the  transaction,  then  the  corporation 
loses  the  money  loaned.  Any  corporation,  unless  expressly 
prohibited,  has  power  to  take  a  mortgage  as  security  for  a  debt 
contracted  in  the  course  of  its  business.- 


To  same  effect,  Cook  v.  Sherman,  20 
Fed.  Rep.  167  (1882);  Workingmen's 
Banking  Co.  v.  Rautenberg,  103  III. 
4G0  (1882),  holding  tliat  a  note  given 
by  a  director  for  a  loan  in  excess  of 
the  amount  limited  by  charter  is 
void  so  far  as  to  release  a  guarantor 
upon  it;  Farmington  Sav.  Bank  v. 
Fall,  71  Ma  49  (1880),  holding  that  a 
prohibition  against  lending  money  on 
the  security  of  names  only  is  merely 
directory,  and  a  note  so  secured  may 
be  collected.  To  same  effect,  Na- 
tional Pemberton  Bank  v.  Porter,  125 
Mass.  333  (1878);  U.  S.  Trust  Co.  v. 
Brady,  20  Barb.  119  (1855);  Vanatta 
V.  State  Bank,  9  Ohio  St.  27  (1858); 
Union,  etc.  Ins.  Co.  v.  Keyser,  32  N,  H. 
313  (1855),  vfhere  a  note  given  for  in- 
surance upon  property  in  one  class, 
when  by  law  it  was  insurable  only  in 
another  class,  was  held  valid ;  McFar- 
lan  V.  Triton  Ins.  Co.,  4  Denio,  392 
(1847),  where  a  bond  owned  by  an 
insurance  company  was  held  to  have 
been  taken  as  an  investment  in  de- 
fault of  proof  of  consideration;  Mar- 
ion Sav.  Bank  v.  Dunkin,  54  Ala.  471 
(1875),  holding  that  an  accommoda- 
tion drawer  of  a  bill,  who  did  not  at 
the  time  know  it  was  discounted  by 
a  bank  in  violation  of  law,  may  de- 
fend by  showing  that  the  bank  was 
not  properly  organized;  Bro^vn  v. 
Killian,  11  Ind.  449  (1858),  holding 
that  notes  in  similitude  of  bank-notes 
are  void,  even  the  issuers  not  being 
liable  upon  them,  but  any  considera- 
tion paid  for  them  may  be  recovered 
back;  White  v.  Franklin  Bank,  39 
Mass.  181  (1839),  holding  that  money 
deposited  in  a  savings  bank  in  viola- 
tion of  a  statute  may  be  recovered; 


Lester  v.  Howard  Bank,  33  Md.  558 
(1870),  where  a  director  who  bor- 
rowed money  from  a  bank  in  viola- 
tion of  its  charter  was  held  liable  for 
the  money;  Philadelpliia  Loan  Co.  v. 
Towner,  13  Conn.  249  (1839),  where  the 
original  debt  was  validly  incurred, 
but  a  subsequent  note  taken  by  the 
corporation  was  illegal;  Pratt  v. 
Eaton,  79  N.  Y.  449  (1880),  wliere 
notes  secured  by  a  mortgage  were 
held  void,  but  the  mortgage  valid; 
People  V.  Brewster,  4  Wend.  498  (1830), 
holding  that  prohibiting  the  carry- 
ing on  of  a  banking  business  does 
not  prevent  lending  money  upon 
notes,  if  it  is  not  done  as  a  business; 
Otis  V.  Harrison,  36  Barb.  210  (1862); 
Barton  v.  Port  Jackson,  etc.  Co.,  17 
Barb.  397  (1854). 

1  New  Hope,  etc.  Co.  v.  Poughkeep- 
sie  Silk  Co.,  25  Wend.  648  (1841). 

2  State  V.  Rice,  65  Ala.  83  (1880); 
National  Bank  v.  Insurance  Co.,  41 
Ohio  St.  1  (1884);  Baird  v.  Bank  of 
Washington,  11  Serg.  &  R  (Pa.)  411 
(1824),  holding  that  a  power  to  take 
mortgages  in  the  course  of  business 
confers  the  power  to  commute  debts 
really  due  for  land;  Bank  of  Michi- 
gan V.  Niles,  1  Doug.  (Mich.)  401  (1844), 
holding  that  power  to  hold  lands  and 
take  mortgages  for  business  pui-poses 
does  not  confer  the  right  to  deal  in 
lands;  National  Trust  Co.  v.  Murphy, 
30  N.  J.  Eq.  408  (1879),  holding  that 
a  corporation  not  authorized  to  take 
land  as  original  investment  may  take 
a  mortgage  on  land  in  a  foreign,  state 
as  additional  security;  Clark  v.  Far- 
rington,  11  Wis.  306  (1860).  Sections 
5136  and  5137  of  the  United  States 
Revised  Statutes  do  not  prevent  a  nar 


1390 


CH.  XLI.] 


INTEA   VIKES    ACTS    AND    CONTKACTS. 


[§  690. 


Although  a  corporation  is  prohibited  by  its  charter  from 
taking  a  real-estate  mortgage  as  security  for  a  debt,  neverthe- 
less the  mortgage,  after  it  has  been  taken,  may  be  enforced  by 
the  corporation.  The  penalty  is  that  the  state  may  forfeit  the 
corporate  charter  for  misuser.^  The  laws  concerning  usury  are 
enforced  against  corporations  as  fully  as  against  individuals,^ 


tional  bank  from  enforcing  the  col- 
lection of  a  note  secured  by  a  moii;- 
gage  of  land  by  a  foreclosure  of  the 
mortgage.  National  Bank  v.  Mat- 
thews, 98  U.  S.  621  (1878);  Palmer  v. 
Lawrence,  3  Sandf.  Super.  161  (1849); 
Lathrop  v.  Scioto  Comm.  Bank,  8 
Dana  (Ky.),  114  (1839) ;  Mapes  u  Scott, 
94  IlL  379  (1880),  holding  that  national 
banks  may  take  conveyances  of  land 
in  payment  of  pre-existing  debts.  A 
national  bank  may  enforce  a  mort- 
gage securing  future  indebtedness. 
National  Bank  v.  Whitney,  103  U.  S. 
99  (1880);  Simons  v.  First  Nat.  Bank, 
93  N.  Y.  269  (1883).  The  case  of  U.  S. 
Mortgage  Co.  v.  Gross,  93  IlL  483 
(1879),  to  the  effect  that  foreign  cor- 
porations for  loaning  on  mortgages 
could  not  take  mortgages  in  Illinois, 
inasmuch  as  no  domestic  corpora- 
tion could  be  organized  for  that  pur- 
pose, was  overruled  by  Stevens  v. 
Pratt,  101  111.  206  (1882),  and  Commer- 
cial, etc.  Co.  V.  Scammon,  102  111.  46 
(1882).  A  foreign  corporation  may 
foreclose  a  mortgage.  American,  etc. 
Ins.  Ca  V.  Owen,  81  Mass.  491  (1860). 
1  National  Bank  v.  Whitney,  103 
U.  S.  99  (1880),  reversing  Crocker  v. 
Whitney,  71  N.  Y.  161  (1877),  holding 
that,  where  a  national  bank  takes  a 
mortgage  to  secure  future  advances, 
it  can  be  objected  to  only  by  the 
government;  National  Bank  v.  Mat- 
thews, 98  U.  S.  621  (1878),  reversing 
]yiatthews  v.  Skinker,  62  Mo.  329 
(1876),  holding  that  a  bank  holding  a 
deed  of  trust  upon  real  estate  as  secu- 
rity for  a  note,  contrary  to  the  act, 
may  sell  the  land  in  order  to  collect 
the  note;  followed  in  Winton  v.  Lit- 
tle, 94  Pa.  St.  64  (1880);  Thornton  v. 


National  Exch.  Bank,  71  Mo.  221 
(1879),  holding  that  the  only  penalty 
for  violations  of  that  act  is  forfeit- 
ure of  charter,  to  be  invoked  only  by 
the  United  States.  To  same  effect, 
Graham  v.  National  Bank,  32  N.  J. 
Eq.  804  (1880);  Oldham  v.  Bank,  85 
N.  C.  240  (1881),  and  Grand  Gulf  Bank 
V.  Archer,  16  Miss.  151  (1847).  For  a 
contrary  decision,  see  Green  v.  Sey- 
mour, 3  Sandf.  Ch.  285(1846);  Bardu 
Chamberlain,  3  Sandf.  Ch.  31  (1845). 

2  McLean  v.  Lafayette  Bank,  3  Mc- 
Lean, 587  (1846);  S.  C,  16  Fed.  Cas. 
264;  New  York  F.  Ins.  Co.  v.  Sturges, 
3  Cow.  664  (1824);  Grand  Gulf  Bank 
V.  Archer,  16  Miss.  151  (1847);  Parkins 
V.  Watson,  2  Baxt.  (Tenn.)  173  (1872), 
holding  that  a  bank  may  discount  on 
the  same  terms  as  an  individual,  and 
should  suffer  the  same  forfeit  for 
usury;  Tyng  v.  Commercial  Ware- 
house Co.,  58  N.  Y.  308  (1874),  holding 
that  general  usury  laws  apply  to  cor- 
porations. Charter  privileges  to  a 
building  association  to  take  larger 
interest  than  is  allowed  to  others 
under  the  usury  law  are  unconstitu- 
tional in  Kentucky.  Gordon  v.  AVin- 
chester,  etc.  Assoc.,  12  Bush  (Ky.), 
110  (1876).  A  note  of  a  third  party 
given  by  a  debtor  to  a  bank  in  good 
faith  for  an  existing  debt  is  not  usu- 
rious^ Dunkle  V.  Renick,  6  Ohio  St. 
527  (1856);  Morse,  Banking  (3d  ed.), 
§  72,  etc.  A  corporation  limited  to 
"legal  interest"  may  take  legal  in- 
terest as  allowed  by  the  laws  of  the 
state  where  the  money  is  loaned.  It 
is  not  confined  to  the  rate  prescribed 
by  the  laws  of  the  state  in  which  it 
is  incoi-porated.  U.  S.  Mortgage  Co. 
V.  SpeiTy,  138  U.  S.  313  (1891).    In 


1391 


§  691.] 


INTKA    VIKES    ACTS    AND    CONTRACTS. 


[cn.  XLI. 


and  where  their  charters  forbid  them  from  exacting  more  than 
a  specified  rate  of  interest  thej  are  bound  by  the  restriction.* 
IS'ational  banks  are  limited  to  the  same  rate  of  interest  as  the 
banks  of  the  state  wherein  they  are  located  arc  allowed  to  take, 
and  to  seven  per  cent  if  there  is  no  restriction  in  that  state ; ' 
but  for  any  infraction  of  this  statute  the  bank  forfeits  the  in- 
terest, or,  if  already  paid,  is  liable  for  twice  such  interest,  but  is 
not  subject  to  the  state  statutes  relative  to  usury.' 

§  691.  Preferences  and  assignments  hy  insolvent  corporor 
tions  —  Assignments  hy  corporations  for  the  'benefit  of  credit- 
ors —  Preferences  in  such  assignments  —  Preferences  hy  way  of 
mortgages,  etc. —  Corporations,  unless  restricted  by  their  char- 
ters, or  by  general  statutes,  may  make  assignments  for  the  bene- 
fit of  creditors  to  the  same  extent  that  individuals  may. 

In  making  the  assignment  the  corporation  may  make  prefer- 
ences to  one  or  more  creditors  over  others,  or  to  one  class  of 
creditors  over  other  classes.* 


some  states  the  excess  of  interest  is 
forfeited;  in  other  states  the  whole 
interest  is  forfeited;  and  in  still  other 
states  the  whole  debt  is  forfeited.  See 
Stimson,  Am.  Stat.  Law,  §  4833.  As 
to  iLSury  as  a  defense  to  a  suit  against 
a  corporation,  see  §  766,  infra. 

1  Bank  of  U.  S.  v.  Owens,  2  Pet  527 
(1829),  where  notes  given  for  more 
than  the  rate  fixed  by  the  charter  of 
a  bank  were  declared  void;  Planters' 
Bank  v.  Sharp,  12  Miss.  75  (1844).  But 
here  it  was  held  that  taking  a  greater 
amount  of  interest  than  that  allowed 
by  the  charter  rendered  the  corpora- 
tion liable  imder  the  general  usury 
laws,  and  that  the  contract  was  not 
void.  On  this  point  see  Eock  River 
Bank  v.  Sherwood,  10  Wis.  174  (1860); 
Commercial  Bank  v.  Nolan,  8  Miss.  508 
(1843);  Grand  Giilf  Bank  v.  Archer, 
16  Miss.  151  (1847);  Bank  of  Chilli- 
cothe  V.  Swayne,  8  Ohio,  257  (1838), 
where  a  contract  for  more  than  the 
specified  rate  was  held  void.  To  same 
effect.  Creed  v.  Commercial  Bank,  11 
Ohio,  489  (1842);  Spalding  v.  Bank  of 
Muskingum,  12  Ohio,  544  (1841),  hold- 
ing also  that  taking  a  commission  is 


only  a  method  of  avoiding  the  stat- 
ute, and  Miami  Exporting  Co.  v. 
Clark,  13  Ohio,  1  (1844),  where  the 
same  ruling  was  made  in  regard  to 
charging  for  exchange;  Morse,  Bank- 
ing (3d  ed.),  §  52.  A  national  bank 
cannot  take  usurious  interest  under 
the  cover  of  a  "commission,"  the 
latter  to  be  paid  in  case  the  borrower 
does  not  keep  a  balance  in  the  bank 
of  a  specified  amount.  Although  a 
corporation  is  forbidden  by  statute 
to  set  up  usury,  yet  a  national  bank 
cannot  collect  usurious  interest  from 
a  railroad  corporation  borrowing 
money  of  the  bank.  Union  Nat. . 
Bank  v.  Louisville,  etc.  R'y,  145  111. 
208  (1893). 

2U.S.  Rev.  Stats.,  §5197. 

3  U.  S.  Rev.  Stats.,  §  5198;  Bamet  v. 
National  Bank,  98  U.  S.  555  (1878). 

*  Federal  Courts:  That  an  assign- 
ment for  the  benefit  of  creditors  may 
be  made,  see  Graham  v.  Railroad  Co., 
102  U.  S.  148  (1880).  Compare  on  this 
subject  the  dictum  in  Consolidated, 
etc.  Co.  V.  Kansas  City,  etc.  Co.,  45 
Fed.  Rep.  7  (1891).  That  preferences 
may  be  given,  see  Smith,  etc.  Co.  v. 


1392 


CH.  XLI.] 


INTKA   VIKES    ACTS    AXD    CONTRACTS. 


[§  C91. 


There  have  been  a  few  decisions  to  the  contrary.    There  has 
also  been  considerable  discussion  in  legal  periodicals,  decisions, 


McGroarty,  136  U.  S.  237  (1890);  Allis 
V.  Jones,  45  Fed.  Rep.  148  (1891);  At- 
lanta, etc.  R.  R.  V.  Western  R'y,  50 
Fed-  Rep.  790  (1892);  Consolidated, 
etc.  Co.  V.  Kansas  City,  etc.  Co..  45 
Fed.  Rep.  7  (1891);  Graham  v.  Rail- 
road Co.,  103  U.  S.  148  (1880);  Gould 
V.  Little  Rock,  etc.  R'y,  52  Fed.  Rep. 
680  (1892).  An  insolvent  corporation 
may  give  a  chattel  mortgage  to  se- 
cure a  part  of  its  debts.  Such  a  mort- 
gage is  legal,  notwithstanding  a  stat- 
ute against  assignments  with  prefer- 
ences. Brown  v.  Grand  Rapids,  etc. 
Co.,  58  Fed.  Rep.  286  (1893),  a  case 
arising  in  Michigan.  A  creditor  who 
becomes  such  after  a  mortgage  is 
executed  cannot  object  to  the  mort- 
gage on  the  ground  that  it  was  an 
unlawful  preference.  Central  Ti-ust 
Co.  V.  Bridges,  57  Fed.  Rep.  753  (1893). 
A  statutory  prohibition  against  pref- 
erences by  an  insolvent  corporation 
does  not  prevent  the  giving  of  col- 
lateral for  a  debt  when  contracted. 
Armstrong  v.  Chemical  Nat.  Bank, 
41  Fed-  Rep.  234  (1890).  A  coi-porate 
creditor  may  take  a  mortgage  on 
the  corporate  property,  although  lie 
knows  that  the  corporation  is  insolv- 
ent. Doe  V.  Northwestern,  etc.  Co., 
78  Fed.  Rep.  62  (1896).  Judgment 
notes  for  past  and  future  advances 
are  illegal  where  the  board  of  direct- 
ors is  at  once  turned  over  to  the  dum- 
mies of  the  holders  of  the  judgment 
notes,  and  the  company  continues  to 
do  business  as  though  said  judgment 
notes  had  not  been  given,  the  intent 
being  to  ensure  a  preference  not  only 
at  once,  but  in  the  futura  Such 
preferences  as  to  the  future  must  be 
evidenced  by  a  mortgage  or  some 
other  instrument  upon  the  public  rec- 
ords. American,  etc.  Co.  v.  Fargo,  77 
Fed.  Rep.  671  (1896).  A  statute  pro- 
hibiting preferences  by  any  insolvent 
debtor  during  ninety  days  prior  to 


an  assignment  does  not  apply  to  a 
mortgage  given  to  take  the  i^lace  of 
a  prior  mortgage,  and  of  obtaining 
a  larger  loan,  the  creditor  having 
no  reasonable  cause  to  suppose  the 
debtor  was  insolvent.  Moore  t\  Amei'- 
ican  L.  &  T.  Co.,  80  Fed.  Rep.  49  (1896). 
A  remittance  to  a  correspondent  by 
a  national  bank  is  legal,  although  the 
bank  is  insolvent  at  the  time.  Hay- 
den  V.  Chemical  Nat.  Bank,  80  Fed. 
Rep.  587  (1897).  In  U.  S.  Rubber  Co. 
V.  American,  etc.  Co.,  82  Fed.  Rep. 
248  (1897),  where  certain  creditors  of 
an  insolvent  corporation  took  secret 
secm-ity  amounting  to  a  preference, 
and  then  took  control  of  the  board  of 
directors  so  as  to  prevent  any  prefer- 
ence to  other  creditors,  the  court  said 
tliat  the  transaction  was  "  incompat- 
ible with  fair  dealing  in  business  and 
with  good  morals."  Where  the. con- 
trolling directors  of  two  corporations 
are  the  same  persons,  and  one  com- 
pany becomes  liable  on  paper  for  the 
accommodation  of  the  other,  and 
thereby  renders  the  directors  of  the 
former  personally  liable  for  breach 
of  tiTLst,  a  mortgage  given  by  the  lat- 
ter to  the  former  as  security  for  such 
paper  is  invalid,  because  it  amounts  to 
a  preference  to  such  officers.  Hutch- 
inson V.  Sutton  Mfg.  Co.,  57  Fed.  Rep. 
998  (1893),  a  case  arising  in  Indiana. 
An  attaching  creditor  cannot  attack 
a  corporate  conveyance  which  oper- 
ates as  a  preference,  the  corporation 
itself  being  insolvent,  inasmuch  as  the 
reason  against  preferences  by  an  in- 
solvent corporation  applies  as  much 
to  attaching  creditors  as  to  parties 
taking  by  conveyance.  Walker  v. 
Miller,  59  Fed.  Rep.  869  (1894)." 

Section  5242  of  the  Revised  Stat- 
utes of  the  United  States  prohibits  a 
national  bank  fi-om  transferring  any 
notes,  bonds,  bills  of  exchange,  or 
other  evidences  of  debt  or  mortgages 


88 


1393 


§  G91.] 


INTKA   VIKES   ACTS    AND    CONTRACTS. 


[CH. 


XLI. 


and  elsewhere  to  the  effect  that  at  common  law  an  insolvent 
corporation  could  not  prefer  one  creditor  as  against  another. 


or  judgments  or  deposits  either  after 
an  act  of  insolvency  or  in  contempla- 
tion thereof  with  a  view  to  a  prefer- 
enca  The  following  decisions  are  on 
this  statute:  National  Security  Bank 
V.  Butler,  129  U.  S.  223  (1889),  all'g  22 
Fed.  Eep.  697,  where  a  bank  holding 
a  certificate  of  deposit  of  an  insolv- 
ent bank  took  assets  of  the  latter  on 
the  day  of  its  failui-e,  and  gave  a  cer- 
tificate of  deposit  therefor,  and  then 
sought  to  offset  the  one  against  the 
other.  The  court  held  that  it  was 
immaterial  that  the  creditor  of  the 
insolvent  bank  was  not  aware  of  the 
insolvency.  Roberts  v.  Hill,  24  Fed. 
Rep.  571  (1885),  rev'g  S.  C,  23  Fed. 
Rep.  311,  where  a  bank  transferred 
to  one  of  its  depositors  a  note  which 
the  bank  held,  the  transfer  being 
made  when  the  bank  was  insolvent. 
Although  the  bank  kept  open  for 
about  three  months  thereafter,  and 
even  though  the  note  was  given  to 
the  depositor  as  collateral  security, 
and  was  the  only  way  of  preventing 
him  from  drawing  out  his  money, 
the  court  held  that  the  act  was  in 
contemplation  of  insolvency,  inas- 
much as  the  officers  could  reason- 
ably see  that  the  bank  would  pres- 
ently be  unable  to  meet  its  obliga- 
tion, and  would  be  obliged  to  suspend 
operations.  Case  v.  Citizens'  Bank, 
2  Woods,  23  (1873);  S.  C,  5  Fed.  Cas. 
251,  in  which  an  insolvent  bank  trans- 
ferred various  bills  and  notes  to  an- 
other bank,  to  which  the  former 
bank  had,  while  solvent,  transferred 
bills  of  exchange  which  were  not 
thereafter  honored.  The  court  held 
the  act  to  be  illegal  Armstrong  v. 
Chemical  Nat.  Bank,  41  Fed.  Rep.  234 
(1890),  wherein  it  was  held  that  an 
insolvent  bank  might  transfer  assets 
to  secure  a  loan  made  contemporane- 
ously with  such  transfer.  Irons  v. 
Manufacturers'  Nat.   Bank,  6   Biss. 


301  (1875);  S.  C,  13  Fed.  Cas.  100, 
where  the  phrase  "  act  of  insolvency  " 
was  held  to  mean  any  act  which 
would  be  an  act  of  insolvency  by  an 
individual  banker.  See  also  National 
Bank  v.  Colby,  21  Wall  609  (1874). 
In  Casey  u  Societe  de  Credit  Mobilier, 
2  Woods,  77  (1874);  S.  C,  5  Fed.  Cas. 
202,  it  was  held  that  the  preference 
intended  by  the  act  is  such  as  is 
given  to  secure  or  pay  a  pre-existing 
debt,  and  does  not  prevent  the  bor- 
rowing of  money  upon  security.  Ve- 
nango Nat.  Bank  v.  Taylor,  56  Pa.  St. 
14  (1807),  holding  that  the  act  relates 
to  legal  as  well  as  voluntary  trans- 
fers of  property  by  banks.  See  also 
National,  etc.  Bank  v.  Mechanics', 
etc.  Bank,  89  N.  Y.  467  (1882);  Robin- 
son V.  Newberne  Nat.  Bank,  81  N.  Y. 
385  (1880),  holdmg  that  the  act  ap- 
plies only  to  such  banks  as  are  in- 
solvent or  are  about  to  become  so. 
A  state  statute  giving  savings  banks 
a  preference  in  payment  from  the 
assets  of  an  insolvent  bank  does  not 
apply  to  national  banks  which  be- 
come insolvent.  Davis  v.  Elmira  Sav. 
Bank,  101  U.  S.  275  (1896),  rev'g  El- 
mira Sav.  Bank  v.  Davis,  142  N.  Y. 
590,  and  73  Him,  357.  Remittances 
by  an  insolvent  national  bank  to  its 
correspondent  bank  are  legal  where 
the  former  bank  has  not  actually 
stopped  business,  and  the  transac- 
tions were  in  good  faith.  Hayden  v. 
Chemical  Nat.  Bank,  84  Fed.  Rep.  874 
(1898). 

Alabama:  That  an  assignment  may 
be  made,  see  Chamberlain  v.  Brom- 
berg,  83  Ala.  576  (1888);  Pope  v.  Bran- 
don, 3  Ala.  (O.  S.)  401  (1800),  holding 
also  that  it  was  not  necessary  that 
the  creditors  should  sign  the  assign- 
ment; nor  was  the  deed  void  because 
the  trustee  was  the  president  of  the 
assigning  bank,  who  in  that  capacity 
executed  the  deed  as  a  grantor;  Allen 


1394 


CH.  XLI.] 


INTRA   YIEES   ACTS    AND    CONTRACTS. 


[§  691. 


The  almost  unanimous  conclusion,  however,  is  that  preferences 
may  be  given  by  an  insolvent  corporation  the  same  as  by  an  in- 


V.  Montgomery  E.  R,  11  Ala.  437, 451 
(1847).  The  president  cannot  make 
an  assignment  by  the  company  for 
the  benefit  of  creditors.  A  ratifica- 
tion by  the  directors  is  not  good  as 
against  an  attachment  in  the  mean- 
time. Norton  v.  Alabama  Nat.  Bank, 
103  Ala.  420  (1894).  A  bill  to  compel 
an  assignee  for  the  benefit  of  credit- 
ors of  an  insolvent  corporation  to  ac- 
count, and  to  hold  stockholders  liable 
on  stock  issued  for  property,  and  to 
reach  corporate  assets  in  the  hands 
of  third  parties,  is  multifarious.  The 
theory  that  the  capital  stock  is  a 
trust  fund  is  im founded.  O'Bear  Jew- 
elry Co.  V.  Volfer,  106  Ala.  205  (1895). 
A  preference,  however,  is  not  al- 
lowed in  this  state.  Yet  even  though 
under  the  decisions  of  Alabama  an 
insolvent  corporation  cannot  give  a 
preference,  nevertheless  so  long  as  the 
corporation  is  a  going  concern  it  may 


Arkansas:  Preferences  are  upheld 
in  this  state.  Ringo  v.  Biscoe,  13 
Ark.  563  (1853);  Ex  parte  Conway,  4 
Ark.  302,  352  (1842).  The  statutes  of 
Arkansas  prohibit  preferences  among 
creditors  of  insolvent  corporations. 
Sand.  &  H.  Digest,  sees.  1425, 1427. 

Canada:  The  directors  may  make 
an  assignment  of  the  corporate  assets 
for  the  benefit  of  creditors.  Whit- 
ing V.  Hovey,  13  Ont.  App.  Cas.  7 
(1886). 

Colorado:  An  insolvent  corpora- 
tion may  give  a  preference  and  con- 
vey to  one  creditor  aU  its  property. 
John,  etc.  Co.  v.  Sweetzer,  51  Pac. 
Rep.  1012  (Colo.,  1897). 

Connecticut:  Preferences  are  up- 
held. Savings  Bank  v.  Bates,  8  Conn. 
505  (1831);  Smith  v.  Skeary,  47  Conn. 
47  (1879).  The  following  case  bears 
upon  this  principle  of  law,  but  does 
not  conflict  with  it:  Catlin  v.  Eagle 


pay  a  party  who  is  not  aware  of  the  in-    Bank,  6  Conn.  233  (1826).    A  deed  in 

trixst  by  a  corporation  of  all  its  prop- 
erty, made  with  consent  of  nearly  all 
its  creditors,  to  trustees  to  continue 
the  business,  is  void  as  to  non-con- 
senting creditors.  Waterman  v. 
Sprague  Mfg.  Co.,  55  Conn.  554  (1888); 
De  Wolf  V.  Sprague  Mfg.  Co.,  49  Conn. 
282  (1881).  Under  the  Connecticut 
statutes  an  insolvent  corporation  is 
placed  in  a  receiver's  hands  for  the 
benefit  of  all  creditors,  and  a  person 
holding  sectirity  must  stand  on  his 
security  or  else  come  in  only  for  the 
excess  of  his  claim  above  the  value 
of  tlie  security.  J2e  Waddell-Entz  Co., 
67  Conn.  324  (1896). 

Georgia:  An  assignment  for  the 
benefit  of  creditors  is  legal.,  Mc- 
Callie  V.  Walton,  37  Ga.  611  (1868). 
And  preferences  may  be  given.  The 
following  case  bears  upon  this  prin- 
ciple of  law,  but  does  not  conflict 
with  it:  HightONver  v.  Mustian,  8  Ga, 
506  (1850). 


solvency.  jMary  Lee,  etc.  R'y  v.  Knox, 
110  Ala.  632  (1895).  A  corporation  in 
financial  difficulties  cannot  execute 
a  mortgage  to  secure  bonds,  and  de- 
liver these  bonds  to  a  bank  as  security 
for  past  and  future  advances,  where 
two  of  the  directors  of  the  company 
are  also  directors  of  the  bank.  Such 
a  mortgage  delays  other  creditors. 
Only  bona  fide  holders  of  such  bonds 
are  protected.  Age-Herald  Co.  v. 
Potter,  109  Ala.  675  (1895).  A  mort- 
gage deed  of  trust  to  secure  bonds 
executed  by  an  insolvent  corpora- 
tion is  presumed  to  be  a  conveyance 
of  corporate  property  to  delay  and 
defraud  creditors;  but  a  bill  attack- 
ing such  a  mortgage  must  allege 
that  parties  receiving  bonds  to  secure 
their  debts  did  not  advance  money 
at  the  time  of  receiving  bonds,  but 
were  antecedent  creditors.  Coal  City, 
etc.  Co.  V.  Hazard  Powder  Co.,  108 
Ala.  218  (1896). 


1395 


§  691.] 


INTKA    YIEES   ACTS    AND    CONTKACTS. 


[CH.  XLI. 


solvent  individual.    And  yet  it  must  be  conceded  that  great 
abuses  have  arisen  therefrom.    The  directors  and  stockholders 


Illinois:  Assignments  by  insolvent 
corporations  with  preferences  are 
legal.  Blair  v.  Illinois  Steel  Co.,  159 
111.  350  (1896),  quoting  and  approving 
the  text  above;  Illinois  Steel  Co.  v. 
O'DonneU,  156  111.  624  (1895);  Chi- 
cago, etc.  Co.  V.  Smith,  158  IlL  417 
(1895).  Tlie  preference  may  be  by 
way  of  mortgage.  Eeed  v.  Bradley, 
17  111.  321  (1856).  A  preference  by 
an  insolvent  corporation  is  legal. 
State  Nat.  Bank  v.  Union  Nat.  Banlc, 
48  N.  E.  Rep.  82  (111.,  1897).  It  is 
legal  in  Illinois  for  an  insolvent  cor- 
poration to  give  judgment  notes, 
even  though  judgment  is  imme- 
diately entered  thereon  and  all  its 
assets  sold  out,  the  creditor  not  being 
a  director  or  stockholder.  Peterson 
V.  Brabrook,  etc.  Co.,  150  111.  290  (1894). 
Although  a  New  York  insolvent  cor- 
poration is  prohibited  by  statute  from 
preferring  a  creditor,  j-et  where  it 
turns  over  in  Ohio  property  to  a  cred- 
itor, the  Illinois  courts  will  sustain 
the  preference  in  accordance  with 
Illinois  decisions.  Warren  v.  First 
Nat.  Bank,  149  IlL  9  (1893).  A  cor- 
poration that  is  imable  to  pay  its 
debts  as  they  become  due  in  the 
usual  coiu'se  of  business  is  insolvent. 
Atwater  v.  American,  etc.  Bank,  153 
IlL  605  (1894). 

Indiana:  The  assignment  may  be 
made  by  a  meeting  of  the  board  of 
directors,  as  in  any  other  corporate 
business.  De  Camp  v.  Alward,  53 
Ind.  468  (1876).  Preferences  are  legaL 
First  Nat.  Bank  v.  Dovetail,  etc.  Co., 
143  Ind.  550(1895);  Smith  v.  Wells, 
etc.  Co.,  46  N.  E.  Rep.  1000  (Ind.,  1897). 

loica:  Preferences  are  legaL  Rol- 
lins V.  Shaver,  etc.  Co.,  80  Iowa,  380 
(1890).  The  following  case  bears 
upon  this  principle  of  law,  but  does 
not  conflict  with  it:  Buell  v.  Buck- 
ingham, 16  Iowa,  284  (1864).  A  di- 
rector and  stockholder  who  acqui- 


esces in  the  giving  of  a  mortgage  to 
a  certain  creditor  cannot  afterwards 
complain  of  the  same.  Gillette  r. 
Meredith,  73  N.  W.  Rep.  443  (Iowa, 
1897). 

Kentucky:  A  creditor  of  an  insolv- 
ent cori^oration  may,  by  attachment, 
obtain  a  preference  over  other  cred- 
itors, and  if  an  insolvent  corporation 
makes  a  fraudulent  assignment  for 
tlie  benefit  of  creditors,  any  creditor 
may  levy  such  an  attachment.  A 
secret  unrecorded  mortgage,  held 
until  the  company  becomes  insolvent, 
is  fraudulent  as  to  other  creditors. 
Louisville,  etc.  Co.  v.  Etheridge,  etc. 
Co.,  43  S.  W.  Rep.  109  (Ky.,  1897). 

Louisiana:  The  Louisiana  statute 
allowing  insolvent  individuals  to 
apply  to  tlie  court  and  obtain  an  ex- 
tension of  time  on  their  debts  does 
not  apply  to  corporations.  Isabella 
Lumber  Co.  v.  Creditors,  19  S.  Rep.  136 
(La.,  1896). 

Maine:  An  insolvent  corporation 
in  Maine  may  be  declared  an  insolv- 
ent debtor  under  tlie  statute,  but 
cannot  obtain  a  discharge  in  insolv- 
ency. A  creditor  may  obtain  judg- 
ment at  law,  and  levy  on  property 
which  the  insolvent  illegally  trans- 
ferred away.  Miller  v.  Waldobor- 
ough  Packing  Co.,  88  Me.  605  (1896). 
Although  an  Illinois  corporation  has 
passed  through  insolvency  proceed- 
ings in  Maine,  yet  a  non-resident  cred- 
itor wiio  was  not  a  party  to  such  pro- 
ceedings may  thereafter  sue  such 
corporation  in  Maine.  Hammond, 
etc.  Co.  V.  Best,  40  AtL  Rep.  338  (Me., 
1898). 

Maryland:  Assignments  are  legaL 
State  V.  Bank  of  Maiyland,  6  Gill  & 
J.  205,  219  (1834).  A  vendor  of  goods 
to  an  insolvent  corporation  may  re- 
scind and  replevy  the  goods  if  the 
corporate  officers  at  the  time  had  no 
reasonable    exjjectation   of  making 


1396 


OH.  XLI.] 


INTEA   TIKES    ACTS   AND    CONTRACTS. 


[§  C91. 


of  a  corporation  are  nmneroiis,  and  each  generally  wishes  some 
particular  creditor  to  be  preferred.   Moreover  an  insolvent  cor- 


payment  when  the  bill  became  due. 
Edelhoff  V.  Homer,  etc.  Co.,  39  Atl. 
Rep.  314  (Md.,  1898).  An  assignment 
for  the  benefit  of  creditors,  executed 
by  the  president  and  secretary  with- 
out authority  from  the  board  of  di- 
rectors, may  be  valid  if  not  promptly 
repudiated  by  the  board  of  directors. 
Miller  v.  Matthews,  40  AtL  Rep.  176 
(Md.,  1898). 

Massachusetts:  Assignments  are 
legal.  Sargent  v.  Webster,  54  Mass. 
497  (1847),  holding  also  that  the  as- 
signment may  be  to  a  stockliolder  to 
pay  a  debt  of  the  corporation  to  him, 
and  the  remainder  to  go  to  the  corpo- 
rate treasurer  for  the  benefit  of  other 
creditors.  As  to  the  Massachusetts 
statute  providing  for  insolvency  pro- 
ceedings against  a  corporation  which 
makes  an  assignment  for  the  benefit 
of  creditors,  see  Steel,  etc.  Co.  v.  Man- 
chester Sav.  Bank,  163  Mass.  253 
(1895). 

Michigan:  An  insolvent  corpora- 
tion may  make  an  assignment  for 
the  benefit  of  creditors,  and  the  board 
of  directors  may  make  it  without  the 
assent  of  the  stockholders,  Boynton 
V.  Roe,  72  N.  AV.  Rep.  257  (Mich.,  1897). 
The  Michigan  statute  against  prefer- 
ences in  assignments  does  not  pre- 
vent the  giving  of  a  mortgage  to  a 
trustee  to  secure  certain  debts  due 
from  the  insolvent  corporation  mort- 
gagor. Austin  V.  First  Nat.  Bank, 
100  Mich.  613  (1894).  At  common  law 
in  Michigan  an  insolvent  corporation 
might  assign.  Bank  of  Montreal  v. 
Potts,  etc.  Co.,  90  Mich.  345  (1892); 
Kendall  u.  Bishop,  76  Mich.  634  (1889). 
.  The  president  who  makes  an  assign- 
ment of  the  company's  assets  for  the 
benefit  of  creditors  under  a  resolu- 
tion of  the  board  of  directors  cannot 
afterwards  attack  it.  He  George,  etc. 
Co.,  86  Mich.  149  (1891);  Covert  v. 
Rogers,  38  Mich.  303  (1878),  holding 


that  the  assignee  may  be  one  of  the 
stockholders.  In  this  case  he  was  a 
former  treasurer,  who  had  resigned. 
Stockholders  cannot  prevent  direct- 
oi-s  making  an  assignment  for  the 
benefit  of  corporate  creditors,  though 
their  term  of  office  expires  in  four 
days,  the  corporation  being  insolvent. 

Minnesota:  The  board  of  directors 
of  an  insolvent  corporation  may 
order  an  assignment  for  the  benefit 
of  creditors.  Tripp  v.  Northwestern 
Nat.  Bank,  41  Minn.  400  (1889).  45 
Minn.  383  (1891).  In  Minnesota,  by 
statute,  an  insolvent  corporation 
cannot  give  preferences.  Yanish  v. 
Pioneer  Fuel  Co.,  64  Minn.  175  (1896). 

Mississippi:  Preferences  are  legal. 
Sells  V.  Rosedale,  etc.  Co.,  72  Miss.  590 
(1895);  Arthur  v.  Commercial,  etc. 
Bank,  17  Miss.  394(1848);  Palmer  v. 
George  W.  Hutchison  Grocery  Co.,  11 
S.  Rep.  789  (Miss.,  1892).  The  follow- 
ing case  bears  upon  this  principle  of 
law,  but  does  not  conflict  with  it: 
Robins  v.  Embry,  1  Sm.  &  M.  Ch. 
(Miss.)  207,  258  (1843).  An  assign- 
ment by  a  railroad  assigns  its  income 
only.  Arthur  v.  Commercial,  etc. 
Bank,  17  Miss.  394,  430  (1848).  See 
also  State  v.  Commercial  Bank,  21 
Miss.  569  (1850). 

Missouri:  Assignments  are  legal 
Hutchinson  v.  Green,  91  Mo.  367 
(1886);  Shockley  v.  Fisher,  75  Mo.  498 
(1882),  construing  a  statute  authoriz- 
ing an  assignment  "  by  a  debtor  to 
any  person  in  trust  for  his  creditors  " 
to  include  corporations,  and  holding 
tha.t  the  right  exists  at  common  law, 
citing  2  Kent,  Com.  398,  and  note. 
Preferences  may  be  given.  Meyer  v. 
American,  etc.  Co.,  130  Mo.  188  (-1895); 
Slavens  v.  Cook  Drug  Co.,  128  Mo.  341 
(1895).  A  creditor  of  an  insolvent 
corporation  may  obtain  a  preference 
by  an  attachment,  and,  it  is  legal, 
even  though  a  director  of  the  corpo 


1397 


§  691.] 


INTEA   VIKES   ACTS    AND    CONTRACTS. 


[CH.  XLI. 


poration  never  hopes  to  resume  business  again,  and  is  more 
ruthless  and  unconscionable  in  its  preferences,  because  no  moral 


ration  advised  him  to  attach.  La 
Grange,  etc.  Co.  v.  National  Bank,  123 
Mo.  154  (1894),  the  court  rcfxising  to 
follow  the  Tennessee  rule.  An  em- 
barrassed corporation  may  take  title 
to  land  in  a  director's  name  and  have 
him  give  a  mortgage  thereon  to  raise 
money  for  the  corporation.  Donham 
V.  Hahn,  127  Mo.  439  (1895).  An  in- 
solvent corporation  may  turn  over  to 
a  bank  book-accounts,  merchandise, 
and  fixtures  as  security  for  a  debt, 
even  though  the  corporation  there- 
after, on  the  same  day,  assigns  for  the 
benefit  of  creditors.  Alberger  v.  Na- 
tional Bank,  123  Mo.  313  (1894),  call- 
ing attention  also  to  the  fact  that 
contraiy  decisions  in  Ohio  and  Texas 
were  based  on  statutes.  A  creditor 
who  has  not  yet  reduced  his  claim  to 
a  judgment  cannot  file  a  bill  to  set 
aside  an  alleged  illegal  transfer  of 
property.  Atlas  Nat.  Bank  v.  Moran, 
etc.  Co.,  39  S.  W.  Rep.  71  (Mo.,  1897). 
An  assignment  for  the  benefit  of 
creditors,  authorized  by  the  direct- 
ors actio  g  separately  and  not  as  a 
board,  is  invalid.  Calumet  Paper  Co. 
V.  Haskell,  etc.  Co.,  45  S.  W.  Rep.  1115 
Qslo.,  1897). 

Montana:  An  insolvent  corpora- 
tion may  give  a  preference  by  a 
mortgage.  Teitig  v.  Boesman,  12 
Mont.  404  (1892).  Preferences  are 
legal  Ames,  etc.  Co.  v.  Heslet,  47 
Pac.  Rep.  805  (Mont.,  1897). 

Nebraska:  An  insolvent  corpora- 
tion may,  in  the  absence  of  actual 
fraud,  prefer  one  or  more  of  the  cred- 
itors, to  the  exclusion  of  others.  Wal- 
lachs  V.  Robinson,  etc.  Co.,  70  N.  W. 
Rep.  53  (Neb.,  1897);  Shaw  v.  Robin- 
son, etc.  Co.,  69  N.  W.  Rep.  947  (Neb., 
1897). 

New  Havipshire:  Assignments  may 
be  made.  Flint  v.  Clinton  Co.,  12  N.  H. 
430,  435  (1841).  As  to  preferences, 
the  following  case  bears  upon  this 


principle  of  law:  Richards  v.  New 
Ilampsliiro  Ins.  Co.,  43  N.  H.  2G3  (1801). 
As  to  proceedings  against  a  corpo- 
ration under  the  insolvent  debtor's 
act,  see  Kennett  v.  Woodworth-M. 
Co.,  39  AtL  Rep.  585  (N.  H.,  1890). 

Nciv  Jersey:  Section  64  of  the 
Laws  of  1890  now  forbids  any  assign- 
ment whatsoever  of  any  of  the  assets 
of  an  insolvent  corporation.  The 
statute  of  1895,  prohibiting  insolvent 
corporations  from  making  assign- 
ments, did  not  apply  to  companies 
organized  before  the  passage  of  the 
statute.  Such  a  statute  did  not  in- 
validate an  assignment  for  the  bene- 
fit of  creditors  given  by  an  insolvent 
New  Jersey  corporation  in  Pennsyl- 
vania. Borton  v.  Brines-Chase  Co., 
175  Pa.  St.  209  (1896).  A  mortgage 
given  by  an  insolvent  coi-jioratipn  to 
a  creditor  for  a  pre-existing  debt  is 
invalid  under  the  New  Jersey  stat- 
utes. Frost  V.  Barnert,  38  AtL  Rep. 
956  (N.  J.,  1897).  The  proper  way  to 
attack  a  preference  given  by  an  in- 
solvent corporation  is  in  the  distribu- 
tion proceedings  in  a  suit  to  have  the 
company  declared  insolvent,  and  a 
receiver  appointed,  and  its  assets  dis- 
tributed. A  warrant  of  attorney  to 
confess  judgment  given  in  Septem- 
ber and  used  in  February  is  evidence 
of  an  intent  to  give  a  preference  if 
existing  notes  are  taken  up  and  new 
notes  given  at  the  time  of  entry  of 
judgment.  Consolidated  Coal  Co.  v. 
National  St.  Bank,  38  AtL  Rep.  657 
(N.  J.,  1897).  At  common  law  insolv- 
ent corporations  may  assign  for  the 
benefit  of  creditors.  Wilkinson  v. 
Bauerle,  41  N.  J.  Eq.  635  (1886).  And  . 
preferences  may  be  given.  Vail  v. 
Jameson,  41  N.  J.  Eq.  648  (1886);  WU- 
kinson  v.  Bauerle,  41  N.  J.  Eq.  635 
(1886).  A  chattel  mortgage  made  in 
contempt  of  court  and  in  violation  of 
the  statutes  against  preferences  by 


1398 


CH. 


XLI.] 


liSTTKA   TIEES    ACTS   AOT)    CONTKACTS. 


[§  691. 


obligation  to  do  equity  rests  on  any  one  director  or  stockholder. 
In  all  this  an  insolvent  corporation  differs  from  an  insolvent 


a  corporation  is  void.  Bissell  v.  Bes- 
son,  47  N.  J.  Eq.  580  (1890).  See  also 
Bergen  v.  Porpoise  Fishing  Co.,  42 
N.  J.  Eq.  397  (1886).  Under  the  old 
New  Jersey  statute  the  directors  of 
a  corpoixtion  might  mortgage  the 
property  and  issue  bonds  to  them- 
selTes  a3  security  for  previous  ad- 
vancements, even  though  the  com- 
pany was  insolvent.  "Whittaker  v. 
Amwell  Nat.  Bank,  53  N.  J.  Eq.  400 
(1894).  It  is  a  disposal  of  property 
for  the  purpose  of  liindering  and  de- 
laying creditors,  within  the  meaning 
of  the  second  section  of  the  statute 
of  frauds,  for  an  insolvent  firm  to 
mortgage  all  their  property  to  a 
trustee  and  take  the  bonds  secured 
by  that  mortgage,  even  though  they 
take  the  bonds  to  turn  over  to  their 
creditors.  But  the  act  is  voidable 
only  as  to  those  creditors  who  object 
and  contest  the  matter.  National 
Bank  v.  Sprague,  21  N.  J.  Eq.  530 
(1870).  Although  New  York  coi-po- 
rations  are  forbidden  by  the  statutes 
of  New  York  to  execute  mortgages 
or  give  preferences  in  contemplation 
of  insolvency,  yet  a  mortgage  given 
by  a  New  York  corporation  on  chat- 
tels and  real  estate  in  New  Jersey 
was  upheld  in  New  Jersey,  although 
made  in  contemplation  of  insolv- 
ency. The  New  Jersey  courts  did 
not  apply  the  New  York  law,  but 
will  apply  that  of  New  Jersey.  The 
debt  securoi  by  the  mortgage  in 
this  case  wog  payable  in  New  Jer- 
sey, however,  and  most  of  the  cred- 
itors resided  there.  Boehme  v.  Rail, 
51  N.  J.  Eq.  541  (1893).  A  mortgage 
made  in  New  Jersey  and  on  property 
in  New  Jersey,  by  a  New  York  corpo- 
ration, was  valid  although  the  corpo- 
ration was  insolvent  at  the  time,  and 
although  the  New  York  laws  prohib- 
ited the  giving  of  a  mortgage  by  an 
insolvent    corporation.    Boehme    v. 

i; 


Rail,  51  N.  J.  Eq.  541  (1893).  A  levy 
of  execution  prior  to  the  appoint- 
ment of  a  receiver  has  a  prior  claim 
on  the  assets  levied  upon.  Van  Steen- 
berg  V.  Parsil,  etc.  Co.,  34  AtL  Rep. 
135  (N.  J.,  1896). 

Neio  York:  In  New  York,  from  1825 
to  1892,  the  statutes  prohibited  cor- 
porations from  making  any  transfers 
or  assignments  in  contemplation  of 
insolvency,  and  declared  any  such 
transfers  and  assignments  utterly 
void.  (1  R.  S.  603,  §  4.)  By  this  stat- 
ute all  assignments  by  New  York 
corporations  for  the  benefit  of  cred- 
itors were  held  to  be  void.  Sibell  v. 
Remsen,  33  N.  Y.  95  (1865);  National, 
etc.  Bank  v.  Mechanics'  Nat.  Bank, 
89  N.  Y.  467  (1882);  Harris  v.  Tliomp- 
son,  15  Barb.  62  (1853);  Atkinson  v. 
Rochester  Printing  Co.,  114  N.  Y.  108 
(1889). 

The  following  decisions  were  as  to 
what  was  meant  by  "  in  contemiila- 
tion  of  insolvency:"  In  Robinson  v. 
Bank  of  Attica,  21  N.  Y.  406  (1860). 
where  a  state  bank,  three  days  before 
its  failure,  induced  a  party  to  give  it 
accommodation  checks,  and  on  the 
following  day  turned  out  securities 
to  secure  such  checks,  the  court  held 
that  the  securities  could  be  recov- 
ered back  by  the  receiver.  In  Marine 
Bank  v.  Clements,  31  N.  Y.  33  (1865), 
where  an  insolvent  corporation  as- 
signed a  note  to  a  party,  and  that 
party  brought  smt  upon  the  note,  the 
coiu-t  held  that  the  maker  of  the  note 
could  not  set  up  the  insolvency  as  a 
defense,  there  being  no  proof  that  the 
indorsee  did  not  give  value  at  the 
time  he  took  the  note  from  the  in- 
solvent corporation.  In  Butcher  v. 
Importers',  etc.  Nat.  Bank,  59  N.  Y.  5 
(1874),  the  court  held  that  where  the 
bank  paid  a  check  to  a  depositor  who 
had  no  knowledge  of  the  insolvency 
of  the  bank,  this  was  not  such  a  pref  er- 
199 


G91.] 


INTKA   VIKES    ACTS    AND    CONTKACTS. 


[CH.  XLI. 


individual.  As  a  result,  the  abuses  from  allowing  an  insolvent 
corporation  to  make  preferences  are  so  great  that  the  various 
states  are  enacting  prohibitory  statutes  on  this  subject. 

ence  as  was  prohibited  by  the  stat- 
ute. In  Paulding  v.  Chrome  Steel 
Co.,  94  N.  Y.  334  (1884),  although  a 
chattel  mortgage  had  been  given  five 
years  before  the  company  became 
insolvent,  and  had  not  been  recorded, 
and  was  renewed  and  recorded  at 
the  time  when  the  corporation  was 
insolvent,  yet  the  court  held  that  the 
mortgage  was  valid.  In  Baker  v.  Em- 
erson, 4  N.  Y.  App.  Div,  348  (189G), 
where  a  manufacturing  company, 
being  insolvent,  paid  a  note  for  $3,000, 
leaving  $17,000  of  debts  unpaid,  pay- 
ment being  made  May  29,  1893,  and 
the  company  suspended  business 
June  5,  1893,  the  court  held  that  the 
payment  was  illegal,  although  the 
company  expected  at  the  time  of 
the  payment  to  raise  sufficient  money 
to  go  on  with  its  business;  citing  to 
this  effect,  Vennard  v.  !McConnell,  93 
Mass.  555,  5G3(186G);  also  Forbes  v. 
Howe,  102  Mass.  427,  436  (18G9). 

In  1892  the  above  statute  was 
changed  so  that  assignments  by 
insolvent  corporations  are  now  le- 
gal, provided  no  preferences  are 
given.  (Stock  Corporation  Law,  §  48.) 
Preferences  given  to  any  creditor, 
whether  a  corporate  officer,  or  stock- 
holder, or  outsider,  are  void.  Where 
preferences  are  forbidden  in  contem- 
plation of  insolvency,  payment  of  a 
debt  while  other  debts  are  due,  the 
company  being  insolvent,  is  illegal, 
even  though  the  company  expected 
'  to  be  able  to  borrow  and  continue 
business.  Baker  v.  Emerson,  4  N.  Y. 
App.  Div.  348  (1896).  Under  the  New 
York  act  a  director  cannot  obtain  a 
preference  by  attachment,  nor  by  a 
judgment  taken  by  default.  Throop 
V.  Hatch  Lithog.  Co.,  125  N.  Y.  530 
(1891).  A  preference  to  a  partner- 
ship of  which  a  stockholder  is  a  mem- 
ber is  illegal    Jones  v.  Blun,  145  N.  Y. 


333  (1895).  An  assignment  for  the 
benefit  of  creditors  is  authorized  by 
tlie  directors  and  not  the  stockhold- 
ers. A  resolution  of  the  board  of  di- 
rectors that  the  company  execute  an 
assignment  for  the  benefit  of  credit- 
ors may  bo  carried  out  by  the  presi- 
dent without  fui'ther  authority;  but 
he  should  not  select  himself  as  as- 
signee. Rogers  v.  Pell,  154  N.  Y.  51!^ 
(1898).  In  New  York  an  insolvent 
corporation  may  make  an  assign- 
ment for  the  benefit  of  creditors,  but 
there  must  not  be  any  preferences. 
CroU  V.  Empire,  etc.  Co.,  17  N.  Y. 
App.  Div.  282  (1897).  Where  a  pri- 
vate corporation,  with  the  consent  of 
all  its  stockholders  of  record,  agrees 
with  its  creditors  that  the  property 
shall  be  taken  charge  of  by  an  indi- 
vidual and  managed  for  the  purpose 
of  paying  the  debts  and  then  return- 
ing the  property  to  the  corporation, 
and  one  of  the  stockholders  at  that 
time  secretly  transfers  some  of  the 
certificates  of  stock  to  his  wife,  and 
she  holds  the  stock  for  three  years 
and  then  transfers  it  without  consid- 
eration to  a  party  who  brings  suit  to 
set  aside  the  transaction,  the  court 
will  not  give  such  relief.  Marbury 
V.  Stone,  17  N.  Y.  App.  Div.  352  (1897). 
The  fact  that  the  company  is  unable 
to  meet  its  obligations,  and  that 
judgments  are  being  entered  against 
it,  shows  insolvency.  Nealis  v.  Ameri- 
can, etc.  Co.,  76  Hvm,  220  (1 894).  Even 
in  New  York,  where  a  conveyance  in 
view  of  insolvency  is  void,  an  embar- 
rassed corporation  may  mortgage  all 
its  property  to  secure  bonds  which 
are  given  to  creditors  for  their  debts, 
where  the  creditor  who  refuses  to 
^"ike  the  bonds  waits  over  three  years 
bei-ore  attacking  the  mortgage.  New 
Britain  Nat.  Bank  v.  A.  B.  Cleveland 
Co.,  91  Hun,  447  (1895).    An  insolvent 


1400 


CH.  XLI.] 


INTEA   YIKES   ACTS   AXD    CO^'TKACTS. 


[§  692. 


§  692.  Preferences  and  assignments'by  insolvent  corporations 
to  directors,  officers,  or  stocklioJders  —  Loans  hy  directors  to  the 
corporation  —  Mortgages  hy  corporations  to  directors. —  Turn- 
ing now  from  preferences  given  to  the  ordinary  creditor  of  a 


corporation  may  give  a  mortgage  to 
secure  bonds  given  at  tliat  time,  if 
the  issue  is  a  fair  business  transac- 
tion and  for  the  purpose  of  saving 
the  company  and  its  property.  Coch- 
ran V.  Anglo-American,  etc.  Co.,  69 
Uun,  168  (1893). 

Formerly  a  foreign  corporation 
might  make,  in  New  York,  an  assign- 
ment for  the  benefit  of  its  creditors, 
where  such  assignment  would  be 
valid  if  made  in  the  state  whei'e  the 
company  was  incorporated;  in  this 
case  in  New  Jersey.  The  New  York 
statute  against  such  assignments  ap- 
plied only  to  a  domestic  corporation. 
At  common  law  any  corporation 
might  make  such  an  assignment. 
Vanderpoel  v.  Gorman,  140  N.  Y.  563 
(1894).  At  common  law  the  president 
and  secretary,  under  authority  of  the 
board  of  directors,  may  execute  an  as- 
signment for  the  benefit  of  creditors 
made  by  the  corporation.  Vanderpoel 
V.  Gorman,  140  N.  Y.  563  (1894).  An 
insolvent  Massachusetts  corporation, 
having  goods  in  New  York,  may  trans- 
fer the  same  to  a  creditor,  and  the 
transfer  takes  precedence  of  an  at- 
tachment subsequently  levied  in  New 
York  by  another  creditor.  The  New 
York  act  against  assignments  by  in- 
solvent corporations  formerly  applied 
only  to  domestic  corporations.  Lane 
•t.  Wheelwright,  69  Hun,  180  (1893).  A 
cre'n.tor  of  a  foreign  coi-poration  may 
obtain  a  preference  in  New  York  upon 
assets  in  New  York.  Logan  uMcCall 
Pub.  Co.,  140  N.  Y.  447  (1893) ;  Coats  v. 
DonneU,  94  N.  Y.  168  (1883),  holding 
that  a  statute  prohibiting  preferences 
by  corporations  does  not  apply  to  for- 
eign corporations.  It  seems  that  a 
temporary'  receiver  may  file  a  bill  to 
set  aside  an  illegal  preference  given 


by  the  insolvent  corporation  to  one 
of  its  creditors.  Stiefel  v.  New,  etc. 
Co.,  14  N.  Y.  App.  Div.  371  (1897).  In 
an  action  by  a  receiver  to  set  aside  a 
transfer  of  propei-ty  made  in  violation 
of  the  statute,  it  seems  that  it  is  no  de- 
fense that  an  execution  sale  by  a  third 
party  had  taken  all  the  equity  of  the 
company  in  the  property.  Stonebridge 
V.  Perkins,  141 N.  Y.  1  (1894).  As  to  for- 
eign corporations  see  L.  1897,  ch.  384. 

North  Carolina:  Preferences  are 
upheld.  Blalock  v.  Kernersville  Mfg. 
Co.,  110  N.  C.  99  (1893).  An  insolvent 
corporation  may  prefer  creditors  in 
North  Carolina  subject  to  a  sixty- 
day  statutory  restriction.  Merchants' 
Nat.  Bank  v.  Newton  Cotton  Mills, 
115  N.  C.  507  (1894).  A  corporation  is 
not  insolvent  so  long  as  its  property, 
at  market  prices,  is  equal  in  value  ta 
its  debts.  Silver,  etc.  Co.  v.  North, 
etc.  Co.,  25  S.  E.  Rep.  954  (N.  C,  1896). 

Ohio:  Preferences  are  illegal  Dam- 
arin  v.  Hiu-on  Iron  Co.,  47  Ohio  St. 
581  (1890);  Sayler  u.  Simpson,  46  Ohio 
St.  510  (1890);  Rouse  v.  Merchants' 
Nat.  Bank,  46  Ohio  St.  493  (1889);  fol- 
lowed in  Smith,  etc.  Co.  v.  McGroarty, 
136  U.  S.  237  (1890),  in  an  Ohio  case. 

Oregon:  A  failing  corporation  may 
give  a  mortgage  if  in  good  faith. 
Currie  v.  Bowman,  25  Oreg.  364  (1894); 
Sabin  v.  Columbia  Fuel  Co.,  25  Oreg. 
15  (1894). 

Pennsylvania:  Assignments  may 
be  naade.  Ardesco  Oil  Co.  v.  North 
American,  etc.  Co.,  66  Pa.  St.  375 
(1870).  A  New  York  corporation  may 
execute  a  judgment  note  which  is 
good  in  Pennsylvania,  notwithstand- 
ing the  New  York  statute  against 
preferences.  East  Side  Bank  v.  Co- 
Itunbus  Tanning  Co.,  170  Pa.  St.  1 
(1895).    A  New  Jersey  corporation. 


1401 


692.] 


INTEA   VIEES    ACTS    AND    CONTEACTS. 


[CU.  XLI. 


corporation  to  preferences  given  to  a  director  of  tlie  corpora- 
tion, it  is  found  that  entirely  different  rules  prevail.  Ko  statute 
is  necessary  to  prevent  preferences  to  a  director  of  an  insolvent 


although  forbidden  by  New  Jersey 
statutes  from  giving  a  preference  by 
way  of  confession  of  judgment,  yet 
may  do  so  in  Pennsylvania,  where 
such  a  preference  is  legal,  tlie  New 
Jersey  laws  allowing  preference  by 
any  other  means  than  a  confessed 
judgment.  Pairpoint  Mfg.  Co.  v. 
Philadelphia,  etc.  Co.,  161  Pa.  St.  17 
(1894).    See  also  note,  p.  1398. 

Rhode  Island:  A  New  York  corpo- 
ration owning  property  in  Rhode 
Island  cannot  make  in  the  latter  state 
an  assignment  which  the  New  York 
statutes  prohibit.  Pierce  v.  Cromp- 
ton,  13  R.  I.  313  (1881). 

South  Dakota:  An  assignment  for 
the  benefit  of  creditors  may  be  made 
by  a  corporation.  A  foreign  coi-po- 
ration  may  make  such  an  assign- 
ment. It  is  legal,  although  the  foreign 
corporation  has  not  complied  with 
the  law  relative  to  filing  a  copy  of 
its  charter  and  appointing  a  resident 
agent.  The  assignment  is  properly 
made  by  the  directors,  and  not  by  a 
meeting  of  the  stockholders.  Where 
the  assignment  is  made  to  a  director 
and  there  are  indications  of  fraud,  it 
is  for  the  jury  to  say  whether  there 
was  fraud.  Wright  v.  Lee,  2  S.  D. 
596  (1892). 

Tennessee:  It  has  been  held  that 
preferences  are  illegal.  Tradesman 
Pub.  Co.  V.  Car  Wheel  Co.,  95  Tenn. 
634  (1895).  Cf.  Hopkins  v.  Gallatin, 
etc.  Co.,  4  Humph.  403  (1843).  But  a 
diligent  creditor  may  obtain  a  pref- 
erence by  a  judgment  although  the 
corporation  is  insolvent,  it  being  a 
going  concern.  Buchanan  v.  Barnes, 
84  S.  AV.  Rep.  425  (Tenn.,  1896).  An 
assignment  by  a  corporation  for  the 
benefit  of  creditors  does  not  displace 
existing  attachments.  First  Nat. 
Bank  v.  Lumber,  etc.  Co.,  91  Tenn.  12 
(1891).  An  insolvent  corporation  can- 


not turn  over  practically  all  its  assets 
to  one  creditor  by  way  of  preference. 
Smith  V.  Bradt  Printing  Co.,  97  Tenn. 
351  (1896).  After  a  corporation  has 
been  declared  insolvent  by  the  board 
of  directors  and  directions  given  to 
file  a  bill  to  wind  up  its  affairs,  a 
creditor  cannot  obtain  a  preference 
by  levy  of  execution  before  the  bill 
is  actually  filed.  Mempliis  B.  etc 
Co.  V.  Ward,  42  S.  W.  Rep.  13  (Tenn., 
1897). 

Texas:  In  Texas  the  statutes  as 
constmed  by  the  courts  make  the 
corporate  property  upon  insolvency 
a  trust  fund  to  be  distributed  equally 
among  all  creditors.  The  corpoi-ation 
may  turn  the  property  over  to  its  di- 
rectors for  that  purpose.  Wright  v. 
Euless,  12  Tex.  Civ.  App.  136  (1896). 
An  insolvent  corporation  cannot 
prefer  its  creditors  by  giving  a  mort- 
gage. Judgment  creditors  may  cause 
it  to  be  set  aside  and  an  accounting 
had.  Lyons,  etc.  Co.  v.  Perry,  etc. 
Co.,  88  Tex.  468  (1894).  An  insolvent 
corporation  cannot  prefer  certain 
creditors,  and  equity  will  prevent 
unjust  preferences.  Lang  v.  Daugh- 
ei-ty,  74  Tex.  226  (Tex.,  1889).  In 
Texas,  however,  any  creditor  may 
obtain  a  preference  by  legal  proceed- 
ings. Moon,  etc.  Co.  v.  Waxahacliie, 
etc.  Co.,  35  S.  W.  Rep.  337  (Tex.,  1896); 
aff'd,  89  Tex.  511;  Florsheim,  etc.  Co. 
V.  Wettermark,  10  Tex.  Civ.  App.  102 
(1895);  Harrigan  v.  Quay,  27  S.  W. 
Rep.  897  (Tex.,  1894).  But  not  by 
assignment.  Orr,  etc.  Co.  v.  Thomp- 
son, 36  S.  W.  Rep.  1129  (Tex.,  1896); 
Fowler  v.  Bell,  90  Tex.  150  (1896); 
Specht  V.  Bookhout,  37  S.  W.  Rep. 
193  (Tex.,  1896),  the  court  holding  also 
that  a  debtor  of  the  corporation  who 
pays  such  jjref erred  creditor,  t9  whom 
the  claim  has  been  assigned,  does  so 
at  his  peril.    It  has  been  held  that  no 


1402 


€H.  XLI.] 


INTEA   VIKES    ACTS   AND    CONTEACTS. 


[§  692. 


corporation.  It  is  undoubtedly  true  that  the  law  allows  a 
director  to  loan  money  to  a  corporation,  and  allows  the  corpora- 
tion, whilfe  it  is  solvent,  to  give  a  mortgage  to  the  director  to 


preference  is  sustained,  even  by  at- 
tachment against  an  insolvent  cor- 
poration, in  Texas.  Farmers',  etc. 
Bank  v.  Waco,  etc.  Co.,  36  S.  W.  Rep. 
131  (Tex.,  1896).  Attachment  lies 
against  a  corporation,  although  it  is 
insolvent  but  is  still  doing  business. 
American  Nat.  Bank  v.  Dallas,  etc. 
Co.,  39  S.  W.  Rep.  955  (Tex.,  1897). 
The  directors  of  an  insolvent  corpo- 
ration may  autliorize  an  assignment 
for  the  benefit  of  creditors.  Birming- 
ham, etc.  Co.  V.  Freeman,  39  S.  W. 
Rep.  626  (Tex.,  1897). 

Utah:  Preferences  are  legal. 
Wyeth,  etc.  Co.  v.  James,  etc.  Co.,  47 
Paa  Rep.  604  (Utah,  1897). 

Vermont:  Preferences  are  legaL 
Warner  v.  Mower,  11  Vt.  385,  390 
(1839). 

Virginia:  Assignments  may  be 
made.  Lewis  v.  Glenn,  84  Va.  947 
(1888).  And  preferences  given.  Plant- 
ers' Bank  v.  Whittle,  78  Va.  737  (1884). 
Washington:  A  corporation  may 
assign  for  the  benefit  of  creditors. 
Nyman  v.  Berry,  3  Wash.  St.  734 
(1892).  But  preferences  are  illegal 
Conover  v.  Hull,  10  Wash.  St.  673 
(1895);  Thompson  v.  Huron  Lumber 
Co.,  4  Wash.  St.  600  (1892).  An  in- 
solvent corporation  may  sell  its  prop- 
erty to  one  of  its  creditors.  Kloster- 
man  v.  Mason,  etc.  R.  R.,  8  Wash.  281 
(1894);  Holbrook  v.  Peters,  etc.  Co.,  8 
Wasli.  344  (1894).  A  mortgage  by  an 
embarrassed  corporation  is  valid,  if 
in  good  faith,  even  though  the  com- 
pany soon  after  fails.  Vincent  v. 
Snoqualmie  Mill  Co.,  7  Wash.  566 
(1894).  Even  though  a  corporation 
has  made  an  assignment  for  the 
benefit  of  creditors,  yet  a  court  of 
equity  may  appoint  a  receiver  of 
the  assets  so  assigned  under  the 
Washington  statutes.  Oleson  v.  Bank 
of  Tacoma,  15  Wash.  148  (1896).    Pref- 


erences are  illegal.  Compton  v. 
Schwabacher,  etc.  Co.,  15  Wash.  306 
(1896).  An  insolvent  corporation  can- 
not make  a  voluntary  preference  by 
way  of  mortgage.  Biddle,  etc.  Co.  v. 
Port  Townsend,  etc.  Co.,  48  Pac.  Rep. 
407  (Wash.,  1897).  A  mortgage  by  an 
insolvent  corporation  to  one  of  its 
creditors  as  a  preference  is  illegal. 
Cook  V.  Moody,  50  Pac.  Rep.  1020 
(Wash.,  1897). 

West  Virginia:  Assignments  for- 
merly were  legal  Lamb  v.  Cecil,  25 
W.  Va.  288  (1884) ;  Lamb  v.  Pannell,  25 
W.  Va.  298  (1884).  And  preferences 
also.  Pyles  v.  Furniture  Co.,  30  W.  Va. 
123  (1887).  A  mining  company  having 
assets  of  $25,000  and  debts  of  $20,000 
is  solvent,  and  may  execute  a  mort- 
gage. Coaldale  Min.  etc.  Co.  v.  Clark, 
27  S.  E.  Rep.  294  (W.  Va.,  1897).  Pref- 
erences by  insolvent  corporations  are 
now  prohibited  by  statute.  See  Part 
VII,  infra. 

y/isconsin:  At  common  law  a  cor- 
poration may  make  an  assignment 
for  the  benefit  of  creditors.  Garden 
City,  etc.  Co.  v.  Geilfuss,  86  Wis.  612 
(1893).  In  Wisconsin  it  is  held  that 
a  trust  deed  executed  by  an  insolvent 
corporation,  giving  the  trustee  power 
to  take  charge  of  the  business  and 
carry  it  on,  is  void,  as  intended  to 
defeat  and  delay  corporate  creditors. 
First  Nat.  Bank  v.  McDonald  Mfg. 
Co.,  67  Wis.  373  (1886).  In  Wiscon- 
sin an  insolvent  corporation  cannot 
prefer  creditors.  Ford  v.  Plankinton 
Bank,  87  Wis.  363  (1894).  The  mere 
insolvency  of  a  corporation  does  not 
convert  its  property  into  a  trust 
fund,  so  as  to  prevent  preferences. 
Ford  V.  Hill,  92  Wis.  188  (1896).  A 
creditor  of  an  insolvent  corporation 
may  levy  an  attachment  on  its  prop- 
erty, and  thereby  obtain  a  prefer- 
ence.    Ballin   v.  Merchants'  Excb. 


1403 


§  G92.] 


INTKA    VIEES    ACTS    AND    CONTRACTS. 


[CU.  XLl. 


secure  the  money  so  loaned.  The  giving  of  the  mortgage  is 
viewed  with  suspicion;  but  it  is  legal  when  it  is  perfectly  free 
from  actual  fTaud.^ 


Bank,  89  Wis.  278  (1895).  An  insolv- 
ent corporation  may  give  a  prefer- 
ence, and  such  preference  may  be 
to  creditors  who  by  contract  have 
named  two  of  the  five  directors. 
South  Bend,  etc.  Co.  v.  George,  etc. 
Co.,  73  N.  W.  Rep.  749  (Wis.,  1897;. 

Wyoming:  Preferences  are  legaL 
Conway  v.  Smith,  etc.  Co.,  46  Pac. 
Rep.  1084  (Wyo.,  1S9G). 

1  Twin  Lick  Oil  Co.  v.  Marbury,  91 
U.  S.  587  (1875);  Duncomb  v.  New 
York,  etc.  R.  R.,  88  N.  Y.  1  (1882),  84 
N.  Y.  190;  Hotel  Co.  v.  Wade,  97  U.  S. 
13  (1877).  Directors  may  execute 
judgment  bonds  to  themselves  at  a 
time  when  the  company  is  solvent, 
and  may  enforce  them  after  it  be- 
comes insolvent.  Neal's  Appeal,  129 
Pa.  St.  64  (1889).  A  corporation,  at 
the  time  of  borrowing  money  from 
its  treasurer  personally,  who  is  also  a 
director,  may  give  liim  a  judgment 
bill  to  enter  judgment.  Cowan  v. 
Pennsylvania,  etc.  Co.,  38  AtL  Rep. 
1075  (Pa.,  1898).  A  mortgage  is  not  void 
on  the  ground  that  it  was  to  a  di- 
rector, where  the  director  was  absent 
when  elected,  did  not  serve,  was  not 
eligible,  and  soon  sent  in  a  resigna- 
tion. Augusta,  etc.  R.  R  v.  Kittel,  53 
Fed.  Rep.  63  (1893).  A  solvent  cor- 
poration may  make  a  mortgage  to 
one  of  its  officers  and  stockholders  to 
secui'e  a  loan  made  by  him.  lilul- 
lanphy  Sav.  Bank  v.  Schott,  135  IlL 
655  (1891).  The  fairness  of  a  debt 
alleged  to  be  due  from  the  coi-pora- 
tion  to  directors  and  audited  by  them 
will  be  closely  scrutinized,  and  a  note 
and  mortgage  therefor  set  aside  if  not 
found  entirely  in  good  faith,  and  the 
whole  amount  justly  due.  Graves  v. 
Mono  Lake,  etc.  Co.,  81  CaL  303  (1889). 
A  director  may  loan  money  to  a  cor- 
poration and  take  a  mortgage  to  se- 
cure the  same,  and  foreclose  and  buy 

1^ 


in  the  property.  Preston  v.  Loughran, 
58  Hun,  210  (1890).  A  mortgage  may 
be  given  by  a  corporation  to  secure 
directors  who  at  the  time  of  the  giv- 
ing of  the  mortgage  guai-antee  cer- 
tain debts  of  the  company.  Be  Pyle 
Works,  [1891]  1  Ch.  173.  A  mortgage 
by  a  company  to  its  directors  to  ?^ 
cure  them  as  loaners  of  money  to  the 
company  is  valid  and  may  be  en- 
forced where  the  transaction  was  in . 
good  faith  and  beneficial  to  the  com- 
pany, and  sanctioned  by  the  stock- 
holders, and  no  offer  is  made  to 
restore  the  consideration.  Gorder  v. 
Plattsmouth  Canning  Co.,  36  Neb.  548 
(1893);  Hope  v.  Valley  City  Salt  Co., 
25  W.  Va.  789  (1885);  Warfield  v. 
Marshall,  etc.  Co.,  72  Iowa,  666  (1887). 
And  see  the  principles  and  cases  in 
^  653,  supra.  See  also  Harpending  v. 
Munson,  91  N.  Y.  650  (1883);  Hallara 
V.  Indianola  Hotel  Co.,  56  Iowa,  1C8 
(1881),  where,  however,  the  purchase 
of  the  property  by  the  director  at  the 
foreclosure  sale  for  a  small  price  was 
set  aside;  Claflin  v.  South  Carolina 
R.  R,  8  Fed.  Rep.  118  (1880).  Cf.  Wil- 
bur V,  Lynde,  49  CaL  290  (1833),  in- 
validating a  note  given  to  a  director. 
In  the  important  case  of  Koehler  v. 
Black  River,  etc.  Co.,  2  Black,  715 
(1862),  the  court  held  void  a  mortgage 
given  by  the  directors  to  themselves, 
where  there  were  other  unsecured 
claims,  and  where  the  giving  of  the 
mortgage  was  inequitable.  In  'Jum- 
berland,  etc.  Co.  v.  Parish,  42  Md.  598 
(1875),  a  mortgage  to  a  director  was 
defeated,  there  being  no  clear  proof 
that  the  debt  was  actually  incurred. 
Du-ectors  who  guarantee  a  corporate 
debt  may  take  a  mortgage  from  the 
company  as  security,  and  may  fore- 
close it.  Hopson  V.  ^tna,  etc.  Co., 
50  Conn.  597  (1883).  A  company  in- 
debted to  its  president  may,  to  secure 
04 


€H.  XLI.] 


IISTTEA   VIKES   ACTS   AND    COXTEACTS. 


[§  C92. 


The  supreme  court  of  tlie  United  States,  speaking  of  loans 
made  by  an  officer  and  stockholder  to  a  corporation,  said :  "  Un- 
doubtedly his  relation  as  a  director  and  officer,  or  as  a  stock- 
holder of  the  company,  does  not  preclude  him  from  entering 
into  contracts  with  it,  making  loans  to  it,  and  taking  its  bonds 
as  collateral  security ;  but  courts  of  equity  regard  such  personal 
transactions  of  a  party  in  either  of  these  positions,  not  perhaps 
with  distrust,  but  with  a  large  measure  of  watchful  care ;  and 
unless  satisfied  by  the  proof  that  the  transaction  was  entered 
into  in  good  faith,  with  a  view  to  the  benefit  of  the  company 
as  well  as  of  its  creditors,  and  not  solely  with  a  view  to  his  own 
benefit,  they  refuse  to  lend  their  aid  to  its  enforcement."  ^ 


such  debt,  give  a  mortgage  to  secure 
a  debt  due  from  him  to  a  third  party. 
Bank  v.  Flour  Co.,  41  Ohio  St.  553 
(1885).  Directors  may  loan  money 
to  the  corporation  and  have  it  repaid. 
Ulster  R'y  v.  Banbridge,  etc.  R'y,  Ir. 
L.  R.  2  Eq.  190  (1SG8);  Borland  v. 
Haven,  37  Fed.  Rep.  394  (1888).  A 
person  may  enforce  a  note  against  a 
coi-poration,  although  lie  was  a  pro- 
moter thereof,  and  is  a  director, 
stockholder,  and  manager  of  the  cor- 
poration- Fitzgerald,  etc.  Co.  v.  Fitz- 
gerald, 137  U.  S.  98, 110  (1890).  Where 
two  directors  borrow  money  for  the 
corporation  and  give  their  own  notes 
therefor,  the  company,  being  still  solv- 
ent, may  give  them  security.  First 
Nat.  Bank  v.  Dovetail,  etc.  Co.,  143 
Ind.  534  (1896).  Cf.  Cahill  v.  People's, 
etc.  Co.,  47  La.  Ann.  1483  (1895).  A 
pledgee  of  bonds  from  the  corpora- 
tion cannot  attack  another  pledge  of 
bonds  to  the  president  to  secure  a 
debt  due  the  president,  especially 
where  the  former  took  the  bonds  in 
pledge  with  knowledge  of  the  pledge 
to  tlie  president.  Hook  v.  Ayers,  63 
Fed.  Rep.  347  (1894).  A  corporation 
may  make  a  mortgage  to  one  of  its 
directors.  St.  Joe,  etc.  Co.  v.  First 
Nat.  Bank,  50  Pac.  Rep.  1055  (Colo., 
1897).  A  director  may  take  a  mortgage 
from  the  company  for  money  loaned 
at  the  time  of  the  mortgage,  and 


may  buy  in  the  property  at  the  fore- 
closure sale  thereof.  Jones  v.  Hale, 
53  Pac.  Rep.  311  (Oreg.,  1898).  A  mort- 
gage given  by  a  solvent  corporation 
to  a  director,  which,  in  order  to  pre- 
serve the  credit  of  the  corporation,  is 
not  recorded,  is  invalid.  Montgomery 
V.  Phillips,  53  K  J.  Eq.  203  (1895),  hold- 
ing also  that  a  mortgage  by  an  insolv- 
ent corporation  to  a  director  is  illegaL 
An  officer  advancing  money  to  a  cor- 
poration may  repay  the  money  to  him- 
self from  the  treasury  when  its  condi- 
tion will  permit.  Stokes  v.  Stokes,  91 
Hun,  605  (1895).  The  president  may 
own  receivers'  certificates.  McKit- 
trick  V.  Arkansas  Central  R'y,  152  U.  S. 
473  (1894).  A  loan  by  the  president  of  a 
bank  to  himself  is  legal,  if  the  direct- 
ors acquiesce  therein.  Reynolds  v. 
Bank  of  Mt.  Vernon,  6  N.  Y.  App. 
Div.  62  (1896).  A  corporation  may 
pledge  treasury  stock  to  a  director. 
Where  treasury  stock,  instead  of 
being  given  to  the  corporation,  is 
placed  in  the  hands  of  trustees  under 
a  tfust  agreement,  such  agreement 
may  be  modified  by  a  new  agreement 
and  the  stock  turned  over  to  the  cor- 
poration. Kinsman  v.  Fisk,  83  Hun, 
494  (1895> 

1  Hence  where  an  oflScer,  for  a  loan 
of  $100,000  to  the  company,  takes  its 
notes  therefor  and  four  hundred 
bonds  as  collateral  and  twelve  hun- 


1405 


§  692.] 


INTRA   VIEES    ACTS    AND    CONTRACTS. 


[CH.  XLI. 


But  where  tlie  corporation  is  insolvent  an  entirely  different 
question  arises.  There  has  been  a  difference  of  opinion  in  the 
courts,  but  the  weight  of  authority  clearly  and  wisely  holds 
that  an  insolvent  corporation  cannot  pay  or  secure  a  debt  due 
to  a  director  in  preference  to  debts  due  others,  either  by  turn- 
ing out  property  or  cash  to  him  or  by  giving  him  a  mortgage 
on  corporate  assets.* 


dred  and  fifty  shares  of  paid-up  stoclc 
as  a  "  bonus,"  the  court  characterized 
tlie  transaction  as  a  fraud,  and  held 
that  the  pledge  of  the  bonds  would 
be  disregarded  and  declared  void. 
Richardson  v.  Green,  133  U.  S.  30 
(1890). 

iHays  V.  Citizens'  Bank,  51  Kan. 
535  (1893):  Chicago,  etc.  Bridge  Co.  v. 
Fowler,  55  Kan.  17  (1895);  Ingwerson 
V.  Edgecombe,  43  Neb.  740  (1894). 
An  insolvent  corporation  cannot  give 
a  pi-eference  to  a  director  by  offset- 
ting against  his  subscription  a  debt 
due  to  him.  Wyman  v.  Williams,  74 
N.  W.  Rep.  48  (Neb.,  1898 1 ;  Hulings 
V.  Hulings  Lumber  Co.,  38  W.  Va.  351 
(1893).  A  sale  of  property  by  an  in- 
solvent company  to  a  director  in 
order  to  prefer  his  debt  is  illegaL 
Beach  v.  Miller,  130  IlL  163  (1889). 
Where  a  corporation  has  $15,000 
assets,  owes  $160,000,  and  confesses 
judgment  for  $40,000  to  its  largest 
stockholder  for  an  old  indebtedness 
due  him,  a  court  of  equity  will  re- 
strain a  sale  under  that  judgment 
until  the  rights  of  all  creditors  are 
determined.  Krause  v.  Malaga,  etc. 
Co.,  18  AtL  Rep.  367  (N.  J.,  1889). 
Where  the  board  of  directors  bon-ow 
money  on  the  statement  that  the 
loan  is  from  an  outsider,  and  it  after- 
wards transpires  that  the  loan  was 
by  the  president  and  another  director, 
a  commission  of  twenty  per  cent  paid 
for  tlie  loan  can  be  recovered  back  by 
the  corporation,  Bensiek  v.  Thomas, 
66  Fed.  Rep.  104  (1895).  Where  a 
cor])orate  creditor  offers  to  take  pay- 
naent,  but  is  induced  to  let  the  debt 


stand  in  order  that  the  president  per- 
sonally may  use  the  money,  the  cor- 
poration is  no  longer  liable.  Edwards 
V.  Carson  Water  Co.,  31  Nev.  409 
(1893).  Corporate  creditors  may  en- 
join the  collection  of  judgments 
fraudulently  confessed  by  an  insolv- 
ent corporation  to  its  oflBcers  and 
stockholders.  Nimocks  v.  Cape  Fear 
Shingle  Co.,  110  N.  C.  230  (1892).  A 
preference  by  an  insolvent  corpora- 
tion to  one  of  its  directors  is  invalid. 
It  is  insolvent  when  early  suspension 
of  business  and  a  failure  are  inevi- 
tabla  Corey  v.  Wads  worth,  99  Ala, 
68  (1892).  A  director  of  an  insolvent 
corporation  cannot  obtain  a  prefer- 
ence for  his  debt.  Gibson  v.  Trow- 
bridge Furnace  Co.,  96  Ala.  357 
(1892).  Where  an  act  by  the  directors 
amounts  to  a  preference  to  them,  the 
corporation  being  insolvent,  the  act 
cannot  be  validated  by  a  vote  of  the 
stockholders,  the  directors  them- 
selves voting  a  majority  of  the  stock. 
Farmers'  L.  &  T.  Co.  v.  San  Diego, 
etc.  Co.,  45  Fed.  Rep.  518  (1891).  Al- 
though creditors  may  complain  of  a 
mortgage  given  to  directors  by  the 
corporation  when  largely  in  debt, 
yet  the  president,  who  is  also  a  large 
stockholder,  and  who  signs  the  mort- 
gage, cannot  do  so.  Perry  v.  Pear- 
son, 135  111.  218  (1890).  Where  a 
corporation  purchases  a  firm's  busi- 
ness, it  cannot  legally  pay  a  debt  due 
by  tlie  firm  to  a  director  in  the  cor- 
'  poration,  if  such  payment  is  induced 
by  such  director  and  the  corporation 
is  insolvent.  Rudd  v.  Robinson,  54 
Hun,  339  (1889).    If  a  director  as  a 


1400 


CH.  XLI.] 


INTKA   VIKES   ACTS   AND    CONTRACTS. 


[§  692. 


But  a  corporation  acting  in  good  faith  and  without  any  pur- 
pose of  defrauding  its  creditors,  but  with  the  sole  object  of 
continuing  a  business  which  promises  to  be  successful,  may 
give  a  mortgage  to  directors  who  have  lent  their  credit  to  it, 


creditor  takes  all  the  corporate  assets 
in  payment  of  his  debt,  he  is  liable 
to  other  creditors  for  the  difference 
between  the  actual  value  of  the  prop- 
erty and  the  price  at  which  he  took 
it.  Wilkinson  v.  Bauerle,  41  N.  J. 
Eq.  635  (1886).  The  president  of  an 
insolvent  corporation  cannot  provide 
for  the  payment  of  a  debt  to  his 
wife,  thereby  giving  her  a  preference. 
West  V.  West,  etc.  Co.,  9  N.  Y.  St. 
Rep.  255  (1887).  Directors  knowing 
that  the  company  is  insolvent  cannot 
assign  its  property  in  trust  to  pay 
debts  due  to  themselves.  Gaslight 
Imp.  Co.  V.  Terrell,  L.  R.  10  Eq.  168 
(1870);  Haywood  v.  Lincoln  Lumber 
Co.,  64  Wis.  630  (1885).  A  preference 
to  a  director  by  an  insolvent  corpo- 
ration is  unlawful,  and  the  directors 
who  cause  the  preference  are  person- 
ally liable  for  property  so  applied. 
A  director  who  took  no  part  is  not 
liable.  Adams  v.  Kehlor  Milling  Co., 
36  Fed.  Rep.  212  (1888).  The  law 
"  prohibits  directors,  when  a  corpora- 
tion is  insolvent  and  about  to  go  into 
liquidation,  from  preferring  debts 
due  to  themselves  from  the  corpora- 
tion, or  from  preferring  debts  in  the 
payment  of  wliich  they  have  a  per- 
sonal interest."  So  held  in  a  case 
where  a  deceased  director  was  pre- 
ferred by  the  other  directors,  his 
brotliers,  and  agents.  Adams  v.  Keh- 
lor Milling  Co.,  35  Fed.  Rep.  433  (1888). 
A  director  of  an  insolvent  corpora- 
tion cannot  have  his  own  debt  due 
from  the  corporation  paid  to  the  ex- 
clusion of  other  creditors.  Adams  v. 
Cross,  etc.  Co.,  5  R'y  &  Corp.  L.  J. 
18  (IlL,  1888),  holding  void  a  mort- 
gage upon  which  this  suit  for  fore- 
closure was  brought,  it  having  been 
given  by  an  insolvent  corporation  to 


its  directors  to  secure  debts  due  from 
it  to  them.  A  confession  of  judg- 
ment by  an  insolvent  corporation  to 
one  of  its  directors  is  a  fraudulent 
preference,  and  the  preference  will 
be  cut  off.  The  director  will  be  al- 
lowed to  come  in  the  same  as  other 
creditors.  Stratton  v.  Allen,  16  N.  J. 
Eq.  229  (1863).  A  mortgage  by  an 
insolvent  corporation  preferring  its 
president  and  director  was  canceled 
in  Lippincott  v.  Shaw  Carriage  Co., 
25  Fed.  Rep.  577  (1885). 

In  Bradley  v.  Farwell,  Holmes,  433 
(1874);  S.  C,  3  Fed.  Cas.  1146,  a  trans- 
fer by  an  insolvent  corporation  of  all 
its  assets  to  a  partnership  in  payment 
of  a  debt  was  set  aside,  where  one 
member  of  the  partnership  was  also 
a  director  in  the  corporation.  Tlie 
fact  that  nine  months  elapsed  before 
the  corporation  passed  into  a  receiv- 
er's hands  was  immateriaL  A  sale 
of  corporate  property  to  a  director 
in  payment  of  debts  due  him  from 
the  insolvent  company  cannot  be  ob- 
jected to  in  a  suit  at  law  by  him  for 
the  conversion  of  the  property.  The 
objection  must  be  made  by  bill  in 
equity.  Little  Rock,  etc.  R'y  v.  Page, 
35  Ark.  304  (1880).  In  New  Jersey, 
by  statute,  a  receiver  is  invested  witli 
all  the  rights  of  creditors.  After  his 
appointment  a  creditor  cannot  sue 
to  set  aside  illegal  conveyances  to 
the  officers,  not  even  in  the  federal 
coui-t.  Werner  v.  Murphy,  60  Fed. 
Rep.  769  (1894).  A  mortgage  by  an 
insolvent  company  to  secure  a  di- 
rector on  an  antecedent  debt,  his 
vote  being  necessary  to  authorize 
the  mortgage,  is  illegal.  Savage  v. 
Miller,  36  Atl.  Rep.  578  (N.  J.,  1897). 
A  preference  to  a  president  is  ille- 
gal    Malloiy  V.  Kirkpatrick,  54  N.  J. 


1407 


§  692.] 


INTRA   YIKES    ACTS    AND    CONTRACTS. 


[cn.  XLI. 


in  order  to  induce  a  continuance  of  that  credit,  and  in  order  to 
obtain  renewals  of  maturing  paper  at  a  time  when  the  corpora- 
tion, although  it  may  not  be  then  in  fact  possessed  of  assets  equal 
at  cash  prices  to  its  indebtedness,  is  in  fact  a  going  concern, 


Eq.  50  (1895).  A  stockholder  may 
cause  to  be  set  aside  a  lease  of  a 
warehouse  and  a  sale  of  the  wheat 
therein  to  two  of  the  directors,  and 
a  foreclosure  by  them  of  a  chattel 
mortgage  on  the  buildings,  which 
chattel  mortgage  had  been  purchased 
by  two  of  the  directors  and  the  prop- 
erty purchased  by  them  at  the  fore- 
closure sale.  Loftus  v.  Farmers' 
Shipping  Assoc,  8  S.  D.  201  (189G). 
Under  the  Michigan  decisions  (prior 
to  the  statute)  and  of  the  federal 
court  sitting  in  Michigan,  the  presi- 
dent of  au  insolvent  corporation 
could  secure  a  preference  for  debts 
due  him,  even  though  the  corpora- 
tion was  insolvent  and  the  debts 
were  old  debts.  Childs  v.  Carlstein 
Co.,  76  Fed.  Rep.  86  (1896).  Where 
the  board  of  directors  of  a  failing  cor- 
poration voted  all  the  assets  to  a  few 
of  their  number  in  payment  of  an 
antecedent  debt,  the  transaction  is 
fraudulent  and  will  be  set  aside,  even 
in  Michigan,  the  directors  so  pre- 
ferred being  three-fourths  of  the 
board.  Rickerson,  etc.  Co.  v.  Farrell, 
etc.  Co.,  75  Fed.  Rep.  554  (1896).  Al- 
though a  director's  mortgage  is  ille- 
gal, yet  where,  after  its  foreclosure, 
another  prior  mortgage  is  foreclosed, 
he  is  not  liable  to  stockholders  as 
having  wreck^  the  corporation. 
Keeney  v.  Converse,  99  ]\Iich.  316 
(1891).  In  Doyle  v.  Leitelt,  97  Mich. 
298  (1893),  the  court  refused  to  com- 
l^el  a  director  to  refund  moneys  ap- 
plied on  his  claim  against  the  corpo- 
ration, although  he  had  caused  all 
the  corporate  property  to  be  sold,  it 
appearing  that  substantial  justice 
had  been  done  and  that  complainant 
had  no  real  grievance.  A  resolution 
of  the  board  of  directors  that  the 
company  execute  an  assignment  for 


the  benefit  of  creditors  may  be  car- 
ried out  by  the  president  without 
further  authority,  but  he  should  not 
select  himself  as  assignee.  Rogers  v. 
Pell,  154  N.  Y.  Rep.  518  (1898),  At 
common  law  a  mortgage  may  be 
made  by  a  corporation  to  a  director 
as  trustee  for  creditors.  Savage  v. 
Miller,  39  AtL  Rep.  665  (N.  J.,  1898). 
The  corporation  itself  cannot  defend 
against  a  suit  by  a  director  on  a  note 
on  the  ground  that  the  judgment 
will  be  an  illegal  preference.  Well- 
ing V.  Ivoroyd  Mfg.  Co.,  15  N.  Y.  App. 
Div.  116  (1897);  Bangs  v.  National 
Macaroni  Co.,  15  N.  Y.  App.  Div.  523 
(1897).  For  a  detailed  review  of  the 
authorities  on  this  subject,  see  Lamb 
V.  Laughlin,  25  W.  Va.  300  (1884). 
Directors  may  be  compelled  to  pay 
back  salaries  which  they  pay  to  them- 
selves when  the  company  is  insolvent. 
Smith  V.  Putnam,  61  N.  H.  632  (1882). 
An  insolvent  bank  cannot  legally 
transfer  its  real  estate  to  a  director 
in  exchange  for  his  stock.  Roan 
V.  Winn,  93  Mo.  503  (1887).  Whei-e 
the  president  causes  the  company 
illegally  to  buy  its  own  stock  from 
his  wife,  a  preference  to  her  for  the 
debt  will  be  set  aside.  Butler  Paper 
Co.  V.  Robbins,  151  III  588  (1894).  No 
preferences  to  directors.  W.  P.  Noble, 
etc.  Co.  V.  Mt.  Pleasant,  etc.  Inst., 
12  Utah,  213  (1895).  Where,  three 
months  prior  to  a  petition  for  wind- 
ing up  a  company,  the  directors,  who 
owe  on  their  stock,  offset  the  same 
by  applying  the  amount  on  their  un- 
paid salaries,  they  jointly  and  sever- 
ally will  be  compelled,  under  the 
English  statute,  to  refund  the  money 
with  interest.  The  transaction  is 
fraudulent.  Re  Washington,  etc.  Co., 
[1893]  3  Ch.  95,  rev'g  the  com-t  below. 


1403 


OH.  XLI.] 


INTKA   VIEES    ACTS    AND    CONTKACTS. 


[§  692. 


and  is  intending  and  is  expecting  to  continue  in  business.* 
"Where  a  director  cannot  legally  obtain  a  preference  directly, 
he  cannot  do  so  indirectly  by  attachment,  or  by  obtaining  judg- 
ment and  causing  execution  to  be  levied.^  A  director  cannot 
legally  vote  on  a  renewal  of  a  note  to  himself.'  The  court 
will  set  aside  a  sale  by  an  insolvent  corporation  of  all  its  assets 
to  its  secretary  and  treasurer,  who  was  the  chief  creditor,  the 
sale  being  in  payment  of  his  debt;  and  the  court  will  hold  him 
liable  for  such  of  the  assets  as  he  has  disposed  of.^  A  prefer- 
ence to  a  large  stockholder  has  also  been  condemned  by  the 
courts  where,  under  the  facts  of  the  case,  the  transaction 
amounted  to  an  actual  fraud,  as  distinguished  from  an  implied 
fraud.^     It  has  been  held  that  a  mortgage  by  an  insolvent 

Howe, 


iSanford  Fork,  etc.  Co.  v. 
etc.  Co.,  157  U.  S.  312  (1895). 

-  Atwater  v.  American,  etc.  Bank, 
152  IlL  605  (1894).  Under  the  Penn- 
sylvania statute,  directors  cannot  ob- 
tain a  preference  by  taking  judgment 
by  default  and  issuing  execution. 
Hopkins's  Appeal,  90  Pa.  St.  69  (1879). 
So  also  in  New  York.  Throop  v. 
Hatch  Lithog.  Co.,  125  N.  Y.  530  (1891). 
The  remedy  in  such  a  case  is  in  equity 
and  not  at  law.  Braem  v.  Merchants' 
Nat.  Bank,  127  N.  Y.  503  (1891).  A 
statute  against  preferences  by  an  in- 
solvent corporation  is  violated  by  an 
offer  of  judgment  by  the  corporation 
and  the  appointment  of  a  receiver 
under  it.  National  Broadway  Bank 
V.  WesseU  Metal  Co.,  59  Hun,  470  (1891), 
holding  also  that  a  director  cannot 
obtain  a  preference  by  causing  a  re- 
ceiver to  be  appointed  on  his  judg- 
ment and  then  purchasing  the  prop- 
erty at  an  inadequate  price.  A 
judgTuent  obtained  by  a  director 
against  an  insolvent  corporation  by 
confession  is  illegal  and  may  be  set 
asida  HUl  v.  Pioneer  Limiber  Co., 
113  N.  C.  173  (1893).  Where  a  di- 
rector of  an  insolvent  corporation 
obtains  judgment  against  it  and  sells 
out  its  property,  another  corporate 
creditor  may  compel  him  to  account 
for  a  proportionate  share  of  the  act- 


ual value  of  the  property.  Kittel  v. 
Augusta,  etc.  R.  R,  84  Fed.  Rep.  386 
(1898). 

3  Smith  V.  Los  Angeles,  etc.  Assoc., 
78  CaL  289  (1889). 

4  Brown  v.  Morristown,  etc.  Co.,  42 
S.  W.  Rep.  161  (Tenn.,  1897). 

5  A  stockholder  cannot  secure  a 
transfer  from  the  corporation  to  him- 
self of  the  property  of  the  corpo- 
ration so  as  to  deprive  a  corporate 
creditor  of  the  payment  of  his  debt. 
Where  he  does  so  through  legal  pro- 
ceedings fraudulently  and  by  con- 
spiracy, the  property  may  be  reached. 
Angle  V.  Cliicago,  etc.  R'y,  151  U.  S. 
1  (1894).  Where  a  stockholder  who 
is  also  a  creditor  of  an  insolvent  cor- 
poration obtains  for  liimself,  just  be- 
fore the  cessation  of  business,  an  as- 
signment of  practically  all  the  assets 
of  the  corporation,  it  is  a  question 
for  the  jury  as  to  whether  such  as- 
signment is  not  fraudulent.  Worten- 
dyke  v.  SaUadtn,  45  Neb.  755  (1895). 
In  Texas  the  couii;  held  that  an  in- 
solvent corporation  could  not,  by  way 
of  mortgage,  prefer  creditors"  who 
were  stocldiolders.  Lyons,  etc.  Co. 
V.  Perry,  etc.  Co.,  86  Tex.  143  (1893). 
See  also  Cochran  v.  Ocean  Dry  Dock, 
30  La.  Ann.  1365  (1878),  holding  that 
stockholders  cannot  appropriate  as- 
sets to  pay  their  salaries  as  officers, 


89 


1409 


§  692.] 


INTRA   TIKES    ACTS    AND    CONTKACTS. 


[CH.  XLI. 


corporation  to  a  creditor  corporation,  the  two  corporations 
having  a  majority  of  their  directors  in  common,  is  illegal.^  A 
purchaser  of  the  equity  of  redemption  from  the  corporation 
cannot  claim  that  the  mortgage  was  to  a  director  and  hence 
invalid,^  A  creditor  who  becomes  such  after  a  mortsa^e  is  ex- 
ecuted  cannot  object  to  the  mortgage  on  the  ground  that  it 
was  an  unlawful  preference.' 

An  officer  of  an  insolvent  corporation  cannot  acquire  a  pref- 
erence over  its  unsecured  creditors  by  accepting  its  bonds  on 
account  of  his  claims  against  it,  even  though  the  officer  did  not 
actually  know  of  the  insolvency.* 

If  a  majority  of  the  directors  of  an  insolvent  corporation, 
knowing  it  to  be  insolvent,  vote  and  cause  the  treasurer  to  exe- 
cute to  themselves  the  corporation's  judgment  note,  and  then 


or  to  pay  money  due  them  on  other 
accounts,  until  all  creditors  who  are 
not  stockliolders  have  been  paid; 
Swepson  v.  Exchange,  etc.  Bank,  9 
Lea  (Tenn.),  713  (1882),  holding  that 
a  conveyance  of  land  by  the  presi- 
dent of  a  bank  to  its  sole  stockholder, 
after  its  insolvency,  would  be  set 
aside  at  the  suit  of  a  judgment  cred- 
itor of  the  bank  who  had  levied  upon 
and  sold  it.  Where  all  the  corporate 
property  is  pledged  to  a  creditor  who 
owns  all  the  stock,  other  creditors 
may  object.  Stewart  v.  Gould,  8 
Wash.  367  (1894).  Corporate  credit- 
ors cannot  object  to  a  sale  of  all  the 
corporate  property  to  one  of  the  cred- 
itors in  payment  of  her  debt,  even 
though  she  be  the  wife  of  the  pres- 
ident and  chief  stockholder.  Rag- 
land  V.  McFall,  137  ILL  81  (1891).  See 
also  Reichwald  v.  Commercial  Hotel 
Co.,  106  IlL  439  (1883).  In  Massachu- 
setts it  has  been  held  that  a  prefer- 
ence given  to  a  large  stockholder  is 
legal  Sargent  v.  Webster,  54  Mass. 
497  (1847).  An  insolvent  corporation 
may  give  a  preference  to  a  stock- 
holder. Moreover,  a  corporate  cred- 
itor, who  became  such  after  such 
preference,  cannot  complain.  Burch- 
inell  V.  Bennett,  53  Pac.  Rep.  51  (Colo., 


1898).  See  also  Krause  v.  Malaga, 
etc.  Co.,  18  AtL  Rep.  367  (N.  J.,  1889). 
^  Sutton  Mfg.  Co.  V.  Hutchinson,  63 
Fed.  Rep.  496  (1894).  See  also  §  658, 
supra.  An  insolvent  corporation  may 
give  a  preference  to  a  creditor,  an- 
other corporation,  having  stockhold- 
ers and  directors  in  common  with  it. 
Sells  V.  Rosedale,  etc.  Co.,  72  Miss.  590 
(1895).  A  preference  by  an  insolvent 
corporation  is  legal,  although  one  of 
the  directors  is  interested  in  the  cor- 
poration that  is  preferred.  Colorad  o, 
etc.  Co.  V.  Western  Hardware  Co.,  50 
Pac.  Rep.  628  (Utah,  1897).  Where 
the  president  and  a  director,  without 
authority  from  the  board  of  direct- 
ors of  an  insolvent  corporation,  turn 
over  the  assets  to  another  corpora- 
tion in  payment  of  a  debt,  such  pres- 
ident and  director  being  interested 
in  the  latter  corporation,  the  trans- 
action is  illegal  German  Nat.  Bank 
V.  First  Nat.  Bank,  75  N.  W.  Rep.  531 
(Neb.,  1898). 

2  Greenstreet  v.  Paris,  21  Grant,  Ch. 
(Can.)  229  (1874). 

3  Central  Trust  Co.  v.  Bridges,  57 
Fed.  Rep.  753  (1893). 

<Sicardi  v.  Keystone  Oil  Co.,  149 
Pa.  St.  148  (1892). 


1410 


OH.  XLI.] 


niTEA   VIEES    ACTS    AND    CONTKACTS. 


[§  692. 


enter  judgment  on  it  at  once,  the  judgment  is  fraudulent  as  to 
other  creditors,  though  the  debt  was  legaL^ 

A  mortgage  by  an  insolvent  corporation  to  a  director  may 
be  upheld  to  the  extent  that  the  director,  at  the  time  of  the 
mortgage,  advanced  funds  to  pay  its  debts,  but  not  as  to  ante- 
cedent debts  due  the  director.^ 

There  are  cases  which  uphold  mortgages  given  by  insolvent 
corporations  to  their  directors,  but  these  cases  are  wrong  in 
principle  and  law.' 


1  Roseboom  v.  Whittaker,  132  IlL  81 
(1890). 

2  Corbett  v.  Woodward,  5  Sawyer, 
403  (1879);  S.  C,  6  Fed.  Cas.  531.  See 
also  WiUiams  v.  Patrons  of  Hus- 
bandly, 23  Mo.  App.  132  (1886);  "White, 
etc.  Co.  V.  Pettes,  etc.  Co.,  30  Fed. 
Rep.  864  (1887);  Lippincott  v.  Shaw 
Carriage  Co.,  25  Fed.  Rep.  577  (1885); 
Stout  V.  Yaeger  Milling  Co.,  13  Fed. 
Rep.  802  (1882). 

3  Planters'  Bank  v.  Whittle,  78  Va. 
737  (1884),  dictum,  that  directors  may 
make  preferences  in  favor  of  them- 
selves if  they  are  creditors;  but  in  so 
doing  they  must  act  in  perfect  good 
faith.  A  mortgage  given  by  an  in- 
solvent corporation  is  valid,  although 
given  to  secure  debts  due  to  the  wife 
of  a  director,  the  administrator  of 
another  deceased  director,  and  the 
payee  of  a  note  indorsed  by  stiU  an- 
other director.  Garrett  v.  Burling- 
ton Plow  Co.,  70  Iowa,  697  (1886).  A 
sale  of  all  the  property  of  an  insolv- 
ent corporation  to  a  director,  who  is 
also  president,  in  payment  of  his  debt, 
cannot  be  set  aside  by  other  corporate 
creditors.  BueU  v.  Buckingham,  16 
Iowa,  284  (1864).  A  preference  is 
legal,  although  given  by  directors 
who  are  relatives  of  the  creditor. 
RoUins  V.  Shaver,  etc.  Co.,  80  Iowa, 
380  (1890).  Corporate  creditors  can- 
not object  to  a  sale  of  all  the  corpo- 
rate property  to  one  of  the  creditors 
in  payment  of  her  debt,  even  though 
she  be  the  wife  of  the  president  and 
chief  stockholder.    Ragland  v.  Mc- 


Fall,  137  EL  81  (1891).  An  insolvent 
corporation,  under  the  Arkansas  de- 
cisions, may  give  a  mortgage  to  one 
of  its  directors  to  secure  a  jjresent  or 
precedent  debt,  and  such  mortgage 
is  valid.  Gould  v.  Little  Rock,  etc. 
R'y,  52  Fed.  Rep.  680  (1892),  review- 
ing the  authorities.  An  insolvent 
corporation  may  mortgage  its  prop- 
erty to  any  one  of  its  creditors.  Such 
a  mortgage  is  not  for  the  benefit  of 
aU  creditors,  even  though  it  is  given 
to  secure  several  The  mortgage 
may  be  given  to  a  director  or  stock- 
holder. Bank  of  Montreal  v.  Potts,  etc. 
Co.,  90  Mich.  345  (1892).  The  following 
cases  are  exceptions  to  and  not  con- 
tradictoiy  of  the  general  rule :  Where 
a  part  of  the  trustees  are  the  only 
ci'cditors,  and  the  business  is  a  losing 
one,  they  may  take  a  mortgage  to 
secure  moneys  loaned  by  them  to  the 
company,  and  may  foreclose  such 
mortgage.  Skinner  v.  Smith,  134  N. 
Y.  240  (1892);  Whitwell  v.  Warner, 
20  Vt.  425  (1848),  holding  that  stock- 
holders who  avail  themselves  of  their 
superior  advantages  to  obtain  secu- 
rity from  the  corporation  for  debts 
due  them,  whether  by  attachment  or 
assignment,  are  not  guilty  of  fraud 
so  as  to  render  themselves  personally 
liable  for  corporate  debts.  Where  a 
corporation  owes  money  to  the  di- 
rectors, and  to  pay  the  same  borrows 
money  and  gives  a  mortgage,  and 
subsequently  the  property  is  sold  for 
less  than  the  mortgage,  a  creditor 
whose  debt  was  not  due  when  the 


1411 


§  693.] 


INTEA   VIEES   ACTS    AND    CONTRACTS. 


[CH.  XLI. 


§  693.  Preferences  in  favor  of  corporate  (leMs  uponwMcTi  tlie 
directors  are  liable  as  indorsers  or  otherwise. —  Where  a  di- 
rector is  merely  the  indorser,  surety,  or  guarantor  of  a  corpo- 
rate debt  or  note,  to  wliich  a  preference  is  given  by  an  insolvent 
corporation,  a  much  more  difficult  question  arises  than  where 
such  debt  or  note  is  held  by  the  director  himself.  The  decisions 
are  in  conflict  on  this  subject.  The  great  weight  of  authority  un- 
doubtedly is  that  such  a  preference  is  illegal.^    This  is  so  held 


mortgage  was  given  cannot  com- 
plain. Holt  V.  Bennett,  14G  Mass. 
437  (1888).  But  see  St.  Louis  v.  Alex- 
ander, 23  ]\ro.  483,  528,  531  (1856), 
M'here  it  was  attempted  to  overturn 
a  deed  of  trust  on  the  ground  that  it 
was  executed  by  a  bare  quorum  of 
the  directors  and  one  or  more  of 
them  were  legally  incapacitated  by 
being  directly  interested.  The  lan- 
guage of  the  com-t  was:  "I  can  see 
no  reason  why  a  member  of  the  board 
of  directors  might  not  sit  in  the 
board,  and,  without  fraud,  in  con- 
junction with  others,  consent  to  an 
order  for  securing  a  debt  actually 
due  to  liim  from  the  corporation." 
A  preference  given  by  an  insolvent 
corporation  to  directors  may  be  legal. 
The  remedy  of  corporate  creditors 
against  an  illegal  preference  is  by 
creditors'  bill  and  not  by  an  execu- 
tion sale.  Butler  v.  Harrison,  etc. 
Co.,  41  S.  W.  Rep.  234  (Iilo.,  1897).  A 
stockholder  cannot  have  a  receiver 
appointed  and  mortgages  set  aside 
where  all  the  stock  is  "  water,"  even 
though  the  controlling  party  has 
made  the  mortgages  to  himself  and 
is  about  to  sell  the  assets  of  the  com- 
pany to  another  company  controlled 
by  himself,  and  has  levied  an  assess- 
ment on  the  stock  of  the  old  com- 
pany in  order  to  sell  out  the  stock. 
Robinson  v.  Dolores,  etc.  Co.,  2  Colo. 
App.  17  (1892).  In  Illinois  it  is  held 
that  an  insolvent  corporation  may 
prefer  a  creditor  who  is  the  father 
of  a  majority  of  the  directors.  It  is 
also  held  that  a  preference  may  be 


given  to  directors  for  a  debt  con- 
tracted while  the  company  was  in- 
solvent. Illinois  Steel  Co.  v.  O'Don- 
nell,  156  EL  624  (1895).  In  Missouri 
an  insolvent  corporation  may  pre- 
fer a  director.  Schufeldt  v.  Smith, 
131  Mo.  280  (1895).  Cf.  National 
Tube  Works  Co.  v.  Ring,  etc.  Co., 
118  Mo.  365  (1893).  Under  the  old 
New  Jex'sey  statute  the  directors  of 
a  corporation  could  mortgage  the 
property  and  issue  bonds  to  them- 
selves as  security  for  previous  ad- 
vancements, even  though  the  com- 
pany was  insolvent.  Whittaker  v. 
Amwell  Nat.  Bank,  52  N.  J.  Eq.  400 
(1894).  In  Connecticut  it  has  been 
held  that  a  corporation  may  turn 
over  property  to  a  director  in  pay- 
ment of  a  debt,  even  though  the  cor- 
poration is  insolvent,  it  being  shown 
that  all  parties  supposed  at  the  time 
that  all  debts  could  be  paid.  Smith 
V.  Skeary,  47  Conn.  47  (1879).  A 
mortgage  by  a  solvent  corporation 
to  secure  its  directors  as  creditors  is 
legal  Hinz  v.  Van  Dusen,  70  N.  W. 
Rep.  657  (Wis.,  1897). 

1  Where  a  director  is  guarantor  of 
a  debt,  a  preference  obtained  by  a 
judgment  creditor's  action  is  illegal. 
Wisconsin,  etc.  Bank  v.  Lehigh,  etc. 
Co.,  64  Fed.  Rep.  497  (1894).  A  draft 
drawn  by  an  insolvent  corporation  to 
pay  a  debt  for  which  a  director  is 
surety  is  illegal  Bosworth  v.  Jack- 
sonville Nat  Bank,  64  Fed.  Rep.  615 
(1894).  Where  two  out  of  four  di- 
rectors of  an  insolvent  coi-poration 
are  liable  as  indorsers  on  a  corporate 


1413 


CH.  XLI.] 


INTEA   TIEES   ACTS   AND    CONTEACTS. 


[§  693. 


because,  first,  siicli  a  preference  is  practically  the  same  as  a 
preference  to  the  director  himself,  inasmuch  as  he  tyouIcI  have 
had  to  take  up  the  debt  as  indorser  if  no  preference  had  been 
given ;  and  second,  because  to  sustain  such  a  preference  would 


debt,  a  mortgage  given  to  secure  that 
debt  ■will  be  set  aside  as  an  illegal 
preference,  even  tliough  the  moi-t- 
gage  has  been  foreclosed.  Lippincott 
V.  Shaw  Carriage  Co.,  34  Fed.  Rep. 
570  (1888).  Where  a  corporation  is 
practically  insolvent,  and  has  as- 
signed its  property  by  deed  of  trust 
to  pay  certain  debts  for  which  the 
directors  are  sureties,  a  court  of 
equity  in  Missouri  will  enjoin  pro- 
ceeding under  the  deed  of  trust,  and 
will  appoint  a. receiver.  Consolidated, 
etc.  Co.  V.  Kansas  City,  etc.  Co.,  43 
Fed.  Rep.  204  (1890) ;  S.  C,  45  Fed.  Rep. 
7  (1891).  An  insolvent  corporation 
may  give  a  preference  by  confession  of 
judgment,  but  not  to  a  creditor  whose 
claim  was  assigned  to  him  by  direct- 
ors. Gottlieb  i\  Miller,  154  lH  44 
(1895).  The  directors  of  an  insolvent 
corporation  are  trustees  for  the  cred- 
itors. They  cannot,  after  it  becomes 
insolvent,  take  mortgages  to  them- 
selves on  its  property  to  secure  ad- 
vances and  indorsements  made  by 
them  for  it.  Olney  v.  Conanicut  Land 
Co.,  16  R.  I.  597  (1889).  Directors  of 
an  insolvent  corporation  cannot  apply 
corporate  funds  exclusively  to  cor- 
porate debts  for  which  they  are  svire- 
ties.  All  debts  will  be  allowed  to 
participate  ratably.  Richards  v.  New 
Hampshire  Ins.  Co.,  43  N.  H.  263 
<1861).  An  insolvent  corporation  can- 
not give  a  preference  to  creditors 
for  whose  debts  the  directors  are 
sureties.  Tillson  v.  Downing,  45  Neb. 
549  (1895).  A  mortgage  to  secure  a 
debt  upon  which  one  of  the  directors 
is  liable  is  illegal.  Stough  v.  Ponca 
Mill  Co.,  74  N.  W.  Rep.  868  (Neb., 
1898).  A  corporation  supposed  to  be 
solvent  may  give  a  mortgage  to  se- 
cure a  debt  guaranteed  by  its  direct- 

14 


ors.  Sabin  v.  Columbia  Fuel  Co.,  25 
Oreg,  15  (1893).  An  insolvent  corpo- 
ration cannot  transfer  all  its  prop- 
erty to  pay  a  note  of  which  a  director 
is  an  indorser,  joint  maker,  or  guar- 
antor. Goodyear  Rubber  Co.  v.  Scott 
Co.,  96  Ala.  439  (1892).  A  mortgage 
given  by  an  insolvent  corporation  to 
secui'e  debts  for  which  the  directors 
are  sureties  is  illegal  It  is  not  legal, 
even  though  it  is  given  for  the  ben- 
efit of  co-sureties  who  are  not  direct- 
ors. The  directors  are  boimd  to  know 
whether  the  company  is  solvent  or 
insolvent.  Lowry  Banking  Co.  v. 
Empire  Lumber  Co.,  91  Ga.  624  (1893). 
"Where  the  controlling  directors  of 
two  corporations  are  the  same  per- 
sons, and  one  company  becomes  lia- 
ble on  paper  for  the  accommodation 
of  the  other,  and  thereby  renders  the 
directors  of  the  former  personally 
liable  for  breacli  of  trust,  a  mortgage 
given  by  the  latter  to  the  former  as 
secvirity  for  such  paper  is  invalid, 
because  it  amoimts  to  a  preference 
to  such  ofiicers.  Hutchinson  v.  Sut- 
ton Mfg.  Co.,  57  Fed.  Rep.  998  (1893). 
A  preference  by  an  insolvent  corpo- 
ration to  creditors  whose  notes  are 
secured  by  the  indorsements  of  di- 
rectors cannot  be  given  by  the  cor- 
poration by  the  vote  of  such  directors. 
Love  Mfg.  Co.  V.  Queen  City  Mfg.  Co., 
74  Miss.  290  (1896).  Even  though  an 
insolvent  corporation  illegally,  but  in 
good  faith,  gives  a  mortgage  by  way 
of  preference  to  its  president,  this 
does  not  sustain  an  attachment  by 
another  creditor  on  the  ground  that 
the  corporation  is  disposing  of  its 
property  with  intent  to  defraud  the 
creditors.  Trebilcock  v.  Big,  etc.  Co., 
68  N.  W.  Rep.  330  (S.  D.,  1896).  A  mort- 
gage to  secure  a  corporate  note,  on 
3 


§  693.] 


INTEA   VIKES   ACTS   AND   CONTKACTS. 


[CH.  XLI. 


tempt  a  director  holding  a  corporate  obligation  to  sell  the  same 
with  his  guaranty  or  indorsement,  and  then  induce  the  board 
of  directors  to  prefer  that  obligation. 

ISTotwithstanding  these  decisions  and  reasons,  there  are  cir- 
cumstances under  which  such  a  preference  will  be  sustained. 
A  corporate  creditor  is  not  to  be  punished  simply  because  the 
directors  have  guaranteed  his  claim.  The  supreme  court  of  the 
United  States  has  strongly  intimated  that  such  is  the  law ;  ^ 


which  the  voting  directors  are  in- 
dorsers,  is  illegal  as  well  as  a  mort- 
gage to  secure  a  note  due  a  daugh- 
ter of  a  voting  director,  he  being  her 
attorney,  or  to  secure  a  debt  due  an- 
other corporation  in  which  a  voting 
director  is  also  a  director.  Savage  v. 
Miller,  36  AtL  Rep.  578  (N.  J.,  1897). 
An  insolvent  corporation  cannot  give 
a  preference  to  a  debt  for  which  its 
directors  are  sureties.  Gray  v.  Tay- 
lor, 38  AtL  Rep.  951  (N.  J.,  1897).  But 
a  corporate  creditor  who  advised  the 
directors  to  take  a  mortgage  from 
the  corporation  to  secure  them  in 
their  indorsement  of  corporate  paper 
cannot  afterwards  object  to  such 
mortgage.  Re  Bloomfield,  etc.  Mills, 
70  N.  W.  Rep.  115  (Iowa,  1897).  A 
corporation  in  financial  diflScidties 
cannot  execute  a  mortgage  to  secure 
bonds,  and  deliver  these  bonds  to  a 
bank  as  seciirity  for  past  and  future 
advances,  where  two  of  the  directors 
of  the  company  are  also  directors  of 
the  bank.  Such  a  mortgage  delays 
other  creditors.  Only  bowa^de  hold- 
ers of  such  bonds  are  protected.  Age- 
Herald  Co.  V.  Potter,  109  Ala,  675 
(1895). 

1  In  Sanford,  etc.  Co.  v.  Howe,  etc. 
Co.,  157  U.  S.  312,  318  (1895),  rev'g 
Howe,  etc.  Co.  v.  Sanford,  etc.  Co.,  44 
Fed.  Rep.  231,  Mr.  Justice  Brewer  says, 
with  much  force:  "Are  creditors 
who  are  neither  stockholders  nor  di- 
rectors, but  strangers  to  a  corpora- 
tion, disabled  from  taking  security 
from  the  corporation  by  reason  of 
the  fact  that  upon  the  paper  they 


hold  there  is  also  the  indorsement  of 
certain  of  the  directors  or  stockhold- 
ers ?  Must,  as  a  matter  of  law,  such 
creditors  be  content  to  share  equally 
with  the  other  creditors  of  the  cor- 
poration, because,  forsooth,  they  have 
also  the  guaranty  of  some  of  the  di- 
rectors or  stockholders  wliose  guar- 
anty may  or  may  not  be  worth  any- 
thing  ?  "  The  payment  and  securing 
of  a  corporate  debt  are  not  fraudu- 
lent merely  because  some  of  the  di- 
rectors had  guaranteed  the  debt. 
Taylor  Coimty  Court  v.  Baltimore, 
etc.  R.  R.,  35  Fed.  Rep.  161  (1888).  A 
chattel  mortgage  securing  a  part  of 
the  creditors  of  an  insolvent  corpora- 
tion may  be  valid  although  some  of 
the  directors  and  stockholders  who 
voted  for  the  mortgage  are  guaran- 
tors and  indorsers  of  the  debts  so  se- 
cured. Brown  v.  Grand  Rapids,  etc. 
Co.,  58  Fed.  Rep.  286  (1893),  following 
the  Michigan  decisions,  and  stating 
that  the  supreme  com-t  of  the  United 
States  has  not  decided  that  a  corpo- 
ration may  not  prefer  one  of  its  di- 
rectors. A  creditor  may  be  preferred 
by  the  giving  of  security  by  an  in- 
solvent corporation,  even  though  his 
claim  is  secured  by  the  directors  and 
stockholders,  he  not  knowing  of  the 
insolvency  at  the  time  of  the  giving 
of  the  security.  Henderson  v.  Indi- 
ana Trust  Co.,  143  Ind.  561  (1895). 
An  insolvent  corporation  may  give 
a  mortgage  to  a  creditor,  by  way  of 
preference,  even  though  a  director  is 
surety  on  the  debt.  Waggoner,  etc. 
Co.  V.  Ziegler,  etc.  Co.,  128  Mo.  473 


1414 


CH,  XLI,] 


INTRA   VIKES   ACTS   AND    CONTKACTS. 


[§  693. 


and  indeed  it  is  difficult  to  see  how  a  court  of  equity  can  re- 
fuse to  uphold,  in  behalf  of  the  corporate  creditor  himself,  a 
preference  which  has  been  given  to  such  creditor,  even  though 
a  director  is  surety  therefor,  where  the  corporate  creditor  ac- 
quired his  claim  either  from  the  director  or  from  the  corpora- 
tion itself  at  a  time  when  the  corporation  was  solvent;  or 
where  the  corporate  creditor  did  not  know  that  the  corpora- 
tion was  insolvent  when  he  acquired  his  claim  from  the  director 
or  from  the  corporation  itself;  or  where  the  corporate  creditor 
loaned  money  to  the  corporation  itself  when  it  was  insolvent, 
and  at  the  same  time  received  a  mortgage  by  way  of  prefer- 
ence, and  also  obtained  the  indorsements  of  the  directors  on 
his  paper ;  or  where  the  directors  were  merely  indorsers  for  the 
accommodation  of  the  corporation.  It  is  true  that  the  above 
rules  would  enable  a  corporation  to  give  a  preference  to  a  cor- 
porate creditor  in  most  cases  where  a  director  is  indorser  or 
guarantor  of  the  claim.     But,  on  the  other  hand,  it  is  now  a 


(1895).  A  mortgage  to  a  creditor  on 
part  of  the  property  of  an  insolvent 
corporation  is  legal,  although  some 
of  the  stockholders  and  directors  are 
indorsers  of  the  debt.  Weihl  v.  At- 
lanta, etc.  Co.,  89  Ga.  297  (1892).  In 
Arkansas  it  is  held  that  an  insolvent 
corporation  may  prefer  certain  cred- 
itors, even  though  their  claim  is  se- 
cured by  the  indorsements  of  the 
directors.  Worthen  v.  Griffith,  59 
Ark.  562  (1894).  In  MiUedgevUle 
Banking  Co.  v.  Mclntyre  AUiance 
Store,  98  Ga.  503  (1896),  the  court 
very  properly  held  that  a  mortgage 
given  by  an  insolvent  corporation  to 
an  outside  creditor  was  valid,  al- 
though the  directors  had  given  their 
personal  note  as  additional  security 
for  the  debt,  such  note  being  purely 
an  accommodation  note.  The  court 
distinguished  Lowry,  etc.  Co.  v.  Em- 
pire, etc.  Co.,  91  Ga.  624  A  director 
who  votes  for  a  preference  on  debts 
for  which  other  directors  are  liable 
cannot  complain.  Lucas  v.  Friant, 
69  N.  W.  Rep.  735  (Mich.,  1897).  Al- 
though a  mortgage  is  invalid  as  to 
the  debts  in  which  the  directors  are 

141 


interested,  it  may  be  valid  as  to  the 
remaining  debts  secured  by  it.  Sav- 
age V.  Miller,  36  AtL  Rep.  578  (N.  J., 
1897).  A  preference  is  legal  although 
some  of  the  directors  voting  therefor 
were  sureties  on  the  paper  to  which 
such  preference  is  given,  their  votes 
not  being  necessary.  Levering  v. 
Bimel,  45  N.  E.  Rep.  775  (Ind.,  1897). 
Where  a  mortgage  is  given  by  an  in- 
solvent corporation  to  secure  an  an- 
tecedent debt  for  which  a  director  is 
surety,  the  mortgage  is  not  neces- 
sarily illegal;  but  if  the  transaction 
is  actually  a  scheme  to  givo  the  di- 
rector a  preference,  it  is  illegal 
Atlas  Tack  Co.  v.  Macon  Hardware 
Co.,  29  S.  E.  Rep.  27  (Ga.,  1897). 
Where  the  debts  equal  only  one-third 
of  the  market  value  of  the  corporate 
property,  and  certain  creditors  hold- 
ing notes  on  which  the  directors  are 
indorsers  demand  security  or  else 
threaten  to  sue  the  corporation,  the 
directors  may  authorize  confession 
of  judgment  in  their  favor.  Mueller 
V.  Monongahela,  etc.  Co.,  38  AtL  Rep. 
1009  (Pa.,  1898). 


§  C9i.] 


INTRA   TIRES   ACTS    AND    CONTRACTS. 


[CH. 


XLI. 


genercal  custom  in  banking  circles  not  to  loan  to  a  business  cor- 
poration unless  the  directors  guarantee  the  debt.  If  the  law 
puts  such  a  debt  at  a  disadvantage  as  compared  with  other  cor- 
porate debts,  the  credit  of  business  corporations  will  be  greatly 
curtailed,  thereby  rendering  insolvent  many  corporations  which 
otherwise  would  be  able  to  extricate  themselves  from  their 
troubles.  In  ISTew  Jersey  the  ingenious  rule  has  been  sustained 
that  where  a  preference  has  been  given  by  an  insolvent  corpo- 
ration to  debts  guaranteed  by  the  directors,  the  amount  realized 
from  such  preference,  over  and  above  what  would  have  been 
realized  if  there  had  been  no  preference,  may  be  recovered  by 
the  general  creditors  from  the  directors.^ 

§  694.  Land  may  })e  inircliasecl  hy  a  domestic  corporation.^ — 
The  English  statutes  of  mortmain  are  not  in  force  in  this  coun- 


» Savage  v.  Miller,  39  AtL  Rep.  665 
(N.  J.,  1898). 

2  Richardson  v.  Massachusetts,  etc. 
Assoc,  131  Mass.  174(1881);  Lancaster 
V.  Amsterdam  Imp.  Co.,  140  N.  Y.  576 
(1894);  Kelly  u.  People's  Transp.  Co., 
3  Oreg.  189  (1870 1;  Page  v.  Heineberg, 
40  Vt.  81  (1868);  Central  Gold  Min. 
Co.  V.  Piatt,  8  Daly,  263  (1870),  to  the 
effect  that  the  holding  may  be  upon 
special  trust;  Nicoll  v.  New  York, 
etc.  R.  R.,  12  N.  Y.  121,  127  (1854); 
Barry  v.  Merchants'  Exchange  Co.,  1 
Sandf.  Ch.  280  (1844);  Sherwood  v. 
American  Bible  Soc,  1  Keyes,  561 
(1864);  Steamboat  Co.  v.  McCutcheon, 
13  Pa.  St.  13  (1850);  Riley  v.  Roches- 
ter, 9  N.  Y.  64  (1853);  Downing  v. 
Marshall,  23  N.  Y.  366  (1861);  State  v. 
Mansfield,  23  N.  J.  L.  510  (1852);  State 
V.  Newark,  25  N.  J.  L.  315  (1855); 
First  Parish  v.  Cole,  20  Mass.  232 
(1825);  Old  Colony  R.  R.  v.  Evans,  72 
Mass.  25  (1856),  where  the  company 
purchased  a  gravel-pit  to  transport 
and  sell  the  gravel.  And  see  Smith 
V.  Sheeley,  12  WalL  358  (1870).  A 
corporation  is  presumed,  in  the  ab- 
sence of  any  showing  to  the  contrary, 
to  have  the  right  to  purchase  and 
hold  land.  Stockton  Sav.  Bank  v. 
Staples,  98  Cal.  189  (1893).    In  a  suit 


by  a  railroad  to  quiet  title  to  its  land, 
the  defendants  cannot  question  the 
power  of  the  railroad  to  hold  land. 
Russell  V.  Texas,  etc.  R'y,  68  Tex.  646 
(1887).  In  a  bill  to  quiet  title,  a  cor- 
poration need  not  allege  that  it  has 
l^ower  to  hold  land.  Torrent  F.  Eng. 
Co.  V.  Mobile,  101  Ala.  559  (1894).  A 
publishing  company  may  take  a  lease 
of  a  building  and  may  sublet  such 
parts  of  it  as  it  does  not  use.  Oswald 
V.  St.  Paul,  etc.  Pub.  Co.,  60  Minn.  82 
(1895).  A  foreign  corporation  may 
buy  and  sell  land  if  authorized  so  to 
do  by  its  charter.  Barcello  v.  Hap- 
good,  118  N.  C.  712  (1896).  A  foreign 
corporation  may  own  land  in  INIissis- 
sippi.    Taylor  v.  Alliance  Trust  Co., 

71  Miss.  694  (1894).  A  bank  may  ac- 
cept a  deed  of  real  estate  from  a 
stockholder  and  director  to  make 
good  an  impairment  of  the  capital 
stock,  it  being  agreed  that  compen- 
sation therefor  should  be  paid  from 
future  profits.    Brown  v.  Bradford, 

72  N.  W.  Rep.  648  (Iowa,  1897).  Where 
a  bank  has  legally  acquired  a  part  in- 
terest in  real  estate,  it  may  pm*chase 
the  remaining  interest  for  the  pur- 
pose of  handling  the  property.  Cock- 
rill  V.  Abeles,  86  Fed.  Rep.  505  (1898). 


1416 


CH,  XLI.] 


IXTKA   TIKES    ACTS    AND    COXTKACTS. 


[§  G94. 


try  except  in  Pennsylvania.  The  only  limitation  upon  the  right 
of  corporations  to  hold  real  property  is  that  the  purchase  must 
he  a  natural  incident  of  the  business  specified  in  the  charter.^ 
A  different  rule  prevails  in  Pennsylvania.^    In  that  state  the 


1 2  Kent,  Com.  *282;  Moore  v.  Moore, 
4  Dana  (Ky.),  354  (1836);  Lathrop  u 
Scioto  Comm.  Bank,  8  Dana  (Ky.'), 
114,  121  (1839 1 ;  Potter  v.  Thornton,  7 
R  I.  252  (1862);  Perin  v.  Carey,  24 
How.  465  (1860);  McCartee  v.  Orphan 
Asylum  Soc,  9  Cow.  437,  451  (1827); 
Page  V.  Heineberg,  40  Vt.  81  (1868). 
See  also  Odell  v.  Odell,  92  Mass.  1 
(1865);  Downing  v.  Marshall,  23  N.  Y. 
366,  392  (1861);  First  Parish  u  Cole, 
20  Mass.  232, 239  (1825) ;  Richardson  v. 
Massachusetts,  etc.  Assoc,  131  ^Mass. 
174  (1881).  One  who  agrees  to  sell 
land  to  a  corporation  is  not  bound  to 
see  that  it  is  required  for  the  pur- 
poses of  the  corporation,  and  if  act- 
ing in  good  faith,  and  without  knowl- 
edge of  an  intention  to  misapply  the 
corporate  funds,  he  may  enforce  spe- 
cific performance  of  the  contract. 
Eastern  Covmties  R'y  v.  Hawkes,  5 
H.  L.  Cas.  331  (1855).  Frequently  the 
charter  places  some  limitations  or 
grants  some  privileges  herein.  A 
charter  power  to  hold  land  for  busi- 
ness purposes  and  to  secure  debts 
does  not  authorize  the  purchase  of 
land  for  the  piu-pose  of  selling  it 
again.  Bank  of  Michigan  v.  Niles, 
Walk.  (Mich.)  99  (1842);  Pacific  R.  R. 
V.  Seely,  45  Mo.  212  (1870),  where  a 
railroad  was  held  to  have  no  power 
to  acquire  land  for  speculation;  Land 
V.  Coffman,  50  Mo.  243  (1872);  Rens- 
selaer, etc.  R.  R  v.  Davis,  43  N.  Y.  137 
(1870).  Under  such  an  express  power 
the  corporation  cannot  purchase 
merely  for  the  convenience  of  the 
corporation,  nor  for  purposes  foreign 
to  its  objects.  State  v.  Mansfield,  23 
N.  J.  L.  510  (1852);  State  v.  Newark, 
25  N.  J.  L.  815  (1855).  But  the  pur- 
chase is  presumed  to  be  for  purposes 
mentioned  in  the  charter.    Chautau- 


que  County  Bank  v.  Risley,  19  N.  Y. 
369  (1859);  Ex  parte  Peru  Iron  Co.,  7 
Cow.  540  (1827) ;  Moss  v.  Rossie  Lead 
Min.  Co.,  5  Hill,  137  (1843);  Alward 
V.  Holmes,  10  Abb.  N.  Cas.  96  (1880), 
where  a  foreign  bank  had  pm'chased. 
A  railroad,  instead  of  condemning  a 
right  of  way,  may  purchase  the  fee. 
Nicoll  V.  New  York,  etc.  R  R,  12 
N.  Y.  121  (1854). 

2  This  arose  from  the  fact  that  the 
judges  of  the  supreme  court,  ap- 
pointed to  examine  and  report  to  the 
legislatm*e  such  of  the  English  stat- 
utes as  were  in  force  in  that  state, 
reported  that  the  statutes  of  mort- 
main were  "  so  far  in  force  that  all 
conveyances  .  .  .  made  to  a  body 
corporate,  or  for  the  use  of  a  body 
corporate,  are  void,  unless  sanctioned 
by  charter  or  act  of  assembly."  The 
report  may  be  found  in  3  Binney  (Pa.), 
595,  626  (1808).  See  also  Methodist 
Church  V.  Remington,  1  "Watts  (Pa.), 
218  (1832);  MiUer  v.  Porter,  53  Pa.  St. 
292  (1866).  The  statute  of  April  6, 
1833,  made  all  purchases  of  land  by  or 
for  corporations,  without  the  license 
of  the  commonwealth,  subject  to  for- 
feiture. Under  this  act  it  has  been 
held  that  a  foreign  corporation  may 
purchase  and  hold  real  estate  in 
Pennsylvania,  subject  to  being  di- 
vested by  the  direct  action  of  the 
state.  Rimyan  v.  Coster,  14  Pet.  123 
(1840).  To  same  effect,  Leazure  v. 
HiUegas,  7  Serg.  &  R  (Pa.)  313  (1821). 
A  shnilar  statute,  i^assed  April  26, 
1855,  was  construed  to  the  same  effect 
in  Hickory  Farm  Oil  Co.  v.  Buffalo, 
etc.  R  R,  32  Fed.  Rep.  22  (1887),  after 
having  been  declared  a  mortmain 
act  in  American  Slate  Co.  v.  Phillips- 
buvg,  etc.  Bank,  8  W.  N.  Cas.  430 
(1880).    A  person  sued  in  Pennsyl- 


1417 


§  694.] 


INTKA   VIKES    ACTS   AI^D    CONTRACTS. 


[CH.  XLI, 


mortmain  laws  are  held  to  still  exist,  and  the  state  itself  has 
enacted  a  statute  restricting  the  right. 

The  amount  of  land  which  a  corporation  may  purchase  can 
be  questioned  only  by  a  stockholder  or  by  the  state  in  a  direct 
proceeding  for  that  purpose.  The  objection  cannot  be  made 
by  others.^    A  stockholder  has  the  same  right  to  object  to  an 


vania  on  a  debt  to  a  foreign  corpora- 
tion cannot  set  up  that  the  corpora- 
tion is  illegally  holding  land  in  the 
state.  Grant  v.  Henry  Clay  Coal  Co., 
80  Pa.  St.  208  (187G).  Where  a  foreign 
corporation  cannot  directly  own  land 
in  a  state,  it  cannot  own  land  in- 
directly by  owning  a  majority  of 
the  stock  of  a  domestic  corporation 
wh  ich  owns  the  land.  The  state  may 
escheat  the  land.  Commonwealth  v. 
New  York,  etc.  R.  R,  114  Pa.  St.  3-10 
(1886).  But  under  the  statutes  of 
Pennsylvania  it  is  legal  for  a  railroad 
company  to  own  all  the  stock  of  a 
mining  company  which  owns  land, 
and  such  land  does  not  escheat.  Com- 
monwealth u  New  York,  etc.  R.  R, 
139  Pa.  St.  457  (1891).  See  also  §  695, 
infra. 

1  Only  the  state  can  raise  the  ques- 
tion that  the  corporation  was  not  en- 
titled to  acquire  real  estate.  Cooney 
V.  A.  Booth,  etc.  Co.,  48  N.  E.  Rep.  406 ' 
(111.,  1897);  Land  v.  Coffman,  50  Mo. 
243  (1872),  holding  also  that  a  deed 
voluntarily  made  to  the  corporation 
of  real  property  in  excess  of  the 
amount  allowed  by  its  charter  will 
pass  a  good  title ;  Natoma  Water,  etc. 
Co,  V.  Clarkin,  14  CaL  544,  552  (1860), 
Field,  C.  J.,  saying:  "It  would  lead 
to  infinite  inconveniences  and  em- 
barrassments if,  in  suits  by  corpora- 
tions to  recover  the  possession  of 
their  property,  inquiries  were  per- 
mitted as  to  the  necessity  of  such 
property  for  the  purposes  of  their  in- 
corporation, and  the  title  made  to 
rest  upon  the  existence  of  that  neces- 
sity." A  grantor  of  property  to  a 
raikoad  company  for  picnic  purposes 
cannot  avoid  his  deed  and  its  oblio-a- 


tions  by  claiming  that  the  purchase 
by  the  company  was  ultra  vires. 
Shelby  v.  Chicago,  etc.  R  R.,  143  111. 
385  (1892).  The  corporation  cannot 
defend  against  a  mortgage  on  the 
ground  that  it  had  no  power  to  pur- 
chase the  property.  Butterworth, 
etc.  V.  Kritzer.  etc.  Co.,  72  N.  W.  Rep. 
990  (Mick,  1897).  The  state  alone  can 
object  to  a  foreign  coi-poration  hold- 
ing more  than  five  thousand  acres  of 
land  in  the  state  as  prescribed  by  the 
statutes.  American  Mortgage  Co.  v. 
Tennille,  87  Ga.  28  (1891).  Where  a 
Connecticut  company  owning  land  in 
South  Dakota  sells  it  to  a  Minnesota 
corporation  organized  to  speculate  in 
land,  a  subsequent  deed  by  the  former 
company  to  an  individual  is  not  good. 
Only  the  state  can  question  the  power 
of  the  Minnesota  corporation  to  take 
title.  The  constitutional  provision 
of  South  Dakota  relative  to  land 
does  not  change  this  rule.  Gilbert  v. 
Hole,  2  S.  D.  164  (1891).  There  are 
many  other  cases  in  which  it  is  held 
that  the  state  alone  can  raise  this  ob- 
jection. National  Bank  v.  Matthews, 
98  U.  S.  621,  628  (1878),  and  cases 
cited;  Cowell  v.  Springs  Co.,  100  U.  S. 
55  (1879);  Myers  v.  Croft,  13  Wall  291 
(1871);  Southern  Pac.  R.  R  v.  Orton, 
6  Sawy.  157,  181  (1879),  and  cases 
cited;  S.  C,  32  Fed.  Rep.  457,  470; 
Shewalter  v.  Pu-ner,  55  Mo.  218  (1874); 
Chambers  v.  St.  Louis,  29  Mo.  543, 
576  (1860);  Mclndoe  v.  St.  Louis,  10 
Mo.  576  (1847);  People  v.  Maui-an,  5 
Denio,  389  (1848):  Silver  Lake  Bank 
V.  North,  4  Johns.  Ch.  370  (1820); 
Leazure  v.  Hillegas,  7  Serg.  &  R  (Pa.) 
313  (1821);  Govmdie  v.  Northampton 
Water  Co.,  7  Pa.  St.  233  (1847);  Steam- 


1418 


en.  XLI.] 


INTEA   VIKES    ACTS   AOT)    CONTRACTS. 


[§  094. 


ultra  vires  purchase  of  land  as  he  has  to  object  to  any  other 
ultra  vires  act;  ^  but  he  must  be  prompt  in  his  objection,"  and 
must  bring  suit  in  behalf  of  all  the  stockholders  to  set  the  pur- 


boat  Co.  V.  McCutcheon,  13  Pa.  St.  13 
(1850);  Kelly  u  People's  Transp.  Co., 
3  Oreg.  189  (1870);  Morgan  v.  Don- 
ovan, 58  Ala.  241  (1877).  But  in  this 
case  it  was  said  that  in  a  suit  to  en- 
force a  contract  of  purchase  which 
remained  executory,  or  to  recover 
for  its  breach,  the  question  of  ultra 
vires  would  be  material  Banks  v. 
Poitiaux,  3  Rand.  (Va.)  136, 146  (1825); 
Barrow  v.  Nashville,  etc.  Co.,  9 
Humph.  (Tenn.)  304  (1848),  holding 
that  the  fact  that  a  corporation  uses 
real  estate  for  pm-poses  beyond  its 
powers  furnishes  no  ground  to  the 
vendor  for  a  rescission  of  the  contract 
of  sale;  Rimyan  v.  Coster,  14  Pet.  122, 
129 (1840) ;  Chicago,  etc.  R.  R.  v.  Lewis, 
53  Iowa,  101  (1880);  Mapes  r.  Scott,  94 
111.  379  (1880),  in  which  the  rule  was 
applied  to  national  banks;  Alexander 
V.  ToUeston  Club,  110  IIL  65  (1884); 
Smith  V.  Sheeley,  12  Walk  358  (1870); 
De  Camp  v.  Dobbins,  29  N.  J.  Eq.  36 
(1878),  which  ca^s  was  afl&rmed  in  31 
N.  J.  Eq.  671  (1879),  where  it  was,  how- 
ever, held  that  an  heir-at-law  may  ob- 
ject that  a  corporation  cannot  hold 
land  in  trust  in  excess  of  its  statutory 
powers.  See  this  report  for  a  well- 
considered  opinion,  citing  cases,  and 
notes  by  the  reporter.  Bone  v.  Dela- 
ware, etc.  Co.,  5  Atk  Rep.  751  (Pa., 
1886);  Chicago,  etc.  R.  R  v.  Lewis, 
53  Iowa,  101  (1880);  Missouri,  etc.  Co. 
V.  BushneU,  11  Neb.  192  (1881);  Jones 
V.  Habersham,  107  U.  S.  174  (1882); 
Barnes  v.  Suddard,  117  Ilk  237  (1886), 
in  which  the  rule  was  applied  to  a 
foreign  corporation;  Hickoiy  Farm 
Oil  Co.  V.  Bviffalo,  etc.  R  R,  32  Fed. 


Rep.  22  (1887),  to  the  same  effect; 
Spear  v.  Crawford,  14  Wend.  20  (1835), 
where  a  stockholder  was  held  liable 
on  his  statutory  liability  to  a  corpo- 
rate creditor  who  had  sold  land  to 
the  corporation. 

If  a  corporation  buys  land  and 
then  finds  it  is  ultra  vires,  and  sells 
its  contract  to  a  third  person,  it  may 
collect  from  the  latter  moneys  paid 
on  the  purchasa  Crutcher  v.  Nash- 
vUle  Bridge  Co.,  8  Humph.  (Tenn.) 
403  (1847).  A  railroad  company  can- 
not refuse  to  complete  a  purchase  of 
lands  which,  prima  facie,  it  could 
vise  for  railroad  purposes  It  can- 
not claim  that  the  purchase  was 
ultra  vires.  Eastern  Counties  R'y  v. 
Hawkes,  5  H.  L.  Cas.  331  (1855).  A 
turnpike  company  may  take  a  lease 
of  land  for  storing  purposes.  Craw- 
ford V.  Longstreet,  43  N.  J.  L.  325 
(1881).  An  agreement  of  a  company 
to  buy  land  if  a  certain  biU  passes  is 
legal  and  binding.  Taylor  v.  Chi- 
chester, etc.  R'y,  L.  R  4  H.  L.  628 
(1870),  reversing  S.  C,  L.  R  2  Exch. 
356  (1867).  Coleman  v.  San  Rafael 
Tump.  Co.,  49  Cak  517  (1875),  holds 
that,  in  an  action  to  quiet  title,  a 
bond  to  convey  to  a  corporation  for 
purposes  beyond  its  requirements  is 
void.  Thweatt  v.  Bank  of  Hopkins- 
viUe,  81  Ky.  1  (1883),  where  an  execu- 
tion sale  to  a  bank  was  held  to  be  void 
at  the  suit  of  the  execution  debtor; 
Riley  v.  Rochester,  9  N.  Y.  64  (1853), 
holding,  in  an  action  of  trespass,  that 
a  conveyance  to  a  miinicipal  corpo- 
ration of  land  beyond  its  limits  for 
the  purposes  of  a  street  is  void.    Al- 


1  Re  Kent  Benefit  Bldg.  Soc,  1  Dr. 
«fe  Sm.  417  (1861),  where  stockliolders 
were  not  required  to  refund  to  di- 
rectors moneys  paid  by  the  latter 
ultra  vires  for  land;  Grimes  v.  Har- 


rison, 26  Beav.  435  (1859),  where  the 
directors  were  compelled  to  make 
good  the  funds  of  the  corporation 
used  ultra  vires  to  purchase  land. 
2  See  ch.  XLIV,  infra. 


1419 


cm.] 


INTRA   VIKES    ACTS    AND    CONTRACTS. 


[CH. 


XLI. 


chase  aside.^  Whenever  a  corporation  may  take  tlie  legal  title 
to  land  it  may  take  the  beneficial  interest  in  it,  but  if  it  cannot 
hold  a  legal  title  it  cannot  hold  as  cestui  que  trust? 

"Where  several  persons,  in  order  to  evade  section  2331  of  the 
United  States  Kevised  Statutes,  which  limits  to  twenty  acres 
the  amount  of  placer-mining  ground  that  a  single  person  may 
locate,  agree  that  "  dummies  "  shall  be  used  as  locators,  and 
the  "  dummies  "  shall  transfer  the  land  to  one  person,  who  shall 
hold  it  for  all  of  the  principal  parties,  and  all  this  is  done,  the 
person  thus  obtaining  title  cannot  be  compelled  by  the  others 
to  divide.  The  contract  is  illegal  and  the  court  will  not  aid 
any  party.' 


though  a  corporation  purchases  land 
in  excess  of  the  amount  limited  by 
its  charter,  yet  only  the  state  can  ob- 
ject, and  its  remedy  is  forfeiture  of 
the  charter.  Fayette  Land  Co.  v. 
Louisville,  etc.  R.  R,  93  Va.  274  (1896). 
The  power  of  a  trust  company  to  buy 
a  tax  title  cannot  be  attacked  by  a 
mortgagee  foreclosing  a  mortgage 
on  the  land.  Watts  v.  Gantt,  42  Neb. 
869  (1894).  In  a  suit  by  a  corporation 
to  quiet  title,  a  grantee  of  its  grantees 
cannot  set  up  that  the  corporation 
had  no  power  to  acquire  or  hold  title. 
Butte  Hardware  Co.  v.  Cobban,  13 
Mont.  351  (1893).  For  a  carefiil  re- 
view of  the  authorities,  and  an  argu- 
ment that  the  corporation  or  its 
stockliolders  are  in  all  cases  pro- 
tected as  to  real  estate  purchased 
ultra  vires,  see  Harvard  L.  Rev.  15 
(1894). 

1  See  ch.  XLV,  infra. 

2  Coleman  v.  San  Rafael  Tump.  Co., 
49  Cal.  517,  522  (1875).  In  tliis  case  a 
bond  to  an  individual  to  convey  land 
in  trust  for  the  stockholders  of  a  cor- 
poration, with  power  to  sell  under 
direction  of  its  board  of  trustees,  was 
held  to  constitute  the  corporation  a 
cestui  que  trust.  Vidal  v.  Girard,  2 
How.  127, 187  (1844),  holding  also  that, 
if  the  trust  be  repugnant  to  or  incon- 
sistent with  the  purposes  of  the  cor- 
poration, a  new  trustee  may  be  sub- 


stituted, but  no  ground  is  furnished 
to  declare  the  trust  void.  See  also 
De  Camp  v.  Dobbins,  29  N.  J.  Eq.  36 
(1878):  affirmed,  31 N.  J.  Eq.  671  (1879): 
Clemens  v.  Clemens,  37  N.  Y.  59  (1867) ; 
Chamberlain  v.  Chamberlain,  43  N. 
Y.  424  (1871);  Harris  v.  American 
Bible  Soc,  2  Abb.  App.  Dec.  316  (1867), 
but  liere  the  corporation  had  express 
power  to  hold  in  trust;  Downing  v. 
Marshall,  23  N.  Y.  366  (1861). 

3  Mitchell  V.  Cline,  84  Cal.  409  (1890). 
See  also  Case  v.  Kelly,  133  U.  S.  21 
(1890).  AVliere  land  is  entered  in  the 
names  of  individuals  in  order  to 
evade  a  statute  against  corporations, 
and  then  they  (feed  to  the  corpora- 
tions, the  state  may  set  aside  the 
grants.  Wichita,  etc.  Co.  v.  State,  80 
Tex.  684  (1891).  A  corporation  taking 
out  patents  to  land  in  the  names  of 
its  employees,  and  then  taking  a  con- 
veyance from  them,  holds  the  land 
subject  to  forfeiture  by  the  govern- 
ment. United  States  v.  Trinidad 
Coal,  etc.  Co.,  137  U.  S.  160  (1890). 
A  corporation  which  engages  in  the 
business  of  buying  and  selling  real 
estate  through  a  trustee  does  not  for- 
feit its  title  to  land  acquired  by  such 
trustee,  although  contrary  to  2  Utah 
Comp.  L.  1888,  §  2272,  which  provides 
that  a  corporation  "shall  not  have 
power  to  enter  into,  as  a  business,  the 
buying  and  selling  of  real  estate,"  but 


1420 


CH.  XLI.] 


INTKA    VIEES    ACTS   AND    CONTRACTS, 


[§  694 


Altliougli  the  officers  of  a  railroad  company  take  in  their 
own  names  the  title  to  lands  which  are  donated  to  the  railroad, 
yet  the  railroad  cannot  compel  them  to  give  up  the  lands,  if 
the  railroad  company  had  no  power  to  acquire  such  lands.^  The 
contract  by  which  a  party  turns  in  land  in  exchange  for  stock 
may  be  such  as  to  give  him  a  vendor's  lien  on  such  land  in  case 
the  scheme  is  not  carried  out.'^ 

Quo  warranto  does  not  lie  to  oust  a  corporation  from  the 
possession  of  land.  Quo  warranto  lies  only  to  oust  a  company 
from  the  franchises  it  claims,  and  not  to  divest  it  of  property.^ 

It  is  well  settled  that  corporations  may,  without  special  au- 
thority, dispose  of  land  as  they  may  deem  expedient,*  and  may 
mortgage  lands  in  the  course  of  legitimate  business.* 

31  How.  414,  424  (1858);  Barry  v.  Mer- 
chants' Exchange  Co.,  1  Sandf.  Ch. 
280  (1844);  Dupee  v.  Boston  Water 
Power  Co.,  114  Mass.  37  (1873);  Bur- 
ton's Appeal,  57  Pa.  St.  213  (1868); 
Miners'  Ditch  Co.  v.  Zellerbach,  37 
CaL  543  (1869);  Reynolds  v.  Stark 
County,  5  Ohio,  204  (1831);  Newark 
V.  EUiott,  5  Ohio  St.  113  (1855):  De 
Ruyter  v.  St.  Peter's  Church,  3  Barb. 
CIl  119  (1848);  aff'd,  3  N.  Y.  238;  Buell 
V.  Buckingham,  16  Iowa,  284  (1804), 
holding  also  that  the  sale  may  be  by 
directors  having  general  powers  to 
make  contracts;  Aurora,  etc.  Soc.  v. 
Paddock,  80  IlL  263  (1875).  And  see 
Binney's  Case,  2  Bland,  Ch.  99,  142 
(1829);  Railroad  Co.  v.  Howard,  7 
Walk  392  (1868),  in  which  a  sale  by  a 
corporation  without  authority,  but 
with  the  consent  of  all  the  parties 
interested  in  the  subject-matter  of  it, 
was  held  valid ;  Edward  v.  Fairbanks, 
27  La.  Ann.  449  (1875);  Rutland,  etc. 
R  R.  u  Proctor,  29  Vt.  93  (1856),  hold- 
ing also  that  a  purchaser  from  a  cor- 
poration cannot  defeat  an  action  for 
the  purchase-money  by  the  defense 
that  the  corporation  had  no  power  to 
acquire  the  property.  A  corporation 
may  authorize  an  agent  to  deed  land 
belonging  to  the  corporation.  Bar- 
cello  V.  Hapgood,  118  N.  C.  712  (1896). 
5  See  g§  779,  etc.,  infra. 


affixed  no  penalty  for  its  violation. 
Fisk  V.  Patton,  7  Utah,  399  (1891). 
Even  a  domestic  corporation  cannot 
obtain  a  patent  to  a  mining  claim 
under  the  federal  statutes,  vmless  all 
of  its  stockholders  are  citizens  of  the 
United  States,  and  are  severally  and 
individually  qualified  and  competent 
to  make  the  location.  Thomas  v. 
Chisholm,  13  Colo.  105  (1889).  A  for- 
eign corporation  not  authorized  to 
own  and  register  ships  in  America 
cannot  evade  the  law  by  taking  title 
in  the  names  of  trvistees  who  are  resi- 
dents of  America.  Ogden  v.  Murray, 
39  N.  Y.  202  (1868),— a  dictum.  Under 
a  constitutional  provision  tliat  con- 
veyances to  a  coi-poration,  a  majority 
of  the  stock  of  which  is  held  by  aliens, 
shall  be  void,  the  attorney-general 
may  commence  suit  to  have  certain 
conveyances  declared  void,  even 
though  a  majority  of  the  stock  was 
owned  by  citizens  at  the  time  of  the 
conveyance,  such  majority  having 
since  that  time  passed  into  alien 
hands.  State  v.  Hudson  Land  Co.,  52 
Pac.  Rep.  574  (Wash.,  1898). 

1  Case  V.  KeUy,  133  U.  S.  21  (1890). 

2  Slide,  etc.  Mines  v.  Seymour,  153 
U.  S.  509,  520  (1894). 

3  State  V.  Pittsburgh,  etc.  R.  R.,  50 
Oliio  St.  239  (1893). 

<  White  Water,  etc.  Co.  u  Vallette, 


1421 


§  C94.] 


INTKA   VIEES    ACTS    AND    CONTRACTS. 


[CH.  XLI. 


Under  the  English  statute  of  wills  a  devise  of  land  to  certain 
bodies  corporate  is  unlawful.  Similar  statutes  have  been  en- 
acted quite  generally  in  America." 

An  educational  corporation  authorized  to  accept  property  to 
a  certain  amount  cannot  take  a  devise  or  bequest  of  property 
after  it  already  has  property  equal  to  the  amount  limited  by 
its  charter.^ 


1  McCartee  v.  Orphan  Asylum  Soc, 
9  Cow.  437  (1827);  Downing  v.  Mar- 
shall, 23  N.  Y.  3C6, 384  (1861),  but  hold- 
ing that  a  charter  provision  enabling 
a  corporation  to  take  land  "  by  direct 
purchase  or  otherwise  "  is  an  express 
authority  within  the  meaning  of  the 
statute  of  wills.  See  also  Kerr  v. 
Dougherty,  79  N.  Y.  327  (1880),  over- 
throwing a  bequest  by  a  resident  of 
another  state  to  a  New  York  corpo- 
ration which  was  forbidden  to  take 
by  bequest;  State  v.  Bates,  2  Harr. 
(Del.)  18  (1835),  where  a  devise  of 
money  arising  from  the  sale  of  land 
was  held  to  be  in  effect  a  devise  of 
land;  but  the  contrary  view  of  such 
a  devise  was  taken  in  American  Bible 
Soc.  V.  Noble,  11  Rich.  Eq.  (S.  C.)  156 
(1859).  The  statutes  of  New  York 
against  bequests  to  certain  corpora- 
tions made  within  a  certain  time  be- 
fore the  testator's  death  do  not  apply 
to  a  bequest  by  a  foreigner  made  in 
a  foreign  land  to  a  corporation  to  be 
organized  under  the  laws  of  New 
York,  the  bequest  being  valid  at  the 
domicile  of  the  testator.  Dammert 
V.  Osbom,  140  N.  Y.  30  (1893).  In 
Massachusetts  it  has  been  held  that 
a  town  or  parish  may  take  and  hold 
a  devise  for  the  use  of  schools.  First 
Parish  v.  Cole,  20  Mass.  232  (1825). 
As  to  the  nile  governing  bequests  to 
charitable  corporations  in  New  York, 
see  Wetmore  v.  Parker,  52  N.  Y.  450 
(1873).  A  foreign  charitable  corpo- 
ration cannot  take  New  York  land 
by  devise  unless  the  New  York  stat- 
ute permits.  White  v.  Howard,  46 
N.  Y.  144  (1871).     Cf.  White  v.  How- 


ard, 38  Conn.  342(1871).  And  con- 
cerning the  common-law  restrictions 
on  the  power  of  charitable  corpora- 
tions to  sell  land,  see  ]\Iadison  Ave. 
Bapt.  Ch.  V.  Oliver  St.  Bapt.  Ch.,  46 
N.  Y.  131  (1871).  See  also  §  695,  infra, 
as  to  foreign  corporations, 

2  Cornell  University  v.  Fiske,  136 
U.  S.  152  (1890).  Where  land  is 
willed  to  a  corporation,  the  heirs  can- 
not defeat  the  devise  by  claiming 
that  the  corporation  already  has  all 
the  land  that  the  statutes  allow. 
Only  the  state  can  raise  that  ques- 
tion. Hamsher  v.  Hamsher,  132  111. 
273  (1890).  In  Jones  v.  Habersham, 
107  U.  S.  174  (1882),  where  the  limit 
was  on  the  income  and  the  gift  in- 
creased it  beyond  the  limit,  the  coiui; 
held  that  only  the  state  could  object. 
Where  the  limitation  upon  the  capac- 
ity of  a  corporation  to  hold  land  is 
based  upon  a  yearly  value,  the  yearly 
value  at  the  time  it  is  acquired  is  in- 
tended, and  the  title  is  not  affected 
by  a  subsequent  increase  in  its  value 
above  the  amoimt  limited.  Bogardus 
V.  Trinity  Church,  4  Sandf.  Ch.  633 
(1847);  Humbert  v.  Trinity  Church. 
24  Wend.  587,  629  (1840).  And  see 
Harvard  College  v.  Boston,  104  Mass. 
470  (1870).  In  McGraw  v.  Cornell 
University,  45  Hun,  354  (1887),  a  will 
giving  to  the  defendant  more  prop- 
erty than  its  charter  allowed  was 
overthrown  by  the  heirs  of  the  tes- 
tatrix. Affirmed,  Re  McGraw,  111 
N.  Y.  66  (1888).  See  also  Church  of 
Redemption  v.  Grace  Church,  68  N. 
Y.  570  (1877);  Bogardus  v.  Trinity 
Church,  4  Sandf.  Ch.  633  (1847).    Cf. 


1423 


en.  XLi,] 


INTRA   TIRES    ACTS    AND    CONTRACTS. 


[§  695. 


A  devise  or  bequest  to  a  corporation  to  be  hereafter  created 
is  valid.^  A  corporation  may  take  the  title  to  land  in  fee  al- 
though the  duration  of  the  corporation  itself  is  limited.^  Where 
a  deed  is  made  by  or  to  a  de  facto  corporation,  the  corporate 
existence  cannot  be  questioned  by  any  of  the  parties.' 

A  deed  to  an  unincorporated  association  is  void.  The  land 
owned  by  such  an  association  is  generally  vested  in  trustees 
for  its  benefit.* 

§  695.  Land  may  "be  purchased,  held,  and  sold  hy  a  foreign 
as  distinginshed  from  an  alien  corporation,  if  there  is  no  stat- 
ute of  the  state  to  the  contrary. —  A  foreign  corporation  other 
than  an  alien  corporation,  ha\ang  power  to  buy  and  sell  land, 
may  at  common  law  buy  and  sell  land.* 

In  the  exercise  of  comity  between  the  states,  corporations 
created  in  one  of  them  may  acquire,  hold,  and  transfer  land  in 
another,  the  same  as  individuals.® 

Rainey  v.  Laing,  58  Barb.  453  (1871). 
Although  a  corporation  is  limited  by 
its  charter  as  to  the  amount  of  prop- 
erty it  may  take,  yet  a  devise  to  it 
of  property  greater  in  value  than 
that  amount  is  not  void,  inasmuch 
as  only  the  state  can  complain.  Far- 
rington  v.  Putnam,  37  AtL  Rep.  653 
(Me.,  1897). 

iRusseU  V.  Allen,  107  U.  S.   163 
(1882);  Burrill  v.  Coardman,  43  N.  Y. 


254  (1871);  Webster  v.  Wiggin,  31 
AtL  Rep.  824  (R  L,  1895).  A  bequest 
to  a  company  to  be  incorporated 
within  the  time  allowed  by  statute 
is  valid.  People  v.  Slmonson,  126 
N.  Y.  299  (1891). 

2  Nicoll  V.  New  York,  etc.  R  R.,  12 
N.  Y.  121  (1854);  Rives  v.  Dudley,  3 
Jones,  Eq.  (N.  C.)  126  (1856);  Ashe- 
ville  Division  v.  Aston,  92  N.  C.  578 
(1885);  Delhi  School  Dist.  v.  Everett, 
52  Mich.  314  (1883).  A  deed  of  prop- 
erty to  a  railroad  for  fifty  years,  or  so 
long  as  its  charter  continued,  which 
by  charter  is  fifty  years,  passes  the 
land  to  a  corporation  which  by  legis- 
lative enactment  succeeds  to  the 
rights  of  the  first  corporation.  Davis 
V.  Memphis,  etc.  R  R,  87  Ala.  633 


(1888).  A  dissolution  of  a  corpora- 
tion after  it  has  conveyed  real  estate 
does  not  impair  the  title  of  the  grant- 
ees. People  V.  Mauran,  5  Denio,  389 
(1848). 

3  See  §  637,  swjjra. 

*  See  §  504,  supra. 

5  Lancaster  v.  Amsterdam  Imp.  Co., 
140  N.  Y.  576,  584  (1894),  wherein  the 
court  said:  "As  a  corporation  de 
facto,  possessing  some  capacity  to 
acquire  and  convey  real  property,  its 
conveyance  is  unimpeachable  upon 
any  ground  of  an  excess  or  of  an 
abuse  of  powers  conferred;  and  im- 
less  in  the  laws  of  this  state  we  are 
able  to  find  a  prohibition,  expressed 
herein,  or  to  be  implied  therefrom, 
which  disabled  this  coi-poration  from 
acquiring  the  land  and  from  convey- 
ing it,  the  plaintiff  would  obtain  a 
valid  title  to  the  premises  conveyed." 

6  Cowell  V.  Springs  Co.,  100  U.  S.  55 
(1879);  Runyan  v.  Coster,  14  Pet.  122, 
130  (1840);  Christian  Union  v.  Yoimt, 
101  U.  S.  352  (1879);  Barnes  v.  Sud- 
dard,  117  IlL  237  (1886);  New  Hamp- 
shire Land  Co.  u  Tilton,  19  Fed.  Rep. 
73  (1884);  Lathrop  v.  Commercial 
Bank,  8  Dana  (Ky.),  114  (1839);  Amer- 


1423 


G05.] 


INTRA   VIRES    ACTS    AND    CONTRACTS. 


[CII.  XLI. 


This  riglit  of  foreign  corporations  to  acquire  and  hold  real 
estate  is,  however,  subject  to  the  statutory  laws  of  the  state 
wherein  the  land  is  situated,  and  also  to  its  public  policy  and  the 
general  policy  of  its  statutes  relating  to  domestic  corporations.^ 


ic^n  Bible  Soc.  v.  IMarshall,  15  Ohio 
St.  537  (1864);  State  v.  Boston,  etc. 
R.  R.,  25  Vt.  438  (1853);  Claremont 
Bridge  v.  Royce,  43  Vt.  730,  730  (1870); 
Lumljard  v.  Aldrich,  8  N.  H.  31  (1835) ; 
Cincinnati,  etc.  R  R  u  Pearce,  28 
Ind.  503  (1867);  Silver  Lake  Bank  v. 
North,  4  Johns.  Ch.  370  (1820),  hold- 
ing that  a  corporation  of  another 
state  may  file  a  bill  for  the  fore- 
closure of  a  mortgage  on  land  in 
New  York ;  Columbus  Buggy  Co.  v. 
Graves,  108  lU,  459  (1884);  Black  v. 
Delaware,  etc.  Canal  Co.,  23  N.  J.  Eq. 
130,  433  (1871),  the  chancellor  saying 
"  that  a  foreign  corporation  may  own 
property  in  this  state  and  transact 
business,  and  make  contracts  in  it  to 
be  performed  here,  is  too  well  set- 
tled to  discuss;"  Northern  Transp. 
Co.  V.  Chicago,  7  Biss.  45,  53  (1874); 
S.  C,  18  Fed.  Cas.  363,  365;  Lebanon 
Sav.  Bank  v.  HoUenbeck,  29  IMinn. 
333  (1883);  New  York  Dry  Dock  v. 
Hicks,  5  McLean,  111  (1850);  S.  C,  18 
Fed.  Cas.  151;  Whitman  Gold,  etc. 
Co.  V.  Baker,  3  Nev.  386  (1867);  Met- 
ropolitan Bank  v.  Godfrey,  23  IlL  579 
(1860),  holding  also  that  foreign  cor- 
porations can  only  acquire  and  hold 
lands  upon  the  terms  and  conditions 
and  in  the  way  authorized  by  the 
law  of  their  creation.  They  may 
loan  money  on  real-estate  mortgages. 
See  §  690,  supra.  Cf.  Northwestern, 
etc.  Ins.  Co.  v.  Overholt,  4  Dill.  287 
(1878);  S.  C,  18  Fed.  Cas.  403;  Morris 
Canal,  etc.  Co.  v.  Townsend,  24  Barb. 
658  (1857),  where  a  statute  authorizing 
a  foreign  corporation  to  appropriate 
land  on  payment  of  a  just  compensa- 
tion to  its  owners  was  held  valid 
(affirmed  as  to  this  point.  Be  Town- 
send,  89  N.  Y.  171  — 1868) ;  Stewart  v. 
Lehigh  Valley  R.  R.,  38  N.  J.  L.  505 


(1875);  National  Trust  Co.  v.  Murphy, 
30  N.  J.  Eq.  408  (1879);  Sherwood  v. 
American  Bible  Soc,  1  Keyes,  561 
(1864);  Elston  v.  Piggott,  94  Ind.  14 
(1883),  to  the  effect  that  it  may  hold 
land  purchased  at  a  judicial  sale 
under  a  decree  in  its  favor.  An  alien 
corporation  may  purchase  and  hold 
land  in  IMissouri.  Missouri,  etc.  Co. 
V.  Reinhard,  114  Mo.  218  (1893).  Al- 
though an  alien  cannot  own  real  es- 
tate, yet  he  may  own  stock  in  a 
corporation  which  owns  real  estate. 
Princeton  IMin.  Co.  v.  First  Nat.  Bank, 
7  Mont.  530  (1888).  As  to  foreign  cor- 
porations holding  land,  see  35  Cent. 
L.  J.  166.  As  to  the  recent  act  of 
congress  prohibiting  foreign  corpo- 
rations from  owning  land  in  the  ter- 
ritories, see  Potter  v.  Rio  Arriba, 
etc.  Co.,  4  N.  M.  323  (1888).  Where 
a  Colorado  corporation  has  power, 
among  other  things,  to  deal  in  real 
estate,  its  purchases  of  land  in  Texas 
cannot  be  questioned  by  any  one  ex- 
cept the  state,  even  though  Texas 
does  not  allow  incoi*poration  for  that 
purpose.  Galveston,  etc.  Co.  v.  Per- 
kins, 26  S.  W.  Rep.  256  (Tex.,  1894). 
Where  a  banker  sells  stock  to  a  law- 
yer, and  informs  the  latter  that  the 
company,  the  owner  of  land  in  Mex- 
ico, had  a  right,  though  an  alien  to 
Mexico,  to  own  land  therein,  as  the 
banker  had  been  informed  by  his  at- 
torney, a  note  of  the  vendee  in  pay- 
ment of  the  stock  cannot  be  defeated 
on  the  ground  that  such  corporation 
could  not  legally  hold  the  land.  Daly 
V.  Brennan,  87  Wis.  36  (1894). 

•  Christian  Union  v.  Yount,  101  U. 
S.  352  (1879);  Carroll  v.  East  St.  Louis, 
67  ni.  568  (1873),  where  a  corporation 
chartered  by  Connecticut  for  the  sole 
purpose  of  buying  and  selling  land 


1434 


CH.  XLI.] 


INTRA    VIKES    ACTS   A^^D    COXTEACTS. 


[§  695. 


Only  the  state  or  a  dissenting  stockholder  can  question  the 
power  of  a  foreign  corporation  to  hold  land.^  And  only  the 
state  can  object  to  a  foreign  corporation  holding  more  land  than 


was  held  not  competent  to  acquire 
land  in  Illinois,  because  such  busi- 
ness was  contrary  to  the  general  pol- 
icy of  the  state  and  tended  to  create 
l>erpetuities;  U.  S.  Trust  Co.  v.  Lee, 
73  IlL  142  (1874),  in  which  the  court 
denied  the  right  of  a  foreign  corpo- 
ration to  hold  real  estate  in  Illinois 
beyond  what  is  necessary  to  the 
transaction  of  its  business  or  the  col- 
lection of  its  debts,  either  for  its  own 
benefit  or  in  trust  for  others;  U.  S. 
Mortgage  Co.  v.  Gross,  7  Cent.  L.  J. 
226  (1878),  in  which  the  Illinois  rule 
was  explained  so  as  not  to  exclude 
foreign  corporations  empowered  to 
loan  money  on  real-estate  securities; 
Thompson  v.  Waters,  25  Mich.  214 
(1872);  Holbert  v.  St.  Louis,  etc.  Ry, 
45  Iowa,  23  (1876),  holding  that  stat- 
utes authorizing  railroads  to  take 
land  for  their  riglit  of  way  do  not 
apply  to  foreign  corporations;  Farm- 
ers' L.  &  T.  Co.  V.  McKinney,  6  Mc- 
Lean, 1  (1853):  S.  C,  8  Fed.  Cas.  1048; 
Farmers'  L.  &  T.  Co.  v.  Harmony  F. 
&  ]VL  Ins.  Co.,  51  Barb.  33  (1868); 
White  V.  Howard,  46  N.  Y.  144  (1871); 
Hollis  V.  Drew  TheoL  Seminary,  95 
N.  Y.  166  (1884),  holding  that  foreign 
corporations  are  subject  to  the  New 
York  statute  which  declares  invalid 
a  devise  or  bequest  in  a  will  exe- 
cuted less  than  two  months  before 
the  death  of  the  testator.  In  Re 
Prime's  Estate,  136  N.  Y.  347,  362 
(1893),  the  court  said:  "A  general 
law  of  the  state  prohibiting  corpo- 
rations from  exercising  particular 
powers  will  operate  upon  foreign 
corporations,  not  because  the  act 
binds  such  corporations  ex  propria 
vigore,  but  for  the  reason  that  their 
exercise  of  such  powers  here  would 
violate    the    public    policy    of    the 


state,  indicated  by  the  general  re- 
straint imposed  upon  our  own  corpo- 
rations." For  the  decisions  in  Penn- 
sylvania on  its  statutes  and  policy 
excluding  foreign  corporations  from, 
holding  land,  see  §  695.  Where  land 
is  claimed  by  3,  foreign  corporation, 
the  courts  of  the  state  in  which  the 
land  is  situated  -will  construe  its 
charter  and  determine  whether  it 
authorizes  the  corporation  to  hold 
the  real  estate.  Boyce  v.  St.  Louis, 
29  Barb.  650  (1859);  White  v.  Howard, 
38  Conn.  342  (1871).  And  in  constru- 
ing such  foreign  charters  the  court 
will  consider  the  decisions  of  the 
courts  of  the  state  granting  them, 
thougli  it  will  not  be  bound  thereby. 
Thompson  v.  Waters,  25  Mich.  214 
(1872);  Boyce  v.  St.  Louis,  29  Barb. 
650  (1859).  The  right  of  a  corpora- 
tion to  hold  realty  is  determined  not 
alone  by  its  charter,  but  by  the  stat- 
utes of  the  state  where  the  land  is. 
A  corporate  deed  in  a  chain  of  title 
is  presumed  good.  Tarpey  v.  Deseret 
Salt  Co.,  5  Utah,  494  (1888).  If  a  for- 
eign corporation  is  not  authorized  to 
hold  real  estate,  it  cannot  take  land 
in  another  state  by  devise.  Boyce  t'. 
St  Loviis,  29  Barb.  650  (1859);  Stark- 
weather V.  American  Bible  Soc,  73 
IlL  50  (1874).  See  also  §  695.  On 
the  other  hand,  if  by  its  charter, 
either  expressly  or  impliedly,  a  cor- 
poration may  take  lands  by  devise,  a 
provision  of  law  in  its  o^vn  state  pro- 
hibiting corporations  from  taking 
by 'devise,  unless  expressly  authorized 
to  do  so,  will  not  prevent  its  taking 
by  devise  in  another  state.  Ameri- 
can Bible  Soc.  v.  Marshall,  15  Ohio 
St.  537  (1864);  Thompson  v.  Swoope, 
24  Pa.  St.  474  (1855);  Chamberlain  v. 
Chamberlain,  43  N.  Y.  424  (1871),  but 


1  Seymour  v.  Slide,  etc.  Mines,  153  U.  S.  523  (1894). 
90  1425 


§  Q^(^-] 


INTRA   VIKES   ACTS    AND    CONTRACTS. 


[CH,  XLI. 


the  statutes  permit.^  A  deed  of  land  to  a  foreign  corporation 
in  Colorado  is  valid,  although  the  corporation  has  not  filed  a 
copy  of  its  charter  as  required  by  the  statutes.  The  grantor 
cannot  complain,^ 

A  state  may  restrict  the  right  of  foreign  corporations  to  take 
and  hold  real  property  within  its  borders.' 

§  696.  Forcifjn  corporations —  Their  right  to  do  'business  in 
the  various  states. —  The  corporations  of  one  state  may  exercise 
any  or  all  of  their  powers  in  another  state,  unless  the  latter 
state,  by  its  statutes,  decisions,  or  policy,  forbids.  This  right 
of  a  corporation  to  act  and  contract  in  any  state  is  due  to  the 
spirit  of  comity  between  the  states.*  It  is  constitutional,  how- 
ever, for  a  state  to  refuse  to  allow  that  privilege,*  except  as 
against  corporations  engaged  in  interstate  commerce. 


here  the  bequest  was  of  personal 
property.  To  same  effect,  Sherwood 
V.  American  Bible  Soc,  4  Abb.  Ajip. 
Dec.  227  (1864).  A  devise  of  land  to 
a  foreign  corporation  is  void  unless 
authorized  by  the  law  of  the  state 
where  it  lies,  even  though  such  for- 
eign corporation  is  duly  aiithorized 
by  its  charter  to  take  it.  White  v. 
Howard,  46  N.  Y.  144  (1871),  followed 
in  United  States  v.  Fox,  94  U.  S.  315 
(1876),  declaring  void  a  devise  of  land 
in  New  York  to  the  government  of 
the  United  States. 

1  Reorganized  Church,  etc..y.  Church 
of  Christ,  60  Fed.  Rep.  937  (1894). 

2Fritts  V.  Palmer,  132  U.  S.  282 
(1889). 

3Runyan  v.  Coster,  14  Pet.  122 
(1840);  Thompson  v.  Waters,  25  Mich. 
214  (1872);  United  States  v.  Fox,  94 
U.  S.  315  (1876). 

*  As  to  the  power  of  a  foreign  cor- 
poration to  do  business  in  New  York, 
the  court,  in  Lancaster  v.  Amster- 
dam Imp.  Co.,  140  N.  Y.  576, 591  (1894), 
said:  "It  seems  to  me  to  be  very 
clear,  upon  examination  of  our  laws 
and  by  reference  to  such  judicial 
opinions,  that  there  never  was  a  time 
in  the  history  of  the  state  wlien  a 
foreign  corporation  was  prevented 


from  entering  its  boundaries  to 
transact  any  lawful  business  which 
a  non-resident  natural  person  might 
liave  transacted  here."  In  People  v. 
Fidelity,  etc.  Co.,  153  111.  25  (1894),  it 
was  held  that,  in  the  absence  of  an 
express  jsrohibitory  statute,  a  corpo- 
ration legally  organized  iinder  the 
laws  of  another  state  to  do  a  multi- 
form insurance  business  may  do  such 
business  in  Illinois,  although  such  a 
corporation  could  not  be  organized 
under  the  laws  of  Illinois. 

*  These  principles  of  law  have  often 
been  enunciated  by  the  courts.  See 
§§  237-239,  supra,  and  notes.  See 
also  Bank  of  Avigusta  v.  Earle,  13 
Pet.  519  (1839);  Western  Union  Tel. 
Co.  u  Mayer,  28  Ohio  St.  521  (1876)  j 
Newburg  Petroleum  Co.  v.  Weare,  27 
Ohio  St.  343  (1875);  Paul  v.  Virginia, 
8  Wall.  108  (1868);  affirmed  in  Ducat 
V.  Chicago,  etc.,  10  Wall.  410  (1870); 
Matthews  v.  Theological  Seminary, 
2Brewst.(Pa.)541  (1868);  Land  Grant, 
etc.  Co.  V.  Coffey  County,  6  Kan.  245 
(1870);  Ducat  v.  Chicago,  48  111.  172 
(1868);  Williams  v.  Creswell,  51  Miss. 
817  (1876);  Hadley  v.  Freedmen's,  etc. 
Co.,  2  Tenn.  Ch.  122  (1874);  Liverpool 
Ins.  Co.  V.  Massachusetts,  10  Wall. 
566  (1870);  S.  C.  sub  nom,  Oliver  v. 


1426 


CH.  XLI.] 


IlSrTEA   VIKES    ACTS   AJ^D    CONTEACTS. 


[§  69G. 


Foreign  corporations  must  exercise  their  powers  and  fran- 
chises in  accordance  with  the  laws  of  the  state  where  they  do 
business,  and  in  consonance  with  the  principles  of  its  general 
policy.^ 

The  validity  and  enforceability  of  a  contract  by  a  foreign 
corporation  are  determined,  not  by  its  charter,  but  by  the  law 
prevailing  where  the  contract  is  made.^ 


Liverpool,  etc.  Ins.  Co.,  100  Mass.  531 ; 
Kennebec  Co.  v.  Augusta  Ins.  etc. 
Co.,  72  Mass.  204  (1856);  Day  v.  Og- 
densburgh,  etc.  R  R,  107  N.  Y.  129 
(1887),  where  a  domestic  corporation 
leased  a  railroad  in  another  state; 
Kerchner   v.   Gettys,    18    S.   C.   521 
(1882);  Mutual,  etc,  Ins.  Co.  v.  Davis, 
12  N.  Y.  5G9  (1855);  Slaughter  v.  Com- 
monwealth, 13  Gratt.  (Va.)  767  (1856); 
Doyle  V.  Continental  Ins.  Co.,  94  U.  S. 
535  (1876);  Fire  Department  v.  Noble, 
3  E.  D.  Smith,  440  (1854);  People  v. 
Philadelphia  Fire  Assoc,  92  N.  Y.  311 
(1883);  Atterbury  v.  Knox,  4  B.  Mon. 
(Ky.)  90  (1843),  where  foreign  corpo- 
rations were  forbidden  to  do  bank- 
ing.   See  also  Cooley,  Const.  Law, 
p.  183;  Wharton,  Conf.  L,  §  48a.    In 
Diamond  IMatch  Co.   v.  Powers,   51 
Mich,  145  (1883),  the  court  refused  to 
mandamus  the  defendant,  a  register 
of  deeds,  to  allow  the  plaintiff,  a  for- 
eign corporation,  to  make  abstracts 
of  all  the  land  in  the  county,  there 
being  no  evidence  of  the  corporate 
powers  of  the  plaintiff.     A  foreign 
corporation  may  make  a  loan  in  Mis- 
sourL  Ferguson  v.  Soden,  111  Mo.  208 
(1892).    An  English  corporation  is  of 
course  an  alien  corporation.  Eureka, 
etc.  Co.  V.  Richmond,  etc.  Co.,  2  Fed. 
Rep.  829  (1880).   A  state  may  exclude 
a  foreign    coi-poration    from  doing 
business  in  the  state  unless  engaged 
in  interstate  business.     Huffman  v. 
Western,  etc.  Co.,  36  S.  W.  Rep.  306 
(Tex.,  1896). 

iRimyan  v.  Coster,  14  Pet.  122 
(1840);  Be  Comstock,  3  Sawyer,  218 
(1874);  S.  C,  6  Fed.  Cas.  244;  Phoenix 


Ins.  Co.  V.  Commonwealth,  5  Bush 
(Ky.),  68  (1868);  Gill  v.  Kentucky,  etc. 
Co.,  7  Bush  (Ky.),  635  (1870);  Martin 
V.  Mobile,  etc.  R.  R,  7  Bush  (Ky.),  116 
(1870);  Milnor  v.  New  York,  etc.  R. 
R,  53  N.  Y.  363  (1873);  Frazier  v. 
Willcox,  4  Rob.  (La.)  517  (1843);  Bard 
V.  Poole,  12  N.  Y.  495  (1855) ;  Diamond 
Match  Co.  V.  Powers,  51  Mich.  145 
(1883);  Pierce  v.  Crompton,  13  R.  L 
312  (1881);  Stevens  v.  Pratt,  101  III. 
206  (1882),  holding  that  the  general 
policy  of  a  state  restricting  foreign 
coi-porations  must  be  expressed  in 
some  affirmative  way;  Blair  v.  Per- 
petual Ins.  Co.,  10  Mo.  559,  564  (1847); 
2  Kent,  Com.  284,  285. 

2  A  charter  provision  prohibiting 
the  corporation  from  selling  its  bonds 
below  par  does  not  invalidate  the 
bonds  when  sold  to  a  bona  fide  pur- 
chaser in  another  state.  Elsworth 
V.  St.  Louis,  etc.  R  R,  33  Hun,  7; 
aff'd,  98  N.  Y.  553  (1885).  See  also 
Philadelphia  Loan  Co.  v.  Towner,  13 
Conn.  249  (1839);  Nichols  v.  Mase,  94 
N,  Y.  160  (1883),  holding  that  the 
holder  of  bonds  issued  by  a  foreign 
corporation,  valid  upon  their  face,  is 
not  boimd  to  show  that  the  provis- 
ions of  the  statute  which  authorized 
their  issue  have  been  complied  with ; 
Bard  v.  Poole,  12  N.  Y.  495  (1855),  hold- 
ing that  a  corporation  prohibited  by 
its  charter  from  contracting  for  inter- 
est over  a  certain  rate  may,  however, 
contract  for  a  greater  rate  in  another 
state  under  whose  laws  it  is  legal. 
To  same  effect,  Knox  v.  Bank  of  U.  S., 
26  Miss.  655  (1854),  and  Bank  of  U.  S. 
V.  Owens,  2  Pet.  527  (1829);  American 


1427 


§§  697-700.]       INTKA    VIEES    ACTS    AND    CONTRACTS. 


[CH. 


XLI. 


§§  697-700.  Foreign  corporations  —  Restrictions  upon  their 
right  to  do  dusiness. —  A  state  legislature  may  impose  such 
terms,  conditions,  and  restrictions  upon  foreign  corporations, 
other  than  corporations  engaged  in  interstate  commerce,  as  it 
may  see  fit.^  Quo  warranto  lies  against  foreign  corpt>rations 
doing  business  in  a  state  contrary  to  its  statute.^ 


Life  Ins.  Co.  v.  Dobbin,  Hill  &  D. 
(Lalor's  Supp.)  252  (1843),  where,  con- 
struing the  New  York  restraining 
act,  it  was  held  that  a  foreign  corpo- 
ration could  purchase  and  sell  prom- 
issoiy  notes,  but  not  bills  of  exchange; 
Bank  of  Chillicothe  v.  Dodge,  8  Barb. 
233  (1850),  holding  that  money  paid 
by  a  foreign  corporation  in  violation 
of  a  local  law  is  recoverable  by  it. 
For  cases  under  a  statute  of  Missouri, 
see  Bank  of  Louisville  v.  Young,  37 
Mo.  398  (1866);  Connecticut  Mut.  L. 
Ins.  Co.  V.  Albert,  39  Mo.  181  (1866); 
Longu  Long,  79  Mo.  644  (1883).  But 
corporate  creditors  and  stockholders 
are  subject  to  provisions  and  regula- 
tions contained  in  the  charter.  Can- 
ada Southern  R'y  v.  Gebhard,  109 
U.  S.  527, 536  (1883),  where  a  statutory 
recapitalization  was  held  to  be  valid; 
Hitchcock  V.  U.  S.  Bank,  7  Ala.  (N.  S.) 
386,  435  (1845),  holding  that  the  cqr- 
poration  can  exercise  only  the  pow- 
ers given  to  it  by  its  charter.  A 
foreign  corporation  may  take  any  in- 
terest allowed  by  the  place  of  the 
contract,  though  such  interest  is 
usurious  by  its  charter.  Hitchcock 
V.  U.  S.  Bank,  7  Ala.  (N.  S.)  386  (1845). 
1  Paul  V.  Virginia,  8  Walk  168  (1868) ; 
affirmed  in  Ducat  v.  Chicago,  10  Walk 
410  (1870);  Doyle  v.  Continental  Ins. 
Co.,  94  U.  S.  535  (1876) ;  Lafayette  Ins. 
Co.  V.  French,  18  How.  404  (1855),  hold- 
ing that  a  corporation  doing  business 
in  such  state  is  presumed  to  assent 
to  its  rules;  State  v.  Lathrop,  10  La. 
Ann.  398  (1855);  State  v.  Fosdick,  21 
La.  Ann.  434  (1869) ;  Indiana  v.  Amer- 
ican Exp.  Co.,  7  Biss.  227  (1876);  S.  C, 


13  Fed.  Cas.  24;  Fire  Department  v. 
Noble,  3  E.  D.  Smith,  440  (1854) ;  SmitJi 
V.  Alvord,  63  Barb.  415  (1866);  Mer- 
rick  V.  Van  Santvoord,  34  N.  Y.  208 
(1866);  Lambu.  Lamb,  13  Bankr.  Reg. 
17  (1875);  S.  C,  14  Fed.  Cas.  1016; 
Farmers',  etc.  Ins.  Co.  v.  Harrah,  47 
Ind.  236  (1874);  Cincinnati  Mut.  etc. 
Co.  V.  Rosenthal,  55  111.  85  (1870),  hold- 
ing that  a  charter  power  to  transact 
business  in  other  states  does  not  ex 
empt  them  from  local  restrictions; 
People  V.  Howard,  50  Mich.  239  (1883); 
People  V.  Philadelphia  Fire  Assoc,  92 
N.  Y.  311  (1883);  Goldsmith  v.  Home 
Ins.  Co.,  62  Ga.  379  (1879),  where  a 
statute  imposing  upon  foreign  corpo- 
rations the  same  license  taxes  as 
their  own  states  impose  was  held  con- 
stitutional; Home  Ins.  Co.  v.  Davis, 
29  Mich.  238  (1874) ;  Slaughter  v.  Com- 
monwealth, 13  Graft.  (Va.)  767  (1856); 
American  Union  TeL  Co.  v.  Western 
Union  TeL  Co.,  67  Ala.  26  (1880);  Mat- 
thews V.  Theological  Seminary,  2 
Brewst.  (Pa.)  541  (1868;:  Common- 
wealth V.  Milton,  12  B.  Mon.  (Ky.)  212 
(1851);  Tioga  R.  R.  v.  Blossburg,  etc. 
R.  R.,  20  AValL  137  (1873),  prohibiting 
foreign  corporations  from  setting  up 
the  statute  of  limitations.  Foreign 
corporations  doing  business  in  a  state 
which  prescribes  statutoiy  provis- 
ions for  that  business  cannot  in  con- 
tracts do  away  with  the  application 
to  it  of  these  provisions.  Fletcher  v. 
New  York  Life  Ins.  Co.,  13  Fed.  Rep. 
526  (1882).  The  same  rxile  applies  to 
an  insurance  corporation  chartered 
by  congress.  It  must  conform  to 
state  restrictions.    Daly  v.  National 


2  State  V.  Fidelity,  etc.  Co.,  39  Minn.  538  (1888). 
1428 


en.  XLi.] 


INTEA   VIRES    ACTS    AND    CONTRACTS. 


[§  TOO. 


Restrictions  by  a  state  on  foreign  corporations  must  not  con- 
flict with  provisions  of  tlie  federal  constitution.  Thus,  the  re- 
striction must  not  interfere  with  interstate  commerce/  or  with 
the  jurisdiction  of  the  federal  courts,^  or  with  the  removal  of 
causes  from  state  to  United  Sta'tes  courts.'  Corporations  are 
not  "citizens"  entitled  to  the  privileges  and  immunities  of 
citizens  in  the  several  states  within  the  meaning-  of  article  4, 
sectioa  2,  of  the  constitution  of  the  United  States.*  A  state 
cannot  prohibit  agents  of  foreign  corporations  entering  the 
state  and  selling  goods.* 

A  statute  making  void  all  contracts  made  in  the  state  by  for- 
eign corporations  unless  a  certain  fee  is  paid  .to  the  state  is  un- 
constitutional as  to  sales  made  by  traveling  salesmen  of  foreign 
corporations.® 


Life  Ins.  Co.,  64  Ind.  1  (1878).  A  rail- 
road company,  by  going  into  another 
state  and  having  and  operating  a 
road  there,  subjects  itself  to  the  legis- 
lation of  that  state.  Stone  v.  Illinois 
Central  R  R.,  116  U.  S.  347  (1885), 
Foreign  corporations  may  be  com- 
pelled to  pay  a  license  fee  before 
doing  business.  Pembina,  etc.  Co.  v. 
Pennsylvania,  125  U.  S.  181  (1888). 

iPensacola  Tel.  Co.  v.  Western 
Union  TeL  Co.,  96  U.  S.  1  (1877);  Tele- 
graph Co.  V.  Texas,  105  XJ.  S.  460  (1881); 
Rae  V.  Grand  Trunk  R'y,  14  Fed.  Rep. 
401  (1882). 

2  Baltimore,  etc.  R.  R.  v.  Cary,  28 
Ohio  St.  208  (1876);  Moore  v.  Chicago, 
etc.  R'y,  21  Fed.  Rep.  817  (1884).  See 
also  ch.  XLV,  infra. 

*  Southern  Pac.  Co.  v.  Denton,  146 
U.  S.  202  (1892);  Barron  v.  Burnside, 
121  U.  S.  186  (1887);  Doyle  v.  Conti- 
nental Life  Ins.  Co.,  94  U.  S.  535  (1876) ; 
Insurance  Co.  v.  Morse,  20  "Wall.  445 
(1874);  Shelby  v.  Hoffman,  7  Ohio  St. 
450  (1857);  Hartford  F.  Ins,  Co.  v. 
Doyle,  6  Biss.  461  (1875);  S.  C,  11  Fed. 
Cas.  702.  A  statute  requiring  for- 
eign corporations  to  agree  not  to  re- 
move suits  to  the  federal  coiu-ts  is 
void.  Rece  v.  Newport  News,  etc. 
Co.,  32  W.  Va.  164  (1889);  Common- 


wealth V.  East  Tennessee  Coal  Co.,  97 
Ky.  238  (1895). 

4  Paul  V.  Virginia,  8  Wall.  168  (1868), 
holding  that  a  statute  requiring  for- 
eign insurance  companies  to  obtain 
a  license  before  doing  business  is  not 
in  conflict  with  that  clause;  Western 
Union  Tel.  Co.  v.  Mayer,  28  Ohio  St. 
521  (1876);  Tatem  v.  AVright,  23  N.  J. 
L.  429,  444  (1852);  Warren  Mfg.  Co.  v. 
JEtna,  Ins.  Co.,  2  Paine,  501  (c.  1837); 
S.  C,  29  Fed.  Cas.  294;  Fire  Depart- 
ment V.  Noble,  3  E.  D.  Smith,  440 
(1854);  Ducat  v.  Chicago,  48  111,  173 
(1868);  Cincinnati,  etc.  Co.  v.  Rosen- 
thal, 55  III  85  (1870) ;  Pierce  v.  Cromp- 
ton,  13  R.  L  312  (1881).  Cf.  McKin- 
leyv.  Wheeler,  130  U.  S.  630  (1889); 
Thomas  v.  Chisholm,  13  Colo,  105 
(1889). 

5  Davis,  etc.  Co,  v.  Dix,  64  Fed,  Rep. 
406  (1894), 

fiAultman,  etc,  Co,  v.  Holder,  68 
Fed,  Rep,  467  (1895),  A  license  fee 
required  of  foreign  corporations  be- 
fore doing  business  in  the  state  is 
unconstitutional  as  an  interference 
with  interstate  commerce,  Coit  v. 
Sutton,  102  Mich.  324  (1894).  But  see 
Moline  Plow  Co.  v.  Wilkinson,  105 
Mich.  57  (1895).  A  statute  by  which 
Pennsylvania  requires  a  New  York 


1429 


§  TOO.] 


INTRA   VIKES    ACTS    AND    CONTRACTS. 


[CH.  XLI. 


"Where  a  state  statute  provides  that  contracts  made  by  for- 
eign corporations  shall  not  be  enforced  in  the  courts  of  the  state 
before  conii^liance  with  certain  requirements  of  the  statute,  the 
prohibition  will  not  be  extended  to  suits  brought  in  the  federal 
courts,  the  contracts  not  being  void.^ 

But  a  requirement  that  a  foreign  corporation  shall  duly  exe- 
cute a  power  of  attorney  appointing  an  agent  upon  whom  serv- 
ice of  process  may  be  made,  or  obtain  a  certificate  from  a  state 
officer,  is  valid.  The  corporation  is  usually  forbidden  to  con- 
tract or  sue  in  the  state  before  complying  with  it.  It  was  for- 
merly held  that  contracts  made  before  complying  with  the 
requirement  were  void;^  but  the  later  doctrine  is  that  they  are 
not  void,  though  not  enforceable  until  compliance,'  and  that 


railroad  corporation  doing  business 
in  Pennsylvania  to  pay  to  the  latter 
a  part  of  coupons  due  to  residents  of 
Pennsylvania,  such  coupons  being 
by  their  terms  payable  in  New  York, 
is  void.  New  York,  Lake  Erie,  etc. 
R.  R  V.  Pennsylvania,  153  U.  S.  628 
(1894). 

1  Sullivan  v.  Beck,  79  Fed.  Eep.  200 
(1897). 

2  Be  Comstock,  3  Sawyer,  218  (1874) 
S.  C,  6  Fed.  Cas.  244;  Bank  of  British 
Columbia  v.  Page,  6  Oreg.  431  (1877) 
Semple  v.  Bank  of  British.  Columbia. 
5  Sa^vyer,  88  (1878);  S.  C,  21  Fed 
Cas.  1063;  Oregon,  etc.  Inv.  Co.  v. 
Rathbun,  5  Sawyer,  33  (1877);  S.  C, 
18  Fed.  Cas.  764;  but  here  a  note 
made  in  Oregon,  but  payable  in  Scot- 
land, was  treated  as  if  made  in  Scot- 
land; American  Button,  etc.  Co.  v. 
Moore,  2  Dak.  280  (1880),  holding, 
under  a  similar  statute,  that  the  for- 
eign corporation  could  sue  in  the 
courts  of  the  state,  but  could  not 
transact  business.  To  same  effect, 
Utley  V.  Clark-Gardner,  etc.  Co.,  4 
Colo.  369  (1878);  Columbus  Ins.  Co. 
V.  Walsh,  18  Mo.  229  (1853);  Union, 
etc.  Co.  V.  Thomas,  46  Ind.  44  (1874); 
Farmers',  etc.  Ins.  Co.  v.  Harrah,  47 
Ind.  236  (1874);  Smith  v.  Little,  67 
Ind.  549  (1879),  holding  that  the  stat- 
ute  referred  only  to  actions  upon 


contract  and  not  to  suits  in  replevin; 
Beard  v.  Union,  etc.  Pub.  Co.,  71  Ala. 
60  (1881),  holding  that  soliciting  sub- 
scriptions for  a  foreign  newspaper 
is  not  "  doing  business "  within  the 
meaning  of  such  a  statute;  New  Eng- 
land F.  &  M.  Ins.  Co.  V.  Robinson, 
25  Ind.  536  (1865),  holding,  however, 
that  a  contract  is  not  void  as  to  a 
citizen;  Morgan  v.  White,  101  Ind. 
413  (1884),  holding  that  requiring  an 
agent  to  hie  his  authority  to  act  does 
not  ajjply  to  a  general  agent  appoint- 
ing local  agents;  American  Ins.  Co. 
V.  Butler,  70  Ind.  1  (1880),  holding  that 
a  failure  of  the  state  officer  to  fur- 
nish the  proper  certificate  after  the 
corporation  has  substantially  com- 
plied with  the  statute  does  not  affect 
its  contracts;  ^tna  Ins.  Co.  v.  Har- 
vey, 11  Wis.  394  (1860). 

3  Walter  A.  Wood,  etc.  Co.  v.  Cald- 
well, 54  Ind.  270  (1876);  Singer  Mfg. 
Co.  V.  Brown,  64  Ind.  548  (1878);  El- 
ston  V.  Piggott,  94  Ind.  14  (1883),  hold- 
ing that  advantage  of  the  failure  to 
comply  can  only  be  taken  by  answer 
in  abatement,  and  that  a  foreclosure 
and  title  under  sale  cannot  be  ques- 
tioned on  that  ground;  American 
Ins.  Co.  V.  Butler,  70  Ind.  1  (1880); 
Behler  v.  German  ]\Iut.  F.  Ins.  Co., 
68  Ind.  347  (1879);  National  Mut.  F. 
Ins.  Co.  V.  Pursell,  92  Mass.  231  (1865); 


1430 


€H.  XLI.] 


INTKA   VIKES    ACTS    AND    CONTRACTS. 


[§  'J'oo. 


the  corporation  cannot  defeat  its  obligations  by  sucb  a  defense.* 
Some  states  have  gone  much  farther  than  this,  and  have 
declared  void  and  unenforceable  the  contracts  of  foreign  corpo- 
rations which  have  not  complied  "with  the  state  laws  in  refer- 
ence to  filing  certificates,  appointing  a  local  agent,  and  keeping 
an  oflBce  in  the  state.  The  courts  endeavor  to  alleviate  the 
harshness  of  the  statutes  as  much  as  possible,  but  do  not  always 
succeed 
the  notes  below.^ 


Yarious  decisions  on  different  statutes  are  ffiven  in 
The  supreme  court  of  the  United  States 


Hagerman  v.  Empire  Slate  Co.,  97 
Pa,  St.  534  (1881),  holding  that  a  for- 
eign corporation  cannot  take  advan- 
tage of  its  own  neglect  to  file  the 
power  of  attorney;  and  that  service 
■upon  an  acting  agent  will  suffice  in 
such  case;  American  Ins.  Co.  v.  Well- 
man,  69  Ind.  413  (1879);  American, 
etc.  Co.  V.  East,  etc.  R.  R.,  37  Fed. 
Rep.  243  (1889).  Stockholders  deal- 
ing with  their  corporation  cannot 
defeat  their  contracts  by  alleging 
that  it  was  a  foreign  corporation  and 
had  not  complied  with  the  state  laws. 
Kilgore  v.  Smith,  123  Pa.  St.  48  (1888). 

1  Swan  V.  Watertown  F.  Ins.  Co.,  96 
Pa.  St.  37  (1880),  holding  that  a  for- 
eign corporation  doing  business  in 
the  state  cannot  set  up  its  failure  to 
comply  with  the  provisions  of  the 
statute  relating  to  such  companies 
to  defeat  an  action  on  contract.  A 
corporation  cannot  repudiate  its  ob- 
ligations on  the  ground  that  it  was 
not  authorized  to  do  business  in  the 
state.  Williams  v.  Bank  of  Com- 
merce, 71  Miss.  858  (1894). 

2  Under  the  New  York  act  provid- 
ing that  foreign  corporations  shall 
not  sue  on  contracts  where  they  have 
not  taken  out  a  license  from  the 
state,  a  foreign  corporation  may,  sub- 
sequently to  the  breach  of  contract, 
take  out  a  license  and  then  sue.  Neu- 
chatel,  etc.  Co.  v.  Mayor,  etc.,  155  N.  Y. 
373  (1898).  A  failure  to  file  the  cer- 
tificate is  a  question  that  cannot  be 
raised  for  the  first  time  in  the  higher 
court.    Dahl  v.  Montana  Copper  Co., 

14[ 


133  U.  S.  264  (1889);  Cooper  Mfg.  Co. 
V.  Ferguson,  113  U.  S.  737  (1885),  hold- 
ing that  a  single  act,  without  the 
purpose  of  doing  others,  in  a  state 
does  not  bring  a  foreign  corporation 
within  the  statute  of  the  state  for- 
bidding it  to  transact  business  there 
without  complying  with  certain 
requirements;  Northwestern,  etc. 
Ins.  Co.  V.  Overholt,  4  Dili  287 
(1878);  S.  C,  18  Fed.  Cas.  403,  where, 
the  requirement  not  being  made 
a  condition  precedent  to  doing  busi- 
ness, a  foreign  corporation  which 
had  not  complied  with  it  was  held 
to  have  power  to  take  a  mortgage 
upon  real  estate.  A  statute  that  no 
suit  shall  be  brought  by  a  foreign 
corporation  which  shall  not  have 
filed  a  statement  concerning  its  busi- 
ness does  not  prevent  the  federal 
courts  from  exercising  jurisdiction. 
Barling  v.  Bank  of  British  N.  A.,  50 
Fed.  Rep.  260  (1892).  A  statute  com- 
pelling a  foreign  corporation  to  file 
its  charter  before  doing  business  in 
the  state  may  have  the  effect  of 
making  it  a  domestic  corporation. 
James  v.  St.  Louis,  etc.  R'y,  46  Fed. 
Rep.  47  (1891).  The  Montana  statute 
requiring  foreign  corporations  to  file 
their  charter  in  the  state  before 
doing  business  there  does  not  apply 
to  a  foreign  trust  company  which 
purchases  bonds  of  a  domestic  cor- 
poration and  takes  a  mortgage  to  se- 
cure them.  Gilchrist  v.  Helena,  etc. 
R.  R,  47  Fed.  Rep.  593  (1891).  A  cor- 
porate agent  who  employ's  labor  and 
;i 


Too.] 


INTKA   VIEES    ACTS   AND    CONTKACTS. 


[cn.  XLI. 


has  held  that,  where  a  contract  made  by  a  foreign  corporation 
is  not  to  be  valid  until  approved  in  its  home  office  in  anotlier 
state,  the  contract  is  not  made  within  the  former  state,  within 
the  meaning  of  the  Michigan  statute  declaring  all  contracts 
void  when  made  by  foreign  corporations  in  the  state  without 
having  filed  their  articles  of  association  in  that  state.^ 


buys  goods  in  the  state  for  a  foreign 
corporation  which  has  not  complied 
with  the  law  prohibiting  such  corpo- 
rations to  do  business  in  the  state 
until  a  resident  oflSce  and  agent  have 
been  named  is  personally  liable  for 
such  labor  and  goods.  Lasher  v. 
Stimson,  145  Pa.  St.  30  (1893).  The 
objection  that  the  foreign  corpora- 
tion has  not  filed  the  statement  as 
required  by  statute  must  be  clearly 
raised  in  order  to  be  available.  Camp- 
bell, etc.  Co.  V.  Hering,  20  Atl.  Rep. 
1061  (Pa.,  1891).  Although  the  statute 
requires  foreign  corporations  doing 
business  in  the  state  to  file  a  power 
of  attorney  autliorizing  the  commis- 
sioner of  corporations  to  accept  serv- 
ice for  them,  yet  a  corporation  not 
doing  so  may  sue  on  one  of  the  con- 
tracts. Rogers,  etc.  Co.  v.  Simmons, 
155  Mass.  259  (1892).  A  foreign  cor- 
poration for  mining  and  various 
other  purposes  cannot  file  its  certifi- 
cate under  the  Michigan  statute  au- 
thorizing foreign  corporations  for' 
mining  purposes  to  file  such  certifi- 
cate and  have  all  the  rights  of  do- 
mestic corporations.  Isle  Royale 
Land  Corp.  v.  Osmun,  76  Mich.  103 
(1889).  Where  the  statute  requires 
foreign  corporations  to  file  a  state- 
ment of  their  condition  before  doing 
business,  a  foreign  corporation  can- 
not enforce  a  contract  until  it  does 
so.  Walter  A.  Wood,  etc.  Co.  v.  Cald- 
weU,  54  Ind.  271  (1876).  But  it  may 
recover  from  an  agent  money  paid 
to  him  for  it.  U.  S.  Express  Co.  v. 
Lucas,  36  Ind.  361  (1871).  See  §  696, 
supra.  Although  the  statutes  re- 
quire a  foreign  corporation,  before 
doing  any  business  in  the  state,  to 


file  certain  papers,  and  makes  it  a 
misdemeanor  not  to  do  so,  yet  this 
does  not  render  contracts  void,  al- 
though such  statute  is  not  complied 
witli.  Dearborn  Foundry  Co.  v.  Au- 
gustine, 5  Wash.  St.  67  (1892). 

J  Holder  v.  Aultman,  169  U.  S.  81 
(1898).  An  agreement  of  a  foreign 
corporation  to  sell  all  its  property 
cannot  be  enforced  by  the  corpora- 
tion in  Michigan,  where  such  corpo- 
ration has  not  complied  with  the 
Michigan  statute  relative  to  doing 
business  within  the  state.  Rough  v. 
Breitung,  75  N.  W.  Rep.  147  (Mich., 
1898). 

Parties  who  have  contracted  with 
a  foreign  corporation  and  received 
the  benefits  of  the  contract  cannot, 
when  sued  upon  the  contract,  set  up 
that  the  company  has  not  complied 
with  the  statutory  requisites  in  re- 
gard to  doing  business  in  the  state. 
Washburn  Mill  Co.  v.  Bartlett,  3  N. 
D,  138  (1893).  The  Arkansas  provis- 
ion requiring  foreign  corporations 
to  file  certificates,  etc.,  and  rendering 
void  contracts  made  by  a  foreign 
corporation  not  complying  there- 
with, does  not  apply  to  a  sale  of  a 
sewing-machine  made  in  Ohio  and 
shipped  to  Arkansas,  this  being  inter- 
state commerce.  Gunn  v.  White  S. 
M.  Co.,  57  Ark.  24  (1892).  The  statute 
relative  to  foreign  corporations  doing 
business  in  the  state  is  not  applicable 
to  loans  made  out  of  the  state,  and  the 
securities  delivered  and  money  paid 
out  of  the  state.  Scruggs  v.  Scottish 
Mortgage  Co.,  54  Ark.  566  (1891).  A 
foreign  corporation  may  sue  on  con- 
tracts made  out  of  the  state,  al- 
tliough  it  has  not  complied  with  th© 


143i 


CH.  XLI.] 


INTEA   VIKES    ACTS   AND    CONTEACTS. 


[§  TOO. 


In  Alabama  particularly  there  has  been  a  large  number  of 
decisions  on  this  subject.^ 

The  statutes  of  the  various  states  of  the  Union  imposing  re- 


law  as  to  contracts  made  in  the  state. 
White  River  Lumber  Co.  v.  South- 
western Imp.  Assoc,  55  Ark.  625  (1892). 
As  against  a  milling  company  that  so- 
licits business  and  sells  goods  through 
commercial  agents,  the  statute  of 
Texas  prohibiting  a  foreign  corpora- 
tion from  transacting  business  in  the 
state  without  filing  its  articles  of  in- 
corporation with  the  secretary  of 
state  is  void  as  being  an  interference 
with  interstate  commerce.  Bateman 
V.  Western,  etc.  Co.,  1  Tex.  Civ.  App. 
90  (1892).     A  foreign  corporation  pur- 


chasing a  piece  of  machinery  in  the 
state  may  be  held  liable  therefor, 
although  it  has  not  filed  the  certifi- 
cate. Colorado  Iron  Works  v.  Sierra 
Grande  Min.  Co.,  15  Colo.  499  (1890). 
A  bondsman  for  a  corporate  agent 
cannot  escape  liability  by  alleging 
that  the  corporation  has  not  com- 
plied with  the  law  relative  to  foreign 
corporations.  Singer  Mfg.  Co.  v. 
Hardee,  4  N.  M.  175  (1888).  A  foreign 
corporation  not  liaving  an  office  in  thft 
state  may  sell  machinery  to  persons 
in  Tennessee  without  filing  its  papers. 


1  In  the  case  of  Dundee,  etc.  Co.  v. 
Nixon,  95  Ala.  318  (1891),  an  alien 
corporation  failed  in  its  suit  on  a 
note  because  it  had  no  kno^vn  place 
of  business  or  authorized  agent  in 
Alabama,  as  required  by  the  constitu- 
tion and  statutes  of  the  state.  The 
note  was  dated  in  that  state.  A  pur- 
chase of  brick  in  another  state,  to  be 
delivered  in  the  state,  is  an  act  of 
interstate  commerce,  and  a  foreign 
corporation  making  the  sale  need  not 
comply  with  the  state  laws.  A  for- 
eign corporation  may  bring  suit  in 
the  state  without  complying  with  the 
state  law  in  regard  to  having  a  place 
of  business  and  an  agent  in  the  state. 
Cook  V.  Rome  Brick  Co.,  98  Ala.  409 
(1893).  Where  a  foreign  corporation 
not  complying  with  the  statute  sells 
chattels,  the  sale  is  void  and  the  cor- 
poration may  reclaim  its  property. 
Boulden  v.  Estey  Organ  Co.,  92  Ala. 
182  (1890).  The  statute  against  for- 
eign corporations  doing  business  in 
the  state  unless,  they  conform  to  cer- 
tain requisites  does  not  apply  to  in- 
terstate traffic,  such  as  selling  goods 
to  be  shipped  in,  having  been  sold 
out  of,  the  state.  Ware  v.  Hamilton, 
etc.  Co.,  92  Ala.  145  (1890).  The  ob- 
jection as  to  the  failure  to  file  the 


certificate  cannot  be  raised  for  the 
first  time  on  appeal.  Ginn  v.  New 
England,  etc.  Co.,  92  Ala.  135  (1890). 
A  mortgagor  to  a  foreign  insurance 
company  cannot  demur  to  a  bill  for 
foreclosure  on  the  groxm.d  that  the 
taking  of  the  mortgage  Avas  ultra 
vires  and  no  certificate,  was  filed. 
Boulware  v.  Davis,  90  Ala.  207  (1890). 
A  mortgage  taken  by  a  foreign  cor- 
poration in  Alabama  which  has  no 
known  place  of  business  or  author- 
ized agent  in  the  state,  as  required  by 
the  constitution  of  the  state,  is  void 
and  not  enforceable.  Farrior  v.  New 
England,  etc.  Co.,  88  Ala.  275  (1889). 
A  foreign  corporation  suing  in  Ala- 
bama to  enforce  a  mortgage  made  in 
that  state  must  allege  that  it  has  a 
known  place  of  business  and  an  au- 
thorized agent  in  the  state.  Chris- 
tian V.  American,  etc.  Co.,  89  Ala.  198 
(1889).  An  agent  suing  a  person  for 
a  commission  on  a  loan  made  by  tlie 
latter  with  a  foreign  corporation 
which  has  not  filed  its  certificate  as 
required  by  statute  cannot  recover. 
Dudley  v.  Collier,  87  Ala.  431  (1888). 
For  a  valuable  discussion  as  to  what 
constitutes  the  doing  of  busine.ss  in 
the  state,  see  Sullivan  v.  Sullivan 
Timber  Co.,  103  Ala.  371  (1894). 


1433 


TOO.] 


INTRA   YIKES   ACTS   AND    CONTKACTS. 


[cn.  XLI. 


strictions  on  foreign  corporations  are  given  in  another  part  of 
this  work.^ 

Restrictions  upon  foreign  insurance  companies  are  strictly 
enf orced.2    A  state  may  require  a  foreign  corporation  to  pay  a 


etc.  Milan,  etc.  Co.  v.  Gorten,  93 
Tenn.  590  (1894).  "Where  an  Indiana 
corporation  ships  goods  to  Texas,  it 
may  sue  in  Texas  for  the  price 
thereof,  although  it  has  not  filed  its 
articles  of  incorporation  in  Texas  as 
required  by  statute.  The  business  is 
interstate  business.  American,  etc. 
Co.  V.  Bateman,  22  S.  W.  Rep.  771 
(Tex.,  1893).  Under  the  California 
statute  forbidding  foreign  corpora- 
tions to  maintain  suits  until  a  certain 
statement  has  been  published,  the 
publication  may  be  prior  to  the  time 
specified  in  the  statute.  Bank  of 
British  N.  A.  v.  Madison,  99  CaL  125 
(1893),  passing  upon  the  requisites  of 
the  statute,  and  what  constitutes 
compliance  therewith.  In  Wright  v. 
Lee,  4  S.  Dak.  237  (1893),  the  court 
passed  upoij  the  statute  which  re- 
quires foreign  corporations  to  file  a 
copy  of  their  articles  of  incorpora- 
tion, etc.,  with  the  secretary  of  state, 
and  prohibiting  the  doing  of  b\isiness 
by  such  corporations  until  such  cer- 
tificates are  filed.  The  court  held 
that  the  failure  to  file  such  a  certifi- 
cate did  not  invalidate  contracts  of 
the  corporation.  As  to  the  Mississippi 
statute  relative  to  foreign  corpora- 
tions doing  business  in  the  state,  see 
Hart  V.  Livermore,  etc.  Co.,  72  Miss. 
809  (1895).  A  statute  that  a  foreign 
corporation,  upon  filing  its  charter, 
shall  become  a  domestic  corporation 
is  constitutional  as  to  the  right  to 
construct  a  railroad.  State  v.  South- 
ern R'y,  25  S.  E.  Rep.  982  (S.  C,  1896). 
A  foreign  corporation  is  doing  busi- 
ness in  a  state,  within  the  meaning 
of  a  statute,  where  a  mortgage  deed 
of  trust  is  made  to  a  resident  for  the 
benefit  of  such  foreign  corporation. 
Myers,  etc.  Co.  v.  Wetzel,  35  S.  W.  Rep. 


896  (Tenn.,  1896).  The  Tennessee 
statute  prohibiting  foreign  corpora- 
tions doing  business  in  the  state 
without  first  complying  with  certain 
requisites  does  not  render  invalid  a 
note  held  by  a  bona  fide  purchaser 
from  a  foreign  coi-poration.  Lauter 
V.  Jar  vis,  etc.  Co.,  85  Fed.  Rep.  894 
(1897).  A  foreign  corporation  is  not 
doing  business  in  the  state,  within 
the  meaning  of  the  Ohio  law,  where 
the  corporation  merely  sells  through 
traveling  agents  and  delivers  goods 
manufactured  outside  of  the  state. 
Toledo,  etc.  Co.  v.  Glen,  etc.  Co.,  45 
N.  E.  Rep.  197  (Ohio,  1896).  The  de- 
fense that  a  corporation  has  not  filed 
its  articles  in  tlie  county  where  prop- 
erty is  to  be  foreclosed  must  be  set 
up  by  plea  in  abatement.  Ontario 
State  Bank  v.  Tibbits,  80  CaL  68 
(1890).  An  alien  corporation  may  sue 
to  recover  back  taxes  paid  under 
protest,  although  it  has  not  filed  its 
charter  as  required  by  statute.  Pow- 
der River  Cattle  Co.  v.  Custer  County, 
9  Mont.  145  (1889). 

1  See  Part  VII,  infra. 

2  If  an  insurance  company  does  busi- 
ness in  the  state  without  complying 
with  the  statutory  conditions  it  can- 
not collect  a  premium  note.  Reliance 
Mut.  Ins.  Co.  V.  Sawyer,  160  Mass.  413 
(1894);  Cincinnati  Mut.  etc.  Co.  v. 
Rosenthal,  55  IIL  85  (1870),  holding 
that  a  premium  note  given  to  a  for- 
eign company  which  had  not  ob- 
tained a  certificate  from  the  state 
auditor  as  required  was  void  in  its 
hands.  To  same  effect,  Hoffman  v. 
Banks,  41  Ind.  1  (1872),  and  Roche  v. 
Ladd,  83  Mass.  436  (1861);  ^tnalns. 
Co.  V.  Harvey,  11  Wis.  394  (1860), 
where  filing  a  statement  of  the  con- 
dition with  the  secretary  of  state  was 


1434 


CH.  XLI.] 


INTEA   YIKES   ACTS   AND   CONTEACTS. 


[§  TOO. 


license  fee  before  doing  business  within  its  borders.^  And  in 
nearly  all  particulars  foreign  corporations  must  bend  to  the 
will  of  the  state. 

A  foreign  corporation  may  sue  or  be  sued  in  the  courts  of  a 
state  whenever  jurisdiction  is  legally  obtained.^ 


required;  Lycoming  F.  Ins.  Co.  v. 
Wright,  55  Vt.  526  (1883);  Chal-ter 
Oak  L.  Ins.  Co.  v.  Sawyer,  44  Wis.  387 
(1878),  but  holding  that  they  may  sue 
for  or  secure  debts  due  from  residents 
without  complying  with  such  stat- 
utes; Williams  v.  Cheney,  69  Mass. 
215  (1855),  but  holding  that  a  premium 
note  void  for  this  reason  is  valid 
iu  the  hands  of  a  bona  fide  holder  for 
value  without  notice;  Jones  v.  Smith, 
69  Mass.  500  (1855),  holding  that  the 
payee  of  a  premitun  note  must  prove 
compliance  by  the  insurance  com- 
pany with  the  statute;  Ehrman  v. 
Teutonia  Ins.  Co.,  1  McCrary,  123 
(1880),  holding  that  if  the  statute 
merely  imposes  penalties  for  non- 
compliance with  such  requirements, 
the  contracts  of  a  foreign  corjaora- 
tion  not  complying  are  not  void.  To 
same  effect  is  King  v.  National  M.  & 
E.  Co.,  4  Mont.  1  (1881);  Clark  v.  Mid- 
dleton,  19  Mo.  58  (1853),  holding  that 
the  failure  of  an  agency  to  file  a  state- 
ment was  not  to  make  void  a  promise 
to  pay  premium  notes  given  to  the 
foreign  insurance  company;  Brook- 
lyn Life  Ins.  Co.  v.  Bledsoe,  53  Ala, 
538  (1875),  holding  that  a  foreign  cor- 
poration cannot  avail  itself  of  its  own 
failure  to  comply;  Union,  etc.  Ins. 
Co.  V.  McMillen,  24  Ohio  St.  67  (1873), 
holding  that  neglect  to  comply  does 
not  make  void  a  policy  issued  by  a 
foreign  company  nor  excuse  the 
holder  from  paying  premiums;  Eu- 
reka Ins.  Co.  V.  Parks,  1  Cin.  Super. 
Ct.  (Ohio),  574  (1871),  holding  that  a 
company  which  issues  a  policy  on 


property  in  another  state  from  its 
home  ofiice  is  not  subject  to  the  re- 
stricting statute  of  that  state,  though 
it  has  paid  a  commission  for  obtain- 
ing the  insurance  to  a  resident 
thereof;  Mutual,  etc.  Ins.  Co.  v. 
Bales,  93  Pa.  St.  353  (1879),  holding 
that  it  cannot  recover  from  sureties 
upon  an  agent's  bond  unless  it  has 
complied  with  a  statute  requiring 
the  agents  to  be  commissioned.  To 
same  effect,  Thorne  v.  Travelers'  Ins. 
Co.,  80  Pa.  St.  15  (1875);  but  in  U.  S. 
Life  Ins.  Co.  v.  Adams,  7  Biss.  SO 
(1873);  S.  C,  28  Fed.  Cas.  816,  it  was 
held  that  compliance  with  a  restrain- 
ing act  is  not  essential  to  the  validity 
of  an  agent's  bond ;  Lamb  v.  Bowser, 
7  Biss.  315  (1876);  S.  C,  14  Fed.  Cas. 
980,  holding  that  a  policy  of  insur- 
ance is  not  void  because  the  com- 
pany has  not  complied  with  the 
statute.  Cf.  Isle  Eoyale  Land  Corp. 
V.  Osmun,  76  Mich.  103  (1889).  As  a 
defense  to  a  note,  see  Dudley  v.  Col- 
lier, 87  Ala.  431  (1880).  See  also  §  696, 
notes,  supra;  Charter  Oak,  etc.  Ins. 
Co.  V.  Sawyer,  44  Wis.  387  (1878), 
holding  that  it  may  sue  or  take  se- 
curity for  a  debt  without  complying 
with  the  local  act.  To  same  effect, 
Colmnbus  Ins.  Co.  v.  Walsh,  18  Mo. 
239  (1853).  See  also  People  v.  How- 
ard, 50  Mich.  239  (1883). 

1  Walker  v.  Springfield,  94  111.  364 
(1889);  Pembina,  etc.  Co.  v.  Pennsyl- 
vania, 125  U.  S.  181  (1888). 

2^his  question  is  fully  discussed  in 
§§  757,  758,  infra. 


1435 


CHAPTER  XLII. 


STOCKHOLDER'S   ACTIONS   TO   HOLD   THE  DIRECTORS   LIABLE 
FOR  NEGLIGENCE  IN  THE  DISCHARGE  OF  THEIR  DUTIES. 


rOl.  Remedy  of  the  stockholder 
herein. 

r02.  Instances  of  negligence  of  di- 
rectors in  the  performance 
of  their  duties. 


r03.  Directors  must  use  ordinary 
care  and  diligence  in  the 
management  of  the  cori)0- 
ration  and  the  transaction 
of  its  business. 


§  701.  Remedy  of  the  stoclclioMer  herein. —  "Where,  by  reason 
of  the  negligence  of  the  directors  or  other  officers,  the  corporate 
funds,  property,  or  rights  have  been  lost,  the  injury  is  practi- 
cally and  ultimately  an  injury  to  the  stockholders.  But,  in  the 
eye  of  the  law,  the  injury  is  to  the  corporation  itself.  The  loss 
has  depleted  its  treasury.  Moreover,  the  negligent  act  was  in 
reference  to  the  affairs  of  the  corporation,  and  was  an  injury 
to  the  corporation.  Accordingly,  it  is  for  the  corporation  to 
call  the  directors  to  an  account  for  their  negligence.  The  ac- 
tion is  not  one  which  the  stockholder  is  to  bring-.  The  nesrli- 
gence  affects  him,  not  directly,  but  indirectly.  Hence,  the  law 
is  well  settled  that  a  stockholder  cannot  bring  the  ordinary  ac- 
tion at  law  for  damages  against  the  corpT)rate  directors  for  their 
negligence  in  the  management  of  the  corporate  affairs.^  It  is 
clear  also  that  the  stockholder  cannot  hold  the  corporation  itself 
liable  for  the  negligence  herein  of  its  directors.  To  allow  such  an 
action  would  be  to  make  part  of  the  stockholders  liable  to  other 
stockholders  for  the  loss,  when  all  are  equally  injured,  equally 
innocent,  and  equally  in  position  to  complain  .^  It  has  been 
held  that  the  remedy  for  the  negligence  of  corporate  directors 
in  the  management  of  the  corporate  affairs  is  a  suit  in  equity  in- 
stituted by  the  corporation  itself.^  If,  however,  the  corporation  is 


1  See  §  734,  infra. 

2  Oliphant  v.  Woodbum,  etc.  Co.,  63 
Iowa,  332  (1884). 

3  In  an  action  by  a  corporation 
against  its  officers  for  damages  for 
negligence,  all  of  the  guilty  parties 
must  be  joined.    The  remedy  of  the 


company  is  in  equity.  North  Hudson, 
etc.  Assoc.  V.  Childs,  82  Wis.  460  (1892). 
The  corporation  itself  may  hold  di- 
rectors liable  for  neglect  of  duty. 
Horn,  etc.  Co.  v.  Ryan,  42  Minn.  196 
(1889).  Even  though  the  corporation 
itself  brings  the  action  to  hold  the 


1436 


<3H.  XLII."] 


NEGLIGENCE  OF  DIEECTOES. 


[§  'i'Ol. 


under  tlie  control  of  the  guilty  parties,  or  if  it  refuses  to  sue  when 
requested  by  a  stockholder  to  do  so,  then  the  stockholder  himself 
may  bring  a  suit  in  equity  in  his  own  behalf,  and  in  behalf  of  all 
other  stockholders  who  may  wish  to  come  in,  making  the  corpo- 
ration and  the  guilty  parties  the  defendants,  and  compel  them  to 
make  good  to  the  corporation  the  corporate  money  or  property 
lost  by  their  negligence.^  The  money  or  property  recovered  in 
such  an  action  belongs  to  the  corporation,  and  not  to  the  stock- 
holder who  brings  the  suit.^  In  a  stockholder's  suit  to  hold  the 
directors  liable  for  negligence,  the  acts  of  negligence  need  not  be 
set  out  with  great  particularity.  The  suit  is  in  a  court  of  equity, 
and  the  court  decides  the  questions  of  fact,  since  the  suit  is  in 
the  nature  of  an  accounting.^  A  general  allegation,  however, 
that  the  board  of  directors  were  neo^li^ent  does  not  render  a 
particular  director  liable.*    A  receiver  may  institute  the  suit.' 


directors  liable  for  negligence,  the 
action  should  be  in  equity.  Empire 
State  Sav.  Bank  v.  Beard,  81  Hun,  184 
(1894'),  holding  also  that  all  the  giiilty 
parties  should  be  joined  as  defend- 
ants. See  also  §  734,  infra.  But  see 
note  5,  sub. 

1 A  stockholder  in  a  national  bank 
•who  has  been  subjected  to  a  stat- 
utory liability  may  sue  the  directors, 
in  behalf  of  the  corporation,  to  render 
them  liable  for  their  gross  negligence, 
the  receiver  having  neglected  to  sue. 
Nelson  v.  Burrows,  9  Abb.  N.  Cas.  280 
(1881),  giving  the  complaint  in  full- 
See  also  §§  734,  740,  infra. 

2  Evans  v.  Brandon,  53  Tex.  56 
(1880);  Dewing  v.  Perdicaries,  96 
U.  S.  193,  198  (1877);  Smith  v.  Poor, 
40  Me.  415  (1855);  Carter  v.  Ford,  etc. 
Co.,  85  Ind.  180  (1883).  See  also  §  734, 
infra. 

3  Halsey  v.  Ackerman,  38  N.  J.  Eq. 
501  (1884),  affirming  Ackerman  v. 
Halsey,  37  N.  J.  Eq.  356.  This  case 
holds  also  that  the  stockholder's  ac- 
tion lies  even  after  the  corporation 
has  become  insolvent.  See  also 
Smith  V.  Poor,  3  Ware,  148  (1858); 
S.  C,  22  Fed.  Cas.  627;  Gardiner  v. 
Pollard,  10  Bosw.  674  (1863) ;  and  §  734, 


infra.  Where  a  stockholder  brings 
a  suit  at  law  against  a  board  of  di- 
rectors for  negligence  in  allowing  the 
cashier  to  wreck  the  bank,  the  di- 
rectors having  been  such  for  different 
periods  of  time,  there  is  a  misjoinder 
of  causes  of  action.  Sayles  v.  White, 
18  N.  Y.  App.  Div.  590  (1897). 

*  Fisher  v.  Graves,  80  Fed.  Rep.  590 
(1897). 

5  Where  a  receiver  has  been  ap- 
pointed, it  is  for  him  and  not  for  a 
stockholder  to  hold  the  directors  re- 
sponsible for  mismanagement  of  a 
bank.  Howe  v.  Barney,  45  Fed.  Rep. 
668  (1891).  A  stockholder  or  creditor 
may  hold  a  director  liable  for  neg- 
ligence where  a  receiver  cannot. 
Briggs  V.  Spaulding,  141  17.  S.  132, 
150  (1891).  A  receiver  of  a  national 
bank  may  hold  the  directors  person- 
ally liable  for  losses  where  they  left 
the  entire  management  in  the  hands 
of  the  officers  and  made  no  inquiries. 
The  court  held  them  liable  from  the 
time  when,  dividends  having  ceased, 
they  were  bound  to  investigate.  Gib- 
bons V.  Anderson,  80  Fed.  Rep.  345 
(1897).  A  creditor  of  an  insolvent 
bank  may  hold  the  directors  liable 
for  allowing  the  president  to  borrow 


1437 


§  702.]  NEGLIGENCE    OF   DIKECTOKS.  [CH.  XLII. 

An  action  by  the  receiver  against  directors  for  negligence  should 
be  at  law,  and  there  must  be  a  separate  suit  against  each  director.- 
An  action  by  the  receiver  to  hold  a  director  liable  for  negli- 
gence does  not  abate  by  the  death  of  such  director.^  In  a  stock- 
holder's suit  against  the  executive  committee  of  a  bank  for 
negligence  in  managing  the  business  of  the  company,  the-  re- 
lease of  one  of  the  defendants  and  a  settlement  with  him  releases 
the  others.' 

§  Y02.  Instances  of  negligence  of  directors  in  the  performance 
of  tlicir  duties. —  It  is  difficult  to  lay  down  any  rules  as  to  what 
acts  will  constitute  negligence  on  the  part  of  corporate  officers. 
Each  case  is  to  be  determined  largely  on  its  own  facts.  Thus, 
where  the  directors  kept  no  accounts,  paid  no  calls,  and  col- 
lected no  subscriptions,  they  were  quite  properly  held  guilty  of 
negligence  and  were  made  liable  therefor.*  So  also  the  directors 
of  a  national  bank  are  liable  when  they  loan  money  to  irrespon- 
sible persons,  allow  overdrafts,  employ  dishonest,  unfaithful, 
and  incompetent  clerks,  and  neglect  to  take  security  from  the 
cashier,  president,  and  other  officers  for  good  conduct  and  the 
performance  of  duties.^  Where  the  president  of  a  corporation 
sells  large  quantities  of  coal  to  a  firm  which  his  sons  control, 
and  allows  the  debt  to  increase  when  he  could  easily  have  col- 
lected it,  and  ultimately  the  debt  is  lost,  he  is  liable  for  negli- 
gence and  must  make  good  the  loss.^  The  business  usages  of 
the  community  enter  into  the  question  of  whether  a  director 
was  negligent  in  making  loans.     The  directors  may  commit  the 

.  an  unreasonably  large  sum  without  483  (1897).    In  Stearns  v.  Lawrence, 

good  security,  and  for  allowing  him  83  Fed.  Rep.  738  (1897),  the  receiver 

to  purchase  stock  of  the  bank  with  held  the  president  liable  for  negli- 

bank  funds.    Such  suit  must  be  for  gence  in  the  management  of  a  bank 

the  benefit  of  all  creditors,  and  the  by  a  suit  in  eqviity. 

results  of  the  suit  will  be  adminis-  2  O'Brien  v.  Blaut,  17  N.  Y.  App. 

tered  by  the  court.    Gores  v.  Day,  74  Div.  288  (1897). 

N.  W.  Rep.  787  (Wis.,  1898).    See  also  3  Chetwood  v.  California  Nat.  Bank, 

§  735,  infra.  113  Cal.  414,  649  (1896). 

1  O'Brien  v.  Fitzgerald,  143  N.  ;Y.  ^Neall  v.  Hill,  16  Cal  145  (1860). 

377  (1894).    See  also  §  734,  infra.    A  »  Brinckerhoff  v.  Bostwick,  88  N.  Y. 

receiver's  action  against  the  direct-  53(1882).    See  also  Smith  r.  Rathbun, 

ors  for  negligence  is  at  law.   Higgins  22  Him,  150  (1880).    As  to  the  liability 

V.  Tefft,  4  N.  Y.  App.  Div.  62  (1896).  of  a  cashier,  see  Commercial  Bank  v. 

The  remedy  of  the  receiver  against  Ten  Eyck,  48  N.  Y.  305  (1872). 

the  directors  for  negligence   is   at  « Doe  v.  Northwestern,  etc.  Co.,  78 

law.     Dykman  v.  Keeney,  154  N.  Y.  Fed.  Rep.  62  (1896). 

1438 


CH.  XLII.]  NEGLIGENCE    OF    DIEECTOES.  [§  702. 

business  to  the  officers,  but  must  give  reasonable  supervision  and 
not  be  guilty  of  gross  inattention.  Thus,  the  loan  of  one-thii-d 
of  the  capital  stock  to  one  person  is  not  necessarily  negligent.* 
Where  for  three  years  the  directors  turn  the  management  for 
years  over  to  the  cashier,  of  no  responsibility,  and  know  of  ille- 
gal loans  and  neglect  to  record  mortgages,  they  are  liable  for 
losses  incurred  thereby.^  "Where  the  president  of  a  bank  can- 
cels a  debt  of  the  bank  against  one  of  his  relatives  in  exchange 
for  securities  which  ultimately  become  worthless,  he  is  liable 
for  the  loss.'  It  is  neo:lis:ence  for  directors  to  build  a  hotel 
before  they  have  provided  funds  therefor  and  before  they  have 
the  title  to  the  land.*  Directors  of  a  bank  are  not  liable  in  an 
action  for  deceit  to  a  purchaser  of  stock,  although  they  signed 
the  cashier's  annual  statement  which  was  false,  there  being 
proof  that  they  believed  it  to  be  true.*  A  director  is  not  liable 
for  a  deposit  made  in  a  bank  after  it  was  insolvent,  where  there 
was  no  fraud  on  his  part  inducing  the  deposit.®  A  depositor 
in  a  bank  may  sue  the  directors  for  gross  negligence  leading  to 
the  loss  of  his  money,  and  may  join  also  a  cause  of  action 
against  them  for  false  statements  as  to  the  condition  of  the 
bank."^  The  president  is  negligent  and  is  liable  if  he  does  not 
require  the  secretary  to  give  a  bond  for  his  good  conduct,  as  re- 
quired by  the  by-laws  of  the  corporation.^  But  it  has  been  held 
that  the  directors  are  not  liable  for  a  failure  to  have  the  secre- 
tary's bond  renewed,  they  supposing  that  it  did  not  expire  at 
the  end  of  the  year.'  The  law  is  well  established  that  the  cor- 
porate officers  are  not  liable  on  the  ground  of  negligence  for 
ultra  vires  acts  which  they  have  done  or  sanctioned,  but  in  good 
faith  and  without  knowledge  of  their  ultra  vires  character. 
The  act  itself  may  be  impeached  and  set  aside,  and  property 
transferred  thereundfer  may  be  recovered  back ;  but  if  the  di- 
rectors have  made  an  honest  mistake,  and  it  was  a  mistake  which 

1  "WTieeler   v.  Aiken  County,  etc.  « Minton  v.  Stahlman,  96  Tenn,  98 

Bank,  75  Fed.  Rep.  781  (1896).  (1896).-    Cf.  27  N.  Y.  App.  Div.  80. 

!2  Robinson  v.  HaU,  63  Fed.  Rep.  223  7  Solomon  v.  Bates,  118  N.  C.  311 

(1894),  rev'g  59  Fed.  Rep.  648.  (1896).     Such  a  suit  is  in  tort.    Tate 

3  Lawrence  v.  Stearns,  79  Fed.  Rep.  v.  Bates,  118  N.  C.  287  (1896). 

878  (1897).  ^  Pontchartrain  R  R  u  Paulding, 

*  Landis  v.  Sea  Isle,  etc.  Co.,  53  N.  J.  11  La.  41  (1837). 

Eq.  654  (1895).  "  Vance  v.  Phoenix  Ins.  Co.,  4  Lea 

5  Foster  v.  Gibson,  38  S.  W.  Rep.  144  (Tenn.),  385  (1880). 

(Ky.,  1896). 

1439 


§  702.]  NEGLIGENCE    OF   DIEECTOES.  [CU.  XLII. 

a  man  of  usual  intelligence  might  make,  they  are  not  personally 
liable  therefor.  The  law  does  not  require  them  to  be  learned  in 
the  law.^  Bank  directors  who  meet  but  once  or  twice  durinir 
the  year,  and  do  not  examine  the  books,  and  have  no  knowledge 
of  affairs,  are  liable  for  losses  resulting  from  long-continued 
overdrafts  by  insolvent  parties.^  Managers  of  a  building- 
loan  corporation  are  liable  for  loans  made  to  a  firm  in  excess 
of  the  amount  allowed  by  a  by-law ;  but  are  not  liable  for  a 
mistaken  estimate  of  value  of  the  security  taken,  nor  for  a  de- 
fect in  the  acknowledgment  of  the  security  —  a  mortgage."  A 
director  has  been  held  not  liable  for  neHio-ence  in  failing;  to 
sue  for  a  debt  due  to  the  corporation.*  Directors  are  not  liable 
for  money  lost  by  an  overdrawn  account.*  A  director  of  a  loan- 
ing company  is  not  liable  for  an  unsecured  loan  merely  because 
it  appeared  on  the  books  and  turns  out  to  be  uncollectible. 
Proof  is  necessary  that  he  knew  of  the  loan.^  Bank  directors 
are  not  liable  for  negligence  merely  because  the  cashier  has 
for  years  been  embezzling  the  funds  and  making  false  entries.'' 
The  directors,  however,  are  liable  for  allowing  the  treasurer  to 
use  corporate  funds  for  lobbying  purposes ;  ^  but  not  for  allow- 
ing one  of  their  number  to  manage  the  business,  though  he 
appropriate  its  property  to  himself.*    They  are  liable  for  mak- 

iWatts's   Appeal,  78   Pa.  St.   370  ment,  and  are  not  liable  therefor. 

(1875);  Hodges  u  New  England  Screw  Clews  v.  Bardon,  36  Fed.  Eep.  617 

Co.,  1  R.  I.  312,  348  (1850);  Spering's  (1888).    For  an  English  case  holding 

Appeal,  71  Pa.  St.  11,  34  (1872);  Wil-  the  trustees  and  managers  of  a  sav- 

liams  V.  McDonald,  37  N.  J.  Eq.  409  ings  bank  liable  for  a  defalcation 

(1883).     Cf.  Joint-Stock  Discount  Co.  of  the  actuary,  see  Ee  Cardiff  Sav. 

V.  Brown,  L,  R.  3  Eq.  139;  S.  C,  L.  R.  Bank,   L.   R.   45    Ch.   D.   537  (1890). 

8  Eq.  381  (1869).   See  also  §  682,  supra.  Where  the  president  of  a  bank  pur- 

2  Marshall  v.  Farmers',  etc.  Bank,  chases  a  note  which  contains  a  guar- 
85  Va.  676  (1889).  antee  on  the  part  of  the  payee,  which 

3  Citizens'  Bldg.  etc.  Assoc,  v.  Co-  guarantee  subsequently  reduces  the 
riell,  34  N.  J.  Eq.  383  (1881).  amount  of  the  note,  the  president  is 

*Be  Forest,  etc.  Min.  Co.,  L.  R.  10  guilty  of  negligence  in  purchasing 

Ch.  D.  450  (1878).  the  note.    Stearns  v.  Lawrence,  83 

STurquand  v.  Marshall,  L  R.  4  Ch.  Fed.  Rep.  738  (1897). 

App.  370  (1869).  8  Shea  u  Mabry,  1  Lea  (Tenn.),  319 

6  Couper  V.  Whitson,  9  Ct.  of  Sess.  (1878). 

Cas.  (4th  ser.)  1115  (1882).  9  A  director  is  not  liable  to  a  cred- 

^  Louisville  Sav.  Bank  v.  Caperton,  itor  of  the  bank  for  negligence  in 

8  S.  W.  Rep.  885  (Ky.,  1888).    The  di-  allowing  the  president  to  gradually 

rectors  of  a  bank  are  not  bound  to  embezzle  all  its  assets,  where  such 

know  of  the  cashier's   mismanage-  director  received  no  pay,  and  once  or 

1440 


CH, 


XLII.] 


KEGLIGEXCE    OF   DIRECTOES. 


[§  T02. 


ing  inyestments  contrary  to  the  charter.*  But  they  are  not 
liable  for  errors  of  themselves  or  the  cashier  in  making  loans.^ 
Inasmuch  as  directors  serve  in  nearly  all  cases  without  pay,  the 
law  is  not  exacting  in  its  requirements  of  them. 

It  is  not  actionable  negligence  in  directors  to  proceed  to  busi- 
ness where  only  a  small  part  of  the  capital  is  subscribed.'  They 
are  not  liable  for  special  deposits  where  there  was  no  negli- 
gence on  their  part.'* 

Directors  are  not  bound  to  make  a  thorough  examination  of 
the  books  and  papers  of  a  bank.* 


twice  a  week  he  attended  to  the  dis- 
counts, saw  how  much  money  was 
on  hand,  and  once  a  year  counted  the 
cash  and  secui'ities.  S  wentzel  v.  Penn 
Bank,  147  Pa,  St.  140  (1892),  holding 
also  that  the  plaintiff  was  not  en- 
titled to  costs,  having  failed  to  prove 
his  case.  Co?ifra  in  New  Jersey.  The 
corporation  shovild  be  a  party  defend- 
ant. Creditors  also  may  be  made 
parties  defendant.  Camp  v.  Taylor, 
19  AtL  Eep.  908  (N.  J.,  1890). 

1  The  case  of  Williams  v.  McKay,  46 
N.  J.  Eq.  25  (1889),  is  very  fuU,  ex- 
plicit, and  clear  in  its  adjudication 
and  distribution  of  losses  on  the  pres- 
ident, treasurer,  manager,  officers, 
finance  committee,  secretary,  and  di- 
rectors of  a  savings  bank,  where 
those  officers,  etc.,  had  made  invest- 
ments contrary  to  the  by-laws,  char- 
ter, and  statutes. 

2  The  directors  of  a  building  corpo- 
ration are  not  liable  for  investing  in 
second  mortgages,  the  act  hem^ultra 
vires.  Shefifield,  etc.  Soc.  v.  Aizle- 
wood,  L.  R.  44  Ch.  D.  412  (1889).  Di- 
rectors are  not  liable  for  a  negligent 
or  ultra  vires  act  in  lending  the  funds 
without  taking  proper  security,  un- 
less it  is  shown  that  they  failed  to 
really  exercise  in  good  faith  their 
discretion  and  judgment  as  directors. 
Be  New  Mashonaland,  etc.  Co.,  [1892] 
3  Ch.  577.  Negligence  is  not  proved 
by  the  facts  that  the  bank's  capital 
is  gone;  that  large  dividends  were 


declared,  based  on  large  amounts  of 
assets  that  turned  out  to  be  worth- 
less ;  that  real  estate  taken  for  debts 
depreciated  in  value;  that  real  estate 
was  bought  in  on  foreclosure  sales 
by  the  bank;  that  the  directors  did 
not  closely  watch  the  cashier,  there 
being  no  proof  of  lack  of  reasonable 
skill,  etc.,  on  his  part;  that  they  en- 
trusted the  management  to  the  cash- 
ier, a  man  of  experience  and  abiUty; 
that  overdrafts  were  allowed  to  re- 
sponsible parties;  and  that  there  was 
delay  in  suing  on  notes.  Wallace  v. 
Lincoln  Sav.  Bank,  89  Tenn.  630  (1891). 
Various  acts  of  mismanagement  were 
considered  in  Re  Liverpool,  etc.  Assoc, 
62  L.  T.  Eep.  873  (1890). 

3  Re  Liverpool,  etc.  Assoc,  62  L.  T. 
Rep.  873  (1890). 

*  An  oflicer  of  a  corporation  is  not 
liable  for  the  loss  of  corporate  se- 
curities without  negligence  on  his 
part,  though  entrusted  with  their 
cara  Mowbray  v.  Antrim,  123  Ind. 
24  (1890). 

5  Briggs  V.  Spaulding,  141  U.  S.  132 
(1891).  Although  the  directors  trust 
the  "management  of  the  bank  en- 
tirely to  the  cashier,  and  do  not  ex- 
amine the  books,  they  are  not  liable 
to  the  creditors  of  the  bank,  even 
though  the  cashier,  by  dishonesty  and 
reckless  management,  wrecks  the 
bank.  Warner  v.  Penoyer,  83  Fed. 
Rep.  181  (1897). 


91 


1441 


§  703.] 


NEGLIGENCE   OF  DIKECTOKS. 


[CH.  XLII. 


A  director  wlio  is  absent  on  leave  of  absence  is  not  liable  for 
losses  occurring  during  that  time,^  nor  for  losses  occui'ring 
shortly  after  he  becomes  a  director .^ 

The  measure  of  damages  for  negligence  cannot  be  the  entire 
capital  stock  which  was  paid  in  in  cash,  and  also  the  debts 
which  the  stockholders  may  have  to  pay.^ 

§  Y03.  Directors  must  use  ordinary  care  and  diligence  in  the 
management  of  the  corporation  and  the  transaction  of  its  hiisi- 
ness. —  The  directors  of  a  corporation  are  not  guarantors  that 
no  mistakes  will  be  made  in  the  management  of  the  corporate 
business,  nor  do  they  insure  the  corporation  against  loss  by 
the  frauds  or  embezzlement  of  subordinate  officers  and  agents. 
They  are  required  to  exercise  reascmable  care  and  sound  busi- 
ness judgment,  but  nothing  further  than  this.  They  generally 
serve  without  pay,  and  usually  by  reason  of  their  own  interest 
in  the  stock  of  the  company  are  directly  interested  in  the  wel- 
fare of  the  corporation.  But,  though  this  is  the  case,  they  must 
use  ordinary  diligence  in  ascertaining  the  condition  of  things, 
and  ordinary  intelligence  in  their  action  as  directors.*    They 


» Briggs  V.  Spaulding,  141  U.  S.  133 
(1891). 

2  A  bank  director  is  not  liable  for 
negligence  where  the  bank  becomes 
insolvent  within  a  short  time  after  he 
became  a  director.  Briggs  v.  Spaul- 
ding, 141  U.  S.  132  (1891). 

'  Bloom  V.  National,  etc.  Loan  Co., 
152  N.  Y.  114  (1897). 

*  The  leading  case  on  the  liability 
of  directors  for  negligence  is  Chari- 
table Corp.  V.  Sutton,  3  Atk.  400 
(1742).  The  most  important,  recent, 
and  fully  considered  case,  however, 
is  Briggs  v.  Spaulding,  141  U.  S. 
132  (1891),  where  the  supreme  court 
of  the  United  States  laid  down  rules 
(pp.  147,  151,  152)  which  very  largely 
exempt  directoi's  in  national  banks 
from  any  liability  whatsoever.  In 
North  Hudson,  etc.  Assoc,  v.  Childs, 
82  Wis.  460,  476,  477  (1892),  the  court 
said  that  an  officer  is  "responsible 
only  for  a  failure  to  bring  to  the  dis- 
charge of  his  duties  such  degree  of 
attention,  care,  skill,  and  judgment 


as  are  ordinarily  used  and  practiced 
in  the  discharge  of  such  duties  or 
employments;  the  degree  of  care, 
skill,  and  judgment  depending  upon 
the  subject  to  which  it  is  to  be  ai> 
plied,  the  particular  circumstances 
of  the  case,  and  the  usages  of  the 
business."  The  court  also  said: 
"  Wliere  they  have  not  profited  per- 
sonally by  their  bad  management, 
or  appropriated  any  of  the  property 
of  the  corporation  to  their  own  use, 
courts  of  equity  treat  them  with  in- 
dulgenca  Were  a  more  rigid  rule 
to  be  applied,  it  would  be  difficult  to 
get  men  of  character  and  pecuuiaiy 
responsibility  to  fill  such  positions." 
In  Percy  v.  Millaudon,  8  Mart.  (La.) 
68  (1829),  the  court  said:  "If  nothing 
has  come  to  their  knowledge  to 
awaken  suspicion  of  the  fidelity  of 
the  president  and  casliier,  ordinary 
attention  to  the  affairs  of  the  insti- 
tution is  sufficient.  If  they  become 
acquainted  with  any  fact  calculated 
to  put  prudent  men  on  their  guard. 


1443 


CH.  XLII.] 


NEGLIGENCE   OF    DIEECTOES. 


[§  T03. 


are  liable  for  losses  if  they  pay  no  attention  to  business  at 
meetings  of  the  directors,  or  if  they  regularly  fail  to  attend 
such  meetings.  They  must  exercise  a  reasonable  amount  of 
diligence  and  care. 


a  degree  of  care  commensurate  with 
the  evil  to  be  avoided  is  reqiiired, 
and  a  want  of  that  care  certainly 
makes  them  responsible."  This  case 
also  holds  that  directors  are  not  liar 
ble  for  errors  of  judgment  imless 
they  are  grossly  wrong.  United  So- 
ciety, etc.  V.  Underwood,  9  Bush 
(Ky.),  609  (1873),  holding  that  the  di- 
rectors must  use  ordinary  diligence; 
Williams  v.  Gregg,  2  Strobh.  Eq. 
(S.  C.)  297  (1848).  In  Richards  v.  New 
Hampshire  Ins.  Co.,  43  N.  H.  263 
(1861),  the  court  said:  "The  rule  is  a 
just  one  that  an  agent  is  bound  to 
apply  the  same  diligence  to  obtain 
payment  of  debts  in  his  care  that  he 
does  to  recover  his  own."  In  Land 
Credit  Co.  v.  Fermoy,  L.  R  5  Ch.  App. 
763  (1870),  an  attempt  was  made  to 
hold  liable,  for  negligence,  directors 
who  innocently  approved  of  a  loan 
which  in  reality  had  not  been  made, 
but  the  money  had  been  used  by 
other  directors  for  speculative  pur- 
poses. See  also  Re  Railway  Imp.  Co., 
42  L.  T.  Rep.  206  (1880);  Scholefield's 
Case,  17  W.  N.  22  (1882);  British,  etc. 
Ass.  Co.,  L.  R.  14  Ch.  D.  385  (1880). 
In  Dunn  v.  Kyle,  14  Bush  (Ky.),  134 
(1878),  where  a  cashier  had  embez- 
zled the  fmids  of  the  bank,  the  court, 
said:  "  Bad  faith  or  gross  negligence 
is  certainly  necessary  to  render  the 
director  hable  to  a  stockholder  in  a 
case  Uke  this."  The  court  also  aj)- 
proved  of  the  rule  given  in  Morse  on 
Banking,  p.  117,  to  the  effect  that, 
"  for  excusable  mistakes  concerning 
the  law,  and  for  many  errors  strictly 
of  discretion,  they  are  not  liable. 
Though  in  cases  in  which  their  ac- 
tion has  been  so  grossly  ill-advised  as 
to  warrant  the  imputation  of  fraud, 
or  to  show  a  want  of  the  knowledge 


absolutely  necessary  for  the  perform- 
ance of  their  duties,  so  great  that 
they  were  not  justified  in  assuming 
the  office,  they  may  be  held  respon- 
sible." The  mere  fact  that  loans  by 
a  bank  turn  out  to  have  been  un- 
wise and  hazardous  does  not  render 
the  director  liable  therefor.  Witters 
V.  Sowles,  31  Fed.  Rep.  1  (1887).  Bank 
directors  cannot  be  held  liable  for 
negligence  in  loans,  etc.,  at  the  suit 
of  a  stockholder,  where  they  have 
used  ordinary  care  and  acted  in  good 
faith,  Jones  v.  Johnson,  86  Ky.  530 
(1888).  The  case  of  Re  Cardiff  Sav. 
Bank,  [1892]  2  Ch.  100,  is  an  example 
of  one  mode  of  doing  business.  The 
]\larquis  of  Bute  was  made  president 
of  a  savings  bank  at  the  age  of  six 
months.  He  continued  to  be  presi- 
dent from  1848  until  1886.  During 
this  time  he  attended  one  meeting 
in  1869.  His  name,  however,  always 
appeared  in  the  pass-books,  annual 
reports,  and  circulars.  He  paid  no 
attention  whatsoever  to  the  bank. 
It  transpired  in  1886  that  the  de- 
ceased actuary  of  the  bank  had  de- 
frauded it  of  a  great  deal  of  money. 
The  court  held  that  the  marquis  was 
not  liable.  The  duty  of  an  auditor 
is  to  examine  the  books,  ascertain 
their  correctness,  and  prepare  a  bal- 
ance sheet  showing  the  company's 
financial  position  at  the  time  he  is 
appointed,  but  he  is  bound  to  use 
only  a  reasonable  amount  of  care  and 
skill,  varj^ing  according  to  the  casa 
Re  Kingston  Cotton  MiU  Co.,  [1896] 
2  Ch.  279.  A  director  who  is  habitu- 
ally absent  from  meetings  of  the 
board  may  be  liable  for  the  acts  of 
the  board.  Schout  v.  Conkey,  etc. 
Assoc,  87  Hun,  568  (1895). 
The  law  on  this  subject  is  ably  and 


1443 


§  Y03.] 


ISTEGLIGENCE    OF   DIEECTOKS. 


[CH. 


XLII. 


The  directors  are  not  bound  to  examine  the  books  of  the 
company,  nor  to  investigate  the  mode  of  living  of  their  em- 
ployees. But  they  are  required  to  attend  the  directors'  meet- 
ings with  reasonable  regularity;  to  have  statements  of  the 


clearly  set  forth  by  Mr.  Justice  Earl, 
in  Hun  u  Gary,  83  N.  Y.  65  (1880).  Cf. 
Van  Dyck  u  McQuade,  86  N.  Y.  38 
(1881).  See  also  Scott  v.  Depeyster,  1 
Edw.  Ch.  513  (1832);  Litchfield  v. 
White,  3  Sandf.  Super.  545  (1850); 
Liquidators,  etc.  v.  Douglas,  32  Scot. 
Jur.  212  (18G0);  Spering's  Appeal,  71 
Pa.  St.  11  (1872),  an  important  case, 
and  one  which  is  frequently  spoken 
of  as  the  leading  case  herein.  A  di- 
rector who  trusts  everything  to  the 
other  directors,  or  who  performs  all 
acts  as  a  mere  man  of  straw,  is  liable. 
Joint-Stock  Discount  Co.  v.  Brown, 
L.  R  8  Eq.  404,  405  (1869).  See  also 
Williams  v.  McKay,  40  N.  J.  Eq.  189 
(1885);  Ackerman  v.  Halsey,  37  N.  J. 
Eq.  356  (1883);  aff'd,  Halsey  v.  Acker- 
man,  38  N.  J.  Eq.  501 ;  Mutual,  etc. 
Bank  v.  Bosseiux,  3  Fed.  Rep.  817 
(1880).  That  directors  are  not  liable 
for  the  fraud  or  misconduct  of  co- 
directors,  see  Movivis  v.  Lee,  30  Fed. 
Rep.  298  (1887).  Directors  are  not  lia- 
ble for  gross  negligence  in  buying 
out  a  business  where  the  corporation 
was  organized  for  the  express  pur- 
pose of  buying  out  that  business. 
Overend,  etc.  Co.  v.  Gibb,  L.  R.  5  H.  L. 
480  (1872).  Where  loans  without  se- 
curities are  improperly  made,  and  the 
guilty  directors  are  liable  therefor,  a 
director  who  did  not  participate  is 
nevertheless  liable,  if  he  does  not 
take  steps  to  remedy  the  matter  as 
soon  as  he  learns  of  it.  Jackson  v. 
Munster  Bank,  15  L.  R.  Ir.  356  (1885). 
After  a  director  sends  in  a  letter  of 
resignation  he  is  not  Liable  for  the 
wrongful  acts  of  the  directors,  even 
though  no  attention  is  paid  to  his 
letter.  Perry's  Case,  34  L.  T.  Rep.  716 
(1876).  In  the  case,  however,  of  Mo- 
vius  V.  Lee,  30  Fed.  Rep.  298, 307  (1887), 


the  court  held,  reviewing  the  cases, 
that  "  there  is  no  case  which  has  been 
cited  or  observed  in  which  it  has 
been  decided  that  a  director  of  a  cor- 
poration was  liable  to  make  good  a 
loss  occasioned  by  the  fraud  or  mis- 
conduct of  a  co-director,  in  which  he 
had  no  part,  and  which  was  perpe- 
trated without  his  connivance  or 
knowledge.  ...  It  is  nowhere  ad- 
judged that  all  must  always  act,  or 
that  they  must  not  trust  one  another 
to  act,  or  that  they  are  liable  for  the 
mere  omission  to  watch  and  restrain 
the  others,  without  wrong  intention 
on  their  own  part,  or  actual  knowl- 
edge of  the  wrong  on  the  part  of  the 
others."  The  treasurer  is  not  liable 
for  losses  by  deposits  made  by  hini, 
where  the  corporation  acquiesced  in 
the  deposits.  New  York,  etc.  R.  R.  v. 
Dixon,  114  N.  Y.  80  (1889).  Directors 
are  required  to  use  such  care  and  dili- 
gence as  a  prudent  man  exercises  in 
his  own  affairs.  If  he  utterly  neg- 
lects his  duties  he  is  liable.  Horn, 
etc.  Co.  V.  Ryan,  42  Minn.  196  (1889). 
Misfeasance  is  such  non-feasance  as 
is  negligence  amounting  to  a  breach 
of  trust.  Liability  for  negligence 
cannot  be  imputed  to  directors  vm- 
less  it  is  gross  negligence  resulting 
in  loss.  To  constitute  gross  negli- 
gence there  must  be,  first,  a  plain 
duty  to  do  or  abstain  from  a  particu- 
lar thing;  secondly,  such  abstention 
or  such  action  as  the  court  would  be 
justified  in  holding  to  be  mischiev- 
ous or  reckless.  When  a  duty  incimi- 
bent  on  the  directors  has  not  been 
performed,  the  burden  of  proving 
gross  negligence  is  on  those  who  al- 
lege that  conclusion ;  but  where  the 
facts  establish  gross  negligence,  but 
at  the  same  time  show  that  it  is  pos- 


1444 


CH.  XLII.] 


NEGLIGENCE   OF   DIKECTOKS. 


[§  T03. 


business  made  to  them;  to  object  to  the  transaction  of  impor- 
tant business  without  the  knowledge  and  consent  of  the  board 
of  directors ;  to  examine  with  reasonable  care  the  reports  and 
matters  of  business  brought  before  them ;  and  not  to  shut  their 
eyes  to  obvious  objections  to  the  business  transactions  and  gen- 
eral condition  of  the  corporation,  or  to  the  character  and  well- 
known  reputation  of  the  employees.  Moreover,  when  a  director 
has  knowledge  that  an  unauthorized  act  is  being  done,  he  can- 
not escape  liability,  however  innocent  he  may  be,  unless  he  .pre- 
vents the  act  by  his  protest,  or  files  a  bill  in  equity  to  remedy 
the  wroncr.^ 


sible  or  likely  that  a  satisfactory  ex- 
planation ought  to  be  forthcoming, 
the  burden  of  proof  is  shifted.  Re 
Liverpool,  etc.  Assoc,  62  L.  T.  Rep. 
873  (1890).  A  treasurer  of  an  associa- 
tion who  receives  no  compensation 
ia  a  gratuitous  bailee,  and  is  only  lia- 
ble for  gross  negligence  in  paying 
out  funds.  Hibemia  Bldg.  Assoc  v. 
McGrath,  154  Pa.  St  296  (1893). 

^  Joint-Stock  Discount  Co.  v.  Brown, 
L.  R  8  Eq.  381, 402  (1869);  Aslihurst  v. 
Mason,  L.  R.  20  Eq.  225  (1875).  That 
a  director  is  not  in  general  liable  for 


misdeeds  of  subordinate  corporate 
agents,  see  Bath  v.  Caton,  37  Mich. 
199  (1877);  Bacheller  v.  Pinkham,  68 
Me.  253  (1878);  Nicholson  v.  Mounsey, 
15  East,  384  (1812);  Stone  v.  Cart- 
wright,  6  T.  R  411  (1795);  Hewett  v. 
Swift,  85  Mass.  420  (1862).  Cf.  Weir 
u  Bamett,  L.  R  3  Exch.  D.  32,  238 
(1878).  But  knowledge  obtained  by 
the  director  previous  to  becoming 
such  does  not  compel  him  to  act. 
Re  Forest,  etc  Ca,  L.  R  10  Ch.  D.  450 
(1878). 


1445 


CHAPTER  XLIII. 

THE  POWER  OF  VARIOUS  OFFICERS  AND  AGENTS  TO  CONTRACT 
FOR  A  CORPORATION,  AND  THE  MODE  OF  DRAWING  AND 
EXECUTING  CORPORATE  CONTRACTS— ADMISSIONS  AND  NO- 
TICE. 


704.  Under  what  circumstances  is  a 
corporation  bound  by  a  con- 
tract made  in  its  name. 

,  POWER  OF  PROMOTERS,  STOCKHOLr>- 
ERS,  DIRECTORS,  EXECUTIVE  COM- 
MITTEE, PRESIDENT,  SECRETARY, 
TREASURER,  CASHIER,  GENERAL 
MANAGER,  AND  MISCELLANEOUS 
AGENTS  TO  CONTRACT  FOR  A 
CORPORATION. 

705-707.  Promoters — Their  liabil- 
ity and  the  liability  of  the 
corporation  and  subscribers. 

708-711.  Stockholders  — Their 
power  to  make  by-laws  and 
contracts,  expel  members, 
and  remove  directors. 

712-714.  Directors  —  Their  power 
to  contract — Ratification  by 
directors  —  De  facto  direct- 
ors —  Directors'  meetings, 
call,  quorum — Their  minute- 
book  as  evidence. 

715.  Executive  committea 

716.  President. 

717.  Secretary  and  treasurer. 

718.  Cashier. 

719.  General  manager  and  super- 

intendent. 

720.  Subordinate  agents. 


B.  THE  FORM  OP  CORPORATE  CON- 
TRACTS —  CORPORATE  SEAL  — 
DRAFTING,  SIGNING,  AND  SEAL- 
ING —  LIABILITY  OF  OFFICERS 
ON  CONTRACTS  IRREGULARLY 
EXECUTED. 

§  721.  Ordinary  corporate  contracts, 
by  the  modern  rule,  need 
not  be  under  seaL 

722.  Method  of  drafting,  signing, 

sealing,  and  acknowledging 
a  corporate  contract  — 
Proof  of  seal  and  authority 
to  attach  it. 

723.  Corporation  is  liable  on  irregu- 

larly-executed instruments. 

724.  Liability  of  officers  on  irregu- 

larly-executed instruments. 

725.  Charter  and  by-law  require- 

ments as  to  manner  of  exe- 
cuting corporate  contracts. 

a  ADMISSIONS  OF  OFFICERS  AND  NO- 
TICE TO  OFFICERS. 

726.  When     is     the     corporation 

bound  by  its  officers'  or 
agents'  admissions. 

727.  Notice  to  the  corporation  by 

notice  to  the  officers — ^When 
notice  is  chargeable  to  di- 
rectors and  stockholders  — 
Notice  of  fraud  perpetrated 
on  the  corporation. 


§  704.  Under  what  circumstances  is  a  corporation  lound  ly 
a  contract  made  in  its  name  —  The  three  tests  for  determining 
whether  a  contract  may  le  enforced  against  a  corporation. —  In 
determining  whether  a  contract  may  be  enforced  against  a  cor- 
poration, three  things  are  to  be  considered.  First,  did  the  cor- 
poration have  the  power  to  enter  into  such  a  contract?  Second, 
was  the  contract  entered  into  by  a  duly-authorized  agent  of  the 
corporation  ?  Third,  was  the  contract  drawn,  signed,  and  sealed 
in  a  form  which  binds  the  corporation  ? 

1446 


CH.  XLIII.]        HOW    COKPOEATE    COKTEACTS   AEE   MADE.  [§  YOo. 

The  first  of  these  questions  has  been  already  treated  in  the 
preceding  chapters  of  this  book.^ 

There  is  an  infinite  variety  of  contracts  which  the  corpora- 
tion may  enter  into,  and  the  great  mass  of  law  on  this  subject 
ij  constantly  being  increased  by  new  decisions.  A  corporation 
may  enter  into  any  contract  which  is  within  its  express  or  im- 
plied powers,  and  which  is  not  mala  in  se.  And  even  a  con- 
tract which  is  not  within  the  express  or  implied  powers  of  the 
corporation  is  sometimes  enforced  against  it  or  for  it  when  one 
party  to  the  contract  has  already  performed,  or  when  the  par- 
ties cannot  be  restored  to  their  original  positions.^ 

The  second  and  third  tests  of  whether  a  contract  is  enforce- 
able against  a  corporation  are  considered  in  this  chapter. 

A.  POWER  OF  PROMOTERS,  STOCKHOLDERS,  DIRECTORS,  EXECUTIVE 
COMMITTEE,  PRESIDENT,  SECRETARY,  TREASURER,  CASHIER,  GEX- 
ERAL  MANAGER,  AND  MISCELLANEOUS  AGENTS  TO  CONTRACT 
FOR  A  CORPORATION,  AND  CONTRACTS  BINDING  ON  THE  COR- 
PORATION  BY   RATIFICATION. 

§  705.  Promoters  —  LidbiUty  to  strangers^  to  the  corporation, 
and  to  siihscrihers  for  stock  —  Liability  of  subscribers  herein  — 
Contribution  —  LiaMlity  of  the  corporation  herein  to  strangers 
and  to  promoters. —  A  promoter  is  a  person  who  brings  about 
the  incorporation  and  organization  of  a  corporation.  He  brings 
together  the  persons  who  become  interested  in  the  enterprise, 
aids  in  procuring  subscriptions,  and  sets  in  motion  the  ma- 
chinery which  leads  to  the  formation  of  the  corporation  itself.' 

There  has  been  great  difficulty  in  determining  who  is  to  be 

1  See  particularly  chs.  XL  and  XLI,  sessing  no  degree  of  caution  whatever. 
supra.  His  ambition  was  to  make  millions." 

2  See  ch.  XL,  supra.  In  England  the  word  "  promoters  " 

3  An  interesting  description  of  the  is  used  often  in  special  acts  of  iiicor- 
"  promoter  "  is  given  by  Judge  Lur-  poration  in  place  of  the  word  "  incor- 
ton,  in  McMullen  v.  Ritchie,  64  Fed.  porators."  Marshall  v.  South  Staf- 
Rep.  253,  260  (1894),  as  follows:  "He  fordshire  Tramways  Co.,  [1895]  2  Ch. 
was  a  man  of  great  ability,  enormous  36.  The  secretary  of  a  prospective 
energy,  and  a  towering  ambition  for  company  ordering  advertisements  is 
great  enterprises.  As  a  promoter  or  liable  for  the  same,  though  he  -orders 
'boomer 'he  seems  to  be  unrivaled;  as  "secretary  pro  tern."  Hopcroft 
a  man  of  large  general  information  v.  Parker,  16  L.  T.  Rep.  561  (1867). 
and  robust  constitution,  extraordi-  For  definitions  of  a  promoter,  in  ref- 
narily  sanguine,  desperately  pugna-  erence  to  his  liability  to  the  corpora- 
cious,  generous  as  a  prince,  and  pos-  tion  itself,  see  §  651,  siipra. 

1447 


§  ^05.] 


HOW  COEPORATE  CONTEACTS  AEE  MADE.   [CH.  XLIII. 


considered  a  promoter  and  -who  is  not.  As  regards  tlie  liability 
to  strangers,  however,  it  seems  that  every  one  is  liable  herein 
as  a  promoter  who  induces  such  stranger  to  act  in  expectation 
of  payment  from  the  prospective  corporation.  Having  induced 
the  party  to  act,  the  promoter  must  see  that  he  is  paid. 

In  America  the  question  of  the  liability  of  promoters  to  per- 
sons who  have  performed  services  or  entered  into  contracts 
relative  to  a  prospective  corporation  has  rarely  arisen.  But  in 
England  this  question  has  frequently  been  passed  upon.  In 
general  the  promoter  of  a  prospective  corporation  is  liable  for 
services  rendered  by  others  who  are  employed  as  clerks,  en- 
gineers, or  in  a  similar  capacity  in  the  work  of  promoting  the 
enterprise.^ 

1  The  promoters  may  be  liable  for    Wend.  649  (1831).    The  chairman  of 


royalties  according  to  contract,  even 
though  they  organized  a  corporation 
which  did  all  the  biisiness.  Ameri- 
can Paper  Bag  Co.  v.  Van  Nort- 
wick,  52  Fed.  Rep.  752  (1892).  Pro- 
moters are  liable  for  goods  ordered 
and  delivered  for  a  corporation  that 
is  never  organized.  Hub  Pub.'  Co.  v. 
Richardson,  13  N.  Y.  Supp.  665(1891). 
Where  the  individuals  who  intend  to 
incorporate  a  company  employ  an 
attorney  and  authorize  him  to  con- 
tract for  printing,  they  are  personally 
liable  for  the  printing-bill.  Hersey 
V.  Tully,  8  Colo.  App.  110  (1896).  Pro- 
moters may  be  liable  on  a  contract 
to  pay  a  commission  to  a  person  ob- 
taining subscriptions  to  the  stock  of 
the  company.  Pratt  v.  Finkle,  25 
S.  E.  Rep.  941  (Ga.,  1896).  A  promo- 
ter is  liable  for  preliminary  debts  in- 
curred. Sandusky  Coal  Co.  v.  Walker, 
27  Ont.  (Can.)  677  (1896).  Where  the 
promoters  after  incurring  debts  aban- 
don the  enterprise,  each  one  of  them 
is  liable  for  at  least  his  proportion- 
ate part  of  such  debts.  Roberts  Mfg. 
Co.  V.  Wright,  62  Minn.  337  (1895). 
A  committee  appointed  at  a  pubUo 
meeting  of  mechanics  to  carry  out 
certain  things  are  personally  liable 
for  the  wages  of  workmen  employed 
by  them.    McCartee  v.  Chambers,  6 


the  promoters  who  signs  the  pros- 
pectus may  by  the  jury  be  held  to 
have  authorized  the  expense  of  print- 
ing, and  is  liable  personally.  Riley 
V.  Packington,  L.  R.  2  C.  P.  536  (1867). 
In  CoUingwood  v.  Berkeley,  15  C.  B. 
(N.  S.)  145  (1863),  a  director  who  al- 
lowed his  name  to  be  xised  as  such  for 
a  proposed  company  was  held  liable 
for  a  passage  ticket  which  was  pur- 
chased on  a  representation  of  the  sec- 
retary that  the  company  would  be 
organized.  That  the  interested  par- 
ties may  be  liable  to  the  attorney  of 
the  provisional  committee  of  a  com- 
pany which  is  abandoned  before  in- 
corporation, see  Parsons  v.  Spooner, 
5  Hare,  102  (1846).  A  promoter  who 
employs  a  person  in  behalf  of  a  pro- 
posed company  is  liable.  Bell  v.  Fran- 
cis, 9  Car.  &  P.  66  (1839).  A  local 
committee  to  form  a  company  are 
liable  to  their  secretary.  They  are 
not  allowed  to  say  that  he  must  look 
to  the  corporation  for  pay.  Kerridge 
V.  Hesse,  9  Car.  &  P.  200  (1839).  A 
promoter  is  liable  personally  on  con- 
tracts made  by  him  in  behalf  of  tlie 
company  with  third  persons,  and  his 
liability  is  not  released  by  the  subse- 
quent adoption  of  the  contract  by 
the  company.  Kilner  v.  Baxter,  L.  R. 
2  C.  P.  174  (1866);  Scott  u  Embury, 


1448 


OH.  XLIII.]        HOW    COEPOKATE    CONTKACTS   AEE   MADE. 


[§  705. 


Where,  however,  the  owner  of  land,  with  knowledge  that 
several  parties  contemplate  forming  a  corporation,  makes  a  lease 
to  one  of  such  promoters,  the  intent  being  that  the  lease  shall  be 


L.  R.  3  C.  P.  255  (1867).  The  question 
of  whether  a  surveyor  employed  by 
l^ronioters  can  look  to  them  for  com- 
pensation, the  company  not  having 
been  formed,  is  for  the  jury,  consider- 
ing all  the  facts  of  the  employment. 
Higgins  V.  Hopkins,  3  Exch.  163  (1848). 
If  he  was  present  when  the  promot- 
ers resolved  that  they  should  not  be 
Liable  he  cannot  recover  from  them. 
Landman  v.  Entwistle,  7  Exch.  633 
(1853).  In  Lake  v.  Argyle,  6  Q.  B.  477 
(1844),  it  was  left  to  the  jury  to  decide 
whether  the  president  of  a  proposed 
corporation  thereby  held  himself  out 
as  liable  on  a  contract  made  by  an 
agent  of  the  proposed  company.  It 
is  a  question  for  the  jury  whether 
the  president  of  a  proposed  corpora- 
tion is  liable.  Wood  v.  Argyle,  6  M. 
&  Gr.  938  (1844).  Allowing  one's  name 
to  be  used  as  a  director  and  suggest- 
ing that  advertising  be  done  does  not 
render  a  person  liable  for  the  adver- 
tising. Burbridge  v.  Morris,  3  H.  & 
C.  664  (1865).  A  promoter  is  not  lia- 
ble on  a  contract  made  before  he 
joined  in  the  enterprise,  though  the 
contract  is  performed  afterwards. 
iJewton  V.  Belcher.  12  Q.  B.  931  (1848). 
A  promoter  is  not  liable  on  contracts 
made  in  writing  before  he  became 
such,  Beale  v.  Mouls,  5  R'y  &  Can. 
Cas.  105  (1847). 

A  person  contracting  with  a  part- 
H  ^rship  may  hold  the  partners  liable, 
although  he  knew  that  their  articles 
provided  for  incorporation  and  they 
afterwards  did  incorporate.  Witmer 
V.  Schlatter,  2  Rawle  (Pa.),  359  (1830). 
But  the  rule  is  otherwise  where  the 
party  allows  the  accoimt  to  be  trans- 
ferred to  the  corporation  and  then 
carries  on  a  long  running  account. 
Whitwell  V.  Warner,  30  Vt.  435  (1848). 
Or  where  the  party  knew  that  he  was 
contracting  with  the    other  as  an 


agent  of  an  xmincorporated  associa- 
tion. Abbott  V.  Cobb,  17  Vt.  593 
(1845).  As  to  this  subject  of  liability, 
see  also  §  845,  supra,  on  the  liability 
of  trustees;  §  508,  supra,  on  the  lia- 
bility of  officers  of  unincorporated 
associations;  §  888,  infra,  on  the  lia- 
bility of  committee-men,  and  §  734, 
infra,  on  the  liability  of  persons  who 
sign  their  names  and  add  an  official 
title.  In  England  a  provisional  com- 
mittee is  generally  appointed  by  the 
subscribers.  This  committee  is  gen- 
erally held  not  liable.  But  a  com- 
mittee of  management  is  usually 
appointed  subsequently,  and  this 
committee  is  generally  held  liable. 
That  a  provisional  committee  is  not 
liable,  see  Nevins  v.  Henderson,  5 
Railw.  &  Can.  Cas,  684  (1848);  Daw- 
son V.  Morrison,  5  Railw.  &  Can.  Cas. 
63  (1847);  Ex  parte  Roberts,  3  Macn. 
&  G.  193  (1850);  Carmichael's  Case,  17 
Sim.  163  (1850);  Ex  parte  Clarke,  80 
L.  J.  (Ch.)  14  (1851);  Maitland's  Case, 
3  Giff.  38  (1861);  Hall's  Case.  3  De  G. 
&  S.  814  (1850);  Ex  parte  Stocks,  83 
L.  J.  (Ch.)  318  (1853);  Tanner's  Case, 
5  De  G.  &  S.  183  (1853);  Forrester  v. 
BiU,  10  Ir.  L.  Rep.  555  (1847);  Ex 
parte  Osborne,  15  Jur.  73  (1851); 
Bm-nside  v.  Dayrell,  3  Exch.  834 
(1849);  McEwan  v.  Campbell,  8  Macq. 
499  (1857).  Contra,  Lefroy  v.  Gore,  1 
Jo.  &  Lat.  571  (1844).  It  is  for  the 
jury  to  say  whether  a  provisional  di- 
rector is  liable  for  advertisements 
which  he  authorized  the  secretary  to 
publish  at  the  secretary's  expense. 
Maddick  v.  Marshall,  17  C.  B.  829 
(1864),  affirming  16  C.  B.  387.  As  to  a 
provisional  committee-man,  see  also 
Williams  v.  Pigott,  2  Exch.  201  (1848). 
Merely  allowing  one's  name  to  be 
used  as  a  member  of  a  provisional 
committee  does  not  render  a  person 
liable  on  contracts  made.     Barker  ix. 


1449 


705.] 


HOW    COKPOKATE   CONTKACTS    ARE   MADE.        [CH.  XLIII. 


assumed  by  the  corporation,  he  cannot  hold  the  individual  tak- 
ing the  lease  personally  liable,  the  lease  having  been  assigned 


Stead,  3  C.  B.  946  (1847);  Patrick  v. 
Reynolds,  1  C.  B.  (N.  S.)  727  (1857). 
Nor  is  he  liable  to  an  engineer,  al- 
though the  former  took  part  in  meet- 
ings. Rennie  v.  Wynn,  4  Exch.  691 
(1849).  Moreover,  the  person  sued 
may  show  that  no  personal  liability 
was  to  be  incurred  and  that  the 
plaintiff  knew  it.  Rennie  v.  Clarke, 
5  Exch.  292  (1850).  It  is  a  question 
for  the  jury  whether  the  provisional 
committee  authorized  and  became 
liable  on  contracts  made  by  the  man- 
aging committee.  Williams  v.  Pigott, 

5  R'y  &  Can.  Cas.  544  (1848).  For  a 
case  where  the  provisional  commit- 
tee were  held  not  to  have  so  author- 
ized, see  Dawson  v.  Morrison,  5  R'y 

6  Can.  Cas.  62  (1847).  But  Barrett  v. 
Blunt,  2  Car.  &  K.  271  (1846;,  made  it 
a  question  for  the  jury.  Barker  v. 
Lyndon,  2  Car.  &  K.  651  (1847),  held 
the  committee  not  liable.  So  also 
Giles  V.  Cornfoot,  2  Car.  &  K  653 
(1847);  Griffin  v.  Beverley,  2  Car.  & 
K.  648  (1847).  In  Bailey  v.  McCauley, 
13  Q.  B.  815  (1849),  the  court  said  that 
it  was  a  question  for  the  jury  whether 
a  committee-man,  i.  e.,  a  promoter, 
allowed  himself  to  be  held  out  as  lia- 
ble, and  that  if  the  debt  incurred  was 
a  necessary  and  usual  one  he  is  liable. 
In  Ex  parte  Cottle,  2  Macn.  &  G.  185 
(1850),  affirmed  sub  novi.  Norris  v. 
Cottle,  2  H.  L.  Cas.  647  (1850),  it  was 
held  that  the  mere  fact  of  allowing 
one's  name  to  appear  as  a  member  of 
the  provisional  committee  d5es  not 
render  a  person  liable  at  law  for  the 
debts.  To  same  effect.  Ex  parte  Rob- 
ei-ts,  2  Macn.  &  G.  192  (1850). 

A  person  who  consents  to  the  use 
of  his  name  as  a  provisional  commit- 
tee to  promote  and  organize  a  com- 
pany is  liable,  as  a  partner,  for  the 
debt  of  the  committee  for  stationery. 
Barnett  v.  Lambert,  15  M.  &  W.  489 
(1846).     But  not  where  a  board  of 


managers  afterwards  takes  charge 
and  incurs  the  expense.  Bright  v. 
Hutton,  3  H.  L.  Cas.  341  (1852),  rev'g 
1  Sim.  (N.  S.)  602,  and  substantially 
oven-uling  Hutton  v.  Upfill,  2  H.  L. 
Cas.  074  (1850).  To  same  effect,  Rey- 
nell  V.  Lewis,  15  M.  &  W.  517  (1846). 
As  to  the  matters  to  be  proved  in 
rendering  a  promoter  liable,  see  Car- 
rick's  Case,  1  Sim.  (N.  S.)  505  (1851). 
Lindley,  Partn.  (see  Thompson,  Lia- 
bility of  Officers,  p.  203),  says  of 
Bright  V.  Hutton,  3  H.  L.  Cas.  341 
(1852),  that  it  overruled  directly  or 
indirectly  the  following  cases:  "Up- 
fill's  Case,  2  H.  L.  Cas.  674  (1850);  Ex 
parte  Besley,  2  Macn.  ti;  G.  176  (1850). 
This  case  occurs  three  times  in  the 
books.  It  was  first  decided  by  Vice- 
Chancellor  Knight-Biiice  (3  De  G.  & 
S.  224),  who  held  that  Besley  was  not 
a  contributory.  This  decision  was 
appealed  against  and  reversed  by 
Lord  Cottenham  (2  Macn.  &  G.  176). 
But  the  appeal  was  reheard  by  Lord 
Truro,  who  affirmed  the  decision  of 
the  vice-chancellor  (3  Macn.  &  G. 
287).  The  case  as  reported  in  3  De  G. 
&  S.  224,  and  3  ]\Iacn.  &  G.  287,  is 
still  law.  Bright's  Case,  1  Sim.  (N.  S.) 
602  (1851).  This  was  reversed  on  ap- 
peal (3  H.  L.  Cas.  341).  Ex  parte 
Brittain,  1  Sim.  (N.  S.)  281  (1851),  de- 
cided reluctantly  on  the  authority 
of  Upfill's  Case.  Hole's  Case,  3  De  G. 
&  S.  241  (1850),  decided  on  the  au- 
thority of  Ex  parte  Besley,  2  Macn. 
&  G.  176  (1850).  Markwell's  Case,  5 
De  G.  &  S.  528  (1852),  decided  on  the 
authority  of  UpfiU's  Case,  but  after 
the  decision  of  Bright  v.  Hutton.  It 
cannot,  however,  be  considered  law. 
See  Ex  parte  Capper,  1  Siin.  (N.  S.) 
178  (1851),  and  Carrick's  Case,  1  Sim. 
(N.  S.)  505  (1851).  Ex  parte  Morrison, 
15  Jur.  346,  and  20  L.  J.  (Ch.)  296 
(1851),  decided  on  the  authority  of 
UpfiU's  Case,  and  in  effect  overruled 


1450 


CH.  XLIII.]        HOW    COEPOKATE    CONTEACTS   AHE   MADE. 


[§  T05. 


by  such,  individual  to  such  corporation  after  it  was  formed.* 
But  a  promoter,  who  makes  a  contract  to  purchase,  and  gives 
a  mortgage  in  his  own  name,  is  personally  liable  thereon,  even 
though  he  was  acting  as  agent  for  a  corporation,  the  stockhold- 
ers of  the  vendor  and  mortgagee  not  knowing  that  he  was  act- 
ing: as  asrent.^ 

The  subject  of  the  liability  of  persons  who  sell  a  business  to 
a  corporation  for  stock,  bonds,  or  cash  is  fully  considered  else- 
where.* 

Where  a  promoter  has  been  held  liable  to  strangers  he  may 
have  contribution  from  his  fellow-promoters.^ 


by  Sharp  and  James's  Case,  1  De  G., 
M.  &  G.  565  (1852).  Nicholay's  Case, 
15  Jur.  420  (1851),  decided  on  the  au- 
thority of  UpfiU's  Case.  Ex  parte 
SicheU,  1  Sim.  (N.  S.)  187  (1851),  de- 
cided reluctantly  on  the  authority  of 
UpfiU's  Case.  Ex  parte  Studley,  14 
Jur.  539  (1850).  This  case  is  very 
briefly  reported,  but  it  seems  incon- 
sistent with  such  cases  as  Hall's  (3 
De  G.  &  S.  214—1850),  Stocks's  (23 
L.  J.  (Ch.)  218  —  1852),  and  Carrick's 
(1  Sim.  (N.S.)  505  — 1851)." 
f  A  member  of  the  managing  com- 
mittee is  liable  where  he  attended  a 
meeting  and  knew  of  the  employ- 
ment. Norbury's  Case,  5  De  G.  &  S. 
423(1852);  Pearson's  Case,  3  De  G.,  M. 
&  G.  241  (1852).  Cf.  Sharp  &  James's 
Case,  1  De  G.,  M.  &  G.  565  (1852). 
But  not  if  he  was  unaware  of  his 
being  on  the  committee.  Ex  parte 
Haight,  1  Drew,  484  (1853).  For  a 
case  where  promoters  were  held  lia- 
ble on  a  contract  that  the  company 
would  pay  certain  damages  to  a  land- 
owner, see  Bland  v.  Crowley,  6  Exch. 
522  (1851).  In  Webb  v.  London,  etc. 
R'y,  1  De  G.,  M.  &  G.  521  (1852),  re- 
versing 9  Hare,  129,  the  company  was 
held  not  liable  on  such  a  contract. 
A  promoter  who  promises  that  an 
existing  railway  company  wiU  pay 
the  parliamentary  expense  of  a  con- 
temjilated  new  railway  is  not  liable 
on    such    promise,  the  same  being 


illegal  and  contrary  to  public  policy. 
MacGregor  v.  Dover,  etc.  R'y,  18  Q.  B. 
618  (1852).  Where  no  stock  is  sub- 
scribed for,  but  an  organization  meet- 
ing is  held  and  officers  elected  and 
debts  incurred,  the  officers  are  liable 
for  such  debts.  Whetstone  v.  Crane, 
etc.  Co.,  1  Kan.  App.  320  (1895),  the 
groimd  of  the  decision  being  that 
such  officers  are  merely  promoters, 
concerning  which  see  ch.  XIII,  supra. 

1  Re  Heckman's  Estate,  172  Pa.  St. 
185  (1896). 

2  Lewis  V.  Weidenfeld,  72  N.  W. 
Rep.  604  (Mich.,  1897). 

3  See  chs.  XL  and  XIII,  supra. 

4  Boulter  v.  Peplow,  9  C.  B.  493 
(1850);  Batard  v.  Hawes,  2  EL  &  B. 
287  (1853);  Edgar  v.  Knapp,  7  Jur. 
583  (1843);  Spottiswoode's  Case,  6 
De  G.,  K  &  G.  345  (1855);  Lefroy 
V.  Gore,  1  Jo.  &  Lat.  571  (1844).  A 
promoter  who  has  advanced  money 
may  have  contribution.  Hamilton  v. 
Smith,  5  Jur.  (N.  S.)  32  (1859).  An 
action  at  law  lies  for  contribution  be- 
tween promoters.  Batard  v.  Hawes, 
2  EL  &  B.  287  (1853).  Where  the  sec- 
retary was  the  original  promoter  and 
persuaded  the  others  to  go  in,  he  can- 
not recover  from  them  for  his  serv- 
ices. Parkin  v.  Fry,  2  Car.  &  P.  311 
(1826).  The  promoters  are  not  part- 
ners. Lindley,  Companies,  p.  143. 
They  are  not  liable  to  each  other  for 
services.    Holmes  v.  Higgins,  1  B.  & 


1451 


T05.] 


HOW    COEPOKATE    CONTRACTS    ARE   MADE.        [CH.  XLin. 


Anotlier  difficult  question  connected  -with  this  subject  is  the 
liability  of  one  promoter  to  another  for  breach  of  the  contract 
of  promotion.  The  general  rule  is  that  where  the  contract  is 
definite  and  the  obligations  are  clear,  an  action  at  law  will  lie 
by  one  promoter  against  another  for  a  breach  thereof.^ 


C.  74  (1822).  A  person  may  collect 
on  a  surveying  contract  from  co-pro- 
moters, though  he  was  also  a  pro- 
moter. Lucas  V.  Beach,  1  Man.  & 
Gr.  417  (1840).  But  not  for  services 
as  secretary.  Wilson  v.  Curzon,  15 
M.  &  W.  533  (1847). 

1  Where  parties  intending  to  incor- 
porate a  company  contract  in  behalf 
of  that  company  to  purchase  certain 
property,  and  the  parties  selling  re- 
fuse to  fulfill,  the  parties  purchasing 
may  sue  in  their  own  names  for 
breach  of  contract.  They  may  re- 
cover damages,  not  as  members  of 
the  company,  but  "  which  tliey  suf- 
fered, if  any,  by  reason  of  the  defend- 
ants preventing  them  from  success- 
fully esiablishing  and  fitting  out  a 
business  to  be  conducted  by  them  as 
a"  company.  Abbott  v.  Hapgood, 
150  Mass.  248  (1889).  Where  promo^ 
ers  agree  to  construct  a  railroad  and 
to  give  a  part  of  the  stock  to  par- 
ties who  furnish  valuable  privileges, 
right  of  way,  grants,  etc.,  but  instead 
of  doing  so  sell  out  the  affair  to  a 
competing  railroad  company,  which 
buys  with  notice  and  does  not  go  on 
with  the  enterprise,  the  parties  who 
are  injured  may  sue  the  purchasing 
railroad  company  for  an  accounting, 
etc.  The  promoters  are  not  neces- 
sary parties  defendant.  Hamilton 
V.  Savannah,  etc.  R'y,  49  Fed.  Rep. 
412  (1892).  A  promoter  who  has 
brought  about  the  sale  of  a  large 
plant  to  new  parties,  who  have  agreed 
to  organize  a  new  corporation  and 
give  the  promoter  a  certain  amount 
of  stock  therein,  cannot,  upon  the 
gi-ound  that  he  is  being  defrauded 
of  his  commissions,  enjoin  the  par- 


ties from  closing  the  transaction  ir- 
respective of  the  promoter,  nor  can 
he  get  specific  performance  of  the 
contract  to  incorporate  a  company 
and  deliver  the  stock.  There  is  no 
fiduciary  relation  between  the  par- 
ties. The  value  of  the  stock  can  be 
estimated  in  damages.  There  was 
no  allegation  of  defendant's  insolv- 
ency. Tlie  promoter  has  ample  rem- 
edy at  law  for  damages.  Avery  v. 
Ryan,  74  Wis.  591  (1889).  Specific 
performance  of  a  contract  to  form 
a  coi-poration  will  not  be  granted. 
Avery  v.  Ryan,  74  Wis.  591  (1889). 
As  to  the  remedy  at  law,  see  Crow 
V.  Green,  111  Pa.  St.  637  (1886);  Hud- 
son  V.  Spaulding,  6  N.  Y.  Supp.  877 
(1889).  For  the  measure  of  damages 
for  the  breach  of  a  contract  of  de- 
fendants to  organize  a  company  and^ 
pay  to  plaintiff  for  his  patents  cer- 
tain stock  and  cash,  see  Kirschmann 
V.  Lediard,  61  Barb.  573  (1872).  As 
to  the  measure  of  damages  in  a  suit 
by  a  vendor  of  property  to  the  corpo- 
ration for  damages  against  it  and  its 
promoters  for  breach  of  the  contract 
to  employ  him  as  manager,  see  Mar- 
ston  V.  Singapore  Rattan  Co.,  163 
Mass.  296  (1895).  Although  two  part- 
ners desire  to  incorporate,  and  each 
to  have  the  same  interest,  and  a  third 
party  to  have  a  smaller  interest, 
thereby  holding  the  balance  of  power, 
and  such  arrangement  is  carried 
out,  and  the  third  party  is  really  a 
dummy  of  one  of  the  partners,  and 
thereby  gives  the  control  of  the  cor- 
poration to  that  partner,  yet  the 
other  partner  has  no  legal  cause  of 
complaint,  notwithstanding  the  gen- 
eral understanding  as  to  the  division 


.   1452 


OH.  XLIII.]        HOW    COEPOEATE    CONTRACTS   AEE   MADE. 


[§  T05. 


Thus,  wliere  a  party  agrees  with  a  promoter  and  constructer 
of  water-works  that  he,  the  former,  will  take  a  certain  amount 
of  water  from  the  corporation  for  ten  years,  and  he  fails  to  do 
so,  the  former  may  hold  him  liable.     It  is  immaterial  that  no 


of  control.    Baumgarten  v.  Nichols, 
69  Hun,  216  (1893). 

A  contract  between  a  stockholder 
and  a  third  person  by  wliich  the 
third  person  is  to  be  made  a  director, 
and  agrees  to  devote  his  time  and 
attention  to  the  business,  and  de- 
velop the  property,  and  procure  the 
construction  of  a  railroad,  and  cause 
various  lots  of  land  owned  by  the 
corporation  to  be  sold,  will  not  sus- 
tain an  action  at  law  for  damages 
by  the  stockholder  for  breach  of  the 
contract.  An  action  in  such  a  case 
may  be  maintained  only  by  the  cor- 
poration or  by  the  stockholder  in  its 
behalf.  So  far  as  the  contract  in- 
tended to  control  the  action  of  the 
board  of  directors,  it  was  illegal. 
Kountze  v.  Flannagan,  19  N.  Y.  Supp. 
33  (1892).  Where  a  promoter  buys 
property  for  the  corporation  before 
it  is  formed,  and  the  seller  supposes 
he  is  selling  to  a  corporation,  but  the 
latter  is  never  formed,  the  seller  may 
recover  back  the  property,  even  from 
one  who  bought  the  property  from 
the  promoter  in  good  faith.  AVyckoff 
V.  Vicarj%  75  Him,  409  (1894).  In 
Angle  V.  Chicago,  etc.  E'y,  151  U.  S. 
1  (1894),  a  contractor  was  harassed 
and  prevented  from  completing  his 
contract  by  the  company  which  had 
passed  under  the  control  of  another 
company  that  was  seeking  to  get 
a  land  grant  that  had  been  given 
conditionally  to  the  former  com- 
pany. The  contractor  was  ruined, 
the  road  not  completed,  and  the  sec- 
ond company  got  the  land  grant  by 
a  subsequent  legislative  act.  The 
contractor  got  judgment  against  the 
first  company,  and  then  filed  a  bill 
against  the  second  company  to  reach 
the  land,  charging  conspiracy,  bri- 


bery, and  fraud.  The  court,  overrul- 
ing the  decision  below,  held  that  a 
demurrer  to  the  bill  was  not  good. 
"Where  the  vendor  of  a  majority  of 
the  stock  of  a  corporation  agrees  that 
the  company  owes  no  debts  exce]3t 
certain  specific  ones,  the  vendee  may 
recover  back  any  excess  of  debts 
over  those  specified.  Where  the 
debts  of  one  class  were  not  to  exceed 
a  certain  simi,  but  did  exceed  that 
sum,  the  vendee  may  recover  the 
difference,  even  though  the  debts 
of  another  class  were  less  than  a 
sum  specified  in  the  contract  of  sale. 
Chicago,  etc.  E'y  v.  Hoyt,  89  Wis.  314 
(1895).  A  promoter  who  does  not 
complete  the  transaction  or  consum- 
mate an  enforceable  contract  cannot 
recover  commissions.  Hammond  v. 
Crawford,  66  Fed.  Rep.  425  (1895). 
Where  one  of  the  promoters  agrees 
with  others  that  he  will  purchase 
property  and  turn  it  into  the  com- 
pany, the  price  to  apply  on  hig  sub- 
scription for  stock,  and  he  does 
purchase,  and  the  company  takes 
possession  of  the  property  and  builds 
thereon,  he  will  be  compelled  to 
transfer  title  to  the  company.  Nester 
V.  Gross,  69  N.  W.  Rep.  39  (]Minn., 
1896).  Sometimes,  where  the  corpo- 
ration cannot  enforce  the  contract, 
the  promoters  may.  Carmody  v. 
Powers,  60  Mich.  26  (1886).  Wliere 
one  promoter  sues  another  for  fail- 
ure to  form  the  corporation,  and  ob- 
tains a  verdict  for  the  par  value  of 
the  stock  which  plaintiff  was  to  re- 
ceive, there  being  no  proof  as  to  what 
the  value  would  have  been  if  issued, 
nor  whether  the  company  would  be 
successful,  the  verdict  will  be  set 
aside  as  excessive.  Pitt  v.  Kellogg, 
11  N.  Y.  Supp.  526  (1890).    A  contract 


1453 


§   705.]  HOW    COEPOEATE    CONTEACTS    AEE    MADE.        [CH.  XLIII, 

formal  contract  was  made  with  the  company.  The  contractor, 
owning  practically  all  the  stock  of  the  company,  may  sue  and 
collect  for  himself  the  price  of  the  water  less  the  cost.*  A 
promise  and  contract  of  promoters  to  subscribers  to  certain 
bonds  may  give  the  latter  an  equitable  lien  on  the  bonds  en- 
forceable in  equity.^ 

On  the  other  hand,  even  though  an  inventor  is  persuaded  to 
turn  in  his  inventions  to  a  corporation  for  stock  on  an  oral  as- 
surance that  plenty  of  money  would  be  forthcoming  to  take 
the  stock  of  the  company  and  make  the  business  successful,  and 
even  though  the  parties  making  such  representations  do  not  ad- 
vance the  money,  but  allow  the  company  to  become  insolvent, 
and  buy  in  the  assets,  including  the  patents,  yet  the  inventor 
cannot  maintain  an  action  for  fraud  in  failing  to  furnish  money 
according  to  promise.'  A  promoter  who  has  taken  a  contract 
to  purchase  a  property  at  a  certain  price,  based  upon  reports 
and  representations  that  the  business  had  not  decreased  since 
the  reports,  may,  upon  discovering  that  the  business  has  largely 
decreased,  refuse  to  carry  out  the  contract,  and  may  hold  the 
party  liable  for  his  disbursements,  but  not  for  profits  which  he 
would  have  made  if  his  plans  had  been  carried  out.'* 

Another  class  of  cases  arise  where  the  enterprise  is  carried 
to  a  successful  conclusion,  but  one  promoter  refuses  to  divide 
the  profits  in  accordance  with  the  contract.  In  such  cases  the 
courts  may  compel  an  accounting  and  distribution  according 
to  the  contract.*    Thus,  where  a  promoter  agrees  to  pay  a  cer- 

between   promoters  by  wliich   one  valid.    Hyer  v.  Richmond  Traction 

agrees  to  assist  in  the  bidlding  of  a  Co.,  168  U.  S.  471  (1897),  modifying 

road  is  too  indefinite  to  sustain  an  80  Fed.  Rep.  839. 

action  for  breach  thereof.    Porter  v.  I  Drummond  v.  Crane,  159  Mass.  577 

Blair,  83  Fed  Rep.  104  (1897).  Where  (1893). 

competing  applicants  for  a  street-  2  Badgerow  U.Manhattan  Trust  Co., 

railway  franchise  agree  to  act  to-  64  Fed.  Rep.  931  (1894). 

gether,  whereby  one  is  to  withdraw  3  Smith  v.  Parker,  45  N.  E.  Rep.  770 

and  the  other  is  to  obtain  the  grant,  (Ind.,  1897). 

and  the  benefits  are  to  be  divided  ^Loewer  v.  Harris,  57  Fed.  Rep.  368 

equally,  which  is  done  with  the  full  (1893). 

knowledge  of  tlie  municipal  author-  5  where  a  party  to  a  contract  rela- 
ities,  and  then  the  one  who  secured  tive  to  an  incorporation  and  division 
the  grant  refuses  to  divide  with  the  of  the  stock  sues  to  recover  his  inter- 
other,  the  remedy  of  the  latter  is  at  est  according  to  the  contract,  the 
law,  and  not  m  equity,  even  if  the  court  will  decree  a  proper  division  of 
agreement   should   be   held   to   be  the  stock,  aU  parties  being  allowed 

1454 


CH.  XLIII.]        HOW    COEPOEATE    COXTEACTS    AEE    ilADE. 


[§  T05. 


tain  compensation  to  a  person  for  services  to  be  performed  by 
the  latter  in  connection  with,  a  reorganization,  the  promoter 
must  pay  such  compensation,  even  though  he  changes  his  reor- 
ganization agreement  and  carries  out  the  reorganization  AWth 
other  parties  than  those  originally  contemplated.^  "Where  a 
person  contracts  to  give  to  another  person  a  fourth  interest  in 
any  mines  which  the  former  may  buy,  the  former  must  give 
the  latter  a  fourth  of  stock  which  the  former  purchases  in  a 
mining  company .^  And  where  the  promoters,  who  are  also 
stockholders,  agree  that  the  profits  are  to  be  divided  in  a  cer- 
tain way  under  a  construction  contract,  and  a  part  of  them 
make  a  secret  profit,  the  others  may  compel  a  complete  divis- 
ion.' 
The  liability  of  promoters  to  persons  w^ho  have  been  induced 


the  amounts  invested  by  them  in 
forwarding  the  enterprise.  Bates  v. 
Wilson,  14  Colo.  140  (1890).  One  pro- 
moter is  not  entitled  to  compensation 
for  services  as  against  the  other,  un- 
less there  was  an  agreement  to  that 
effect  Baily  v.  Burgess,  48  N.  J.  Eq. 
411  (1891).  One  of  the  promoters 
suing  for  Ms  interest  according  to 
the  contract  cannot  hold  any  of  them 
liable  where  he  has  released  some. 
Burgess  v.  Sherman,  147  Pa.  St  254 
(1892).  Several  persons  defrauded  as 
to  their  contract,  whereby  they  were 
to  receive  stock,  cannot  sue  jointly. 
Each  must  sue  separately.  Summer- 
lin  V.  Fronteriza,  etc  Co.,  41  Fed- 
Rep.  249  (1890).  As  to  promoters'  suits 
to  enforce  their  right  to  stock,  see 
also  g  334,  supra.  For  an  agreement 
to  take  effect  when  a  certain  corpo- 
ration should  be  formed,  see  Childs 
V.  Smith,  46  N.  Y.  34  (1871).  Where 
for  $1,300  a  person  was  to  have  a  ten 
per  cent  commission  on  the  price  for 
which  a  mine  is  sold,  and  is  to  have  all 
stock  received  over  and  above  the 
sum  of  $225,000  net  to  the  vendor,  and 
the  mine  is  sold  by  the  vendor,  a  com- 
plaint by  the  holder  of  the  contract 
is  subject  to  demurrer  where  the  ne- 
gotiations and  agreements  are  not 
fully  set  forth-    Sipes  v.  Seymour,  44 

1455 


Fed  Rep.  326  (1890).  Where  a  pro- 
moter conveys  property  to  a  differ- 
ent corporation  from  the  one  agreed 
upon  by  liim  with  a  co-promoter,  the 
latter  may  make  the  promoter  ac- 
count for  the  consideration  on  the 
basis  of  the  contract.  Sims  v.  Tyrer, 
26  S.  E.  Rep.  508  (Va.,  1897).  A  pro- 
moter's contract  that  he  should  re- 
ceive a  certain  percentage  of  all 
stock  received  by  the  interested  par- 
ties was  enforced  in  the  case  of  Hix 
V.  Edison,  etc.  Co.,  10  N.  Y.  App.  Div. 
75  (1896).  Where  two  persons,  each 
being  interested  in  different  street 
railways,  make  a  contract  to  form  a 
new  corporation  to  which  such  street 
railways  are  to  be  transferred,  and 
one  of  the  parties  afterwards  turns 
his  street  railways  over  to  a  different 
corporation,  the  other  party  cannot 
hold  him  liable  in  an  action  for  an 
accoimting  for  profits.  A  breach  of 
contract  must  be  set  up.  Schantz  v. 
Oakman,  10  N.  Y.  App.  Div.  151  (1896). 

1  Babbitt  v.  Gibbs,  150  N.  Y.  281 
(1896). 

2  Dennison  v.  Chapman,  105  CaL  447 
(1895). 

3  Krohn  v.  Williamson,  62  Fed.  Rep. 
869  (1894);  affirmed  in  Williamson  v. 
Krohn,  66  Fed.  Rep.  655  (1895> 


§  T06.] 


HOW    COKrOKATE    CO.^TKACTS    AKE    MADE.        [ciI.   XrTIT. 


by  fraudulent  prospectuses  to  subscribe  for  stock,'  and  the  lia- 
bility of  promoters  to  the  corporation  itself  to  account  for 
fraudulent  profits  which  the  promoter  has  secretly  made  out 
of  contracts  which  he  caused  the  corporation  to  enter  into,^ 
have  already  been  fully  considered. 

§  706.  Tlie  questions  sometimes  arise  Avhether  a  subscriber 
for  stock  in  a  projected  corporation  is  liable  to  its  creditors  in 
case  the  enterprise  is  abandoned  before  incorporation ;  and  also 
whether  the  promoters  of  the  abortive  corporation  are  liable 
to  the  subscribers  for  deposits  made  by  the  latter.  The  former 
question  is  decided  in  the  negative.  "  The  subscribers  to  the 
stock  or  articles  of  association  are  not  partners  with  those  who 
assume  the  risk  of  acting  for  a  corporation  not  yet  legally  es- 
tablished."^ As  to  the  latter  question  the  rule  lias  become 
well  established  in  England  that  a  subscriber  for  stock  in  a  cor- 
poration that  never  comes  into  existence,  who  has  paid  a  part 
of  his  subscription,  may  recover  back  from  the  promoters  of 
the  enterprise  the  amount  so  paid,  and  is  not  liable  even  for 


1  See  clis.  IX  and  XX,  supra. 

2  See  §  651,  supra. 

3  Ward  V.  Briglaam,  117  Mass.  24 
(1879),  the  court  saying  also:  "Those 
who  acted  as  agents  for  the  inchoate 
corporation  acted  without  a  princi- 
pal behind  them,  because  there  was 
no  body  corporate  capable  of  appoint- 
ing agents,  and  so  became  principals 
in  the  transaction."  See  also  Duke 
V.  Andrews,  3  Exch.  290  (18-18);  Hut- 
ton  V.  Thompson,  3  H.  L.  Cas.  161 
(1857);  Duke  v.  Diver,  1  Exch.  36 
(1847),  where  the  stockholder  had 
promised  to  pay  on  a  certain  day,  and 
was  held  to  his  promise.  To  same 
effect,  Duke  u  Forbes,  1  Exch.  356 
(1847):  Aldham  v.  Brown,  7  EL  &  Bl. 
164  (1857);  2  El.  &  El.  398,  on  appeal; 
Woolmer  v.  Toby,  10  Q.  B.  691  (1847). 
However,  in  the  case  of  Lake  v.  Duke 
of  Argyle,  6  Q.  B.  477  (1844),  the  court 
held  that  attendance  at  a  meeting, 
announcement  of  intention  of  beino- 
president  and  of  takmg  stock,  and 
concurrence  in  measures  for  incor- 
poration, may    be   strong  evidence 


that  defendant  "hold  himself  out  as 
a  paymaster  to  all  who  executed  the 
orders."  The  question,  then,  is  for 
the  jxiry.  Where  a  proposed  corpo- 
ration, never  incorporated,  contracts 
to  purchase  certain  property  of  a  sul> 
scriber,  he  cannot  bring  suit  at  hiir 
against  other  subscribers  for  damage 
caused  by  non-fulfillment  of  contract. 
Crow  V.  Green.  Ill  Pa.  St.  637  (1886). 
Subscribers  are  not  liable.  Bourne 
V.  Freeth,  9  B.  «&  C.  632  (1829).  Unless 
they  allow  themselves  to  be  held  out 
as  partners  in  the  enterprise.  Fox  v. 
Clifton,  9  Bing.  115  (1832),  rev'g  6 
Bing.  776.  Cf.  Heraud  v.  Leaf,  5  C. 
B.  1^7  (1847);  Dickinson  v.  Valpy,  10 
B.&C.  128  (1829).  Ex  parte  mrsche\, 
15  Jut.  924  (1851),  held  that  a  sub- 
scriber for  stock  in  an  abortive  com- 
pany was  not  liable  for  debts  in- 
curred. The  vice-chancellor  said: 
"Where  courts  have  been  contradict- 
ing each  other  for  years,  this  court 
can  do  no  otherwise  than  follow  the 
last  decision." 


1456 


CH,  XLIII.]        HOW    COEPOKATE   CONTKACTS    ARE    MADE. 


[§  T06. 


the  preliminary  expenses.^  His  remedy  may  be  by  bill  in 
equity.^  If,  however,  the  subscriber  expressly  or  by  implica- 
tion authorizes  expenditures,  he  cannot  recover  back  his  de- 
posit.'   The  subscriber  need  not  submit  to  the  deduction  of  any 


1  Aslipitel  V.  Sercombe,  5  Exch.  147 
(1850),  where  the  court  said:  "There 
seems  to  1)6  no  doubt  that  t)ie  plaint- 
iff, havinj^  paid  his  money  for  shares 
in  the  concern  which  never  came 
into  existence,  or  a  scheme  which 
was  abandoned  before  it  was  carried 
into  execution,  has  paid  it  on  a  con- 
sideration which  has  failed,  and  may 
recover  it  back  as  money  had  and  re- 
ceived to  its  use,  unless  he  can  be 
shown  to  have  consented  to  or  acqui- 
esced in  the  application  of  the  money 
■which  the  directors  have  made."  See 
also  Thompson,  Liabilities  of  Ofllcers. 
210;  Nockels  r.  Crosby,  3  B.  &  C.  814 
(1825),  the  leading  case;  1  Lindley, 
Companies,  p.  31,  citing  Walstab  v. 
Spottiswoode.  15  >L  &  W.  501  (184G); 
Moore  v.  Garwood,  4  Exch.  (J81  (1849); 
Coupland  v.  Cliallis,  3  Excli.  QS2 
(1848);  Owen  v.  Challis,  5  C.  B.  115 
(1848);  Ward  v.  Londesborough,  12  C. 
B.  252(1852);  Mowatt  v.  Londesbor- 
ough, 8  EL  &  BI.  307  (1854),  and  4  El.  & 
BL  1.  See  also  VoUans  v.  Fletcher,  1 
Excla.  20  (1847);  Chaplin  v.  Clarke,  4 
Exch.  402  ( 1849).  Where  a  contract  is 
made  in  the  corporate  name  after  the 
articles  have  been  filed,  but  before  any 
subscriptions  have  been  obtained,  and 
before  an  organization  meeting  has 
been  held  or  officers  elected,  the  in- 
corporators are  liable  on  the  contract 
as  partners.  McVicker  v.  Cone,  21 
Oreg.  353  (1891).  A  subscription  agree- 
ment prior  to  incorporation,  in  which 
the  parties  state  the  number  of  shares 
taken,  and  in  which  they  agree  to 
jKiy  the  contractors,  who  are  parties 
to  the  contract,  a  si>ecified  sum,  is  a 
joint  undertaking  on  the  subscribers' 
part.  The  contrar'tors  may  hold  them 
liable  as  partners,  the  agreement  not 
limiting  their  liability  to  the  number 


of  shares  taken  by  each.  An  imma- 
terial alteration  after  a  part  have 
signed  does  not  release  any  ona  The 
agreement  of  the  contractors  to  hold 
each  subscriber  liable  only  on  his 
subscription,  if  he  would  pay  that,  is 
without  consideration  and  void.  Any 
subscriber  could  expressly  Limit  his 
liability  to  his  subscription.  Davis 
V.  Siiafer,  50  Fed.  Rep.  764  (1892). 

^  2  Lindley,  Comi)anies,  p.  508.  *'  A 
bill  in  equity  lies  to  recover  back 
money  paid  in  a  bubble."  Colt  v. 
WooUaston,  2  P.  Wms.  154  (1723), 
wliere  thei-e  was  fraud;  Green  v.  Bar- 
rett, 1  Sim.  45  (1820);  Blain  v.  Agar, 

1  Sim.  37  (1826);  S.  C,  2  Sim-  289 
(1828);  Cridland  v.  De  Mauley,  1  De  G. 
&  S.  459  (1847),  before  the  Judica- 
ture Acts;  and  Cooper  v.  Webb,  15 
Sim.  454  1 1840);  Wilson  v.  Stanhope, 

2  ColL  627  (1846);  Apperly  v.  Page, 
1  Phillips,  775  (1847);  Clements  v. 
Bowes,  17  Sim.  167  (1852);  Sheppard 
V.  Cxenford,  1  K  &  J.  491  (1855); 
Butt  V.  Monteaux,  1  K  &  J.  98  (1854), 
since  such  acts.  In  these  latter  cases 
the  demurrers  were  overruled.  See 
also  W^illiams  v.  Pago,  24  Beav.  654 
(1857),  and  "The  Bubble  Act,"  9  Geo. 
I,  ch.  la 

'  1  Lindley,  Companies,  p.  33,  citing 
Baird  v.  Ross,  2  Macq.  61,  68  (1856); 
Garwood  v.  Ede,  1  Exch.  264  (1847); 
Watts  V.  Salter,  10  C.  B.  477  (1850); 
Vane  v.  Cobbold,  1  Exch.  798  (1848/ ; 
Atkinson  v.  Pocock,  1  Exck  796 
(1848);  WiUey  v.  Parratt,  3  Exch.  211 
(1848);  Clements  r.  Todd,  1  Excli. 
208  (1847);  Jones  v.  Harrison,  2  Excli. 
52  (1848);  Aldham  v.  Brown,  7  EL  <& 
B.  164  (1857);  S.  C,  2  EL  &  EL  398 
(1859);  Burnside  v.  Dayrell,  3  Exch. 
224  (1849). 


92 


14.57 


707.] 


HOW    COKPOEATE    CONTRACTS    ARE   MADE.        [cn.  XLIII. 

part  of  his  subscriptions  to  be  applied  to  the  pa}Tnent  of  the 
expenses  incurred  by  the  promoters  in  attempting  the  incorpo- 
ration.^ An  agreement  to  deliver  stock  in  a  company  to  bo 
formed,  nothing  being  said  as  to  any  preferred  stock,  is  not 
fulfilled  by  delivering  common  stock,  where  there  is  preferred 
stock  issued  also.^ 

§  707.  Great  difficulty  has  arisen  in  determining  wliether  a 
cor|)oration  is  liable  on  contracts  made  in  its  behalf  by  its  pro 
moters  before  the  incorporation  took  place.'  The  decided  weight 
of  authority  holds  that  the  corporation  is  not  bound  thereby.' 


1  Nockels  V.  Crosby,  3  B.  &  C.  814 
(1825).  Contra,  "Williams  v.  Salmond, 
2  Kay  &  J.  463  (185G). 

2  Mcllquham  v.  Taylor,  [ISOo]  1 
Ch.  53. 

^Munson  v.  Syracuse,  etc.  R.  R, 
103  N.  Y.  58,  75  (188G).  The  agree- 
ment of  the  promoters  of  a  bank  that 
a  person  will  be  paid  for  obtaining 
subscriptions  to  its  stock  does  not 
bind  the  bank  itself.  Tift  v.  Quaker 
City  Nat.  Bank,  141  Pa.  St.  550  (1891). 
A  corporation  is  not  liable  on  a  con- 
tract of  its  promoters  to  pay  for  draw- 
ings, plans,  etc.  Hence,  although  by 
statute  stockholders  are  personally 
liable  on  corporate  contracts,  if  the 
corporation  commences  business  be- 
fore one-half  of  its  capital  is  sub- 
scribed and  twenty  per  cent  paid  in, 
they  are  not  liable  on  such  a  contract 
made  before  incorporation.  Buffing- 
ton  V.  Bardon,  80  Wis.  635  (1891).  The 
company  is  not  bound  to  issue  stock 
in  payment  for  services  of  a  claim 
which  the  promoters  agreed  should 
be  paid  for  by  the  company.  Carey 
V.  Des  Moines,  etc.  Co.,  81  Iowa,  674 
(1891).  The  corporation  is  not  liable 
for  the  breach  of  an  agreement 
among  its  organizers  as  to  the  distri- 
bution of  stock.  Summerlin  v.  Fron- 
teriza,  etc.  Co.,  41  Fed.  Rep.  249  (1890). 
A  corporation  is  not  bound  by  the 
contracts  of  its  promoters,  where  it 
has  not  ratified  the  same  nor  accepted 
the  benefit  of  the  same.  Moore,  etc. 
Co.  V.  Towers  Hardware  Co.,  87  Ala. 


1458 


20G  (1889).     The  correspondence  of 
one  who  afterwards  becomes  presi- 
dent of  a  corporation  wliich  is  after- 
wards incorporated,  does  not  bind 
such  corporation.     I^irst  Nat.  Bank 
V.  Armstrong,  42  Fed.  Rep.  193  (1890). 
A  promoter's  contract  is  not  bindin;? 
on  the  company,  even  though  it  ol>- 
tains  the  benelits  thereof.    "Wilbur 
V.  New  York,  etc.  Co.,  58  N.  Y.  Super. 
Ct.  539  (1891).     The  parliamentary 
agent  was  held  bound  to  look  to  the 
promoters  for  his  pay,  and  not  to  tlie 
company,  in  Ee  Skegness,  etc.  Co., 
L.  R.  41  Ch.  D.  215  (1888).    Promoters 
have  no  power  to  bind  tlie  corpora- 
tion, even  though  they  afterwards 
become  tnistees.     Berridge  v.  Aber- 
nethy,  24  N.  Y.  Week.  Dig.  513  (1886). 
An  agreement  among  the  officers  to 
reduce  their  salaries  cannot  be  in- 
sisted upon  by  the  corporation.     It 
was  not  a  party  to  the  agreement 
Thompson  Co.  v.  Brook,  14  N.  Y.  Supp. 
370  (1891).    A  contract  of  promoters 
to  sell  to  a  corporation  to  be  formed 
cannot  be  enforced  by  a  stockholder 
suing  in  behalf  of  himself  and  other 
stockholders,  when  tlie  company  has 
not  performed  or  endeavored  to  per- 
form its  part  of  the  agreement.   Neg- 
ley  V.  McWood,  N.  Y.  L.  J.,  May  2. 
1890.    An  assignment  of  patents  by 
one  of  several  parties  to  a  corporation 
formed  to  unite  various  patents  in  a 
certain  business  is  absolute  and  can- 
not be   revoked,  even    though   the 
party  was  by  agreement  to  liave  a 


CH.  XLIII.]        HOW    COKPOEATE    CONTEACTS    AEE    ilADE. 


[§  TOT. 


Any  otlier  rule  would  be  dangerous  in  the  extreme,  inasmuch 
as  promoters  are  proverbially  profuse  in  their  promises,  and,  if 
the  corporation  were  to  be  bound  by  them,  it  would  be  subject 
to  many  unknown,  unjust,  and  heavy  obligations.     The  only 


salary  of  $6,000  per  year,  and  this 
salary  has  not  been  paid.  Bracher  v. 
Hat  Sweat  Mfg.  Co.,  49  Fed.  Rep.  921 
(1892).  The  company  is  not  liable  for 
goods  ordered  and  received  before  it 
was  incorporated,  even  though  it 
used  them.  Bradley  Fertilizer  Co.  v. 
South  Pub.  Co.,  17  N.  Y.  Supp.  587 
(1892).  An  agreement  of  promoters 
that  a  corporation  should  be  formed 
to  pay  $.5,000  to  a  factory  does  not 
bind  such  corporation.  Davis,  etc. 
Co.  V.  Hillsboro  Creamery  Co.,  10  Ind. 
App.  42  (1894).  A  corporation  is  not 
bound  by  a  contract  made  in  its  name 
before  it  was  organized.  Winters  v. 
Hub  Min.  Co.,  57  Fed.  Rep.  287  (1893). 
An  agreement  by  promoters  that  cer- 
tain stock  need  not  be  paid  for  is  not 
binding  on  the  corporation,  and  it 
may  collect.  York,  etc.  Assoc,  v, 
Barnes,  39  Neb.  834  (1894).  The  cor- 
poration is  not  liable  for  moneys  ex- 
pended by  its  promoters  in  develoi> 
ing  or  purchasing  property,  nor  is  it 
liable  on  their  contracts.  Bash  v. 
Culver  Gold  Min.  Co.,  7  Wash.  123 
(1893).  A  corporation  may  be  liable  on 
a  contract  made  before  incorporation 
by  a  party  who  afterwards  becomes  a 
director  and  president,  even  though 
the  contract  was  to  perform  services 
after  incorporation.  Oaks  v.  Catta- 
raugus Water  Co.,  143  N.  Y.  430 
(1894).  The  corporation  is  not  liable 
for  the  services  and  expenses  of  its 
promoters.  Security  Co.  v.  Benning- 
ton, etc.  Assoc.,  40  AtL  Rep.  43  (Vt, 
1897).  The  agreement  of  the  promot- 
ers of  a  corporation  that  a  certain 
claim  of  a  person  would  be  paid,  pro- 
vided he  gave  to  the  corporation  cer- 
tain business,  may  be  binding  upon 
the  corporation.  Durgin  v.  Smith,  73 
N.  W.  Rep.  3G1  (Midi.,  1897).    An  in- 


surance company  may  refuse  to  pay 
a  loss  incun-ed  after  its  incorporation, 
but  growing  out  of  a  policy  taken  by 
its  promoters  before  incorporation. 
Gent  V.  Manufacturers',  etc.  Ins.  Co., 
107  III  652  (1883);  S.  C,  106  IlL  252. 
The  corporation  is  not  liable  for  the 
debts  of  an  old  partnership,  and  not 
even  the  parol  promise  of  its  presi- 
dent makes  it  liable.  Georgia  Co.  v. 
Castleberry,  43  Ga.  187  (1871).  An 
agreement  among  the  donors  to  an 
academy  that  the  money  should  be 
repaid  does  not  bind  the  academy 
after  incorporation.  Bluehill  Acad- 
emy V.  Witham,  13  Me.  403  (1836). 
An  agreement  of  promoters  to  pay  a 
person  for  obtaining  subscriptions  is 
not  binding  on  the  corporation.  New 
York,  etc.  R  R  u  Ketchimi,  27  Conn. 
169  (1858),  the  court  saying:  "Can  a 
few  persons  combine  for  their  own 
interest  to  get  up  a  railroad  —  agree 
with  one  of  their  number  to  give  hiux 
a  large  commission  or  bonus  for  every 
stockholder  he  can  allure  into  the 
company  —  and  privately  make  this 
commission  or  bonus  a  charge  on 
the  corporation  when  formed  ?  This 
would  be  a  breach  of  faith  towards 
the  honest  and  unsuspecting  stock- 
holders who  pay  the  charter  price 
for  their  stock,  and  expect  to  take  it 
clear  of  all  incumbrance."'  In  Illi- 
nois the  rule  is  favored  that  the  cor- 
poration is  never  liable  on  contracts 
made  by  its  promoters,  unless  it  ex- 
pressly agreed  to  perform.  So  held  as 
regards  preliminary  surveys.  Rock- 
ford,  etc.  R  R  u  Sage,  65  IlL  328 
(1872);  and  book-keeping  for  one  of 
the  promoters.  Safety,  etc.  Co.  v. 
Smith,  65  111.  309  (1872);  and  the  lia- 
bility of  a  new  company  for  the  serv- 
ices of  the  superintendent  of  an  abor- 


1459 


§  TOT.] 


HOW    COKPOEATE   CONTRACTS    AKE    MADE.        [CH.  XI.III. 


protection  of  the  stockholders  and  of  subsequent  corporate 
creditors  against  such  a  result  lies  in  the  rule  tliat  the  corpora- 
tion is  not  bound  by  the  contracts  of  its  promoters.     Tlio  rule 

tive  company  by  the  same  parties, 
"Western,  etc.  Co.  v.  Cousley,  73  IlL 
531  (1874). 

An  agreement  of  promoters  that  a 
certain  person  shall  have  a  certain 
part  of  the  stock  upon  incorporation, 
lapon  his  paying  therefor,  does  not 
bind  the  corporation.  ]\IoiTison  v. 
Gold,  etc.  Co.,  53  Cal.  306  (1877).  An 
agreement  with  a  vendor  before  for- 
mation of  the  company  provided  that 
he  should  not  be  removed  fi-om  the 
directorate  until  a  certain  date.  The 
memorandum  and  articles  provided 
that  this  agreement  should  be 
adopted,  and  the  articles  "con- 
firmed" and  incorporated  it.  The 
agreement  was  acted  on,  but  no  con- 
tract was  made  between  the  vendor 
and  the  company.  Held,  the  articles 
did  not  form  a  contract  between 
them,  and  the  vendor  could  be  re- 
moved. Eley  V.  Positive,  etc.  Co.,  L.  R. 
1  Exch.  D.  88 (1876),  followed;  Browne 
V.  La  Trinidad,  L.  R.  37  Ch.  D.  1  (1887). 
See  Lindley,  Companies,  p.  146, 
etc.;  Chadwyck,  Healey,  36.  Where 
the  bondholders,  in  order  to  procure 
a  government  land  grant,  contracted 
with  plaintiff  to  complete  the  road, 
and  subsequently  the  bondholders 
foreclosed  and  reorganized,  the  coui-t 


of  the  projectors  that  it  would  be- 
come a  corporate  debt,  and  that  tlio 
company  afterwards  entered  upon 
and  enjoyed  the  l)enorit  of  tlie  con- 
tract, and  by  no  other  title  than  that 
derived  through  it"  Little  Kock,  etc. 
R.  R.  V.  Perry,  37  Ark.  IGl,  191  (ISSl); 
aff'd  in  Perry  v.  Little  Rock.  etc.  R  R., 
44  Ark.  383  (1884).  See  also  Re  Em- 
press, etc  Co.,  L.  R  16  Ch.  D.  125 
(1881),  where  the  agreement  of  tlie 
promoters  on  behalf  of  the  company, 
that  it  could  pay  the  costs  and 
charges  of  the  solicitors,  for  services 
and  disbursements  in  perfecting  the 
organization  thereof,  was  dismissed, 
but  witliout  prejudice  to  any  equi- 
table claim  on  a  quantum  meruit; 
Sully's  Case,  L.  R.  33  Ch.  D.  16  ^1886), 
holding  that,  in  the  absence  of  a  new- 
contract  made  by  a  company  after 
its  incorporation,  a  contract  made 
before  its  incorporation  by  a  person 
purporting  to  contract  as  trustee  for 
the  company  is  not  binding  on  the 
company,  thougli  the  parties  after- 
wards carry  out  some  of  the  terms  of 
the  contract  and  act  on  the  supposi- 
tion that  it  is  binding  on  the  com- 
pany. A  provision  in  the  by-laws, 
which  in  England  are  filed,  that  a 
certain  person  shall  be  the  attorney 


le m  that  the  new  company  was  not    for  the  company,  is  not  binding  on 
lable  on  such  contract  merely  from    the  company.    Eley  v.  Positive,  etc 
Jiavmg  accepted  the  complete  road.     ~      " 
The  court  said:   "From  all  the  au- 
thorities it  seems  clear  that,  in  order 
to  recover  in  an  action  at  law,  the 
plaintiff  must  show  either  an  express 


Co.,  L.  R.  1  Exch.  D.  20,  88  (1876). 
See  also  Be  Skegness,  etc.  Co.,  L.  R. 
41  Ch.  D.  215  (1888),  holding  that 
a  parliamentary  agent  or  lobbyist 
could  not  hold  the  company  liable. 


IpZf      .       '''^''rP^''^'^'*^^*  ^  agreement  of  promoters  with  a 

the  contract  was  made  with  persons  turnpike  company  that  the  proposed 

hen  engaged  m  its  formation  and  railway  company  will  make  1  certS 

ht!f  oUh  '  !  ""'  ^'^'  ""  ^^-  ^^^^^^S    ^-  ^^«  railway  company. 

PC  nl         T  ^''"'P^''^'  '"  ^^'^  ^^-  ^l^'-^d  ^-  North  Midland  Ry,      R y 

ind  w  th  tTe  ^  """'''  "'  ""  ^^^""'^^  ^^^-  '''  (1«^^)-     ^-  attorney'^^annot 

and  with  the  assurance  on  the  part  collect  liis  fees  from  the  coi  poration 

1460 


CU.  XLIII.J        HOW    CORrOEATE    COXTRACTS    ARE   MADE. 


[§70; 


is  just  and  sliould  not  be  weakened.  It  is  entirely  legal,  how- 
ever, for  the  corporation  to  ratify,  confirm,  or  adopt  the  contracts 
of  its  promoters.     A  promoter's  contract  may  be  adopted  by 

Payne  v.  New  South,  etc.  Co.,  10  Excli- 
283  (1854).  An  agreement  of  pro- 
moters that  the  company  shall  pay 
an  attorney  a  certain  sum  for  services 
is  not  binding  on  the  company  —  not 
even  by  ratification  and  agreement 
between  the  company  and  the  pro- 
moters, lie  Empress,  etc.  Co.,  L.  R. 
16  Cli.  D.  125  (1880J.  It  has  been  held 
that  equity  will  enforce  an  agree- 
ment of  tlie  promoters  that,  if  opposi- 
tion to  the  grant  of  its  charter  is 
withdrauTi,  the  company  will  con- 
tract to  do  certain  things  which  the 
opposition  desired  to  put  into  the 
charter.  Edwards  v.  Grand,  etc.  R'y, 
1  Myl.  &  Cr.  G50  (1836),  aff'g  7  Sim. 
337;  questioned  in  Caledonian,  etc. 
R'y  V.  Helensburg,  etc.,  2  Macq.  391 
(1855),  and  held  overruled  in  Earl  of 
Shrewsbury  v.  North,  etc.  R'y,  L.  R. 
1  Eq.  593  (1865).  But  an  agreement 
to  pay  a  large  price  for  land  owned 
by  the  opposition  party  is  not  so  en- 
forceable. Preston  v.  Liverpool,  etc. 
R'y,  5  H.  L.  Cas.  605  (1856),  aff'g  17 
Beav.  114;  S.  C,  before  amendment 
of  the  bill,  1  Sim.  (N.  S.)  586  (1851). 
Cf.  Stanley  v.  Chester,  etc.  R'y,  3  MyL 
&  C.  773  (1838);  and  Eastern,  etc.  Ry 
V.  Hawkes,  5  H.  L.  Cas.  331  (1855); 
Earl  of  Lindsey  v.  Great  Northern 
R"y,  10  Hare,  664  (1853),  in  an  inferior 
court.  This  doctrine  is  sustained  in 
Earl  of  Shrewsbury  v.  North,  etc. 
Ry,  L.  R.  1  Eq.  593  (1865),  disapprov- 
ing Edwards  v.  Grand,  etc.  R'y,  1 
Myl.  &  Cr.  650  (1836),  and  Petre  v. 
Eastern,  etc.  Co.,  1  R'y  Cas.  463 
(1838 1,  and  is  sustained  also  in  Gooday 
V.  Colchester,  etc.  R'y,  17  Beav.  133 
(1852).  The  articles  of  association 
may  provide  for  the  payment  of  pro- 
moters' contracts.  Terrell  v.  Hutton, 
4  H.  L.  Cas.  1091  (1854).  Cf.  Gunn  v. 
London,  etc.  Ins.  Co.,  12  C.  B.  (N.  S.) 
694  (1862).  Contra,  Mixlhado  v.  Porto, 


for  services  previous  to  incorporation, 
even  though  the  by-laws  provided  for 
payment,  and  the  directors  in  meet- 
ing assembled  said  that  he  would  be 
paid.  Re  Rotherham,  etc.  Co.,  L.  R. 
25  Ch.  D.  103  (1883).  The  corporation 
is  not  liable  for  services  in  obtaining 
street  permits  and  franchises  prior 
to  its  incorporation.  Hutchinson  v. 
Sui-rey,  etc.  Assoc.,  11  C.  B.  689  (1851). 
A  railway  company  is  not  bound  by 
the  agreement  of  its  promoters  that 
it  will  purchase  the  canal  of  a  canal 
company  if  the  latter  will  not  oppose 
the  grant  of  tlie  charter.  Leominster, 
etc.  Co.  V.  Shrewsbury,  etc.  R'y,  3  Iv. 
&.  J.  654  (1857).  A  railway  company 
is  not  bound  by  the  contract  of  its 
promoters  for  it  with  a  town  that 
the  company  would  build  certain 
wharves,  etc.  "  If  such  secret  or  un- 
expected terms  are  to  be  held  binding 
on  those  who  take  shares,  the  result 
may  be  ruinous  to  those  who  act  on 
the  faith  of  what  appears  on  the 
face  of  the  legi.slative  incorporation." 
Caledonian,  etc.  R'y  v.  Magistrates, 
etc.,  2  3Jacq.  391  (1855),  questioning 
Edwards  v.  Grand  Junction  R'y,  1 
MyL  &  C.  650  (1836);  Stanley  v. 
Chester,  etc.  R'y,  1  R'y  Cas.  58;  S.  C, 
9  Sim.  264;  aff'd  in  3  Myl.  8c  C.  773 
(1838).  and  Petre  v.  Eastern,  etc.  R'y, 
1  R'y  Cas.  462  (1838).  Where,  by  the 
articles  of  incorporation,  the  sub- 
scribers are  not  to  be  bovmd  until  a 
certain  amount  of  stock  is  subscribed, 
the  corporation  is  not  liable  for  the 
salary  of  an  engineer  employed  be- 
fore such  full  subscription.  Pierce 
V.  Jersey,  etc.  Co.,  L.  R.  5  Exch.  209 
(1870). 

A  corporation  is  not  liable  on  the 
contracts  of  its  promoters  to  employ 
plaintiff  as  a  broker,  nor  does  an  ex- 
press ratification  of  the  contract  bind 
it  unless  a  consideration  is  alleged. 


1461 


.§  TOT.] 


now   COKrOPwATE    CONTEACTS    AEE    MADE.        [CH,  XL  III. 


the  corporation  in  any  way  in  wliicli  a  contract  may  be  made 
by  the  corporation.' 

A  corjDoration  accepting  the  benefits  of  the  contract  of  its 
incorporators  must  accept  the  burden,  and  a  iironioter's  con- 
tract which  has  been  ratified  or  adopted  by  the  corporation,  or 
the  benefits  of  wliich  have  been  accepted  by  tlie  corporation 
with  knowledge  of  such  contract,  may  be  enforced  agaiust  it.'- 

etc.  R'y,  L.  R  9  C.  P.  503  (1874);  Ee    Water  Co.,  143  N.  Y.  430  (1894).  prior 


Empress,  etc.  Co.,  L.  R.  16  Ch.  D.  125 
(1880).  Under  a  charter  provision 
that  the  company  shall  be  liable,  see 
J?e  Brampton,  etc.  R'y,  L.  R.  10  Ch. 
App.  177  (1875),  where  an  attorney 
was  allowed  to  collect,  although  he 
had  assured  subscribers  that  they 
would  not  be  liable;  distinguishing 
Savin  v.  Hoylake  R'y,  L.  R.  1  Exch. 
9  (1865).  Where  the  articles  of  in- 
corporation expressly  provide  for  the 
payment  of  a  specified  amount  to  a 
person  who  had  contracted  with  the 
promoters  to  sell  to  the  company  cer- 
tain facilities  for  business,  the  com- 
pany is  liable.  Touche  v.  Metropoli- 
tan, etc.  Co.,  L.  R.  6  Ch.  671  (1871), 
rev'g  4  De  G.,  M.  &  G.  465.  A  judg- 
ment against  the  co^npany,  entered 
by  consent  on  a  claim  of  a  land- 
owner that  the  promoters  agreed 
that  the  company  would  take  his 
land  at  a  certain  price,  is  binding. 
Williams  v.  St.  George,  etc.  Co.,  2 
De  G.  &  J.  547  (1858). 

1  Mc  Arthur  v.  Times  Printing  Co., 
48  Minn.  319  (1892),  the  court  holding 
also  that  the  contract  begins  only 
from  its  adoption,  and  on  that  basis 
tlie  statute  of  frauds  is  applicable, 

2  Seymour  v.  Spring  Forest  Cem. 
Assoc,  144  N.  Y.  333  (1895);  Rogers  v. 
New  York,  etc.  Land  Co.,  134  N.  Y. 
197,  211  (1892),  the  court  saying] 
"  While  it  could  have  refused,  when 
it  came  into  existence,  to  accept  the 
one  or  to  be  bound  by  the  other,  it 
could  not  accept  the  advantages  and 
then  refuse  to  assume  the  obliga- 
tions."    In    Oakes    v.    Cattaraugus 


1462 


to  incorporation  a  written  agreement 
was  made  in  tlie  name  of  the  com- 
pany with  a  jarty  wlio  agreeil  to 
secure  the  riglit  of  way,  liydrant 
rental,  and  to  place  investments,  ot<\. 
and  was  to  receive  pay  from  tlie  cor- 
poration. He  was  also  to  abandon  a 
rival  water-works  scheme  and  to  aid 
generally.  The  president  and  gpnoral 
manager'of  the  corporation  after  the 
incorporation  acknowledged  the  debt 
and  contract,  and  promised  payment. 
The  court  lield  that  the  fact  that 
the  president  called  upon  the  party 
for  performance  constituted  ratili- 
cation.  The  whole  question  was  for 
the  jury.  Although  the  promot- 
ers have  no  authority  to  bind  the 
company  by  their  agreements  as  to 
the  construction  contract,  yet  where 
the  company  receives  a  benefit  from 
such  agreement,  and  in  its  records 
and  minutes  recognizes  it,  the' com- 
pany will  be  liable  in  damages  for 
letting  the  contract  to  othera  Wil- 
son V.  King's,  etc.  R  R,  114  N.  Y.  487 
(1889). 

"A  corporation  has  power,  when 
fully  organized,  to  ratify  a  contract 
made  by  the  promoters  when  it  is  one 
within  the  purposes  for  which  the  cor- 
poration was  organized  and  appears 
to  be  a  reasonable  means  for  the 
carrying  out  of  those  purposes."  Stan- 
ton V.  New  York,  etc.  R  R,  59  Conn. 
272  (1891).  The  corporation  may  ac- 
cept and  ratify  a  contract  of  its  pro- 
moters. Davis  V.  IMontgomerj^  etc. 
Co.,  8  S.  Rep.  496  (Ala.,  1890).  Where 
promoters  agree  to  employ  a  person. 


CH.  XLIII.]        now    CORPOKATE    CONTKACTS    AEE    MADE. 


[§  TOT. 


The  corporation  alone  is  liable  wliere  its  note  is  given  in  f  ul- 
fQlment  of  a  contract  entered  into  in  its  name,  although  such 
contract  was  prior  to  its  incorporation.^ 


and  the  company  actually  does  em- 
ploy liim  afterwards,  the  company 
thereby  ratifies  the  contract.  Pitts- 
burg, etc.  Co.  V.  Quintrell,  91  Tenn- 
693  (1892).  Bonds  and  mortgages  exe- 
cuted by  corporate  officers  in  pursu- 
ance of  a  resolution  made  by  pro- 
moters previous  to  incorporation  are 
valid  where  the  directors  ordered  the 
issue  of  the  bonds  after  their  execu- 
tion. Wood  V.  Whelen,  93  111.  153 
(1879).  A  bank,  after  incorporation, 
may  ratify  and  become  liable  on  the 
contract  of  its  promoters  to  the  ef- 
fect that  the  bank  would  give  stock 
and  a  certain  sum  of  money  to  a  per- 
son for  his  services.  McDonough  v. 
Bank,  34  Tex.  309  (1870).  Where  a 
corporation  is  organized  before  its 
articles  are  filed  and  a  contract  of 
purchase  is  made,  the  contract  price 
is  collectible,  the  company  having 
received  the  property  after  incorpo- 
ration. Paxton,  etc.  Co.  v.  First  Nat 
Bank,  21  Neb.  G21  (1887).  A  corpora- 
tion is  liable  for  machinery  which  is 
accepted  by  it  on  a  contract  made  by 
its  organizers  for  it  before  incorpora- 
tion. Whitney  v.  Wyman,  101  U.  S. 
392  (1879).  An  .agreement  by  corpo- 
rate organizers  that  the  corporation 
wiU  pay  royalties  on  a  patent  is 
enforceable  against  the  corporation 
when  it  has  acted  on  the  contract 
and  for  a  time  paid  the  royalties. 
Bommer  w  American,  etc.  Co.,  81 
N.  Y.  4G8  (1880).  See  also  Lorillard 
V.  Clyde,  86  N.  Y.  384  (1881).  A  pre- 
liminary agreement  that  a  person 
may  turn  in  property  for  stock  is 
valid  where  the  corporation  has  after- 
wards accepted  the  property  and  is- 
sued the  stock  therefor.  Reichwald 
V.  Commercial  Hotel  Co.,  lOG  IlL  439 


(1883).  A  contract  made  by  the  presi- 
dent, as  such,  after  the  certificate  of 
incorporation  was  signed,  but  before 
it  was  filed,  binds  the  corporation 
where  it  has  adopted  the  contract  by 
carrying  it  out.  Grape,  etc.  Co.  v. 
Small,  40  i\Id.  395  (1874).  A  corpora- 
tion is  not  bound  by  the  contracts  of 
its  promoters,  but  it  may  adopt  them 
after  incorporation-  Adoption  may 
be  in  any  way  in  which  it  might 
make  the  contract  de  novo.  Battelle 
V.  Northwestern,  etc.  Co.,  37  Minn.  89 
(1887),  and  note.  The  company  may 
of  course  employ  and  be  liable  to  a 
superintendent  whom  the  promoters 
agreed  should  be  employed.  Brown- 
ing V.  Great,  etc.  Co.,  5  H.  &  N.  856 
(18G0).  A  grant  of  a  license  to 
use  a  patent  made  to  an  individual 
with  the  privilege  to  assign  to  a  con- 
temyjlated  corporation  may,  as  to 
royalties,  be  enforced  against  the 
corporation  when  the  corporation 
expressly  adopted  the  contract  and 
acted  on  it.  Spiller  v.  Paris,  etc. 
Co.,  L.  R  7  Ch.  D.  3G8  (1878),  distin- 
gruishing  Melliado  v.  Porto  Alegre, 
etc.  R'y,  L.  R  9  C.  P.  503  (1874),  as 
being  a  case  at  law.  Money  paid  by 
a  town  after  its  incorporation  to  a 
person  for  bribing  the  legislature  to 
grant  the  charter  may  be  recovered 
back  by  a  bill  in  equity.  Frost  v.  In- 
habitants, etc.,  88  Mass.  152  (1863). 
Where  persons  who  give  their  notes 
in  payment  for  property  deed  the 
property  to  a  corporation,  the  latter 
is  not  bound  to  reimbuise  them  for 
amounts  paid  by  them  on  the  notes. 
Ruby,  etc.  Co.  v.  Gurley,  17  Colo. 
199  (1892).  The  olTer  of  a  party  to 
take  such  stock  as  may  not  be  taken 
by  the  pubUc  when  offered  to  the  pul>- 


1  Case  Mfg.  Co.  v.  Soxman,  138  U.  S.  431  (1891);  Shields  v.  Clifton,  eta  Co, 

28  S.  W.  Rep.  668  (1894). 

14G3 


roT.] 


now    COKPOEATE    CONTRACTS    ARF    MADE.        [cil.  XI.III. 


"Where  property  is  to  be  turned  in  to  a  corporation  for  stock, 
but  work  is  to  be  clone  by  the  owners  on  the  property  before 
it  is  so  turned  in,  the  corporation  is  not  liable  to  tiiird  persons 
for  such  work,  the  deeds  never  having  been  made  to  it.' 

A  consolidation  agreement  between  individuals,  whorcl»y  the 
consolidated  company  is  to  assume  a  lease  owned  by  another 
company,  cannot  be  enforced  by  such  other  company.  It  is  not 
a  party  to  the  agreement.^  The  contract  by  which  a  party 
turns  in  land  in  exchange  for  stock  may  be  such  as  to  give  him 
a  vendor's  lien  on  such  land  in  case  the  scheme  is  not  carried 
out.' 

]^ot  only  may  a  ratified  contract  be  enforced  against  a  cor- 
poration, but  it  may  be  enforced  by  such  a  corporation.* 

lie  may  be  accepted  after  the  public  of  a  proposed  corporation,  by  which 
subscriptions  are  closed.  Especially  agreement  the  coi-poration  is  to  have 
is  this  the  case  where  the  underwriter    the  first  right  to  buv  the  stock  of  any 


afterwards  practically  accepted  the 
stock.  Be  Hemp,  etc.  Co.,  [1896J  2  Cli. 
121.  Where  promoters  are  entitled 
to  certain  stock  from  the  corporation, 
but  such  obligation  is  canceled  by 
mutual  agreement,  one  of  them  can- 
not afterwards  revive  the  obligation 
on  the  ground  that  the  other  pro- 
moter, who  dominated  the  corpora- 
tion, had  agreed  that  it  would  all  be 
made  right.  Dillon  v.  Commercial 
Cable  Co.,  87  Him, 444  (1895).  Where  a 
promoter  agrees  to  pay  a  commission 
for  obtaining  a  bonus  for  a  corpora- 
tion, the  corporation  is  liable  for  the 
commission  if  it  accepts  the  bonus 
with  knowledge  of  the  contract. 
Weatherford,  etc.  R.  R.  v.  Granger,  86 
Tex.  350  (1894).  Promoters  are  liable 
on  a  contract  made  before  incorpora- 
tion, but  are  not  liable  on  the  con- 


one  who  wislies  to  sell,  does  not  pre- 
vent a  sale  by  a  stockliolder  without 
offering  the  stock  to  the  corporation. 
Hence,  the  corporation  cannot  refuse 
to  transfer  the  stock,  Ireland  v. 
Globe,  etc.  Co.,  38  AtL  Rep.  110  (R.  I., 
1897). 

3  Slide,  etc.  Mines  v.  Seymour,  153 
U.  S.  509,  520  (1894). 

*An  agreement  of  land-owners  with 
a  promoter  that  they  will  sell  to  the 
contemplated  railway  a  right  of  way 
at  a  specified  price  may  be  enforced 
by  the  railway,  Bedford,  etc.  R'y  v. 
Stanley,  2  J.  &  H.  746  (18G2).  But  the 
company  cannot  enforce  it  where  no 
formal  ratification  has  been  made. 
Penn  Match  Co.  v.  Hapgood,  141 
Mass.  145  (1886).  A  corporation  can- 
not ratify  a  contract  made  for  it  be- 
fore it  was  incorporated,  but  it  may 


tract  if  it  was  made  for  the  company    adopt  the  contract  expressly.     See 


and  the  company  adopts  it.  Ennis, 
etc.  Co.  V.  Burks,  39  S.  W.  Rep.  966 
(Tex.,  1897).    See  also  §  712,  infra. 

1  Rathbun  v.  Snow,  123  N.  Y.  343 
(1890). 

2  Lorillard  v.  Clyde,  122  N.  Y.  498 
(1890).  A  personal  agreement  be- 
tween the  incorporators,  promoters, 
and  proposed  subscribers  to  the  stock 


1464 


3  R'y  &  Corp.  L.  J.  482  (English  cases). 
The  mortgagor  to  a  corporation  can- 
not set  up  usury  on  the  ground  that 
the  promoters  required  him  to  sul> 
scribe  for  stock  in  order  to  obtain 
the  loan.  Central,  etc.  Ins.  Co.  v. 
Callaghan,  41  Barb.  448  (1864).  And 
see  many  cases  in  ch.  IV,  snipra,  hold- 
ing that  a  corporation  may  enforce 


CII.  XLIII.]        UOW    COlirOKATE    CONTEACTrS   ARE   MADE. 


[§  T07. 


In  Missouri,  Massachusetts,  and  England  it  is  held  that  a  cor- 
poration cannot  ratify  a  promoter's  contract/  but  that  a  new 
contract  to  the  same  effect  may  be  made  by  the  corporation. 

The  corporation  is  not  liable  to  the  promoters  for  their  ex- 
penses and  labor  in  effecting  the  incorporation.^ 


subscriptions  taken  before  its  incor- 
poration. 

1  There  is  no  such  thing  as  a  "rati- 
fication "  of  a  promoter's  contract. 
It  is  the  making  of  an  original  con- 
tract by  the  corjjoration,  and  does 
not  release  the  promoters.  Queen 
City,  etc.  Co.  v.  Crawford,  127  Mo. 
356  (1895).  "If  a  contract  is  made 
in  the  name  and  for  the  benefit  of  a 
projected  corporation,  tlie  corpora- 
tion, after  its  organization,  cannot 
become  a  party  to  the  contract,  even 
by  adoption  or  ratification  of  it." 
Abbott  V.  Hapgood,  150  IMass.  248 
(1889),  citing  cases.  In  England  the 
law  "  is  settled  by  a  series  of  decis- 
ions that  it  is  impossible  for  a  com- 
pany to  ratify  anything  that  is  done 
or  any  contract  that  is  made  before 
it  comes  into  existence."  Hence,  a 
contract  as  to  the  secretary's  salary 
is  unenforceabla  He  can  recover 
only  on  a  quantum  vieruit.  lie  Dale, 
61  L.  T.  Rep.  206  (1889). 

2  Where  a  promoter  contracts  to 
obtain  subscriptions  and  take  his 
pay  in  stock,  and  the  company,  when 
organized,  adopts  the  contract,  and 
he  obtains  the  subscription,  but  the 
company  is  unable  to  get  legislative 
authority  to  cross  a  river,  and  so 
abandons  the  enterprise,  he  may  col- 
lect damages.  Stanton  v.  New  York, 
etc.  R  R.,  59  Conn.  272  (1891).  Where, 
prior  to  the  incorporation,  property 
is  conveyed  to  a  tnistee  to  be  con- 
voyed by  him  to  the  corporation,  he 
cannot  claim  from  the  corporation 
compensation  for  his  services,  al- 
though the  promoters  agreed  that 
he  should  have  pay.  The  corpora- 
tion can  compel  a  conveyance  of  the 
property  without  paying  the  com- 


pensation. Hecla,  etc.  Min.  Co.  v. 
O'Neill,  19  N.  Y.  Supp.  592  (1892).  A 
person  suing  for  services  rendered  in 
procuring  a  construction  contract 
cannot  collect  if  he  was  not  instru- 
mental in  obtaining  the  contract,  or 
if  he  gave  a  secret  commission  to  the 
agent  of  the  party  who  was  to  pay 
the  whole  commission,  unless  tlie 
principal  ratified  the  contract  with 
knowledge  of  such  commission  to 
the  agent.  Smith  v.  Seattle,  etc.  R"y, 
72  Hun,  202  (1893).  Where  two  street 
railways  are  consolidated,  and  the 
stockliohlers  in  one  are  to  receive 
share  for  share,  and  the  stockholders 
in  the  other  company  are  to  receive 
fourteen  shares  of  consolidated  stock 
for  one  share  of  the  old  stock,  the 
stockholders  so  tm'ning  in  their  stock 
for  new  stock  cannot  also  claim 
from  the  consolidated  company  the 
amount  of  money  which  they  ex- 
pended in  buying  the  stock  of  one 
of  the  constituent  companies.  Wil- 
son V.  Trenton,  etc.  R.  R.,  40  Atl.  Rep. 
597  (N.  J.,  1898).  Expenses  and  debts 
incurred  by  the  promoters  for  and  in 
behalf  of  a  corporation  may  be  col- 
lected from  the  corporation  after  it 
is  organized,  if  the  corporation  as- 
sumes such  debts.  Schreyer  v.  Turner 
Flouring  Co.,  29  Oreg.  1  (1890).  Com- 
pare  Weatherford,  etc.  R'y  v.  Gran- 
ger, 86  Tex.  350  (1894).  A  corporation 
is  liable  for  the  expenses  of  its  pro- 
moters in  procuring  a  subscription, 
where,  after  its  organization,  it  ac- 
cepts the  subscription  witli  tlie  knowl- 
edge of  such  expenses.  Weatherford, 
etc.  R.  R.  V.  Granger,  22  S.  W.  Rep.  70 
(Tex.,  1893).  A  person  who,  at  the 
request  of  a  minority  of  the  promot- 
ers, attends  meetings  of  the  promot- 


1465 


§  T08.] 


HOW   COEPOKATE    CONTRACTS    AKE   MADE.        [cil.  Xl.lll. 


The  question  whether  a  person  who  has  contracted  witli  a 
corporation  as  an  existing  corporation  can  repudiate  his  con- 
tract on  the  ground  that  it  was  never  incorporated  is  discussed 
elsewhere.^ 

§  Y08.  Acts  which  must  he  authorized  hij  stoclhol(lct\s  meet- 
ings instead  of  hij  directors  meetings  —  Stockholders  make  the 
ly-laivs. —  The  functions  of  stockholders  are  exceedingly  lim- 
ited. The  theory  of  a  corporation  is  that  stockholders  shall 
have  all  the  profits,  but  shall  turn  over  the  complete  manage- 
ment of  the  enterprise  to  their  representatives  and  agents,  called 
directors.  Accordingly  there  is  little  for  the  stockholders  to 
do  beyond  electing  directors,  making  by-laws,  increasing  or 


ers,  lobbies  for  the  charter,  makes  a 
preliminary  survey,  and  pays  some 
expenses,  cannot  recover  from  the 
subsequently  incorporated  company. 
The  court  said  that  in  all  the  cases 
to  the  contrary  "  the  services  were 
either  performed  after  the  charter 
had  been  obtained,  and  there  was 
therefore  an  inchoate  corporation,  or 
there  was  an  informal  organization 
preparatory  to  obtaining  a  charter, 
and  the  employment  was  authorized 
by  the  organization  as  such,  and  was 
not  the  mere  employment  by  indi- 
viduals having  no  authority,  express 
or  implied,  to  contract  for  any  one." 
Bell's,  etc.  R.  R.  v.  Christy,  79  Pa.  St. 
54  (1875).  For  a  case  where  one  of 
the  promoters  of  a  consolidation  used 
his  stock  to  bring  it  about,  but  failed 
to  hold  the  consolidated  company 
liable  therefor,  see  Eldred  v.  Bell  TeL 
Co.,  119  U.  S.  513  (1886).  The  com- 
pany on  winding  up  is  not  liable  for 
the  promoters'  expenses.  Terrell's 
Case,  2  Sim.  (N.  S.)  126  (1851);  Ex 
2yarte  Lloyd,  1  Sim.  (N.  S.)  248  (1851). 
A  promoter  cannot  recover  from  the 
corporation  money  which  he  ex- 
pended before  its  incorporation  in 
bribing  the  legislature  to  grant  the 
charter.  Marchand  u  Loan,  etc. 
Assoc,  26  La.  Ann.  389  (1874).  See 
also  Hall  v.  Vermont,  etc.  Co.,  28  Vt. 
401  (1856).    The  statute  may  provide 


that  the  corporation  shall  pay  the 
promoters'  expense  of  obtaining  the 
charter.  Ilitchins  r.  Kilkenny  R'y, 
9  C.  B.  536  (1850).  "Wliere  a  corr>oni- 
tion  was  not  to  exist  until  a  certain 
amount  of  stock  was  subscribed,  the 
secretary  cannot  recover  from  the 
corporation  any  compensation  for  his 
services  prior  to  the  obtaining  of 
that  amount  of  subscriptions.  Frank- 
lin, etc.  Ins.  Co.  v.  Ilart,  31  Md.  59 
(1809).  In  Law  v.  Connecticut,  etc. 
R  R.,  45  N.  H.  370  (1864),  a  suit  at  law 
by  a  promoter  against  the  company 
for  services  rendered  in  procuring 
subscriptions  was  sxistained  on  the 
ground  that  "  a  corporation  is  liable 
at  law,  upon  an  implied  assumpsit, 
for  services  rendered  before  it  came 
in  esse,  but  which  were  necessary  to 
perfect  its  organization,  and  which^ 
after  such  organization  was  per- 
fected, it  accepted,  and  the  benefits 
of  which  it  enjoyed."  Affirmed,  46 
N.  H.  284  (1865).  To  same  effect.  Hall 
V.  Vermont,  etc.  Co.,  28  Vt.  401  (1856). 
Where  work  has  been  can-ied  on  by 
the  president  for  his  company,  he  is 
allowed,  in  his  accounting,  credit  for 
work  done,  materials  furnished,  and 
money  advanced  before  as  weU  as 
after  the  full  incorporation.  Grand 
River  Bridge  Co.  v.  Rollins,  13  Colo.  4 
(1889). 
1  See  §  637,  mipra. 


1466 


CH,  XLIII.]        HOW    CORPOEATE    CONTRACTS    ARE    MADE. 


[§  T09. 


decreasing  the  capital  stock,  authorizing  an  amendment  to  the 
charter,  and  dissolving  the  corporation.^  Of  the  functions  of 
the  stockholders  the  most  important,  perhaps,  is  that  of  making 
bj-lavrs.  The  law  is  clear  that  stockholders  in  meeting  as- 
sembled have  the  power  to  make  the  by-laws  of  the  corporation.- 
§  700.  Stoclliolders  cannot  carry  on  the  business  or  enter  into 
contracts  for  the  corjwratwn  —  These  are  the  functions  of  the 
directors  —  One  person  owning  all  the  stocic  —  "  Dummy  "  corpo- 
rations.—  The  stockholders  cannot  enter  into  contracts  with 
third  persons.  Contracts  between  the  corporation  and  third 
persons  must  be  entered  into  by  the  directors  and  not  by  the 
stockholders.  The  corporation,  in  such  matters,  is  represented 
by  the  former  and  not  by  the  latter.  Such  is  one  of  the  main 
objects  of  corporate  existence.  To  the  directors  are  given  the 
management  and  formation  of  corporate  contracts.  The  stock- 
holders cannot,  in  meeting  assembled,  bind  the  corporation  by 
their  contracts  in  its  behalf.'    The  stockholders  have  no  power 


1  See  Eidman  v.  Bowman,  58  111.  444 
(1871);  Metropolitan,  etc.  R'y  v.  Man- 
hattan, etc.  R'y,  11  Daly  (N.  Y.),  377 
<1S84).  As  to  increasing  or  reducing 
the  capital  stock,  see  ^  28.j,  supra; 
amending  charter,  cla.  XXVIIl,  su- 
pra; dissolution,  eh-  XXXVIII,  su- 
pra, 

^  For  a  full  discussion  of  the  sub- 
ject of  by-laws,  see  §  4a,  supra. 
.  3  Quoted  and  approved  in  Sellers  v. 
Greer,  173  111.  549  (1898),  rev'g  Greer 
V.  Sellers,  64  IlL  App.  505,  and  hold- 
ing that  the  court  will  not  grant  spe- 
cific performance  of  a  contract  of 
one  of  the  stockholders  to  sell  all  the 
property  of  the  corporation  to  an- 
other stockholder,  even  though  these 
two  stockholders  owned  nine  hun- 
dred and  ninety-eight  shares  of  the 
one  thousand  shares  of  the  capital 
stock,  and  even  though  the  holders 
of  the  remaining  two  sliares  of  stock 
were  merely  nominal  holders  thereof; 
Conro  V.  Port  Henry,  etc.  Co.,  12 
Barb.  27  (1851),  where  a  lease  of  iron 
works  was  declared  void  becavise  it 
was  the  act  of  the  stockholders  and 
not  of  the  directors;  McCuUough  v. 


Moss,  5  Denio,  5G7  (1846),  in  wliich  a 
promissory  note  signed  by  the  presi- 
dent and  secretaiy  of  the  corporation 
was  held  invalid  because  autliorized 
only  by  the  stockholders  and  not  by 
the  directors ;  Dana  v.  Bank  of  United 
States,  5  Watts  &  S.  (Pa.)  223,  245 
(1843);  Union,  etc.  Co.  v.  Rocky 
Mountain  Nat  Bank,  2  Colo.  565 
(1875),  holding  that  it  is  for  the  di- 
rectors and  not  the  stockholders  to 
repudiate  corporate  contracts  made 
by  an  authorized  agent;  Gashwiler 
V.  Willis,  33  CaL  11  (1867),  holding, 
that  the  stockholders  have  no  power 
to  authorize  a  sale  of  corporate  prop- 
erty. Such  authority  must  come 
from  the  directors.  The  stockhold- 
ers do  not  authorize  contracts.  Alta 
Silver  Miru  Co.  v.  Alta  Placer  Min. 
Cq.,  78  CaL  629  (1889).  Where  a  guar- 
anty authorized  by  statute  is  to  be 
by  the  company,  it  may  be  by  the  di- 
rectors without  any  action  -of  the 
stockholders.  Louisville  Trust  Co.  v. 
Louisville,  etc.  R'y,  75  Fed  Rep.  433 
(1896).  The  stockholders  have  no 
power  to  authorize  a  mortgage.  Only 
the  board  of  directors  can  do  sa 


1407 


§  709.]  HOW    COKPOEATE   CONTRACTS   ARE    MADE.        [cil.  XLIII. 

to  elect  the  president.  Their  action  is  a  nullity.'  Stockhold- 
ers cannot  elect  a  committee  and  compel  the  directors  to  act 
with  that  committee  in  corporate  matters.'^  It  is  not  for  the 
stockholders  to  direct  how  money  received  on  the  issue  of  new 
stock  shall  be  used.^  A  resolution  of  the  stockholders  fixin^j 
the  rates  of  mileage  to  be  paid  to  the  directors  is  not  binding 
on  the  directors,  although  if  enacted  into  a  by-law  it  would  bo 
binding.*  A  committee  appointed  by  the  stockholders  to  ar- 
range to  meet  the  obligations  of  the  com])any  has  no  power  to 
make  contracts.^  An  assignment  for  the  benefit  of  creditors 
is  authorized  by  the  directors,  and  not  the  stockholders.'  The 
stockholders  have  no  power  to  sell  the  property  of  the  corpo- 
ration, either  separately  or  collectively.'' 

The  law  seems  to  be  clear  that  all  corporate  contracts  are 
to  be  made  by  the  directors.  Tliis  includes  the  original  con- 
tracts as  well  as  modifications' of  them.  If  a  contract  is  within 
the  express  or  implied  powers  of  the  corporation,  then  the  di- 
rectors need  not  consult  the  stockholders  nor  follow  their  wishes, 
even  though  the  latter  constitute  a  majority  or  a  minority,  and 
though  these  stockholders  object  in  meeting  assembled  or  indi- 
vidually in  the  courts.  Thus,  a  lease  of  the  corporate  property 
is  authorized,  not  by  the  stockholders,  but  by  the  directors.' 

Blood  u  La  Serena,  etc.  Co.,  113  CaL  Manliattan  R'y,  15  Am.  &  Eng.  R'y 

221  (1896).    See  also  §  808,  infra.  Cas.  1  (1884).  '  Cf.  Harkness  v.  Man- 

1  Walsenberg  Water  Co.  v.  Moore,  hattan  R'y,  54  N.  Y.  Super.  Ct. 
5  Colo.  App.  144(1894).  174  (1886);  Cass  v.  Manchester,  etc. 

2  Charlestown,  etc.  Co.  v.  Duns-  Co.,  9  Fed.  Rep.  649  (1881);  also 
more,  60  N.  H.  85  (1880).  §  712,  infra.    The  result  is  that  di- 

3  Jones  V.  Concord,  etc.  R.  R.,  30  rectors  are  never  obliged  to  consult 
Atl.  Rep.  614  (N.  H.,  1893).  the  stockholders  in  meeting  assem- 

4  Mutual  F.  Ins.  Co.  v.  Farquhar,  39  bled,  nor  as  a  majority,  as  regards 
Atl.  Rep.  527  (Md.,  1898).  corporate  contracts.    The  stockhold- 

5  Augsburg  Land,  etc.  Co.  v.  Pep-  ers  cannot,  by  suit  in  equity,  compel 
per,  27  S.  E.  Rep.  807  (Va.,  1897).  the  directors  to  enter  into  a  contract 

6  Rogers  v.  Pell,  154  N.  Y.  518  (1898).    of  lease.    Ives  v.  Smith,  8  N.  Y.  Supp. 
TRoughu.  Breitung,  75N.  W.  Rep.    46(1889).    But  the  directors  must 

147  (Mich.,  1898).  consider  that  any  stockholder  may 

8  Beveridge  v.  New  York  Elev.  R'y,  object  to   ultra  "vires    acts.     Thus, 

113  N.  Y.  1  (1889);  Flagg  v.  Metro-  stockholders  cannot  control  the  di- 

politan,    etc.    R'y,   20    Blatchf.    142  rection  of  the  directors  when  the  lat- 

(1881);   People  v.  Metropolitan  R'y,  ter  direct  aA  assignment  to  be  made 

26  Hun,  82  (1881);  Nashua,  etc.  R.  R.  for  the  benefit  of  creditors.    So  held 

V.  Boston,  etc.  R.  R.,  27  Fed.  Rep.  821  though  the  directors  were  to  go  out 

(1886).     Confra,  Metropolitan  R'y  u  of  office  in  four  days.    Hutchinson  n 

1408 


CH.  XLIII.]        HOW    COKPOKATE    CONTKACTS   AUE   MADE. 


[§  TOO. 


However,  if  the  contract  is  beyond  the  express  and  implied 
powers  of  the  corporation,  then  any  stockholder  may  have  the 
contract  enjoined  or  set  aside.  He  can  do  so  even  though  a 
majority  of  the  stockholders  approve  the  act  and  ratify  it  in 
meeting  assembled.     He  may  resort  to  the  courts.^ 

A  single  stockholder  cannot  make  a  contract  for  and  in  the 
name  of  the  corporation  which  shall  have  any  binding  force  or 
validity,  except  by  subsequent  ratification  or  adoption  in  the 
regular  manner.-  A  stockholder,  however,  may  be  appointed 
the  agent  of  the  corporation.' 


Green,  91  Mo.  367  (1886).  An  exten- 
sion of  a  railway  cannot  be  enjoined 
merely  because  a  majority  of  stock- 
holders oppose  it.  Ultra  vires  must 
be  alleged.  Moses  v.  Torapkms,  84 
Ala.  613  (1888). 

1  Part  IV  of  this  work  discusses 
this  subject.  As  regards  the  relation 
and  rights  of  stockholders  towards 
suits  and  compromises  of  suits  by  or 
against  the  corporation,  see  §  750, 
infra. 

^Morelock  v.  Westminster  Water 
Co.,  4  Atl.  Rep.  404  (Md.,  1886);  Mays 
V.  Foster,  13  Oreg.  214  (1886);  Rice  v. 
Peninsular  Club,  53  Midi.  87  (1883); 
Berford  v.  New  York  Iron  ^line,  4 
N.  Y.  Supp.  836  (1888).  The  misrep- 
resentations of  a  stockholder  induc- 
ing a  person  to  purchase  stock  of 
the  corporation  are  not  binding  on 
the  corporation.  Bumes  v.  Pennell, 
2  H.  L.  Cas.  497,  519  (1849).  The  cir- 
cumstance that  a  person  is  a  mem- 
ber of  an  incorporated  company  gives 
him  no  authority  to  release  a  debt 
due  to  the  coqjoration.  Harris  v. 
Muskingum,  etc.  Co.,  4  Blackf.  (Ind.) 
267  (1836).  A  stockholder  cannot 
bind  the  corporation.  Jones  v.  Wil- 
liams, 39  S.  W.  Rep.  486  (Mo.,  1897). 


The  stockholders  do  not  make  the 
contracts.  Solomon  Co.  v.  Barber, 
49  Pac.  Rep.  524  (Kan.,  1897).  Where 
all  the  individuals  composing  a  cor- 
poration covenanted  in  behalf  of 
such  corporation  for  themselves  and 
their  heirs  that  the  corporation 
should  do  certain  acts,  they  were 
held  to  be  bound  personally.  Tiles- 
ton  V.  Newell,  13  Mass.  406  (1816).  In 
a  suit  to  recover  damages  of  a  corpo- 
ration for  flooding  the  plaintiffs' 
land,  it  was  held  error  to  ask  a  wit- 
ness whether  individual  members  of 
the  company  had  employed  him  to 
deprive  the  plaintiffs  of  their  claim. 
Shay  V.  Tuolumne,  etc.  Co.,  6  CaL  74 
(1856).  Where  the  plaintiff  claims 
the  amount  of  his  disbursements  for 
work  on  the  defendant  corporation's 
road,  but  the  evidence  does  not  prove 
a  request  to  the  plaintiff  by  the  cor- 
poration, its  directors,  or  authorized 
agent,  or  any  stipulation,  expressed 
or  implied,  to  authorize  a  charge 
against  the  corporation  for  such  dis- 
bui-sements,  no  act  of  an  individual 
member  can  be  held  to  bind  the  cor- 
poration. Hayden  v.  Middlesex,  etc. 
C©rp.,  10  Mass.  397  (1813).  The  in- 
tention of  a  corporation  can  only  be 


3  Stoddert  v.  Port  Tobacco  Parish, 
2  Gill  &  J.  (Md.)  227  (1830),  where  a 
religious  corpoi'ation  employed  a 
member  of  its  vestry  to  make  sale  of 
pews;  Spear  v.  Ladd,  11  INIass.  94 
(1814),  where  the  president  of  a  bank 


was  appointed  its  agent  to  indorse  a 
note;  Northampton  Bank  v.  Pepoon, 
11  Mass.  288  (1814);  Bank  Commis- 
sioners V.  Bank  of  Brest,  Harr.  Cli. 
(Mich.)  106  (1840). 


1469 


ro9.] 


HOW    COKPOKATE   CONTKACTS    ARE    MADE.        [CH.  XL  1 1 1. 


A  company  is  not  liable  on  the  contracts  of  a  person  who 
makes  a  construction  contract  with  it,  even  though  that  per- 
son is  the  principal  stockholder  and  dominates  and  controls 
the  action  of  the  corporation.^  A  deed  of  corporate  property 
by  a  person  who  owns  all  the  stock  does  not  convey  good  title.* 
Although  one  person  owns  a  majority  of  the  stock,*  or  all  of  it,* 


learned  by  the  language  of  its  re- 
corded acts;  and  neither  the  private 
views  nor  the  public  declarations  of 
individual  members  of  such  corpora- 
tion are  for  this  purpose  to  be  in- 
quired after.  Tlius,  a  plaintiff  resist- 
ing a  tax  may  not  establish  its 
legality  by  evidence  as  to  the  intent 
of  those  voting  the  levy.  Bartlett  v. 
Kinsley,  15  Conn.  327  (1843).  A  deed 
of  real  estate  executed  by  the  direct- 
ors of  a  corporation  separately  and 
at  different  times,  but  not  formally 
authorized  by  them  as  a  board,  is  not 
only  ineffectual  as  a  conveyance  of 
real  property,  but  equally  so  as  a 
contract  to  convey.  Baldwin  v.  Can- 
field,  26  Minn.  43,  54  (1879).  See  also 
§  713aj  infra.  Stockholders'  con- 
tracts do  not  bind  the  corporation. 
American  Preservers'  Co.  v.  Norris, 
43  Fed.  Rep.  711  (1890);  Wright  v. 
Lee,  2  S.  D.  596  (1892).  Damages  may 
be  recovered  by  a  corporation  for  a 
fraud  practised  upon  it,  even  though 
an  agent  of  the  corporation  who 
aided  in  the  perpetration  of  the 
fraud  was  a  stockholder  in  the  cor- 
poration. Grand  Rapids,  etc.  Co.  v. 
Cincinnati,  etc.  Co.,  45  Fed.  Rep.  671 
(1891). 

1  Central  Trust  Co.  v.  Bridges,  57 
Fed.  Rep.  753  (1893). 

2  Parker  v.  Bethel  Hotel  Co.,  96 
Tenn.  253  (1896).  In  this  case  some 
of  the  stock  had  been  pledged.  The 
stockliolders,  as  such,  cannot  convey 
the  real  estate  of  the  corporation, 
though  they  all  join  in  the  deed,  un- 
less the  execution  is  in  pursuance  of 
some  vote  of  the  corporation.  Isham 
V.  Bennington  Iron  Co.,  19  Vt.  230 


(1847);  Wheelock  v.  Moulton,  etc.,  15 
Vt.  519  (1843). 

3  Hopkins  v.  Roseclare  Lead  Co.,  72 
111.  373  (1874).  He  cannot  sell  the  cor- 
porate property.  The  person  owning 
a  majority  of  the  stock  cannot  con- 
tract for  tlie  corporation,  and  a  con- 
tract in  its  name  made  by  him  is 
not  binding  on  it  AUemong  i\  Sim- 
mons. 124  Ind.  199  (1890).  Wher.i  a 
construction  contract  is  signed  In' 
an  individual  in  his  own  name,  tlie 
corporation  is  not  liable  on  it,  al- 
though he  owned  nearly  all  the  stock 
and  the  work  was  for  its  benefit. 
Donoghue  v.  Indiana,  etc.  R'y,  87 
Mich.  13  (1891).  Where,  however,  a 
part  of  the  stockholders  contract  to 
sell  the  corporate  property  to  a  tliird 
person,  they  are  liable  in  damages 
for  breach  of  the  contract.  Curtis 
V.  Watson,  04  Vt.  530  (1892). 

*  "  The  property  of  a  corporation  is 
not  subject  to  the  control  of  individ- 
ual members,  whether  acting  sepa- 
rately or  jointly.  They  can  neither 
incumber  nor  transfer  that  property, 
nor  authorize  others  to  do  so.  The 
corporation  —  the  artificial  being  cre- 
ated—  holds  the  property,  and  alone 
can  mortgage  or  transfer  it;  and  the 
corporation  acts  only  through  its 
officers,  subject  to  the  conditions 
prescribed  by  law."  Humphreys  i". 
McKissock,  140  U.  S.  304  (1891).  On 
this  subject,  see  ^■§  603,  664,  s^ipra. 
A  railroad  company  owning  all  the 
stock  and  bonds  of  another  company 
does  not  own  the  property  of  the  lat- 
ter, and  cannot  sue  on  a  cause  of 
action  belonging  to  the  latter.  Fitz- 
gerald V.  Missouri  Pac.  R'y,  45  Fed. 


1470 


CU.  XLIII.]        now    COKPOKATE    CONTRACTS    ABE    MADE. 


[§  709. 


or  all  but  two  shares,^  he  does  not  in  consequence  thereof  ac- 
quire the  right  to  act  for  the  corporation,  or  as  the  corporation, 
independently  of  the  directors.  One  person  may  owji  all  the 
stock,  and  yet  the  existence,  relations,  and  business  methods  of 
the  corporation  continue.^  Although  one  Avater-works  com- 
pany owns  all  the  stock  of  another  water-works  company,  a 
mortgage  given  by  the  former  company  on  all  its  property 


Rep.  812  (1891).  Stockholders  who 
transfer  the  corxwrate  property  are 
jointly  and  severally  liable  to  corpo- 
rate creditors.  Graham  v.  Hoy,  38 
N.  Y.  Super.  Ct.  506  (1875).  The  fact 
that  the  manager  of  a  corporation 
and  his  brothers  own  all  the  capital 
stock  does  not  make  their  acts  the 
acts  of  the  corporation.  Bank  of 
Monroe  v.  Gifford,  72  Iowa,  750  (1887). 
Stockholders  owning  all  the  stock 
and  bonds  of  a  road  cannot  destroy 
the  same  and  then  sell  the  road  to 
another  company.  Gulf,  etc.  R'y  v. 
Morris,  67  Tex.  092  (1887).  See  also 
Button  V.  Hoffman,  61  Wis.  20  (1884), 
where  it  is  held  that  such  a  stock- 
holder is  not  the  corporation.  Corv- 
tra,  Swift  v.  Smith,  65  Md.  428  (1886). 
A  railroad  company  owning  practi- 
cally all  the  stock  of  another  com- 
pany may  lease  the  line  of  the  latter 
company  to  another  company.  Chi- 
cago, etc.  R'y  V.  Union  Pac.  R'y,  47 
Fed.  Rep.  15  (1891).  A  bridge  owned 
by  a  bridge  corporation  is  not  to 
be  taxed  as  railroad  property,  even 
though  its  stock  is  owned  by  the 
stockholders  in  a  railroad  corpora- 
tion, and  the  stock  has  been  pledged 
to  such  railroad  corporation,  and  the 
bridge  itself  leased  to  the  latter.  St. 
Louis,  etc.  R'y  v.  Williams,  53  Ark.  58 
(1890).  Where  a  corporation  or  per- 
son owns  all  the  stock  and  bonds  of 
another  corporation,  and  causes  the 
latter  to  lease  all  its  property,  it  is 
legal  to  have  the  rent  made  payable 
to  the  first-named  corporation  or  per- 
son. Union  Pac.  R'y  v.  Chicago,  etc, 
R'y,  51  Fed.  Rep.  309  (1892).    The  sole 

14 


owner  of  the  entire  capital  stock  can- 
not collect  a  corporate  debt  by  a  suit 
in  his  own  name.  Randall  v.  Dudley, 
69  N.  W.  Rep.  729  (Mich.,  1897).  The 
corporate  entity  is  distinct,  although 
one  party  owns  the  whole  stock.  Ex- 
change Bank  v.  Macon  Constr.  Co., 
97  Tenn.  1  (1895).  The  fact  that  one 
person  owns  all  the  stock  does  not 
dissolve  the  corporation.  Harring- 
ton V.  Connor,  70  N.  W.  Rep.  911 
(Neb.,  1897).  Specific  performance 
of  a  contract  to  sell  stock  will  be  de- 
creed wliere  the  property  of  the  cor- 
poration is  real  estate  —  a  brewery  — 
and  the  real  transaction  is  a  sale  of 
the  entire  property.  Megibben  v. 
Perin,  49  Fed,  Rep.  183  (1892). 

1  England  v.  Dearborn,  141  Mass. 
590  (1886),  Such  a  stockholder  can- 
not mortgage  the  corporate  property. 

2  Newton  Mfg.  Co.  v.  White,  42  Ga. 
148  (1871).  See  also  Sharp  v.  Dawes, 
46  L.  J.  (Q.  B.)  104  (1870);  Button  v. 
Hoffman,  61  Wis.  20  (1884);  Swift  v. 
Smith,  65  Md.  428  (1886);  England 
V.  Dearborn,  141  Mass.  590  (1886); 
Hopkins  v.  Roseclare  Lead  Co.,  72 
la  383  (1874);  Bellona  Co.'s  Case,  3 
Bland  (Md.),  442, 446  (1831) :  Farmers', 
etc.  T.  Co.  V.  Chicago,  etc.  R'y,  39 
Fed.  Rep.  143  (1889).  The  rule  is  the 
same  where  two  persons  buy  all  the 
stock.  Russell  v.  McLellan,  31  Mass. 
63  (1833).  The  corporation  still  sub- 
sists, and  the  two  purchasers  do  not 
become  partners,  or  joint  tenants,  or 
tenants  in  common  of  the  corporate 
property.  Cf.  Commonwealth  v.  Cul- 
len,  13  Pa,  St.  133  (1850);  g  663,  supra. 


71 


§  709.]  HOW   COEPOKATE    CONTRACTS    ARE    MADE.        [CIT.  XLIII. 

does  not  cover  the  property  of  the  latter  company  as  against 
honafide  purchasers  of  bonds  of  the  latter  conipan}'.* 

A  railroad  company  owning  all  the  stock  and  bonds  of  an- 
other company  does  not  own  the  property  of  the  latter,  and 
cannot  sue  on  a  cause  of  action  belonging  to  the  latter;*  and 
ordinarily  is  not  liable  for  its  debts.' 

There  are,  however,  two  exceptions  to  the  rules  given  above. 
The  first  is  that  corporate  action  may  arise  in  other  ways  than 
by  the  formal  action  of  its  board  of  directors  or  meeting  of 
stockholders  or  of  its  agents.  It  may  arise  by  a  long  course 
of  dealing  which  estops  the  corporation  from  denying  tlie  legal- 
ity of  that  mode  of  dealing.*  It  may  arise  by  passively  allow- 
ing itself  to  be  used  as  an  instrument  of  Avrong  or  illegal  acts.* 
It  is  to  be  borne  in  mind  also  that  by  unanimous  consent  a 
corporation  may  do  many  acts  which  ordinarily  would  be  vltra 
vires  of  the  corporation.®  The  second  exception  is  that,  where 
a  corporation  is  merely  a  "dummy,"  the  court  has  power  to 
ignore  its  corporate  existence  and  to  hold  that  the  acts  of  the 
stockholders  are  the  acts  of  the  corporation  itself.'' 

Thus,  where  a  railroad  company  causes  a  telegraph  company 

1  National  Water- works  Co.  v.  Kan-    stockliolders,  is  valid.    Kalamazoo, 
sas  City,  78  Fed.  Rep.  428  (1896).  etc.  Co.  v.  Winans,  etc.  Co.,  lOG  Miclu 

2  Fitzgerald  v.  Missouri  Pac.  R'y,    193  (1895). 

45  Fed.  Rep.  812  (1891).  6  People  v.  North   River  Co.,   121 

^Although  one  railroad  owns  or  con-  N.  Y.  582,  619  (1890).     But  an  agree- 

trols  all  the  stock  of  another  railroad,  ment  of  the  stockholders  of  a  corpo 

yet  the  former  is  not  personally  lia-  ration  that  they  will  not  compete 

ble  for  the  negligence,  debts,  etc.,  of  with  a  "  trust "  into  which  they  have 

the  latter.    Atchison,  etc.  R  R.  ?;.  entered  will  not  bind  the  corporation 

Cochran,  43  Kan.  225  (1890).    When  itself.    It  may  revive  its  business, 

a  corporation  or  person  owns  all  the  even  though  its  stockholders  are  the 

stock  and  bonds  of  another  corpora-  ones  who  entered  into  the  "trust." 

tion  and  causes  the  latter  to  lease  aU  American  Preservers'  Co.  v.  Norris, 

its  property,  it  is  legal  to  have  the  43  Fed.  Rep.  711  (1890). 

rent  made  payable  to  the  first-named  6  See  §  3,  ^i-pra. 

corporation  or  person.    Union  Pac.  ^  See  §§  663,  664,  sr/pm.    Although 

R'y  V.  Chicago,  etc.  R'y,  51  Fed.  Rep.  a  new  railroad  corporation  is  clearly 

309  (1892).  a  "  dimimy  "  corporation,  its  incorpo 

4  See  many  cases  in  the  succeeding  rators  and  officers  being  officers  in 

sections  relative  to  the  authority  of  another  railroad  corporation,  and  its 

various  officers.    A  chattel  mortgage  expenses  being  paid  by  the  latter 

executed  by  the  president  and  secre-  company,  still  it  is  a  legal  corpora- 

tary  of  an  insolvent  corporation,  with  tion.     Southern  Kansas,  etc.  R.  R.  ^;. 

the  knowledge  and  consent  of  all  the  Towner,  41  Kan.  72  (1889). 

1472 


on.  XLIII.]       HOW  COEPOKATE  CONTKACTS  AKE    MADE.       [§§  710,  Til. 

to  be  incorporated,  and  subscribes  to  all  its  stock  and  appoints 
all  its  officers,  and  holds  it  out  as  the  future  owner  of  a  tele- 
graph system  which  the  railroad  owns,  and  then  sells  that  sys- 
tem to  some  one  else,  a  person  contracting  with  the  telegraph 
company  on  the  faith  of  the  scheme  being  carried  out  may  hold 
the  railroad  company  liable  on  the  contract,  on  the  principle 
of  law  that  a  principal  is  liable  on  the  contracts  of  its  agent.^ 

Where  the  corporation  does  business  by  organizing  branch 
corporations,  and  the  stockholders  in  the  latter  are  disregarded, 
and  the  main  corporation  pays  up  the  stock  and  manages  it 
without  regard  to  its  corporate  character,  the  property  of  the 
branch  corporation  is  subjects  to  the  debts  of  the  parent  com- 
pany.2 

Sometimes  a  "  dummy  "  corporation  is  used  to  hold  land,  the 
stockholders  being  aliens  or  foreign  corporations.^ 

§  710.  The  exj)ulsion  of  stocltlwlders. —  The  law  forbids  the 
directors  or  stockholders  of  a  corporation  having  a  capital  stock 
from  depriving  him  of  his  rights  as  a  stockholder.  He  cer- 
tainly cannot  be  (.\eprived  of  his  right  to  dividends  equally  with 
other  stockholders.*  He  cannot  be  deprived  of  his  right  to  vote.* 
And  it  is  clear  that  his  various  rights  as  a  stockholder  cannot 
be  taken  from  him  by  any  or  all  of  the  other  stockholders.  In 
this  respect  a  corporation  having  a  capital  stock  is  clearly  dif- 
ferent from  a  corporation  formed  for  religious,  social,  charitable, 
and  similar  purposes.  The  former  is  for  purposes  of  gain,  and 
the  property  which  is  represented  by  stock  cannot  be  taken 
from  a  stockholder  by  expelling  him  from  the  corporation.® 

§  711.  Stocliholders  cannot  change  the  directors  except  at  elec- 
tions.—  The  term  of  office  of  directors  is  usually  fixed  by  the 
charter  of  the  corporation  or  the  statutes  applying  to  it.  Such 
being  the  case,  a  director  having  been  elected  is  entitled  to  hold 
his  position  until  the  expiration  of  his  term  of  office.     He  can- 

1  Interstate  TeL  Co.  v.  Baltimore,  ^  Tiie  right  to  forfeit  stock  for  non- 
etc.  TeL  Co.,  51  Fed.  Rep.  49  (1892).  payment  of  calls  may  possibly  be 

2  Day  V.  Postal  TeL  Co.,  66  Md.  354  called  an  "  expulsion,"  but  is  a  mis- 
(1887).  use  of  that  term.  Seech.  VIII,  supra. 

'See  ch.  XLI,  supra,  concerning    Brokers' associations  frequently  have 

tliis  subject  by-laws  authorizing  the  expulsion  of 

*  See  §  540,  supra.  members.    Concerning  expulsion  in 

*See  §  621,  supra.  general,  see  §  11,  supra. 

93  1473 


§  T12.] 


HOW   COKPOEATE   CONTRACTS   AEE   ilADE.        [CH.  XLIII. 


not  be  turned  out  either  by  the  stockholders,*  or  the  directors, 
or  by  a  court.^  Sometimes,  however,  the  charter,  statutes,  or 
by-laws  authorize  and  empower  the  stockholders  to  remove  di- 
rectors at  any  time.'  And  where  the  stockholders  have  power 
by  charter  or  statute  to  remove  directors  for  cause,  the  exercise 
of  their  discretion  therein  will  not  be  reviewed  in  equity.*  So, 
likewise,  where  such  a  power  is  given  to  the  stock hohlers,  a 
court  of  chancery  will  not  enjoin  the  holding  of  a  meeting  called 
by  the  stockholders  to  consider,  among  other  matters,  the  re- 
moval of  the  directors.*  The  president  of  the  corporation,  duly 
elected  by  the  board  of  directors,  does  not  hold  his  position  at 
the  pleasure  of  the  board." 

§  712.  Directors  —  Their  ])oicer  as  a  hoard  and  as  iiidicid- 
iials  to  contract  for  the  corporation  —  liatification  hy  the  di- 
rectors.—  All  contracts  of  a  corporation  are  to  be  made  by  or 
under  the  direction  of  its  board  of  directors.     The  board  of  di- 

1  Imperial,  etc.  Hotel  Co.  v.  Ilanip-    tain  number  of  directors,  the  state 


son,  L.  R.  23  Ch.  D.  1  (1882);  Powers 
V.  Blue,  etc.  Assoc,  86  Fed.  Rep.  705 
(1898);  Nathan  v.  Tompkins,  82  Ala, 
437  (1886),  holding  also  that  an  elec- 
tion is  wholly  void  where  part  of 
those  elected  are  to  fill  the  place  of 
oflScers  illegally  removed,  there  being 
no  particular  persons  designated  to 
fill  the  legal  vacancies.  See  also 
Berry  v.  Cross,  3  Sandf.  Cli.  1  (1845); 
Gorman  v.  Guardian  Sav.  Bank,  4 
Mo.  App.  180  (1877).  Cf.  dicta  in  State 
V.  Brice,  7  Ohio  (pt.  2d),  82  (1836); 
Adamantine  Brick  Co.  v.  Woodruff, 
4  MacArthur,  318  (1880);  Burr  v.  Mc- 
Donald, 3  Gratt.  (Va.)  206  (1846);  Bay- 
less  V.  Orme,  Freem.  Ch.  (Miss.)  161 
(1841).  A  director,  however,  may  re- 
sign, and  in  such  a  case  the  corpo- 
ration may  accept  the  resignation. 
Cloutman  v.  Pike,  7  N.  H.  209  (1834), 
a  municipal  corporation  case.  In 
England  the  by-laws  generally  give 
the  stockholders  the  power  to  remove 
directors.  See  Browne  v.  La  Trinidad, 
L.  R.  37  Ch.  D.  1  (1887);  Isle  of  Wight 
R'y  V.  Tahourdin,  L.  R.  25  Ch.  D.  320 
(1883).  Where  in  a  corporation  the 
state  itself  is  represented  by  a  cer- 


may  remove  those  directors  at  any 
time,  and  appoint  others  in  their 
placa  Tucker'  v.  Russell,  82  Fed. 
Rep.  263  (1897). 

2  Johnston  v.  Jones,  23  N.  J.  Eq.  210 
(1872).  See  also  §  624,  supra,  and 
§  746,  ififra. 

3  Such  is  the  law  in  Ohio,  West  Vir- 
ginia, and  many  other  states.  See 
Part  VII,  infra.  Such,  also,  is  the 
law  applicable  to  national  banks. 
See  U.  S.  Rev.  St.,  §  5136;  also,  Taylor 
V.  Hutton,  43  Barb.  195  (1864).  The 
fact  that  a  secretary's  salary  is  an- 
nual does  not  prevent  the  company 
from  discharging  him  at  any  time, 
where  the  by-laws  provide  for  re- 
moval at  any  time.  Douglass  v.  Mer- 
chants' Ins.  Co.,  118  N.  Y.  484  (1890). 
The  president  may  remove  the  tel- 
ler. Harrington  v.  First  Nat.  Bank, 
Thompson's  N.  B.  Cas.  760  (1873). 

*  Inderwick  v.  Snell,  2  Macn.  &  G. 
216  (1850). 

5  Isle  of  Wight  R'y  v.  Tahourdin, 
L.  R.  25  Ch.  D.  320  (1883). 

fi  Archer  v.  People's  Sav.  Bank,  88 
Ala.  249  (1889).  Where  three  out  of 
five  directors  met  without  notice  to 


.1474 


CH.  XLIII.]        HOW    COEPOKATE    COXTKACTS    AKE    MADE.  [§  712. 

rectors  make  corporate  contracts  by  a  regular  vote  of  the  board ; 
or  by  authorizing  an  agent  to  make  them ;  or  by  allowing  an 
agent  to  assume  and  exercise  that  power ;  or  by  accepting  a 
contract  or  its  benefits  after  it  has  been  made  by  an  unauthor- 
ized agent.  And  in  all  cases  the  board  of  directors  and  not  the 
stockholders,  nor  the  president,  secretary,  treasurer,  or  other 
agent,  is  the  original  and  supreme  power  in  corporations  to 
make  corporate  contracts.  The  stockholders,  indeed,  have  very 
few  functions.^  The  board  of  directors  have  the  widest  of 
powers.  All  of  the  various  acts  and  contracts  which  a  corpo- 
ration may  enter  into  ^  are  entered  into  by  and  through  the 
board  of  directors.  The  board  of  directors  make  or  authorize 
the  making  of  the  notes,  bills,  mortgages,  sales,  deeds,  liens, 
and  contracts  generally  of  the  corporation.  They  appoint  the 
agents,  direct  the  business,  and  govern  the  policy  and  plans  of 
the  corporation.  The  directors  elect  the  oflBcers,  and  in  this 
connection  it  may  be  added  that  "  at  common  law  there  is  no 
limit  to  the  number  of  offices  which  may  be  held  simultaneously 
by  the  same  person,  provided  that  neither  of  them  is  incom- 
patible with  any  other." '  They  institute,  prosecute,  compro- 
mise, or  appeal  suits  at  law  and  in  equity  which  the  corporation 
brinofs  or  has  broutrht  against  it.*  But  there  are  limitations  on 
their  powers.  If  the  board  of  directors  attempt  to  do  an  act 
or  make  a  contract  which  the  corporate  charter  does  not  give 
the  corporation  the  power  to  do  or  enter  into,  then  any  stock- 
holder may  enjoin  that  act  or  contract.*  Moreover,  the  direct- 
ors can  contract  and  act  only  as  a  board,  duly  notified  and 
assembled.  The  members  of  the  board  cannot  agree  separately 
and  outside  of  the  meeting  and  thereby  bind  the  corporation.' 
Xor  can  a  minority  of  the  board  meet  and  bind  the  board.  A 
majority  must  be  present,  and  then  a  majority  of  that  majority 
binds  the  corporation.' 

the  other  two,  and  deposed  the  pres-  People  v.  Green,  58  N.  Y.  295  (1874). 

ident  and  authorized  a   mortgage,  Cf.  Atty.-Gen.  v.  Detroit,  70  N.  W. 

their  acts  are  void.    Hatch  v.  John-  Rep.  450  (Mich.,  1897). 

son  L.  &  T.  Co.,  79  Fed.  Rep.  828  (1895).  *  See  §  750,  infra. 

iSee  ^§  708,  711,  supra.  ^See  ch.  XL,  supra.    As  to  ratifi- 

2  See  ch.  XLI,  supra,  and  in  fact  cation  of  such  acts  by  the  stockhold- 

most  of  the  preceding  chapters  of  ers.  see  ch.  XLIV,  infra. 

'  this  book.  *  See  §  713a,  infra, 

»Throop  on  Public  Officers,  §30;  '  See  §  713a,  rn/ro. 

1475 


§  712.]  HOW   COKPOKATE   CONTRACTS   AEE   MADE,        [CH.  XLIIL 


A  sino-le  director  has  no  power  to  contract  for  the  corpora- 
tion.^ It  is  perfectly  legal,  however,  for  a  board  of  directois 
to  delegate  to  an  agent  the  power  to  make  a  contract,-  and  this 
ao-ent  may,  of  com-se,  be  a  director  as  well  as  a  third  person.' 
The  board  of  directors  and  the  corporation  are  bound  also  by 
the  contracts  of  a  person  who  has  assumed  to  contract  for  the 
company,  and  for  some  time  has  been  allowed  by  the  board  to 
so  act  and  contract.^    So  also  the  board  of  directors  and  the 


1  See  the  cases  under  §  716,  infra, 
where  the  president  even,  who  is 
nearly  always  a  director,  was  held 
not  to  have  power  to  contract.  A 
director  has  no  authority  to  contract. 
Noblesville,  etc.  Co.  v.  Loehr,  124  Ind. 
79  (1890);  Allemong  v.  Simmons,  124 
Ind.  199  (1890);  Goodyear  Rubber 
Co.  V.  Scott  Co.,  96  Ala.  439  (1892); 
New,  etc.  Co.  v.  Upton,  36  Atl.  Eep. 
366  (N.  H.,  1893).  See  also  Chicago, 
etc.  R.  R.  V.  James,  22  Wis.  194  (1867); 
Trundy  v.  Hartford,  etc,  Co.,  6  Rob. 
(N,  Y.)  312  (1868),  where  a  director 
employed  a  broker;  New  Haven,  etc, 
Co.  V.  Hayden,  107  Mass.  525  (1871), 
where  a  director,  stockholder,  and 
overseer  contracted  to  extend  the 
business;  Titus  v.  Cairo,  etc.  R.  R.,  37 
N.  J,  L.  98  (1874),  where  a  director 
sold  bonds;  Lockwood  v.  Thunder, 
etc.  Co.,  42  Mich.  536  (1880);  Bramah 
V.  Roberts,  3  Bing.  N.  Cas.  963  (1837), 
where  a  director  accepted  a  bill; 
Rice  V.  Peninsular  Club,  52  IMich.  87 
(1883),  where  a  director  said  that  a 
purchase  was  all  right.  But  in  Brad- 
street  V.  Bank  of  Rutland,  42  Vt.  128 
(1869),  it  was  held  that  an  employee 
who  was  employed  by  three  direct- 
ors might  recover.  If  the  corpora- 
tion is  only  an  intermediary  of  title, 
such  as  payee  and  indorser,  the  in- 
dorsee may  recover  against  the  maker 
without  making  strict  proof  as  to 
the  authority  of  the  directors  to  in- 
dorse. Smith  V.  Johnson,  3  H.  &  N. 
222  (1858).  Where  a  director  causes 
work  to  be  done  on  the  corporate 
property  on  an  agreement  that  he 


will  pay  for  the  same,  the  corpora^ 
tion  is  not  liable  therefor,  Ayers  v. 
Green,  etc.  Co.,  48  Pac.  Rep.  221  (Cal., 
1897).  He  is  not  an  agent  to  dis- 
count paper.  Washington  Bank  v. 
Lewis,  39  Mass.  24  (1839),  Nor  to 
agree  to  give  extra  pay.  Stoystown, 
etc.  Turnp.  Co.  v.  Craver,  45  Pa.  St, 
386(1863);  Lindley,  Companies,  p.  155. 
See  also  §  726,  infra. 

2  Spear  v.  Ladd,  11  Mass.  94  (1814); 
Northampton  Bank  v.  Pepoon,  11 
Mass.  288  (1814),  where  a  director  was 
authorized  to  indorse  a  note;  Bank 
Commissioner  v.  Bank  of  Brest,  Ilarr. 
Ch.  (Mich.)  106  (1810);  Stevens  v.  Hill, 
29  Me.  133  (1848);  Lester  v.  Webb,  83 
Mass.  34  (1861);  Abbot  v.  American 
Hard  Rubber  Co.,  33  Barb.  578  (1861); 
U.  S.  Bank  v.  Dana,  6  Pet.  51  (1832); 
Metropolis  Bank  v.  Jones,  8  Pet.  12, 
16  (1834) ;  Percy  v.  Millaudon,  5  La.  568 
(1833);  Pennsylvania  Bank  v.  Reed, 
1  Watts  &S.  (Pa.)  101  (1841);  Ridg- 
way  V.  Farmers'  Bank,  12  Serg.  &  R. 
(Pa.)  256  (1825);  Leavitt  v.  Yates,  4 
Edw.  Ch.  134  (1843).  As  to  delegation 
of  discretionary  powers,  see  §  715,  in- 
fra; Sheridan,  etc.  Co.  v.  Chatham 
Nat.  Bank,  52  Hun,  575  (1889). 

'  A  director  who  is  authorized  to 
purchase  and  pay  in  stock  cannot 
agree  to  pay  in  cash,  Hayden  v. 
Middlesex,  etc.  Co.,  10  Mass.  403  (1813), 
Authority  to  a  director  to  make  con- 
tract for  the  sale  of  land  does  not 
authorize  him  to  convey  the  land. 
Green  v.  Hugo,  81  Tex.  452  (1891). 

^  See  many  cases  in  the  following 
sections.    Also  Beers  v.  Phoenix,  etc. 


1478 


CH.  XLIII.]        HOW    COKPOKATE    COXTKACTS    AKE   MADE.  [§  Y12. 


corporation  are  bound  by  an  nnautliorized  agent's  contract 
when  the  contract  is  acquiesced  in  or  the  benefits  of  that  con- 
tract are  accepted ;  ^  or  when  the  corporation  expressly  ratifies 
and  confirms  the  contract.^ 

It  is  an  important  principle  of  law  that  a  corporation  is  lia- 
ble on  a  contract  the  benefit  of  which  it  accepts,  even  though 
such  contract  was  not  authorized  by  the  board  of  directors. 
Thus,  a  contract  signed  in  the  corporate  name,  but  without  the 
authority  of  the  board  of  directors,  may  be  validated  by  the 
corporation  acting  under  it  for  a  year.^ 


Co.,  14  Barb.  358  (1852),  where  a  di- 
rector and  secretary  borrowed  rqoney 
as  he  was  accustomed  to  do.  But 
unless  the  custom  is  known  to  the  di- 
rectors the  corporation  is  not  bound. 
Lawrence  v.  Gebhard,  41  Barb.  575 
(1864).  And  the  act  must  be  intra 
vires.  Women's,  etc.  Union  v.  Tay- 
lor, 8  Colo.  75  (1884). 

1  See  many  cases  in  subsequent  sec- 
tions herein.  Also  New  York,  etc. 
Co.  V.  Phoenix  Bank,  3  N.  Y.  156  (1849), 
where  loans  of  the  company's  money 
were  made  by  a  director. 

2  See  §  707,  siqrra,  on  promoters! con- 
tracts. The  ratification  of  an  unau- 
thorized mortgage  may  be  by  express 
resolutions.  Purser  v.  Eagle  Lake, 
etc.  Co.,  Ill  Cal.  139  (1896).  An  un- 
authorized note  issued  by  a  corpora- 
tion may  be  ratified  by  the  board  of 
directors.  Nebraska,  etc.  Co.  v.  Bell, 
58  Fed.  Rep.  226  (1893). 

3  Jourdan  u  Long  Island  R  R.,  115 
N.  Y.  380  (1889).  Although  a  sale  of 
property  is  not  authorized  by  the 
board  of  directors,  yet  if  they  accept 
the  pay  the  sale  is  valid.  Beach  v. 
MiUer,  130  ILL  163  (1889).  Where  a 
contractor  does  extra  work  upon  the 
assurance  of  a  director  that  the  com- 
pany will  pay  for  it,  and  had  agreed 
80  to  do  at  a  meeting,  and  a  majority 
of  the  directors  knew  of  the  extra 
work,  the  company  is  liable  therefor. 
Tryon  v.  White,  etc.  Co.,  63  Conn.  161 
(1893).  Ratification  in  the  case  of  a 
land  contract  may  have  to  be  in  writ- 

1. 


ing  to  satisfy  the  statute  of  frauds. 
Salfield  V.  Sutter,  etc.  Co.,  94  CaL  546 
(1893).  It  may  be  a  question  of  fact 
for  the  jury  as  to  whether  the  com- 
pany accepted  the  contract  or  not. 
Cliapin  V.  Cambria,  etc.  Co.,  145  Pa. 
St.  478  (1891).  Although  mortgage 
bonds  are  issued  by  corporate  officers 
witliout  authority,  yet  if  for  several 
years  they  are  used  as  a  pledge  to 
secure  corporate  debts,  and  in  the 
meantime  directors  and  stockholders 
know  of  their  issue,  they  are  valid. 
Stainback  v.  Junk,  etc.  Co.,  39  S.  W. 
Rep.  530  (Tenn.,  1897).  An  assess- 
ment by  the  directors  to  pay  a  mort- 
gage does  not  legalize  such  mortgage 
if  it  was  not  properly  authorized, 
even  though  signed  by  the  president, 
secretary,  and  two- thirds  of  the  stock- 
holders. Alta  Silver  Min.  Co.  v.  Alta 
Placer  Min.  Co.,  78  CaL  629  (1889). 
An  unauthorized  purchase  of  real  es- 
tate and  a  mortgage  thereon  by  a 
corporation  may  be  ratified,  but  only 
by  the  same  formalities  as  if  original 
authority  were  being  given.  Blood  v. 
La  Serena,  etc.  Co.,  113  CaL  231  (1896). 
An  unauthorized  alteration  in  a  mort- 
gage may  be  ratified  by  the  subse- 
quent acts  of  the  parties.  Woodbury 
V.  Allegheny,  etc.  R.  R,  72  Fed.  Rep. 
371  (1895).  Bonds  issued  by  a  ceme- 
tery corporation,  and  sigricd  and 
sealed  and  recognized  at  many  meet- 
ings of  the  directors,  are  legaL  Sey- 
mour V.  Spring  Forest  Cem.  Assoc, 
144  N.  Y.  333  (1895).    Where  the  cor- 


§  Y12.] 


HOW    CORPOKATE    COXTRACTS    AKE    MADE.        [CH.  XLIH. 


A  corporation  may  be  liable  for  an  accident  on  a  ferry  oper- 
ated in  its  name,  where  it  knew  of  the  operation  and  received 
the  benefits  of  the  same.^  Where  a  corporation  is  a  mere 
"  dummy,"  the  courts  sometimes  hold  that  the  corporation  is 
liable  for  the  acts  and  on  the  contracts  of  its  stockholders.* 
An  express  vote  of  the  directors  authorizing  a  note  need  not 
be  proved  where  the  corporation  whose  obligation  is  in  ques- 


poration  has  occupied  premises  \inder 
an  unauthorized  lease,  the  court  may 
submit  to  the  jury  the  question  of 
whether  it  ratified  the  lease.  Hay- 
den  V.  Wheeler,  etc.  Co.,  20  N.  Y. 
Supp.  902  (1893).  The  regularity  or 
authorization  of  a  corporate  mort- 
gage cannot  be  successfully  attacked 
by  a  stockholder  in  an  action  to  fore- 
close the  mortgage,  where  for  twelve 
years  the  interest  has  been  paid  upon 
the  bonds  with  the  knowledge  and 
acquiescence  of  the  stockholder. 
Warren  v.  Bigelow  Blue  Stone  Co., 
74  Hun,  304  (1893).  Where  all  the 
directors  and  all  the  stock  except 
one  share  assent  to  borrowing  money 
and  giving  a  mortgage,  the  money 
being  used  in  the  business,  the  loan 
and  mortgage  may  be  enforced.  Wit- 
ter V.  Grand  Rapids,  etc.  Co.,  78  Wis. 
543  (1891).  A  board  of  directors  may 
ratify  and  thereby  validate  a  mort- 
gage which  may  have  been  executed 
without  authority.  AUis  v.  Jones,  45 
Fed.  Rep.  148  (1891).  A  corporation 
is  liable  for  work  done,  although  the 
officer  employing  plaintiff  had  him- 
self contracted  to  do  the  work  for 
the  corporation.  Plaintiff  had  no 
notice  of  tlais  agreement.  Salt  Lake, 
etc.  Co.  V.  Mammoth  Min.  Co.,  6  Utah, 
351  (1890).  If  the  corporation  admits 
in  its  pleading  that  a  contract  was 
entered  into,  a  judgment  for  plaint- 
iff will  not  be  disturbed  although 
the  pleading  was  not  put  in  evidence. 
Teall  V.  Consolidated,  etc.  Co.,  119 
N.  Y.  654  (1890).  A  reorganized  com- 
pany may,  by  accepting  the  benefits 
of  a  contract  and  liability  of  the  old 


company,  become  liable  therefor,  al- 
thougli  the  meeting  of  the  directors 
authorizing  the  contract  was  in- 
formal. Baker  v.  Harpster,  42  Kan. 
511  (1889).  That  the  corporation  is 
liable  if  the  work  was  ordered  and 
done  for  its  benefit,  see  Grier  v.  Haz- 
ard, 13  N.  Y.  Supp.  583  (1891).  A 
party  accepting  the  benefit  of  a  con- 
tract for  a  long  time  cannot  repudi- 
ate it  on  the  ground  that  the  calls 
for  the  meetings  of  the  executive 
committee  and  of  tlie  stockholders 
which  authorized  the  contract  were 
insufficient;  nor  can  he  set  up  in 
such  a  case  that  the  directors  had 
not  authorized  the  contract.  Union 
Pac.  R'y  V.  Chicago,  etc.  R'y,  51  Fed. 
Rep.  309  (1892).  Although  a  mort- 
gage was  not  authorized,  yet  where 
the  board  of  directors  subsequently 
provide  for  payment  of  part  of  it, 
and  do  pay  part  of  it,  they  ratify  it. 
Seal  V.  Puget  Sound,  etc.  Co.,  5  Wash. 
St.  422  (1892).  It  is  a  ratification  of 
a  contract  for  the  corporation  to 
admit  its  execution  in  a  pleading. 
Tingley  v.  Bellingham,  etc.  Co.,  5 
Wash.  St.  644  (1893).  Ratification  by 
a  company  of  an  agent's  contract  is 
not  binding  on  the  other  party,  if  the 
ratification  rejected  one  provision  of 
the  contract.  Crabtree  v.  St.  Paul, 
etc.  Co.,  39  Fed.  Rep.  746  (1889).  Sub- 
sequent ratification  of  the  contract 
in  toto  is  not  sufficient  vmless  the 
other  party  assents.  Crabtree  v.  St. 
Paul,  etc.  Co.,  39  Fed.  Rep.  746  (1889). 

'Nims  V.  Mount  Hermon  Boys* 
School,  160  Mass.  177  (1893). 

2Seeg§663,  664,  ^i^ro. 


1478 


CH.  SXIII.]        HOW    COKPOEATE    CONTEACTS    AEE   MADE. 


[§  T13. 


tion  is  enofaffed  in  a  business  the  nature  of  which  and  the 
duties  in  relation  to  which  require  or  justify  the  giving  of  nego- 
tiable instruments  without  the  oiBcers  being  authorized  thereto 
by  a  special  vote  to  that  effect.^  TVTiere  a  mortgage  recites 
that  it  was  duly  executed  by  authority  of  the  corporation,  nei- 
ther the  corporation  nor  its  creditors  can  claim  that  the  board 
of  directors  did  not  authorize  it  in  the  form  in  which  it  was 
executed.^  In  California  it  is  held  tliat  an  unauthorized  mort- 
gage is  not  ratified  nor  is  it  made  valid  by  estoppel  in  pais 
except  in  a  manner  in  writing  sufficient  to  authorize  the  mort- 
gage.' Corporate  creditors'  rights  by  attachments  which  are 
obtained  between  the  time  of  the  execution  of  an  illegal  mort- 
gage and  the  ratification  of  the  same  have  priority  over  the 
mortf]:aore.* 

§  713.  De  facto  directors  and  officers  of  a  corporation  —  The 
validity  of  their  contracts. —  A  de  facto  officer  is  one  who  has 
the  reputation  of  being  the  officer  he  assumes  to  be,  and  yet  is 
not  entitled  to  the  office  in  point  of  law.**  A  de  jure  officer  is 
one  who  has  the  lawful  right  to  the  office,  but  who  has  either 


*  Martin  v.  Niagara,  etc.  Co.,  122 
N.  Y.  165  (1890). 

2  Sioux  City,  etc.  Co.  v.  Trust  Co.,  83 
Fed.  Rep.  124  (1897).  Wliere  the  seal 
of  the  company  has  been  duly  affixed 
to  a  mortgage  by  the  secretary,  the 
mortgagee  need  not  inquire  whether 
the  secretary  was  duly  authorized  to 
affix  it,  or  whether  a  quorum  of  the 
directors  was  present  at  the  meeting 
and  authorized  the  mortgage,  the 
court  upholdiag  the  mortgage,  al- 
though a  quorum  was  not  present 
when  it  was  authorized.  County, 
etc.  Bank  v.  Rudry  ]Merthyr,  etc.  Co., 
[1895]  1  Ch.  629.  "None  but  the  cor- 
poration and  its  stockholders  or  cred- 
itors can  impeach  a  transfer  of  prop- 
erty by  the  corporation  for  the  want 
of  the  previous  action  of  the  board  of 
directors;  and  then  only  by  a  direct 
action  brought  for  that  purpose." 
Castle  V.  Lewis,  78  N.  Y.  131  (1879); 
Eno  V.  Crooke,  10  N.  Y.  60  (1854). 

3  Blood  V.  La  Serena,  etc.  Co.,  113 
CaL  221  (1896). 

14' 


*  State  Nat.  Bank  v.  Union  Nat 
Bank,  48  N.  E.  Rep.  82  (IlL,  1897). 

5  "  To  constitute  an  officer  de  facto 
there  must  be  a  color  of  election  or 
appointment,  or  an  exercise  of  the 
functions  of  the  office  under  such 
circumstances  and  for  such  length  of 
time,  without  interference,  as  to  jus- 
tify the  presumption  of  a  due  elec- 
tion or  appointment.  The  mere  ex- 
ercise of  the  functions  of  the  office  is 
in  itself  insufficient."  Moses  v.  Tomp- 
kins, 84  Ala.  613  (1888).  See  also  Rex 
V.  Bedford  Level,  6  East,  356  (1805); 
Mechanics',  etc.  Bank  v.  Burnett,  etc. 
Co.,  32  N.  J.  Eq.  236  (1880);  Hamlin  u 
Kassafer,  15  Greg.  456  (1887).  Contra, 
Litchfield  Iron  Co.  v.  Bennett,  7  Cow. 
284  (1827);  Clark  v.  Farmers'  Mfg. 
Co.,  15  Wend.  256  (1836);  Wait  v. 
Mining  Co.,  36  Vt.  18  (1863).  See 
also  Wait,  Insolv.  Corp.,  §  23.  Offi- 
cers are  stiU  de /acfo  after  judgment 
of  ouster  is  rendered,  but  before  its 
entry,  even  though  they  acted  with 
knowledge  of  the  decision.  Mining 
79 


§  T13.] 


HOW    COKrOEATE    CONTRACTS    ARE    MADE.        [cil.  XLIII. 


been  ousted  from  it  or  has  never  actually  taken  possession  of 
it.  An  officer  is  de  facto  when  the  statute  under  which  ho 
holds  office  is  unconstitutional;*  or  when  he  was  elected  Init 
was  ineligible,^  or  was  irregularly  or  illegally  elected.'  An 
officer  who  holds  over  by  reason  of  the  failure  of  the  corpora- 
tion to  elect  his  successor  is  not  only  a  de  facto  but  a  de  jure 
officer.^ 

The  contracts  of  an  officer  de  facto,  acting  within  the  sphere 
of  his  office,  are  binding  upon  the  corporation.* 

Co.  V.  Anglo,  etc.  Bank,  104  U.  S.  192    Uncle  Sam,  etc  Min.  Co.,  1  Nev.  197 


(1881);  S.  C.  in  U.  S.  C.  Ct.,  6  Rep.  705. 
Cf.  Walker  v.  Flemming,  70  N.  C. 
483  (1874).  In  McCall  v.  Byram,  etc. 
Co.,  6  Conn.  428  (1827),  it  is  held 
that  a  secretary  is  de  facto  only 
where  there  is  at  least  a  pretended 
election.  See  Hamlin  v.  Kassafer,  15 
Oreg.  456  (1887).  A  demand  on  a  cor- 
poration for  certain  property  is  not 
proved  by  showing  a  demand  on 
those  who  afterwards  became  its  in- 
corporators and  officers.  McCallimi 
V.  Purssell  ]\Ifg.  Co.,  1  N.  Y.  Supp. 
428  (1888).  Directors  whose  title  is 
contested  are  not  de  facto  officers  as 
against  the  old  officers  holding  over. 
Ellsworth,  etc.  Co.  v.  Faunce,  79  Ma 
440  (1887). 

The  following  definitions  have  been 
given  of  an  officer  de  facto:  "  One 
who  has  the  reputation  of  being  the 
officer  he  assumes  to  be,  and  yet  is 
not  a  good  officer  in  point  of  law." 
Parker  v.  Kett,  1  Ld.  Raym.  658; 
Rex  V.  Bedford  Level,  6  East,  368 
(1805).  "  One  who  actually  performs 
the  duties  of  an  office,  with  appar- 
ent right,  and  under  claim  and  color 
of  an  appointment  or  election." 
Brown  v.  Lunt,  37  Me.  428  (1854). 
"  One  who  has  the  color  of  right  or 
title  to  the  office  he  exercises;  one 
who  has  the  apparent  title  of  an  offi- 
cer dejure:'  Brown  v.  O'Connell, 
36  Conn.  451  (1870).  "On  the  one 
hand  he  is  distinguished  from  a  mere 
usurper  of  an  office,  and  on  the  other 
from  an  officer  de  jure."    Mallett  v. 


1480 


(1805);  Plymouth i\  Painter,  17  Conn, 
588  (1816).  In  State  v.  Curtis,  9  Nev. 
325  (1874),  the  court  held  tliat  in  order 
to  make  a  person  an  officer  de  facto 
he  should  in  some  way  have  been  put 
into  the  office  and  liave  secured  such 
a  holding  thereof  as  to  be  considered 
in  peaceable  possession  and  actually 
exercising  the  functions  of  an  officer; 
an  intrusion  by  force  is  not  suffi- 
cient. 

1  Leach  v.  People,  122  111.  420  (1887). 

2  Despatch  Line  v.  Bellamy  Mfg. 
Co.,  12  N.  H.  205  (1841).  Cf.  ch. 
XXXVII,  supra, 

3  Baird  v.  Bank  of  Washington,  11 
Serg.  &  R  411  (1824),  where  a  mi- 
nority of  the  directors  elected  him; 
Delaware,  etc.  Canal  Co.  v.  Pennsyl- 
vania Coal  Co.,  21  Pa,  St.  131  (1853), 
where  the  president  was  not  a  resi- 
dent as  required  by  statute. 

*See  §  624,  supra;  Thornton  v. 
Gould,  59  Ala.  461  (1877).  Contra, 
Curling  v.  Chalklen,  3  M.  &  S.  496, 
510  (1833);  Peppin  v.  Cooper,  2  B.  & 
Aid.  431  (1819);  People  v.  Twaddell, 
18  Him.  427  (1879). 

5  St.  Luke's  Church  v.  Matthews,  4 
Dessaus.  (S.  C.)  578  (1815);  Vernon 
Soc.  V.  HiUs,  6  Cow.  23  (1826);  All 
Saints  Church  v.  Lovett,  1  Hall,  191 
(1828) ;  Lovett  v.  German  Ref.  Churcli, 
12  Barb.  67  (1852);  Riddle  v.  Bedford, 
7  Serg.  &  R.  (Pa.)  392  (1821);  York 
County  V.  Small,  1  Watts  &  S.  (Pa.) 
315  (1841);  Kmgsbury  v.  Ledyard,  2 
Watts  &  S.  (Pa.)  41  (1841);  Despatch 


CH.  XLIII.]        HOW    COKPOKATE    CONTBACTS    ARE   MADE. 


"  'WTiere  persons  have  to  deal  for  the  first  time  with  an  es- 
tablished company,  and  with  those  who  have  been  and  are  act- 
ing openly  and  without  challenge  as  directors  of  that  company, 
and  whom  they  honestly  believe  to  be  directors,  they  certainly 
are  not  bound  to  inquire  into  the  qualifications  or  validity  of 
appointment  of  those  de facto  directors."  ^   And  the  general  rule 


Line  u  Bellamy  Mfg.  Co.,  12  N.  H.  205 
(1841);  Smith  v.  Erb,  4  Gill  (Md.),  437 
(1846);  Burr  v.  McDonald,  3  Gratt. 
(Va.)20G.  215  (1846);  Granville  Char- 
itable Assoc.  V.  Baldwin,  42  Mass.  359 
(1840);  Green  v.  Cady,  9  Wend.  414 
(1832):  Elizabeth  City  Acad.  v.  Lind- 
sey,  6  Ired.  L.  (N.  C.)  476  (1846);  Mc- 
Call  V.  Byram  Mfg.  Co..  6  Conn.  428 
(1827):  Lathrop  v.  Scioto  Bank,  8 
Dana  (Ky.),  115  (1839);  Delaware,  etc. 
Canal  Co.  v.  Pennsylvania  Coal  Co., 
21  Pa.  St  131  (1853);  St.  Marj-'s  Bank 
V.  St.  John,  25  Ala.  5G6  (1854);  Baird 
V.  Washington  Bank,  11  Serg.  &  R. 
411  (1824);  Ex  parte  Rogers,  7  Cow. 
530,  n.  (1827);  Doremus  v.  Dutch  Re- 
formed Ch.,  3  N.  J.  Eq.  332  (1835); 
Re  Mohawk,  etc  R  R,  19  Wend. 
135  (1838);  Ee  Chenango  Ins.  Co.,  19 
Wend.  635  (1838) :  Blandford  v.  School 
District,  56  Mass.  39  (1848);  Sampson 
V.  Bowdoinham  Co.,  36  Me.  78  (1853); 
Penobscot  v.  Dunn,  39  Me.  587  (1855) ; 
Fairfield,  etc.  Co.  v.  Thorp,  13  ConrL 
173  (1839);  Rex  r.  Bedford  Level,  6 
East,  356,  368  (1805);  Parker  v.  Kett, 
1  Ld.  Raym.  658  (1701);  Wild  v.  Pas- 
samaquoddy  Bank,  3  ]\Iason,  505 
(1825);  S.  a,  29  Fed.  Cas.  1215;  Bar- 
rington  v.  Washington  Bank,  14  Serg. 
&  R  (Pa.)  405  (1826);  Minor  v.  Me- 
chanics' Bank,l  Pet.  46  (1828);  Cahill 
V.  Kalamazoo  Ins.  Co.,  2  Doug.  (Mich.) 
124  (1845);  M'Gargell  v.  Hazelton 
Coal  Co.,  4  Watts  &  S.  (Pa.)  424  (1842), 
an  action  for  a  penalty,  in  which  evi- 
dence was  admitted  to  show  that 
the  person  representing  the  company 
was  an  officer  de  facto;  Re  County, 
etc.  Co.,  L.  R  5  Ch.  288  (1870n  Maho- 
ney  v.  East,  etc.  Co.,  L.  R  7  H.  L.  869 
(1875;;  Partridge  v.  Badger,  25  Barb. 


146  (1857),  where  the  treasurer  was 
only  de  facto;  Doremvis  v.  Dutch, 
etc.  Co.,  3  N.  J.  Eq.  332  (1835),  where 
seceding  trustees  made  a  mortgage; 
Mechanics',  etc.  Bank  v.  Burnet,  etc. 
Co.,  32  N.  J.  Eq.  236  (1880),  and  Char- 
itable Assoc.  V.  Baldwin,  42  Mass. 
359  (1840),  where  de  facto  directors 
brought  suits;  Clark  v.  Easton,  146 
Mass.  43  (1888);  Cooper  v.  Curtis,  30 
Me.  488  (1849),  holding  that  debtors 
to  the  corporation  cannot  set  this 
up;  Susquehanna,  etc.  Co.  v.  General 
Ins.  Co.,  3  Md.  305  (1852),  holding  that 
a  president  who  executes  an  instru- 
ment is  presumed  to  be  president; 
Hackensack,  etc.  Co.  v.  De  Kay,  36 
N.  J.  Eq.  548  (1883),  where  de  facto 
directors  gave  a  mortgage.  Direct- 
ors who  are  elected  at  a  stockholders' 
meeting  not  properly  called  cannot 
make  and  enforce  calls.  Hawbeach, 
etc.  Co.  V.  Teague,  5  H.  &  N.  151 
(1860).  A  board  of  directors  who  are 
ineligible  cannot  revoke  an  agiee- 
ment  to  arbitrate  a  suit.  Richards 
V.  Attleborough  Nat.  Bank,  148  Mass. 
187  (1889).  See  also  §  624,  supra.  An 
exhibition  corporation  is  liable  for 
premiums,  although  the  exhibition 
was  conducted  by  de  facto  officers, 
whose  title  to  office  was  held  to  be 
bad  a  month  prior  to  the  exliibition. 
Richards  v.  Farmers',  etc.  Inst.,  154 
Pa.  St.  449  (1893). 

1  Webb  V.  Shropshire  R'ys,  69  L.  T. 
Rep.  533, 539  (1893);  also  holding  such 
to  be  the  rule  where  a  quorum  was 
not  present  when  they  were  elected 
or  where  they  were  not  qualified. 
Although  a  director  is  not  qualified 
according  to  the  by-laws,  yet,  if  he  is 
elected  and  permitted  to  act,  his  eleo 


1481 


§  ns.] 


HOW    COEPOEATE    CONTRACTS    ARE    MADE.        [CH.   XLIU. 


is  that  where  corporations  allow  persons  to  act  publicly  as  their 
officers,  their  right  to  act  in  the  offices  will  be  presumed  in 
favor  of  third  parties  contracting  with  the  corporations  through 
them.^ 


tion  is  valid  so  far  as  his  acts  as  di- 
rector affect  third  persons.   Despatch 
Line  v.  Bellamy  Mfg.  Co.,  12  N.  H. 
205  (1841).    The  fact  that  a  contract 
of  a  Pennsylvania  company  is  made 
by  its  president  and  managers,  who 
are  non-residents  and  not  residents  as 
required  by  statute,  does  not  enable 
the  other  party  to  the  contract  to 
raise  that  objection.    Delaware,  etc. 
Canal  Co.  v.  Pennsylvania  Coal  Co., 
21  Pa.  St.  131  (1853).    The  eligibility 
of  a  director  wlio  has  acted  witli  the 
consent  of  all  cannot  be  questioned 
on  an  application  to  have  the  com- 
pany dissolved   under  the  statute. 
Re  Santa,  etc.  Co.,  4  N.  Y.  Supp.  173 
(1889).     Although  the    statutes  re- 
quire the  directors  to  be  residents  of 
the  state,  nevertheless,  even  tliough 
the  directors  are  non-residents,  the 
incorporation  is  valid,  and  the  corpo- 
ration is  not  dissolved,  nor  are  the 
stockholders  liable  as  partners.  Dem- 
arest  u  Flack,  128  N.  Y.  205  (1891). 
The  qualification  of  a  director  cannot 
be  questioned  by  a  creditor  who  is 
seeking  to  enforce  a  statutory  liabil- 
ity of  officers.    Wallace  v.  Walsh,  125 
N.  Y.  26  (1890).    One  who  assumes  the 
duties  of  a  director  cannot  say  that 
he  never  was  a  director.    McDowall 
V.  Sheehan,  129  N.  Y.  200  (1891).    The 
disqualified  director  is  bound;  he  is 
liable  as  a  director  for  breach  of 
trust.    Western  Bank  v.  Baird,   11 
Ct.  of  Sess.  Cas.,  3d  series,  96,  121 
(1872);   Easterly  v.  Barber,  65  N.  Y. 
252  (1875).     Cf.  Craw  v.  Easterlv,  54 
N.  Y.  679  (1873).    The  principle  of"  law 
tJiat  the  acts  of  an  ineligible  but  de 
facto  officer  may  bind  the  corpora- 
tion arises  often  in  municipal  corpo- 
ration cases.    State  v.  Farrier,  47  N  J 
L.383  (1885);  aff'd,  48  N.  J.' L.  613.' 


1482 


Although  the  directors  are  not  quali- 
fied, nevertheless  the  company  can- 
not repudiate  stock  issued  to  a  con- 
tractor in  payment  for  work,  wlioro 
such  work  has  been  received,  such 
contract    being   authorized  by   the 
disquiilified  directors.    Tlie  company 
cannot  accept  the  subscription,  ami 
at  the  same  time  repudiate  the  con- 
tract mode  of  payment.   lie  Stafford- 
sliire  Gas,  eta  Co.,  66  L.  T.  Kep.  413 
(1892).    Directors   may  act  as  such 
before    they    acquire    qualification 
shares.     Re  International  Cable  Co., 
66  L.  T.  Rep.  253  (1892).    Although  the 
statutes  require  three  directors,  wlio 
sliall  be  stockholders,  and  one  assigns 
his  stock,  and  the  other  two  autliorize 
and  execute  a  corporate  mortgage  at 
a  meeting  held  without  notice  to  the 
other,  yet  the  mortgagee  having  no 
knowledge  of  these  facts  is  protected. 
Kuser,  v.  Wright,  31  Atl.  Rep.  397 
(N.  J.,  1895),  rev'g  28  Atl.  Rep.  719. 

lU.    S.    Bank    v.    Dandridge,    13 
Wheat.   64    (1829);    Union   Bank  v. 
Ridgely,  1  Har.  &  G.  (Md.)  392  (1827); 
Barrington  v.  Washington  Bank,  14 
Serg.  &  R  (Pa.)  421  (1826);  Wild  v. 
Passamaquoddy  Bank,  3  Mason,  505 
(1825);  S.  C,  29  Fed.  Cas.  1215;  Perkins 
V.  Waoliington  Ins.  Co.,  4  Cow.  645 
(1825);  TroyTurnp.  Co.  u  M'Chesney, 
21  Wend.   296    (1839);    Doremus    v. 
Dutch  Reformed  Church,  3  N.  J.  Eq. 
332  (1835);  Warren  v.  Ocean  Ins.  Co., 
16  Me.  439  (1839);  Badger  v.  Cumber- 
land Bank,  26  Me.  428  (1846);  David- 
son V.  Bridgeport,  8  Conn.  472  (1831); 
Selma,  etc.  R.  R  v.  Tipton,  5  Ala.  787 
(1843);  Detroit  v.  Jackson,  1   Doug. 
(Mich.)  106  (1843);  Farmers'  Bank  v. 
Chester,  6  Humpli.  (Tenn.)  458  (1846); 
Hall  V.  Carey,  5  Ga.  259  (1848);  Con- 
over  V.  Albany  Ins.  Co.,  1  Comst.  290 


CH,  XLITI.]        HOW    COKPORATE    CONTKACTS   AUE   MADE.  [§   713«. 


It  is  no  defense  to  a  mortgage  that  tlie  directors  authorizing 
it  were  irregularly  elected,  the  stockholders  having  acquiesced.^ 
The  fact  that  some  of  the  directors  are  not  residents  of  the 
state,  as  required  by  statute,  does  not  invalidate  a  mortgage 
given  by  them  on  land  in  another  state.^  But  the  acts  of  de 
facto  directors  cannot  be  invoked  in  behalf  of  themselves  or 
stockholders.  Only  strangers  can  rely  thereon.^  The  de  facto 
director  cannot  avoid  a  liability  by  setting  up  that  he  was  not 
a  dejure  director;*  nor  collect  a  salary  as  a  de  facto  officer;' 
nor  make  a  note  to  himself  and  claim  that  his  office  gave  him 
the  authority.®  A  de  facto  officer  is  ousted  by  a  quo  warranto 
proceeding,''  and  not  by  a  suit  in  equity,^  nor  by  an  action  in 
trespass,"  nor  a  writ  of  prohibition.^" 

§  1\Za.  Mectinga  of  directors — Place — Notice — Action  tvitJi- 
out  meeting  —  Quorum. —  A  meeting  of  the  directors  of  a  cor- 
poration may  be  held  outside  of  the  state  creating  the  corpora- 
tion, unless  the  charter  or  a  statute  expressly  forbids  such  a 
meeting.  The  acts,  proceedings,  and  contracts  of  a  meeting 
of  the  board  of  directors  held  outside  of  the  state  are  valid  and 
enforceable." 


(1848);  Lohman  v.  New  York,  etc.  R 
R.,  2  Sandf.  39  (1848);  Beers u.  Phoenix 
Glass  Co.,  14  Barb.  358  (1852);  Ala- 
bama Bank  v.  Comegys,  12  Ala.  773 
(1848);  Mead  v.  Keeler,  24  Barb.  20 
(1857);  Fiyeburg  Canal  v.  Frye,  5  Me. 
38  (1827);  Northern  Liberties  Bank  v. 
Cresson,  12  Serg.  &  R  (Pa.)  306  (1824). 

1  Savage  v.  Miller,  36  AtL  Rep.  578 
(N.  J.,  1897). 

2  Wheehvright  v.  St.  Louis,  etc 
Transp.  Co.,  56  Fed.  Rep.  164  (1893). 

3  Shellenberger  v.  Patterson,  168 
Pa.  St.  30  (1895). 

<Keyser  v.  McKissara,  2  Rawle 
(Pa.),  139  (1828),  involving  a  bond; 
Bank  of  St.  Mary's  v.  St.  John,  25  Ala. 
566  (1854);  West  Bank  of  Scotland  v. 
Baird  and  others,  11  Ct.  of  Sess.  Cas. 
(3d  series),  pp.  96-121  (1872).  A  di- 
rector who  has  acted  as  such  cannot 
claim  that  the  election  was  irregular. 
HaU  V.  West,  etc.  Pub.  Co.,  37  AtL  Rep. 
106  (Pa.,  1897).  A  de  facto  director 
cannot  defend  against  a  statutory 


liability  of  directors  on  the  ground 
that  he  did  not  hold  sufficient  stock 
to  qualify  himself  to  be  a  director. 
Donnelly  v.  Pancoast,  15  N.  Y.  App. 
Div.  323  (1897).  A  director  who  acts, 
even  though  not  qualified,  is  subject 
to  the  rule  disqualifying  him  from 
selling  property  to  the  company. 
Stetson  V.  Northern  Inv.  Co.,  73  N.  W. 
Rep.  869  (Iowa,  1898). 

5  Riddle  v.  Bedford  County,  7  Serg. 
&  R  (Pa.)  386  (1821). 

8  Lebanon,  etc.  Co.  v.  Adair,  85  Ind. 
244  (1882). 

^  See  §  617,  sxipra.  A  superintend- 
ent elected  by  de  facto  directors  may 
be  ousted.  State  v.  Curtis,  9  Nev.  325 
(1874). 

8  See  §  618,  mpra. 

9  Kingsbury  v.  Ledyard,  2  Watts 
&  S.  (Pa.)  37  (1842). 

1"  San  Jose,  etc.  Bank  v.  Sierra,  etc. 
Co.,  63  CaL  179  (1883). 

11  The  first  or  organization  meeting 
of  the  directors  may  be  held  out  of  the 


1483 


713«.]  HOW   COKPOKATE    CONTKACTS    AKE    iL\.DE.        [CH.  ILIII. 


There  has  been  some  controversy  and  doubt  as  to  the  neces- 
sity of  giving  notice  of  directors'  meetings.  Many  cases  apply 
to  directors'  meetings  the  same  rules  that  apply  to  stochlioM- 
ers'  meetings.     Other  cases  hold  that  less  formality  and  strict- 


state.  Glymont  Imp.  etc.  Co.  v.  Toler, 
80  Md.  278  (1894).  A  by-law  that 
regular  directors'  meetings  shall  be 
held  in  the  state  does  not  prevent 
special  meetings  outside  of  the  state. 
Ashley  Wire  Co.  v.  Illinois  Steel  Co., 
164  IlL  149  (189G);  Wright  v.  Bundy, 
11  Ind.  398,  404  (1858).  where  a  mort- 
gage of  a  railway  incorporated  bj''  In- 
diana was  held  valid  though  executed 
in  Ohio;  Bassett  v. Monte  Christo,  etc. 
Co.,  15  Nev.  293  (1880),  where  power 
to  issue  bonds  and  mortgage  real 
property  in  Nevada  was  conferred  at 
a  meeting  of  directors  held  in  New 
York,  the  corporation  having  been 
chartered  by  Pennsylvania  —  but 
here  the  charter  authorized  the  cor- 
poration to  meet  and  act  at  any  place 
in  the  United  States;  Ohio,  etc.  R.  R. 
V.  McPherson,  35  Mo.  13  (18G4),  where 
calls  for  payment  of  subscriptions  to 
stock  made  by  a  board  of  directors  at 
meetings  held  outside  of  the  state 
creating  the  corporation  were  lield 
to  be  valid;  Wood  Hydraulic,  etc.  v. 
King,  45  Ga.  34  (1872),  in  which  the 
minutes  of  a  meeting  of  directors  held 
out  of  the  state  chartering  their  com- 
pany were  held  to  be  evidence  of  the 
acts  of  the  board  in  making  con- 
tracts in  other  states.  A  directors' 
meeting  out  of  the  state  may  author- 
ize a  mortgage  on  real  estate.  Salt- 
marsh  V.  Spaulding,  147  Mass.  224 
(1888);  Reichwald  v.  Commercial 
Hotel  Co.,  106  IlL  439  (1883);  Galves- 
ton, etc.  R.  R.  u  Cowdrey,  11  Walk 
459,  476  (1870),  in  which  it  was  held 
that  bona  fide  holders  of  railroad 
bonds  could  not  be  prejudiced  by  the 
fact  that  the  mortgage  by  which  they 
were  secured  was  executed  by  virtue 
of  a  resolution  of  directors  at  a  meet- 
ing held  out  of  the  state  which  char- 


tered the  road;  Bellows  v.  Todd,  39 
Iowa,  209,  217  (1874),  where  a  convey- 
ance of  real  estate  was  authorized; 
Armes  v.  Conant,  36  Vt  744  (1864); 
IMcCall  V.  Byram  Mfg.  Co.,  G  Conn. 
428  (1827);  Smith  v.  Alvord,  03  Barb. 
415  (1806).  Cf.  Ormsby  v.  Vermont, 
etc.  Co.,  50  N.  Y.  C'23  (1874);  Aspin- 
wall  V.  Ohio,  etc.  R.  R.,  20  Ind.  492, 
497  (1803).  Corporations  incoriX)rated 
in  New  Jersey  were  formerly  re- 
quired by  statute  to  hold  their  di- 
rectors' meetings  within  that  state. 
Hilles  V.  Parrish,  14  N.  J.  Eq.  380  (1802). 
The  president  may  call  a  meeting  of 
the  directors  at  a  place  other  than 
the  chief  place  of  business.  Corbett 
V.  Woodward,  5  Sawj-er,  403  (1879); 
S.  C,  0  Fed.  Cas.  531.  A  person  who 
participates  in  a  directors'  meeting 
held  out  of  the  state  cannot  object 
to  it  on  that  ground.  Wood  v.  Boney, 
21  Atl.  Rep.  574  (N.  J.,  1891).  The  di- 
rectors may  hold  their  meetings  out- 
side of  the  state.  Missouri,  etc.  Co.  v. 
Reinhard,  114  Mo.  218  (1893).  An  as- 
signment of  a  corporate  mortgage 
may  be  executed  in  another  state. 
Gray  v.  Waldron,  101  Mich.  612  (1894). 
In  Brockway  v.  Gadsden,  etc.  Co.,  102 
Ala.  020  (1894),  a  meeting  of  the 
board  of  directors  outside  of  the  state 
was  held  to  be  illegal  under  the  Ala- 
bama statute  which  regulates  such 
meetings.  A  mortgage  authorized 
by  the  board  of  directors'  meeting 
held  outside  of  the  state  is  illegal, 
unless  such  meeting  was  authorized 
or  its  acts  ratified  by  a  vote  of  two- 
thirds  of  the  directors  at  a  regular 
meeting  in  the  state  in  accordance 
with  the  statute.  State  Nat.  Bank  v. 
Union  Nat.  Bank,  48  N.  E.  Rep.  82 
(IlL,  1897).  Special  meetings  of  the 
directors  may  be  held,  altliough  the 


1484 


OH.  XLHI.]        HOW    COEPOEATE    CONTEACTS    AEE   MADE.  [§  713^. 


ness  are  required  in  calling  a  directors'  meeting.  The  former 
rule  is  safer,  although  probably  the  latter  rule  will  ultimately 
prevail.^ 


by-laws  do  not  provide  for  such. 
United  Growers'  Co.  v.  Eisner,  22 
N.  Y.  App.  Div.  1  (1897). 

1  The  following  decisions  will  throw 
light  upon  this  subject :  "  That  all  the 
directors  are  entitled  to  notice,  either 
express  or  implied,  of  any  meeting  at 
which  any  business  is  transacted,  in 
order  that  the  business  may  be  bind- 
ing upon  all  the  persons  concerned, 
admits  of  no  question.  ...  If  the 
meetings  held  are  regular  meetmgs, — 
that  is,  such  as  are  provided  for  by 
charter  or  the  by-laws,  fixing  time 
and  place, —  then  notice  thereof  is 
implied.  Of  all  other  meetings,  es- 
pecially those  at  which  any  business 
not  pertaining  to  the  ordinary  affairs 
of  the  corporation  is  transacted,  ex- 
press notice  must  be  given  of  the 
time  and  place  and  the  object  or  pur- 
pose of  the  meeting."  Whiteliead  v. 
Hamilton  Rubber  Co.,  52  N.  J.  Eq. 
78,  82  (18'J3).  An  assignment  of  bank 
accoimts  by  a  corporation  to  its  pres- 
ident, as  collateral  secm-ity,  is  not 
valid  where  no  notice  was  given  to 
all  the  directors  of  the  meeting  au- 
thorizing the  assignment.  Whitehead 
V.  Hamilton  Rubber  Co.,  52  N.  J.  Eq. 
78  (1893).  A  special  meeting  of  di- 
rectors is  void  if  no  notice  is  given 
to  absent  directors.  Hill  v.  Rich 
Hill,  etc.  Co.,  119  Mo.  9  (1893).  A  per- 
son who  is  elected  a  director  but  does 
not  accept  need  not  be  notified  of 
a  directors'  meeting.  Whittaker  v. 
Amwell  Nat.  Bank,  52  N.  J.  Eq.  400 
(189-4).  A  meeting  of  a  majority  of 
the  directors  at  an  unusual  t^me  and 
place  is  not  valid  where  the  minority 
had  no  notice.  First  Nat.  Bank  v. 
AsheviUe,  etc.  Co.,  116  N.  C.  827  (1895). 
The  fact  that  a  director  owns  or  con- 
trols a  majority  of  the  stock  does  not 
validate  an  illegally-called  meeting 
of  the    directors,  even    though   he 


favored  their  action.    Hill  v.  Rich 
HiU,  etc.  Co.,  119  Mo.  9  (1893).    Where 
the  directors  of  a  bank  are  accus- 
tomed to  hold  directors'  meetings  at 
the  bank  whenever  a  quorum  is  pres- 
ent, this  custom  will  be  upheld,  and 
a  meeting  is  legal,  although  no  notice 
thereof  was  given,  there  being  no 
by-law  or   statute  on    the  subject. 
American  Nat.  Bank  v.  First  Nat. 
Bank,  82  Fed.  Rep.  961  (1897).    Direct- 
ors are  required  to  take  notice  of  an 
annual  meeting,  and  no  notice  need 
be  given  of  an  adjournment  thereof. 
Western  Imp.  Co.  v.  Des  Moines  Nat. 
Bank,  72  N.  W.  Rep.  657  (Iowa,  1897). 
Even  though  no  notice  is  given  to  a 
director  of  a  meeting  of  the  board, 
yet  where  the  matter  passed  upon  by 
the  board  is  one  which  he  would  be 
disquaUfied  from  voting  upon,  the 
meeting  is  legal.    Troy  Min.  Co.  v. 
Wliite,  74  N.  W.  Rep.  236  (S.  D.,  1898). 
An    assignment  for  the  benefit  of 
creditoi's,  authorized  at  a  meeting  of 
the  board  of  directors  where  a  part 
of  the  directors  were  absent  and  had  ■ 
no  notice  thereof,  is  not  valid.    Simon 
V.  Sevier  Assoc,  54  Ark.  58  (1890). 
Notice  of  a  directors'  meeting  need 
not  be  given  to  a  director  who  re- 
sides abroad,  nor  to  another  director 
who  is  traveling  abroad.    The  court, 
however,  refused  to  lay  dT)wn  the 
broad  rule  that  no  notice  in  any  case 
need  be  given  to  directors  who  are 
abroad.    Halifax,  etc.  Co.  v.  Franck- 
lyn,  62  L.  T.  Rep.  563  (1890).    Notice 
of  a,  directors'  meeting  cannot  be 
waived  in   advance  by  a    director 
where  the  time  and  purpose  of  the 
meeting  have  not  yet  been  deter- 
mined  upon.    lie   Portuguese,   etc. 
Mines,  L.  R.  42  Ch.   D.   100  (1889). 
Where  three  of  seven  directors  are 
non-residents,  one  having   sold  liis 
stock,  one  traveling,  and  one  iuacces- 


1485 


§  713a.]  HOW    COKPOEATE    C0NTEACT8    AEE   MADE.        [CH.  XLIH. 


The  law  is  inclined  to  tolerate  more  freedom  in  the  notice 
and  the  calling  and  holding  of  directors'  meetings,  inasmuch  as 
the  meetings  are  more  frequent,  the  absences  more  common, 
the  acts  less  fundamental,  and  ratification  by  acting  on  the  con- 


sible  for  immediate  notice,  the  four 
remaining  directors  may  hold  a  meet- 
ing and  autliorize  an  assignment  of 
the  corporate  property  for  the  benefit 
of  creditors.  The  assignment  was 
held  to  be  legal,  the  traveling  di- 
rector and  the  inaccessible  director 
having  subsequently  voted  in  a  meet- 
ing for  the  selection  of  an  assignee. 
National  Bank  of  Commerce  v.  Shum- 
way,  49  Kan.  224  (1892).  A  mortgage 
authorized  at  a  directors'  meeting  at 
which  four  were  present  and  the 
other  received  no  notice  is  illegal, 
the  giving  of  notice  being  possible, 
and  there  being  no  necessity  for  im- 
mediate action.  Bank  of  Little  Rock 
V.  McCarthy,  55  Ark.  473  (1892).  An 
assignment  for  the  benefit  of  credit- 
ors, made  by  order  of  a  directors' 
meeting  at  which  three  directors 
were  present  and  the  other  two  were 
not  notified,  is  invalid,  and  no  bar  to 
a  creditor's  action  to  collect  unpaid 
subscriptions.  Doernbecher  v.  Co- 
lumbia, etc.  Co.,  21  Greg.  573  (1892). 
Where  a  directors'  meeting,  accord- 
ing to  the  by-laws,  may  be  called  by 
the  president,  or  if  there  is  no  presi- 
dent by  two  directors,  the  two  direct- 
ors cannot  call  it,  even  if  the  president 
refuses  to  do  so.  The  acts  of  a  meet- 
ing of  a  board  so  called  are  illegal,  a 
majority  of  the  directors  only  being 
present.  Smith  v.  Dorn,  96  CaL  73 
(1892).  A  director  is  entitled  to  notice 
of  a  meeting  to  elect  a  president.  Un- 
due haste  and  failure  to  give  notice 
will  suffice  to  set  the  election  asida 
A  subsequent  meeting  of  the  board 
cannot  ratify  it.  The  election  must 
be  held  over  again.  State  v.  Smith, 
15  Oreg.  98  (1887);  53  Pac.  Rep.  1024. 
A  notice  of  a  school  trustees'  meet- 
ing need  not  be  given  to  trustees  out 


of  the  state  who  could  not  have  at- 
tended any  way.    Porter  v.  Robinson, 
30  Hun,  209  (1883).  In  Harding  v.  Van- 
dewater,  40  Cal.  77  (1870),  a  note  given 
for  an  assessment  upon  a  subscrijv 
tion  which  was  called  at  a  special 
meeting  of  the  board  of  trustees  of  a 
mining  company,  of  which  two  of 
the  trustees  had  no  notice,  was  held 
to  be  void.     In  Farwell  v.  Hougliton 
Copper,  etc.,  8  Fed.  Rep.  60  (1881),  it 
was  held  that  one  wlio  had  been  a 
shareholder  and  purchased  all  the 
property  of  the  company  at  a  meet- 
ing of  tlie  directors  held  without  no- 
tice, at  which  he  was  present  and 
knew  that  one  director  was  absent, 
was  bound  to  know  that  notice  to 
such  absent  director  was  necessaiy, 
and  that  he  was  not  a  bona  fide  jiur- 
chaser  without  notice.   Lane  v.  Brain- 
erd,  30  Conn,  5G5  (1862),  holding  that 
the  corporate  record  of  a  meeting  at 
which  a  quorum  was  present  was 
presumptive  proof  that  all  tlie  direct- 
ors had  been  duly  notified,  whether 
living   in  the    state    or    elsewhere. 
Where  the  deed  of  settlement  pro- 
vided for  special  meetings,  the  time 
and  place  of  which  were  to  be  fixed 
by  notices  countersigned  by  the  sec- 
retary, it  was  held  that  a  meeting  of 
the  requisite    nvmiber  of  directors 
without  previous  agreement  to  meet 
on  any  fixed  day  or  hovir  was  not  a 
meeting  duly  convened  within  the 
charter  provision.    Moore  v.   Ham- 
mond, 6  Bam.  &  C.  456  (1827).     To 
same  effect  in  municipal  corporation 
cases,  Smyth  v.  Darley,  2  H.  L.  Cas. 
789  (1849);  Rex  v.  Carlisle,  1  Stra.  38^ 
(1720).    An  adjourned  meeting  of  di- 
rectors may  act  to  the  same  extent 
that  the  original  meeting  might  have 
acted.    Smith  v.  Law,  21  N.  Y.  286 


1486 


CH.  XLIII.]        HOW    COEPOEATE   COXTKACTS    AEE    MADE.  [§  T13a. 


tracts  more  certain  and  easy.  "Where  five  of  eight  members  of 
the  board  of  an  insolvent  company  meet  and  authorize  the  sale 
of  certain  personal  property,  and  such  sale  is  carried  out,  other 
creditors  cannot  raise  the  objection  that  no  notice  was  given  to 


(I860);  Wills  v.  Murray,  4  Exch.  843 
(1850).  A  by-law  enacted  by  the  di- 
rectors in  reference  to  the  calling 
of  a  directors'  meeting,  even  if  not 
complied  with,  does  not  invalidate 
the  meeting.  •  Samuel  v.  Holladay, 
Woolw.  400  (1869);  S.  C,  21  Fed.  Cas. 
306.  A  quorum  of  directors  may  bind 
tlie  corporation,  although  the  other 
directors  are  not  notified,  there  being 
no  by-law  or  charter  provision  requir- 
ing notica  Edgerly  v.  Emerson,  23 
N.  BL  555  (1851).  Contra,  Despatch 
Line  v.  Bellamy  Mfg.  Co.,  12  N.  H. 
205  (1841).  An  assessment  made  at 
an  irregularly-called  directors'  meet- 
ing is  void.  Thompson  v.  Williams, 
76  CaL  153  (1888).  Two  out  of  three 
directors  cannot  authorize  a  chattel 
mortgage,  the  tliirJ  not  having  been 
notified  of  the  meeting.  The  mort- 
gagee was  one  of  the  directors.  Doyle 
V.  Mizner,  42  Mich.  332  (1879).  A  cor- 
porate receiver  cannot  object  to  a 
contract  on  the  ground  tliat  the  di- 
rectors' meeting  authorizing  it  was 
not  properly  convened,  but  the  re- 
ceiver may  avoid  corporate  notes 
issued  contrary  to  express  statute. 
Leavitt  v.  Yates,  4  Edw,  Ch.  134 
(1843).  Bonds  issued  under  author- 
ity of  a  meeting  of  two  commission- 
ers of  a  town  %vithout  notice  to  a 
third  commissioner  are  not  valid. 
Pike  County  v.  Rowland,  94  Pa,  St. 
238  (1880).  In  Kersey,  etc.  Co.  v.  Oil, 
etc.  R.  R.,  12  Phila.  374  (1877),  a  lease 
was  declared  void  because  it  was 
authorized  only  by  a  meeting  of  di- 
rectors of  which  part  of  the  directors 
had  no  notice  and  were  not  present. 
A  special  meeting  of  an  executive 
committee  is  irregular  unless  notice 
is  given  to  each  member.  Metropol- 
itan, etc  Co.  V.  Domestic,  etc.  Co.,  43 


N.  J.  Eq.  626  (1888).  ^Vhere  a  subse- 
quent meeting  of  directors  expressly 
ratifies  the  acts  of  a  preceding  meet- 
ing, any  defect  in  the  notice  given 
of  the  latter  meeting  is  cured. 
County  Court  v.  Baltimore,  etc.  R.  R, 
35  Fed.  Rep.  161  (1888).  Acts  of  a 
board  of  directors,  no  notice'  having 
been  given  to  absent  directors,  may 
be  valid  by  acquiescence.  Reed  v. 
Hayt,  51  N.  Y.  Super.  Ct.  121  (1884); 
aff'd,  109  N.  Y.  659.  Although  an  al- 
lotment of  stock  may  be  illegal  by 
reason  of  notice  not  having  been 
given  of  a  directors'  meeting,  yet  the 
allotment  may  be  confirmed  by  a 
subsequent  legally-called  meeting. 
Re  Portuguese,  etc.  Mines,  L.  R  45  Ch. 
D.  16  (1890).  A  person  who  commits 
a  trespass  on  the  property  of  a  cor- 
poration cannot  question  the  regu- 
larity of  a  contract  of  such  corpora- 
tion, so  far  as  such  regularity  turns 
on  the  action  pf  a  directors'  meeting, 
or  meeting  of  an  executive  commit- 
tee, or  assent  of  three-fifths  of  the 
stocldiolders,  as  required  by  statute. 
Farnsworth  v.  Western,  etc  Co.,  6 
N.  Y.  Supp.  735  (1889).  "The  evi- 
dence that  a  day  was  fijxed  by  com- 
mon consent  is  sufficient  to  show  no- 
tice to  all  of  the  meetings  on  that 
day."  "It  was  wholly  immaterial 
in  what  way  the  day  of  the  regtdar 
meetings  was  fixed."  Atlantic,  etc. 
Ins.  Co.  V.  Sanders,  36  N.  H.  252,  269 
(1858J.  In  a  case  where  directors 
were  empowered  to  meet  once  a  week 
at  their  office,  without  notice  or  sum- 
mons, but  on  such  day  and  at  such 
hour  as  they  should  from  time  to 
time  agree  upon,  it  was  held  that  a 
resolution  come  to  by  a  quorum  as- 
sembled without  notice  was  invalid, 
inasmuch  as  no  day  or  hour  for  the 


1487 


713a.]  now    COKPOKATE    CONTKACTS    AKE    MADE.        [cil.  XI.III. 


tlie  remaining  three  members  of  the  board.'  If  all  the  directors 
are  present  at  a  meeting,  it  is  immaterial  that  notice  was  not 
given,  even  though  the  by-laws  required  it.''  TVhcre  meetin"-s 
of  the  directors  can,  by  the  by-laws,  be  called  only  by  the 
president  or  majority  of  the  board,  the  secretary  cannot  call 
one.^  A  party  dealing  with  a  corporation  is  not  bound  to  in- 
quire whether  proper  notice  was  given  of  a  directors'  meetin<T.* 
A  general  notice  to  directors  of  a  corporation  of  a  meeting,  not 
specifying  the  business  to  be  transacted,  is  all  that  is  necessary 
to  authorize  the  transaction  of  the  ordinary  business  affairs  of 
the  corporation.' 


meeting  of  the  directors  had  ever 
been  fixed.  Moore  v.  Hammond,  6 
B.  &  C.  456  (1827).  If  the  board 
meeting  be  specially  convened,  the 
general  rule  is  that  notice  must  be 
served  upon  eveiy  member  entitled 
to  be  present.  Pike  County  v.  Row- 
land, 94  Pa.  St.  238  (1880).  Mandamus 
lies  to  compel  vestrymen  to  attend  a 
meeting  when  by  reason  of  dissen- 
sions they  decline  so  to  do.  People 
V.  Winans,  9  N.  Y.  Supp.  249  (1890). 
Notice  to  all  is  necessary,  although 
a  quoiiim  is  present.  Johnston  v. 
Jones,  23  N.  J.  Eq.  216  (1872),  where 
the  meeting  was  for  the  purpose  of 
calling  a  stockholders'  meeting.  Con- 
cerning the  differences  between  the 
position  of  municipal  corporation 
officials  and  the  officers  of  a  private 
corporation,  see  Wallace  v.  Walsh, 
125  N.  Y.  26,  36  (1890).  A  recess  may 
be  taken  by  a  board  without  formal 
action,  and  two  meetings  on  the 
same  day  may  be  construed  as  one 
meeting  with  a  recess.  State  v.  Pow- 
ell, 70  N.  W.  Rep.  592  (Iowa,  1897). 

1  Johnson  Co.  v.  Miller,  174  Pa.  St. 
605  (1896). 

2  Minneapolis  Times  Co.  v.  Nimocks, 
53  Minn.  381  (1893). 

3  Hill  V.  Rich  Hill,  etc.  Co.,  119  Mo.  9 
(1893).  Where  the  secretary  has  power 
to  call  a  meeting  of  the  directors,  but 
instead  of  his  doing  so  the  president 
uses  a   rubber   stamp  to   affix  the 


1488 


secretary's  name  to  the  call,  and  it 
transpires  that  every  director  .either 
received  the  nocice  or  was  present  at 
the  meeting,  the  informality  is  im- 
material. Ashley  Wire  Co.  v.  Illinois 
Steel  Co.,  164  IIL  149  (1896). 

*  Kuser  v.  Wright,  52  N.  J.  Eq.  825 
(1895).  A  mortgage  authorized  by  a 
quorum  of  directors  is  valid,  though 
the  other  directors  were  not  present 
and  were  not  notified  Bank  v.  Flour 
Co.,  41  Ohio  St.  552  (1885).  See  also 
§  713,  siipra. 

5  Re  Argus  Co.,  138  N.  Y.  557  (1893); 
New  Haven  Sav.  Bank  v.  Davis,  8 
Conn.  192  (1830),  holding  that  a  meet- 
ing of  bank  directors  was  legal  for  an 
ordinary  transaction,  although  the 
notice  did  not  specify  its  object,  and 
that  mortgaging  its  real  estate  to  se- 
cure a  debt  was  proper  at  such  meet- 
ing. Where,  a  few  days  before  a 
new  board  was  to  go  in,  a  notice  of 
a  directors'  meeting  states  that  it 
is  to  hear  the  treasurer's  report  and 
transact  other  business  that  might 
come  before  the  board,  it  is  illegal 
for  the  board,  at  such  meeting,  to 
make  a  perpetual  lease  of  all  the 
corporate  property.  Mercantile  Li- 
brary Hall  Co.  V.  Pittsburgh  Library 
Assoc,  173  Pa,  St.  30  (1896).  A  notice 
of  a  special  meeting  of  the  board  of 
directors  need  not  specify  the  busi- 
ness which  is  to  be  considered.  Wills 
V.   Murray,  4  Exch.   843  (1850);   Re 


CH,  XLIII.j        HOW   CORPOKATE   CONTRACTS   ARE  MADE.  [§  71Sa. 

The  notice  must  be  given  a  reasonable  time  before  the  horn* 
of  the  meeting,  and  the  mode  of  giving  or  serving  the  notice 
must  be  reasonable.  All  this  turns  on  the  circumstances  and 
facts  in  each  case.*  "Where  no  special  method  of  serving  notice 
of  directors'  meetings  is  prescribed,  and  the  notice  is  served 
by  mail,  upon  proof  of  mailing,  the  receipt  of  the  notice  is  pre- 


Argus  Co.,  138  N.  Y.  557  (1893).  A 
notice  of  a  special  meeting  of  the 
trustees  of  a  religious  corporation 
must  state  the  object  of  the  meeting. 
Maclaury  v.  Hart,  10  N.  Y.  Supp.  125 
(1890).  It  is  not  necessary  to  state  in 
the  notice  convening  a  meeting  of 
tlie  directors  of  a  company  the  busi- 
ness to  be  transacted  at  the  meeting, 
even  if  it  is  of  an  extraordinary  char- 
acter; and  any  decision  come  to  at 
such  meeting  cannot  afterwards  be 
questioned  on  the  grovmd  that  no 
notice  of  such  business  was  given. 
Compagnie  de  Mayville  v.  Whitley, 
[1896]  1  Ch.  788. 

1 A  notice  of  a  directors'  meeting 
sent  out  in  the  afternoon  for  the 
evening  is  sufficient,  if  delivered  to 
a  servant  at  a  director's  residence, 
even  though  such  director  was  absent 
from  home,  his  absence  not  being 
known  to  the  party  calling  the 
meeting  until  such  notice  was  de- 
livered. Re  Argus  Co.,  138  N.  Y.  557 
(1893).  Notice  of  a  directors'  meet- 
ing, received  on  the  morning  of  the 
day  of  the  meeting,  is  insufficient  al- 
though the  meeting  was  to  be  at  four 
o'clock  in  the  afternoon.  The  court 
said:  "Prima  facie  this  was  not  a 
reasonable  time.  The  managers  are 
all  reported  as  business  men,  who 
cannot  be  presumed  to  be  ready  to 
drop  their  own  affairs  and  attend  off- 
hand on  such  a  notice.  One  full  day 
in  advance  of  the  time  fixed  is  as 
little  as  the  law  could  presume  to  be 
reasonable,  and  in  many  cases  that 
would  be  too  short."  The  court  said, 
however,  that  a  by-law  or  the  prac- 


tice of  the  board  might  vary  this 
rule.  Mercantile  Library  Hall  Co.  v. 
Pittsburgh  Library  Assoc,  173  Pa.  St. 
30  (1896).  A  meeting  of  directors 
called  in  the  morning  for  two  o'clock 
that  day  is  invalid  where  one  director 
could  not  come  until  three  o'clock  and 
another  received  the  notice  next 
morning.  A  quorum  was  present.  Re 
Homer,  etc.  Mines,  L.  R.  39  Ch.  D.  546 
(1888).  Leaving  notice  of  a  directors' 
meeting  at  a  director's  business  place 
suffices,  even  though  he  is  known  to 
be  ill.  Corbett  v.  Woodward,  5  Saw- 
yer, 403  (1879).  Notice  to  a  director 
is  sufficient  if  given  orally  to  the 
director's  brother  at  the  director's 
place  of  business,  where  a  by-law  al- 
lowed notice  to  be  given  by  mail  or 
in  other  ways.  Williams  v.  German, 
etc.  Ins.  Co.,  08  111.  387  (1873).  Notice 
by  postal  card  of  a  directors'  meet- 
ing suffices  where  it  is  customary 
and  all  received  it.  People  v.  Albany 
Med.  Coll.,  26  Hun,  348  (1882);  aff'd, 
89  N.  Y.  635.  Notice  to  directors, 
sent  by  mail,  is  sufficient  if  sent  in 
time  so  that  the  director,  after  receiv- 
ing it,  would  have  time  to  reach  the 
place  of  meeting.  Covert  v.  Rogers, 
38  Mich.  363  (1878).  A  meeting  of  the 
directors  may  be  valid  although  two 
of  them,  being  absent  from  the  state, 
did  not  receive  the  notice.  Chase  v. 
Tutlle,  55  Conn.  455  (1888).  Tele- 
graphic notice  to  two  directors  out 
of  the  state,  of  a  meeting  to  make  an 
assignment,  is  sufficient,  though  not 
received  by  them,  a  majority  having 
met  and  ordered  the  assignment. 
Chase  v.  Tuttle,  55  Conn.  455  (1888). 


94 


1489 


§  713«.]  HOW    COKPOKATE    CONTEACTS   AKE   MADE.        [CH.  XLIII. 

sumed,  even  as  against  a  director's  doubt  as  to  his  having  re- 
ceived it.^    Notice  to  all  the  directors  is  presumed.^ 

There  has  been  a  question  whether  directors  could  vote  and 
act  as  a  board  without  coming  together.  Many  attempts  have 
been  made  to  sustain  a  vote  of  the  directors  which  they  had 
separately  and  singly  agreed  to.  The  law,  however,  is  now 
clear  that  such  separate  assent  is  void.  Directors  are  elected 
to  meet  and  confer,  and  to  act  after  an  opportunity  for  an 
interchange  of  ideas.  They  cannot  vote  or  act  in  any  other 
manner.' 


1  Ashley  Wire  Co.  v.  Illinois  Steel 
Co.,  164  111.  149  (1896).  Where  written 
notices  of  a  special  directors'  meet- 
ing, properly  addressed,  are  sent  by 
mail  to  them,  it  is  presumed  that 
such  notices  were  received,  though 
there  is  no  by-law  that  notice  may 
be  given  by  mail,  Stockton,  etc. 
Works  V.  Houser,  41  Pac.  Rep.  809 
(Cal.,  1895). 

2  Ross  V.  Crockett,  14  La.  Ann.  811 
(1859);  Chouteau  Ins.  Co.  v.  Holmes, 
68  Mo.  601  (1878).  Notice  of  a  meet- 
ing of  directors  is  presumed.  Hardin 
V.  Iowa,  etc.  Co.,  78  Iowa,  726  (1889); 
Stockton,  etc.  Works  v.  Houser,  109 
Cal.  1  (1895).  Where  the  corporate 
record  shows  that  a  quorum  of  the 
directors  was  present,  this  is  prima 
facie  evidence  that  all  had  notice. 
Fletcher  v.  Chicago,  etc.  R'y,  69  N. 
W.  Rep.  1085  (Minn.,  1897). 

3  Tradesman  Pub.  Co.  v.  Knoxville 
Car  Wheel  Co.,  95  Tenn.  634  (1895). 
The  verbal  assent  of  directors  to  the 
execution  of  a  mortgage  is  not  good. 
Alta  Silver  Min.  Co.  v.  Alta  Placer 
Min.  Co..  78  CaL  629  (1889).  Where 
the  directors  own  all  the  stock  of  a 
corporation,  they  may  authorize  its 
president  to  sell  its  assets,  and  the 
fact  that  the  authority  was  not  given 
at  a  regular  directors'  meeting  is  im- 
material. Jordan  v.  Collins,  107  Ala. 
572  (1895).  A  mere  street  conversa- 
tion between  the  directors,  by  which 
they  "  agree  "  that  subscriptions  shall 


be  called,  is  not  a  sufficient  call. 
Branch  v.  Augusta  Glass  Works,  95 
Ga.  573  (1895).  A  separate  assent  of 
a  township  committee  to  the  con- 
struction of  a  street  railway  is  ille- 
gal. West  Jersey  Traction  Co.  v. 
Camden  Horse  R.  R.,  58  N.  J.  Eq.  163 
(1895).  Separate  action  of  the  direct- 
ors without  a  meeting  is  not  good. 
Limer  v.  Traders'  Co.,  28  S.  E.  Rep. 
730  (W.  Va.,  1897).  Separate  acqui- 
escence of  the  directors  is  not  suffi- 
cient. Sanderson  v.  Tinkliam,  etc. 
Co.,  83  Iowa,  446  (1891).  The  direct- 
ors of  a  religious  corporation  cannot 
act  as  a  board  by  the  separate  assents 
of  the  members  to  the  act  in  ques- 
tion. Columbia  Bank  v.  Gospel  Tab- 
ernacle, 127  N.  y.  361  (1891).  The 
separate  assent  of  the  directors  to  a 
mortgage  is  not  good.  Duke  v.  Mark- 
ham,  105  N.  C.  131  (1890).  Directors 
can  act  in  behalf  of  the  corporation 
only  as  a  board.  Their  power  is  not 
joint  and  several,  but  joint  only. 
Buttrick  v.  Nashua,  etc.  R.  R,  63 
N.  H.  413  (1882).  Directors  cannot 
act  except  as  a  board.  North  Hud- 
son, etc.  Assoc.  V.  Childs,  83  Wis.  460 
(1892).  Directors  can  act  as  such  in 
meeting  only.  Their  individual  as- 
sent is  not  sufficient.  State  v.  Peo- 
ple's, etc.  Assoc,  42  Ohio  St.  579 
(1885);  Junction  R  R  v.  Reeve,  15 
Ind.  236  (1860);  Stoystown,  etc.  Tump. 
Co.  V.  Craver,  45  Pa.  St.  386  (1863). 
A  bargain  and  sale  deed  of  corporate 


1490 


€H.  XLIII.]        now    COEPOKATE    COXTEACTS   AEE   MADE.  [§  713^. 


Many  of  the  cases  to  tlie  contrary  may  be  reconciled  by  the 
principle  of  law  that  the  acts  of  a  board  of  directors  may  be 
validated  by  subsequent  acquiescence,  even  though  the  board 
was  summoned  irregularly  or  proceeded  irregularly. 


property,  authorized  and  executed 
separately  and  singly  by  all  the  di- 
rectors without  a  board  meeting,  is 
void.  Baldwin  v.  Canfield,  26  Minn. 
43  (1879);  Gashwiler  v.  Willis,  33  Cal, 
11  (18G7).  Separate  and  single  con- 
sent of  a  quorum  of  directors  to  the 
secretary's  execution  of  a  bond  is 
void.  D'Arcy  v.  Tamar,  etc.  R'y,  L. 
R  2  Excli.  158  (1867).  The  assent  of 
a  mere  majority  of  the  board,  given 
singly  and  separately,  gives  no  au- 
thority to  a  cashier  to  do  an  act  out- 
side of  his  customa'ry  duties.  Elliot 
V.  Abbot,  12  N.  H.  549  (1842).  Where 
a  mortgage  is  executed  by  order  of 
directors  assenting  apart  and  not  in 
a  meeting,  and  is  executed  by  a  pres- 
ident and  secretary  who  were  elected 
by  the  stockholders  at  a  meeting  not 
properly  called,  the  stockholders  hav- 
ing no  power  to  elect  such  officers  in 
any  case,  the  mortgage  is  not  good. 
Re  St.  Helen  JliU  Co.,  3  Sawy.  88 
(1874).  A  pledge  of  corporate  secu- 
rities to  raise  money  is  legal  where 
six  of  the  eight  directors  consented, 
even  though  no  meeting  was  held. 
Hubbard  v.  Camperdown  Mills,  26 
S.  C.  581  (1887).  Directors  may  bind 
the  corporation  by  their  separate 
approval  of  claims  when  they  have 
been  accustomed  so  to  do.  Long- 
mont,  etc.  Co.  v.  Coffman,  11  Colo. 
551  (1888).  The  separate  assent  of 
the  board  of  trustees  of  a  religious 
corporation  to  the  execution  of  a 
note  is  void.  They  must  meet.  Peo- 
ple's Bank  v.  St  Anthony's,  etc. 
Church,  109  N.  Y.  512  (1888).  An  as- 
signment for  the  benefit  of  creditors 
authorized  by  the  directors  acting 
separately  and  not  as  a  board  is  in- 
valid, Calumet  Paper  Co.  v.  Haskell, 
etc.  Co.,  45  S.  W.  Rep.  1115  Q,i.o.,  1897). 


Where  an  officer  is  sued  for  mal- 
feasance in  office,  it  is  no  defense 
that  his  acts  were  authorized  by  di- 
rectors who  did  not  meet  as  a  board, 
but  separately  and  singly  assented 
to  acts.  Directors  bind  the  corpora- 
tion by  their  votes  only  when  they 
meet  as  a  board.  "  The  law  proceeds 
upon  the  theory  that  the  directors 
shall  meet  and  coimsel  with  each 
other,  and  tliat  any  determination 
affecting  the  corijoration  shall  only 
be  arrived  at  and  expressed  after  a 
consultation  at  a  meeting  of  the 
board  attended  by  at  least  a  major- 
ity of  its  members."  National  Bank 
V.  Drake,  35  Kan.  576  (1886).  A  tax 
which  is  assessed  by  two  trustees  in 
meeting  assembled,  who  then  obtain 
the  separate  and  private  assent  of 
the  third  trustee,  is  void.  Keeler  v. 
Frost,  22  Barb.  400  (1856);  Schumm 
V.  Seymour,  24  N.  J.  Eq.  143  (1873). 
The  members  of  a  board  of  highway 
commissioners  cannot  authorize  or 
ratify  a  contract  by  separate  ap- 
proval A  meeting  is  necessary. 
Taymouth  v.  Koehler,  35  Mich.  23 
(1876).  The  majority  of  a  school 
board  cannot  act  separately  and 
singly,  no  meeting  being  held.  Har- 
rington V.  District,  etc.,  47  Iowa,  11 
(1877).  The  separate  consent  of  three 
directors  was  held  not  good  in  Bosan- 
quet  V.  Shortridge,  4  Exch.  699  (1850). 
A  due-bill  running  from  the  corpo- 
ration to  a  person  and  signed  by 
the  directors  cannot  be  defeated  by 
showing  that  the  directors  did  not 
meet,  but  signed  it  separately  and 
singly.  Sampson  u  Bowdoinliam,  etc 
Corp.,  36  Me.  78  (1853) ;  CoUins's  Claim, 
L.  R.  12  Eq.  246  (1871).  The  execu- 
tion of  a  replevin  bond  by  the  presi- 
dent for  the  corporation  is  legal,  a 


1491 


§  T13a.]  HOW   COKrOKATE    CONTKACTS    ARE    MADE.        [cil.  XLIII. 

A  director  cannot  obligate  himself  to  vote  in  a  certain  way, 
even  as  to  the  election  of  president.^  Directors,  of  com*se,  can- 
not act  or  vote  by  proxy.^ 

A  majority  of  the  whole  board  of  directors  constitute  a  quo- 
rmn.  When  the  meeting  is  properly  called  and  a  majority 
attend,  that  majority  may  proceed  to  transact  business.  If 
a  majority  are  present,  a  majority  of  that  majority  bind  the 


majority  of  the  directors  singly  and 
separately  assenting  thereto.  Bank 
of  Middlebury  v.  Rutland,  etc.  R.  R, 
30  Vt.  159  (1858),  where  Redfield.  Ch. 
J.,  said:  "The  cases  are  numerous 
where  the  consent  of  a  majority  of 
the  directors  given  separately  has 
been  held  binding  upon  the  com- 
pany." Probably  in  these  last  cases 
the  contract  would  have  been  bind- 
ing, even  if  the  directors  had  not 
acted  at  alL  See  also  Cammeyer  v. 
United,  etc.  Churches,  3  Sandf.  Cli. 
186, 229  (1844),  holding  that  the  trust- 
ees must  meet  in  order  to  act,  and 
that  their  alfirmative  vote  in  a  stock- 
holders' or  general  assemblage  is  not 
sufficient.  Collective  action  as  a 
board,  and  not  individual  action  as 
members  of  the  board,  is  necessary 
to  bind  the  corporation.  Allegheny 
County  Workhouse  u  Moore,  95  Pa. 
St.  408  (1880);  Twelfth  St.  Market 
Co.  V.  Jackson,  102  Pa.  St.  273  (1883). 
Where  there  are  but  two  stockhold- 
ers, and  they  are  directors,  and  no 
directors'  or  stockholders'  meeting 
has  been  held  since  the  organization 
meeting,  and  these  two  have  carried 
on  the  business  as  though  it  was  a 
partnership  concern,  a  hona  fide  as- 
signment by  these  two  persons  in 
the  name  of  the  corporation  to  se- 
cm-e  prefei-red  creditors  of  the  cor- 
poration is  good,  although  no  corpo- 
rate seal  was  used  and  no  meetings 
were  held  authorizing  the  act.  Tei- 
tig  V.  Boesman,  12  Mont.  404  (1892). 
When  all  the  officers  assent  to  a 
money  obligation  being  given  in 
the  corporate  name  by  the  chief  offi- 


cer, the  prioress,  the  educational  cor- 
poration is  bound.  Louisville,  etc. 
R  R.  V.  St.  Rose  Literary  Soc,  91 
Ky.  395  (1891).  See  also  Re  Great 
Northern,  etc.  Works,  L.  R  44  Ch. 
D.  472  (1890),  drawing  a  distinction 
where  all  of  the  directors  assent. 
Directors  cannot  act  singly.  Mor- 
rison V.  Wilder  Gas  Co.,  40  AtL  Rep. 
542  (Me.,  1898 ).  Where  some  of  the  di- 
rectors agree  privately  among  them- 
selves to  pay  for  certain  things  needed 
by  the  corporation,  and  the  latter  uses 
them,  they  alone  are  liable  for  the 
price  thereof.  Lyndon,  etc.  Co.  v. 
Lyndon,  etc.  Inst.,  22  AtL  Rep.  575 
(Me.,  1891). 

1  Dulin  V.  Pacific,  etc.  Co.,  103  CaL 
357  (1894). 

2  Perry  v.  Tuskaloosa.  etc.  Co.,  93 
Ala.  364  (1891);  Craig  Medicine  Co. 
V.  Merchants'  Bank,  59  Hun,  501 
(1891);  Re  Portuguese,  etc.  Co.,  L.  R 
43  Ch.  D.  160  (1889);  McLaren  v. 
Fisken,  28  Grant,  Cii.  (Can.)  352  (1881); 
Attorney-General  v.  Scott,  1  Vese}', 
413  (1749),  where  the  election  of  a 
minister  was  committed  to  trustees. 
It  was  held  that  they  could  not  dele- 
gate to  proxies  their  right  to  vote. 
A  vote  by  letter  on  a  particular 
question  would,  of  course,  be  the 
same  as  voting  separately  and  singly. 
Although  one  of  the  directors  ille- 
gally voted  by  proxy,  and  his  vote 
was  necessary,  yet  the  court,  in  Dud- 
ley V.  Kentucky  High  School,  9  Bush 
(Ky.),  576  (1873),  refused  to  set  the 
vote  aside,  the  court  saying  that 
only  one  stockliolder  objected,  and 
that  the  majority  might  ratify. 


1493 


en.  XLIII.]        HOW    COKrOKATE    COXTEACTS    ARE    3JADE.  [§  7l3a. 


board  and  the  corporation,  although  they  are  a  minority  of  the 
whole  board.  ^  ^y 

Although  d'  meeting  of  the  board  of  directors  at  which  a 
quorum  is  not  present  calls  a  stockholders'  meeting,  and  the 


1  Wells  V.  Rahway,  etc.  Co.,  19  N.  J. 
Eq.  402  (18G9);  Cram  v.  Bangor,  etc., 
12  Ma  354  (1835);  Caliill  v.  Kalama- 
zoo, etc.  Ins.  Co.,  2  Doug.  (Mich.)  124 
(1845);  Ex  parte  Willcocks,  7  Cow. 
402  (1827);  People  v.  AValker,  2  Abb. 
Pr.  421  (1856);  Sargent  v.  Webster,  54 
Mass.  497  (1847).  If  only  a  minority 
of  the  board  are  present  the  acts  are 
not  valicL  Lockwood  v.  Mechanics' 
Nat.  Bank,  9  R.  I.  308  (1869);  Ernest 
V.  Nicholls,  6  H.  L.  Cas.  401, 417  (1857); 
Price  V.  Grand,  etc.  R.  R.,  13  Ind.  58 
(1859);  Ridley  u  Plymouth,  etc.  Co., 
2  Exch.  711  (1848).  A  director  who 
is  present  but  does  not  vote  is  counted 
in  the  negative.  Commonwealth  v. 
Wickersham,  66  Pa,  St.  134  (1870). 
See  also  g  608,  note  8  (stipra  i,  on  tliis 
subject.  The  majority  of  a  board  of 
directors  constitute  a  quorum,  and  a 
majority  of  the  quorum  decide  the 
action  of  the  board.  Leavitt  v.  Ox- 
ford, etc.  Co.,  3  Utah,  265  (1883).  A 
majority  of  a  quorum  of  directors 
bind  the  corporation.  Buell  v.  Buck- 
ingham, 16  Iowa,  284  (1804).  WJiere 
the  charter  says  five  shall  constitute 
a  quorum  of  directors,  a  mortgage 
executed  under  the  authority  of  a 
directors'  meeting  when  only  four 
are  present  is  void.  Holcomb  v. 
Bridge  Co.,  9  N.  J.  Eq.  457  (1853).  A 
quolTim  of  the  directors  is  presumed 
to  have  been  present.  Sargent  v. 
Webster,  54  Mass.  497  (1847).  A  ma- 
jority of  the  trustees  are  necessary 
to  constitute  a  quorum.  State  v.  Por- 
ter, 113  Ind.  79  (1888).  A  by-law  can- 
not authorize  less  than  a  majority  to 
act  when  the  charter  requires  a  ma- 
jority. State  V.  Curtis,  9  Nev.  325 
(1874).  A  by-law  of  the  corporation 
authorizing  a  quonim  of  five  direct- 
ors, with  the  president,  to  transact 


ordinary  business,  is  valid,  though 
there  are  twenty-three  directors. 
Hoyt  V.  Thompson.  19  N.  Y.  207  (1859). 
Where  by  resolution  of  the  board 
four  constitute  a  quorum,  an  act  at 
a  board  of  three  is  not  binding.  Du- 
carry  v.  Gill,  4  Car.  &  P.  121  (1830). 
Where  there  are  eight  vestrymen  and 
the  statute  requires  five  to  constitute 
a  quorum,  four  cannot  act,  although 
there  are  three  vacancies  in  the 
board.  Moore  v.  Rector,  etc.,  4  Abb. 
N.  Cas.  51  (1873).  When  the  presence 
of  the  president  is  by  law  necessary 
to  the  meeting  of  an  executive  com- 
mittee, a  meeting  without  him  can- 
not bind  the  corporation.  Corn  Excli. 
Bank  v.  Cumberland  Coal  Co.,  1 
Bosw.  436  (1857).  Where  two  out  of 
six  directors  have  been  accustomed 
to  act  as  a  quorum,  a  forfeiture  of 
stock  by  two  is  legal.  Lyster's  Case, 
L.  R.  4  Eq.  233  (1867).  The  acts  of 
less  than  a  quorum  are  valid  if  they 
are  subsequently  ratified  by  a  quo- 
rum. Austin's  Case,  24  L.  T.  Rep. 
(N.  S.)  932  (1871).  A  lease  taken  by 
a  meeting  of  a  board  of  directors  at 
which  no  quorum  was  present  is  rat- 
ified by  the  acquiescence  of  two 
boards  elected  in  subsequent  years, 
with  knowledge  and  no  objection. 
Oregon  R'y  v.  Oregon  R'y  &  Na v.  Co., 
28  Fed.  Rep.  505  (1886).  "V.'liere 
there  is  a  definite  body  in  a  corpora- 
tion, a  majority  of  that  defijiite  body 
must  not  only  exist  at  the  time  wlien 
any  act  is  to  be  done  by  them,  but  a 
majority  of  that  body  must  attend 
the  assembly  where  such  act  is  done." 
Rex  V.  Miller,  6  T.  R  268  (1795),  per 
Lord  Kenyon.  A  custom  is  legal 
which  allows  three  to  constitute  a 
quorum  of  a  board  of  nine  directors. 
Re  Regents',  etc.   Co.,  W.  N.   1867, 


1493 


§  713a.]  HOW    COKrOEATE    CONTKACTS    ARE    MADE.        [CH.  XLIII. 


stockholders'  meeting  takes  action,  yet  where  no  stockholders 
object  until  six  months  thereafter  the  court  will  not  interfere.* 
The  president  is  not  entitled  to  a  casting  vote,  in  case  of  a  tie, 


p.  79  (1867).    An  allotment  of  shares 
by  a  board  of  two  when  the  statute 
requires  tliree  is  void.    The  subscrip- 
tion is  not  collectible.    Re  British, 
etc.  Co.,  59  L.  T.  Rep.    291  (1888). 
"Where  the  charter  makes  a  majority 
of  directors  a  quorum,  a  minority 
cannot  fill  a  vacancy  in  the  board. 
State  V.  Curtis,  9  Nev.  325  (1874).     Al- 
though  a  meeting  of  directors    is 
legally  called,  yet.  if  a  quorum  does 
not  attend,  those  wlio  do  attend  can- 
not adjourn  to  another  day.    It  re- 
quires a  quorum  to  adjourn.     Mc- 
Laren V.  Fisken,  28  Grant,  Ch.  (Can.) 
352  (1881).    A  managing  committee 
of  eight  cannot  act  at   a   meeting 
of  six  only.     Brown  v.  Andrew,  13 
Jur.  988  (1849).    A  quorum  of  the  di- 
rectors must  be  present  to  act,  and 
this  quorum  consists  of  a  majority. 
Craig   Medicine    Co.   v.  Merchants' 
Bank,  59  Hun,  561  (1891).    In  a  mu- 
nicipal corporation,  if  all  the  board 
are  present  and  four  vote  one  way, 
while  the  other  four  do  not  vote  at 
all,  the  vote  prevails.    It  is  a  ma- 
jority of  a  quorum.    State  v.  Dillon, 
125  Ind.  136  (1890).    Where  the  rec- 
ord shows  that  two  of  the  four  di- 
rectors present  voted  aye  and  one 
nay,  and  the  other  director  was  in 
the  chair,  and  the  motion  was  de- 
clared carried,  the  law  presumes  that 
the  chairman  voted  aye.    Rollins  v. 
Shaver,  etc.  Co.,  80  Iowa,  380  (1890).  If 
all  six  members  of  a  city  council  are 
present,  three  may  pass  a  resolution, 
although  the  other  three  do  not  vote. 
Riishville  Gas  Co.  v.  Rushville,  121 
Ind.  206  (1889).    A  director  who  is 
chosen  by  the  board  when  less  than 
a  quorum  is  present  may  be  treated 
as  not  a  director,  even  though  he  has 
met  with  the  board  frequently  when 
a  majority  was  present.    His  rem- 


edy is  not  mandamus.    People  r.  New 
York,  eta  Asylum,  7  N.  Y.  St  Rep. 
277  (1887).     A  meeting  of  four  legally 
elected  and  three  illegally  electe<l  di- 
rectors of  a  corporation  is  not  such 
a  meeting  as  siistains  an  action  for 
salary   by    the    i)resiilent   who  was 
elected  by  them.     Waterman  v.  Clii- 
cago,  etc.  R  R.,  139  IlL  (J3S  (1892). 
The  confirmation  by  the  board  of  di- 
rectors  of  resolutions  passed   by  a 
meeting  not   containing  a  quorum 
relates  back,  and  is  as  if  the  resolu- 
tions were  regularly  passed  in  the 
first  placa  Re  Portuguese,  etc.  Mines, 
L.  R  45  Ch.  D.  16  (1890).     Two  direct- 
ors cannot  transact  business  when 
there  are  four  directors.     Tie  Portii- 
guese,  etc.  Co.,  L.  R  42  Ch.  D.   IGO 
(1889).     A  by-law  may  make  five  a 
quorum  out  of  twenty-three  direct- 
ors where  the  statute  is  silent  on  the 
subject.    Hoyt  v.  Shelden,  3  Bosw. 
267  (1858).     In  an  action  by  an  insur- 
ance company  to  collect  an  asses.s- 
ment,  it  is  no  defense  that  losses 
were  allowed  at  meetings  of  the  di- 
rectors where  no  quorum  was  present. 
Atlantic,  etc.  Ins.  Co.  v.  Sanders,  36 
N.  H.  252,  269  (1858).    A  majority  of 
the  quorum  may  decide  a  question, 
and  a  plurality  may  elect  any  officer, 
unless  otherwise  provided  by  char- 
ter or  by-laws  or  by  law.     Ex  parte 
Willcocks,  7  Cow.  410  (1827);  Cooley, 
Const.  Lim.  (4th  ed.)  *141;  Oldknow 
V.  Wainwright,  2  Burr.  1017  (1760); 
Booker  v.  Yovmg,  12  Gratt.  (Va.)  303 
(1855).    Where  twelve  are  present, 
and  one  candidate  receives  six  votes, 
another  four,  and  another  one,  and 
one  blank,  there  is  no  election.    Peo- 
ple V.  Conklin,  7  Hun,  188  (1876). 

1  Southern,  etc.  Bank  v.  Rider,  73 
L.  T.  Rep.  374  (1895). 


1494 


CH.  XLIII.]        BOW    COKPOKATE    CONTRACTS   AEE   MADE.  [§  713^. 


where  he  has  already  voted  once.^  Although  there  are  less 
stockholders  and  less  directors  than  the  statute  or  charter  re- 
quires, yet  the  acts  of  these  are  sufficient  to  sustain  obligations 
incurred  by  the  corporation  with  third  persons.^  A  corporate 
creditor  attaching  property  of  the  company  which  has  already 
been  assigned  to  another  creditor  cannot  attack  such  assign- 
ment on  the  ground  that,  while  the  statute  required  three  direct- 
ors, ouiy  two  directors  existed,  the  third  one  having  resigned.' 
The  question  of  whether  the  directors  may  delegate  their  au- 


1 A  by-law  cannot  give  him  this 
right  State  v.  Curtis,  9  Nev.  325 
^1874).  The  president  does  not  have, 
in  addition  to  his  first  vote,  a  casting 
vote  as  president.  Toronto,  etc.  Co. 
r.  Blake,  2  Ont.  (Can.)  175  (1882). 

2  Welch  V.  Importers",  etc.  Bank,  123 
N.  Y.  177  (1890);  Wallace  v.  Walsh, 
125  N.  Y.  26  (1890).  An  attaching 
creditor  of  a  corporation  cannot 
claim  that  a  certain  vote  of  the  di- 
rectors to  pay  another  debt  was  void 
because  there  were  less  directors 
than  the  charter  recjuired.  Castle  v. 
Lewis,  78  N.  Y.  131  (1879).  Where 
the  charter  provided  that  two  direct- 
ors might  act,  although  vacancies 
existed  in  the  board,  it  is  immaterial 
that  the  number  of  directors  is  less 
than  the  minimum  charter  number. 
Re  Scottish,  etc.  Co.,  L.  R  23  Ch.  D. 
413  (1883).  Although  the  statutes  re- 
quire three  directors  who  shall  be 
stockholders,  and  one  assigns  his 
stock,  and  the  other  two  autliorize 
and  execute  a  corporate  mortgage  at 
r  meeting  held  without  notice  to  the 
other,  yet  the  mortgagee,  having  no 
knowledge  of  these  facts,  is  protected. 
Kuser  v.  Wright,  52  N.  J.  Eq.  825 
(1895),  rev'g  Wright  v.  First  Nat 
Bank,  52  N.  J.  Eq.  392  (1S94X  Where 
the  charter  requires  three  directors 
who  shall  be  and  continue  to  be 
stockholders,  and  one  of  them  sells 
his  stock,  the  remaining  two  cannot 
act  Toronto,  etc  Co.  v.  Blake,  2  Ont 
(Can,)  175  (1882).  Even  though  on  ac- 
count of  vacancies  in  the  board  of 


directors  it  cannot  act,  yet  the  re- 
maining directors  may  call  a  stock- 
holders' meeting  to  hold  an  election. 
Toronto,  etc.  Co.  v.  Blake,  2  Ont.  (Can.) 
175  (1882).  It  is  held  in  Faure,  etc. 
Co.  V.  PhiUipart,  58  L.  T.  Rep.  525 
(1888),  that  where  the  board  of  di- 
rectors was  to  consist  of  from  three 
to  seven,  but  the  quorum  to  consist 
of  two,  and  where  by  resignation  the 
whole  board  is  reduced  to  two,  these 
two  cannot  act;  nor  can  they  elect 
one  or  more  to  fill  the  vacancies. 
T)  e  quorum  can  act  only  when  the 
board  consists  of  the  requisite  num- 
ber. This  objection,  however,  cannot 
be  raised  by  one  who  takes  part  as  di- 
rector. Where  by  charter  the  board 
of  directors  is  to  be  from  five  to 
seven,  and  three  may  act,  three  can- 
not act  when  there  are  but  four  di- 
rectors. The  act  is  not  binding  on 
the  corjwration.  Kirk  v.  Bell,  IG  Q.  B. 
290  (1851).  See  also  Bottomley's  Case, 
L.  R.  16  Ch.  D.  681  (1880);  Lindley, 
Companies,  p.  157.  A  company  whose 
directors  are  to  be  twelve  may  act, 
although  by  resignation  or  death  the 
number  is  less  than  twelve.  Thames, 
etc.  R'y  V.  Rose,  4  Man.  &  G.  552  (1842). 
Where  a  majority  of  the  directors 
may  fill  vacancies,  and  of  seven  di- 
rectors only  two  remain,  they  cannot 
fill  the  vacancies.  Moses  v.  Tomp>- 
kins,  84  Ala.  613  (1888). 

3  Castle  V.  Lewis,  78  N.  Y.  131  (1879). 
Where  the  charter  requires  tliree  di- 
rectors, who  shall  be  and  continue  to 
be  stockholders,  and  one  of  them  sells 


1495 


§  TM.] 


HOW    COKPOKATE    CONTRACTS    AKE    MADE.        [cil.  X  I.I  11. 


thority  to  an  executive  committee  lias  given  rise  to  much  con- 
troversy. Such  a  delegation  of  authority  has  become  very 
common,  and  will  be  sustained  by  the  courts.  This  question  is 
discussed  elsewhere.^ 

§  714.  Minute-l)Oolc  of  directors'  mediugs  and  other  hools  of 
tJie  corporation  as  evidence  of  acts  and  contracts  of  the  corpo- 
ration and  autliorization  of  agents. —  The  minute-book  of  the 
proceedings  of  the  directors'  meetings  is  the  proper  evidence 
to  prove  a  corporate  contract  or  the  authority  of  a  corporate 
agent  to  act  or  contract  for  it.'^  A  director  has  a  right  to 
examine  all  the  books  and  papers  of  the  company.' 


his  stock,  the  remaining  two  cannot 
act.  Toronto,  etc.  Co.  v.  Blake,  2  Ont. 
(Can.)  175  (1882). 

1  See  §  715,  infra. 

2  Where  the  appointment  of  an 
agent  is  by  resolution  of  the  directors, 
or  in  any  other  manner  requiring  a 
record  of  the  matter,  the  entry  upon 
the  minutes  or  books  of  the  corpora- 
tion may  be  introduced  in  evidence  of 
the  appointment.  Buncombe  Turnp. 
Co.  V.  McCarson,  1  Dev.  &  B.  (N.  C.) 
306  (1835);  Owings  v.  Speed,  5  Wheat. 
420,  424  (1820);  Thayer  v.  Middlesex 
Ins.  Co.,  27  Mass.  326  (18B0);  Narra- 
gansett  Bank  v.  Atlantic  Silk  Co.,  44 
Mass.  282  (1841);  Clark  v.  Farmers' 
Mfg.  Co.,  15  Wend.  256  (1836);  Meth- 
odist Chapel  V.  Herrick,  25  Me.  354 
(1845) ;  Haven  v.  New  Hampshire  Asy- 
lum, 13  N.  H.  532  (1843).  Where  a 
corporate  agent  is  appointed  by  a 
resolution,  his  authority  cannot  be 
proved  by  parol  The  extent  of  the 
authority  in  such  a  case  is  a  question 
of  law  for  the  court.  McCreery  v. 
Garvin,  39  S.  C.  375  (1893).  In  order 
to  make  the  corporate  books  admis- 
sible, proof  must  be  given  as  to  who 
kept  them,  and  that  the  entries  were 
made  at  the  proper  time  or  by  the 
proper  directors,  and  that  the  entries 
were  properly  made.  Powell  v.  Cono- 
ver,  75  Hun,  11  (1894).  A  contract 
duly  accepted  and  agreed  to  in  a  di- 


rectors' meeting  and  entered  on  tlte 
minutes,  which  are  duly  signed,  is  a 
contract  in  writing.  Texas,  etc.  R'y 
V.  Gentry,  69  Tex.  625  (1888).  An  entry 
on  the  corporate  minutes  of  a  resolu- 
tion to  form  a  corporate  contract  is 
sufflcient  on  notice  of  the  same  to  the 
other  party,  and  suffices  to  form  the 
contract.  It  satisfies  the  .statute  of 
frauds.  Argus  Co.  v.  Mayor,  etc.,  55 
N.  Y.  495  (1874).  An  entrj-  on  the  di- 
rectors' minute-book,  duly  signed,  is 
sufficient  to  prevent  a  contract  being 
void  by  the  statute  of  frauds.  Jones 
V.  Victoria,  etc.  Co.,  L.  R  2  Q.  B.  D.  314 
(1877).  Directors'  minutes  are  evi- 
dence of  a  contract,  though  written 
up  after  the  meeting.  Wells  v.  Rail- 
way, etc.  Co.,  19  N.  J.  Eq.  402  (1869). 
A  person  purchasing  aiTiortgage  from 
a  savings  bank  through  its  treasurer 
and  secretaiy  may  rely  upon  a  copy 
of  a  resolution  passed  by  the  trustees 
authorizing  such  sale,  and  duly  signed 
by  the  secretary.  So  though  the  sec- 
retary had  intentionally  made  the 
copy  different  from  the  original. 
Whiting  V.  Wellington,  10  Fed.  Rep. 
810  (1882).  In  a  suit  by  an  employee 
of  a  corporation  for  pay  for  services, 
the  defendants'  books,  properly  kept 
by  its  proper  officers,  are  admissible 
in  evidence  to  prove  payments  to 
plaintiff  on  account  of  services.  Gan- 
ther  V.  Jenks,  etc.  Co.,  76  Mich.  510 


3  See  §  511,  supra. 
1496 


CH.  XLIII.]       HOW   COEPOEATE   OONTEACTS   AEE   3IADE.  [§  Tl-t. 

A  corporation  may  enter  into  a  written  contract  mider  seal 
without  a  formal  vote  or  written  entry  of  a  vote  l>y  the  du.«cV 
ors  mere  the  director?  are  present,  and  aU  assent  to  the  exe- 
cution of  the  contract,  this  is  sufficient.'    But  a  stockholder 


(1889).    A  resolution  of  the  board  of 
directors  authorizing  an  assignment 
for  the  benefit  of  creditors  is  suffi- 
cient.   Tripp  V.  Northwestern  Nat 
Bank,  45  Minn.  383  (1891).    The  min- 
utes of  directors'  meetings  as  they 
appear  in  a  corporate  book  will  not 
be  excluded  as  evidence  merely  be- 
cause the  secretary  swears  that  they 
were  written  up  several  years  after 
the  meetings  and  were  made  par- 
tially from  the  recollections  of  the 
president.  Mcllhenny  v.  Binz,  80  Tex. 
1  (1890).  In  proving  a  de  facto  corpo- 
ration, the  meetings  and  the  issue  of 
stock  and  the  transaction  of  business 
may  be  proved  by  parol  without  pro- 
ducing the  books.    Johnson  v.  Schu- 
lin.  73  N.  W.  Rep.  147  (Minn.,  1897). 

1  Zihlman  v.  Cumberland  Glass  Co., 
74  Md.  303  (1891).    "The  entry  of  a 
resolution  in  a  minute  is  not  essen- 
tial to  the  validity  of  the  resolution, 
which  is  proved  aliunde"    Re  Great 
Northern,  etc.  Works,  L.  R  44  Ch.  D. 
472  (1890).     Although  a  resolution  is 
not  inserted  in  the  minutes  of  the 
meeting,  it  may  be  proved  by  other 
evidence.    So  held  as  to  a  resolution 
authorizing  the  secretary  to  borrow 
money.    Bank  of  Yolo  r.  Weaver,  31 
Pac.  Rep.  160  (Cal.,  1892).    "  Parol  evi- 
dence is  admissible  to  prove  the  ac- 
tion of  the  board  of  directors  or  stock- 
liolders  where  the    record  fails  to 
state  it."    AUis  v.  Jones,  45  Fed.  Rep. 
148  (1891).    "Where   a    corporation 
consists  of  a  small  number  of  per- 
sons, like  a  partnership,  they  may 
transact  all  their  business  by  conver- 
sation, without  formal  votes;  and  it 
would  be  a  violation  of  the  plainest 
principles  of  justice  to  hold  those 
who  deal  with  them  to  prove  all  their 
acts  by  written  votes,  which  they  do 


not  keep  or  do  not  produce."    IMel- 
ledge  V.  Boston,  etc.  Co.,  59  Mass.  158. 
179  (1849).    Parol  evidence  may  be 
given  to  prove  a  vote  of  a  salary  to 
an  officer  where  the  secretary  is  dead 
and  the  minute-book  does  not  con- 
tain a  record  of  the  vote.    Pickett  v. 
Abney,  84  Tex.  65  (1892).    A  vote  of 
the  directors  employing  a  person  is 
not  a  contract.    It  must  be  known  to 
and  accepted  by  the  person  employed. 
It  may  be  shown  by  parol  that  the 
contract  was  to  be  binding  only  in 
case  certain  negotiations  were  car- 
ried out    A  statement  by  the  treas- 
urer,   showing   the    liabUities    and 
making  no  mention  of  his  salary, 
is  admissible  as  evidence.    Sears  v. 
King's,  etc.  R.  R.,  152  Mass.  151  (1890). 
See  llso,  on  this  subject,  U.  S.  Bank 
V.  Dandridge,  12  Wheat  64,  95  (1827); 
Union  Bank  v.  Ridgely,  1  Har.  &  G. 
(Md.)  324, 425  (1827) ;  St.  Mary's  Church 
Cagger,  6  Barb.  576  (1849);  Max- 


well V.  Dulwich  College,  1  Fonbl.  Eq. 
296  (1834);  Magill  v.  Kaufman,  4  Serg. 
«fe  R.  (Pa.)  317  (1818);  Brady  v.  Brook- 
lyn, 1  Barb.  584  (1847);  Essex  Turnp. 
Corp.  V.  Collins.  8  Mass.  292, 298  (1811); 
Marshall  v.  Queensborough,  1  Sim.  & 
S.  520  (1823);   Elysville  Mfg.  Co.  v. 
Okisko  Co.,  1  Md.  Ch.  392  (1849);  Gar- 
vey  V.  Colcock,  1  Nott  &  McC.  (S.  C.) 
231  (1815) ;  Bates  v.  Bank  of  Alabama, 
2  Ala.  452  (1841).    The  corporate  secre- 
tary's letters  to  a  vendor  are  admissi- 
ble as  evidence.    Scott  v.  Middleton, 
eta  R  R,  86  N.  Y.  200  (1881).    The 
minutes  of  a  directors'  meeting  may 
by  parol  be  shown  not  to  include  the 
whole  agreement  where  the  party 
being  contracted  with  was  present 
at  the  meeting  and  discussed  the 
matter  with  the  board.    Tibbals  v. 
Mount  Olympus  Water  Co.,  10  Wash. 


1497 


714.] 


HOW    COKPOKATE    CONTRACTS    AEE    MADE.        [CH.  XLIII. 


cannot  prove  by  parol  that  a  dividend  was  declared,  the  rec- 
ords not  showing  the  same.     His  remedy  is  by  proceedings  to 
correct  the  corporate  record.^ 
The  question  of  whether  the  books  are  evidence  against  offi- 


329  (1894).  A  verbal  agreement  of 
the  directors  in  meeting  assembled 
to  pay  tlie  treasurer  a  certain  salary 
is  binding  on  the  company,  altliough 
no  written  resolution  thereof  is  en- 
tered in  the  minutes.  Outterson  v. 
Fonda  Lake  Paper  Co.,  20  N.  Y.  Supp. 
980  (1892).  When  there  are  but  a  few 
persons  interested  in  a  corporation, 
"ordinary  business  may  be  transacted 
without  the  formality  of  resolutions. 
It  may  be  done  by  conversation  with- 
out formal  votes."  Hall  v.  Ilerter,  83 
Hun,  19  (1894).  The  resolutions  of  di- 
rectors need  not  be  reduced  to  writ- 
ing in  order  to  be  valid.  Columbia, 
etc.  Co.  V.  Vancouver,  etc.  Co.,  52  Pac. 
Rep.  513  (Oreg.,  1898).  Corporate 
minutes  need  not  be  written  out  by 
the  secretary  himself.  It  is  suflQcient 
that  he  sign  them.  United  Growers' 
Co.  V.  Eisner,  22  N.  Y.  App.  Div.  1 
(1897).  A  resolution  of  the  board  of 
directors  that  the  company  execute 
an  assignment  for  the  benefit  of  cred- 
itors may  be  carried  out  by  the  presi- 
dent without  further  authority,  but 
he  should  not  select  himself  as  as- 
signee. Rogers  v.  Pell,  154  N.  Y.  518 
(1898).  Authority  to  an  agent,  given 
by  the  board  of  directors,  may  be 
proved  by  oral  evidence,  there  being 
no  record  of  the  same  in  the  corporate 
books.  There  is  no  law  requiring  a 
board  of  directors  to  keep  a  record 
of  their  proceedings.  Morrill  v.  C.  T. 
Segar  Mfg.  Co.,  32  Hun,  543  (1884). 
Contra,  Andover,  etc.  Turnp.  Co.  v. 
Hay,  7  Mass.  102, 107  (1810);  Garvey 
V.  Colcock,  1  Nott  &  McC.  (S.  C.)  231 
(1815);  Peek  v.  Detroit,  etc.  Works, 
29  Midi.  313  (1874) ;  but  see  Taymouth 
V.  Koeliler,  35  Mich.  22  (1876).  The 
acts  of  the  directors  need  not  be  for- 
mally entered  on  the  corporate  min- 


utes. Nashua,  etc.  R.  R.  u.  Boston, 
etc.  R.  R,  27  Fed.  Rep.  821  (188G); 
Morrill  v.  Segar,  etc.  Co.,  32  Hun,  543 
(1884);  Moss  v.  Averell,  10  N.  Y.  449 
(1853).  Parol  evidence  may  show 
that  the  corporate  records  have  been 
burned.  Baptist  House  v.  Webb,  CO 
Ma  398  (1877).  Or  lost.  Wallace  v. 
First  Parish,  etc.,  109  Mass.  2G3  (1872); 
Prothro  v.  Minden  vSem.,  2  La,  Ann. 
939  ( 1847).  It  may  be  proved  by  parol 
that  the  board  of  directors  authorized 
an  agent  to  draw  a  bill  of  exchange. 
No  corporate  seal  or  record  evidence 
are  necessary.  Preston  v.  Missouri, 
etc.  Co..  51  Mo.  43  (1872).  The  direct- 
ors' votes  may  be  proved  by  parol 
when  they  were  not  recorded.  Ed- 
gerly  v.  Emerson,  23  N.  H.  555  (1851); 
Wait,  Insolv.  Corp..  §  529.  It  may  be 
for  the  jury  to  s<iy  whether  a  subse- 
quent meeting  changed  the  minutes. 
Delano  v.  Smith  Charities,  138  Mass. 
63  (1884).  The  company  is  not  bound 
by  fraudulent  insertions,  at  least 
where  strangers  have  not  relied 
thereon.  Holden  v.  Hoyt,  134  Mass. 
181  (1883).  Where  all  the  stockhold- 
ers, being  directors,  agree  informally 
and  without  meeting  that  a  certain 
person  shall  be  the  corporate  agent 
and  take  entire  control,  he  is  author- 
ized to  bind  the  corporation  by  his 
acts.  Wood  V.  Wiley,  etc.  Co.,  56 
Conn.  87  (1888).  See  also  Perkins  v. 
Washington  Ins.  Co.,  4  Cow.  645 
(1825);  Hoag  v.  Lament,  60  N.  Y.  96 
(1875);  Fleckner  v.  Bank  of  U.  S.,  8 
Wheat.  338  (1823);  ElysviUe  Mfg.  Co. 
V.  Okisko  Co.,  1  Md.  Ch.  392  (1849), 
holding  that  an  appointment  need 
not  be  entered  upon  the  records  of  th  e 
corporation.  See  also  note  3,  p.  1490. 
1  Dennis  v.  Joslin,  etc.  Co.,  36  Atl. 
Rep.  129  (R.  L,  1896). 


1498 


en,  XLIII.]        HOW    COKPOKATE    CONTRACTS   AKE    MADE. 


[§  TM. 


cers,  and  whether  the  ofBcers  are  conclusively  presumed  to 
have  notice  of  all  that  is  contained  in  the  corporate  books,  is 
considered  elsewhere.^  The  books,  of  course,  are  not  admissi- 
ble as  evidence  against  strangers  dealing  with  the  corporation.^ 
Proof  of  corporate  resolutions  or  votes,  and  of  votes  of  the 
directors,  is  made  by  producing  the  original  minutes  or  record- 
book  of  the  corporation.  But  where  the  record-book  is  lost,  or 
no  record  was  ever  made,  secondary  evidence  may  be  resorted 
to.^    Where  there  is  no  statute  or  by-law  requiring  a  private 

V.  Tisdale,  84  N.  Y.  655  (1881).  Books 
of  the  board  of  directors,  in  which 
their  proceedings  are  recorded,  proved 
by  proving  the  liandwriting  of  the 
clerk  and  president,  are  competent 
evidence  to  prove  the  facts  therein 
recorded.  Owings  v.  Speed,  5  Wheat. 
420  (1820).  Acts  of  a  board  of  di- 
rectors  may  be  sJiown  by  parol  when 
no  record  of  them  has  been  made. 
Zalesky  v.  Iowa,  etc.  Co.,  70  N.  W. 
Rep.  187  (Iowa,  1897).  In  an  action 
by  a  foreign  corporation,  oral  proof 
of  the  corporate  books,  papers,  and 
records,  in  the  possession  of  the  cor- 
poration outside  the  state,  is  not  ad- 
missible in  its  behalf.  Mandel  v. 
Swan,  etc.  Co.,  154  IlL  177  (1895). 
Query,  whether,  under  the  statutes 
of  Tennessee  requiring  the  board  of 
directors  to  keep  a  full  and  true  rec- 
ord of  all  their  proceedings,  an  au- 
thorization of  a  mortgage  is  legal 
where  no  such  record  of  the  authoriza- 
tion is  made?  Lowry  Banking  Co.  v. 
Empire  Lumber  Co.,  91  Ga.  624  (1893). 
Even  though  the  resolutions  author- 
izing a  mortgage  were  oral,  and  no 
%vritten  record  was  made,  yet  they 
may  be  proved  to  svLstain  the  mort- 
gage. Boggs  V.  Lakeport,  etc.  Assoc, 
lll'Cal.  354  (1896).  Where  the  secre- 
tary is  dead,  and  his  memoranda  of 
the  minutes  cannot  be  found,  and  no 
record  has  been  made,  the  minutes 
may  be  proved  by  paroL  New  Bos- 
ton, etc.  Co.  V.  Saunders,  34  Atl.  Rep. 
670  (N.  H.,  1892).  Resolutions  of  the 
board  may  be  shown  by  parol  where 


1  See  §  727,  infra. 

^  See  ^127,  infra. 

'Secondary  evidence  of  the  rec- 
ords is  not  admissible  unless  the 
officers  are  first  examined  and  the 
originals  are  not  to  be  found.  Mul- 
lanphy  Sav.  Bank  v.  Schott,  135  IlL 
635  (1891).  Entries  in  the  corporate 
books  should  be  proved  by  the  books 
themselves,  and  not  by  the  clerk,  un- 
less an  excuse  is  given  for  their  non- 
production.  National  Bunk  v.  Na- 
vassa,  etc.  Co.,  56  Hun,  130  (1890). 
Where  the  original  minutes  have 
been  destro3-ed,  the  minutes  as  they 
have  been  copied  into  the  minute- 
book  are  admissible.  Brower  v.  East, 
etc.  Co.,  84  Ga.  219  (1890).  Tlie  books 
of  the  company  are  the  best  evi- 
dence, and  not  the  testimony  of  offi- 
cers as  to  what  tliey  had  seen  on  the 
books.  Dial  v.  Valley,  etc.  Assoc,  29 
S.  C.  500  (1888).  A  copy  of  a  resolu- 
tion of  the  directoi's  of  an  alien  cor- 
poration is  not  evidence  until  proof 
of  a  reasonable  effort  to  obtain  the 
original  is  given.  Bowick  v.  Miller, 
21'  Oreg.  25  (1891).  Sworn  copies 
taken  from  corporate  books  are  in- 
competent unless  evidence  is  given 
of  the  loss  of  the  book  itself.  Lar 
tourette  v.  Clark,  51  N.  Y.  639  (1872). 
A  copy  of  the  directors'  resolution  is 
evidence,  not  when  merely  certified 
to  by  the  secretary,  but  when  sworn 
to  by  him.  Hallowell,  etc.  Bank  v. 
Hamlin,  14  ^lass.  178  (1817).  Entries 
need  not  be  proven  by  the  clerk  who 
made  the  entries.     First  Nat.  Bank 


1499 


14.] 


HOW    COEPOKATE   CONTKACTS   AKE    MADE.        [cH.  XLIII. 


corporation  to  keep  a  minute-book,  it  seems  that  tlie  certifi- 
cate of  the  secretary  under  the  corporate  seal  that  a  resolution 
Avas  passed  cannot  be  questioned  by  any  one  claiming  under  or 
through  the  corporation.* 


only  a  part  of  the  business  has  been 
entered  in  the  minutes.  Cameron  v. 
First,  etc.  Bank,  34  S.  W.  Rep.  178 
(Tex.,  1896).  The  acts  and  resolu- 
tions of  the  directors,  if  not  recorded, 
may  be  proved  by  parol.  Langsdale 
V.  Bonton,  12  Ind.  467  (1859);  Bay, 
etc.  Assoc.  V.  Williams,  50  Cal.  353 
(1875).  Minutes  not  signed  by  the 
chairman  are  not  evidence  of  a  call ; 
nor  is  a  subsequent  ratification  of 
those  minutes.  Cornwall,  etc.  Co.  v. 
Bennett,  5  H.  &  N.  423  (1860).  After 
notice  to  the  corporation  to  produce 
its  records  is  given,  secondary  evi- 
dence may  be  introduced.  Thayer 
V.  Middlesex,  etc.  Co.,  27  Mass.  325 
(1830);  Elems  v.  Ogle,  15  Jur.  180 
(1850);  Lohman  v.  New  York,  etc. 
E.  R.,  2  Saudf.  39  (1848),  holding  that 
the  failure  to  produce  may  send  the 
question  to  the  jury.  To  same  efi;ect, 
Narragansett  Bank  v.  Atlantic  Silk 
Co.,  44  Mass.  282  (1841).  The  pre- 
sumption is  that  a  suit  in  the  corpo- 
rate name  was  authorized  by  it. 
Bangor,  etc.  R.  R.  v.  Smith,  47  Me.  34 
(1859).  In  proving  employment,  no- 
tice to  produce  must  be  given.  Haven 
V.  New  Hampshire  Asylum,  13  N.  H. 
532  (1843).  So  also  in  proving  agency. 
Clark  V.  Farmers',  etc.  Co.,  15  Wend. 
256  (1836);  Montgomery  R.  R.  v.  Hurst, 
9  Ala.  513  (1846).  As  to  proving  sub- 
scription to  stock,  see  ch.  IV,  supra. 
Parol  evidence  cannot  explain  the 
minutes.  Gould  v.  Norfolk,  etc.  Co., 
63  Mass.  338  (1852).  The  rough  min- 
utes are  evidence  if  not  subsequently 
written  out.  Waters  v.  Gilbert,  56 
]\Iass.  27  (1848).  It  may  be  shown 
tliat  tlie  minutes  are  incorrect.  Van 
Hook  V.  Sonierville,  etc.  Co.,  5  N.  J. 
Eq.  137,  169  (1845).  If  on  production 
of  the  books  no  resolution  is  found, 


proof  of  acts,  etc.,  may  be  given. 
Boston,  etc.  Co.  v.  Barton,  59  Mass. 
158,  179  (1849).  See  also  g  721,  and 
note  1,  p.  1499.  Proof  that  the  book 
is  a  corporate  record  is  made  by  the 
person  having  custody  of  the  book. 
Smith  V.  Natchez,  etc.  Co.,  2  Miss.  479, 
492  (1837).  It  must  be  proved  that 
it  is  a  corporate  book,  kept  as  such, 
and  by  the  proper  officer.  Highland 
Turnp.  Co.  v.  McKean,  10  Johns.  154 
(1813);  Whitman  u  Granite  Church, 
24  Me.  236  (1844).  Proof  may  be  by 
the  secretary.  Stebbins  v.  Merritt, 
64  Mass.  27  (1852).  The  book-keeper 
may  prove  his  entries.  Union  Bank 
V.  Knapp.  20  Mass.  96  (1825).  Or,  if 
he  is  dead,  his  handwriting  may  be 
proved.  Union  Bank  v.  Knapp,  20 
Mass.  96  (1825);  also  Chenango,  etc. 
Co.  V.  Lewis,  63  Barb.  Ill"  (1872). 
Where  a  corporation  is  disproving 
agency  it  is  held  to  strict  proof.  Its 
records  are  inadmissible  unless  proof 
is  given  that  they  were  kept  by  the 
proper  officer,  and  unless  he  testifies 
to  them.  Union,  etc.  Co.  v.  Rocky 
Mountain  Nat.  Bank,  2  Colo.  565 
(1875).  See  Gafford  v.  American,  etc. 
Co.,  77  Iowa,  736  (1889).  For  a  very 
full  note  on  the  admissibility  of  cor- 
porate books  as  evidence,  see  23  Cent. 
L.  J.  468-473.  An  examination  be- 
fore trial,  to  ascertain  whetlier  the 
defendant  corporation  authorized  a 
person  to  make  a  contract  for  it,  was 
granted  in  Bloom  v.  Pond's  Extract 
Co.,  18  N.  Y.  Supp.  179  (1891). 

1  Prentiss,  etc.  Co.  v.  Godchaux,  66 
Fed.  Rep.  234  (1894).  A  certified  copy 
of  resolutions  sent  to  a  mortgagee, 
and  authorizing  a  mortgage,  are  suf- 
ficient proof  without  proving  loss  of 
the  corporation  records.  Purser  v. 
Eagle  Lake,etc.  Co.,  Ill  CaL  139  (1896). 


1500 


CH.  XLIII.]        HOW    COKPOEATE   CONTRACTS   AKE   MADE. 


[§  715. 


A  resoliition  adopted  at  a  stockholders'  meeting  is  valid,  al- 
though only  a  pencil  memorandum  was  made  of  it  and  no 
formal  record  made  until  long  afterwards.  The  proceedings 
may  be  proved  by  parol.^ 

§  Y15,  Executive  committee. —  There  formerly  was  some  doubt 
as  to  whether  the  powers  of  a  board  of  directors  might  be  dele- 
gated to  an  executive  committee.  The  right  of  the  board  of 
directors  to  delegate  to  agents  the  transaction  of  the  ordinary 
and  routine  business  of  the  corporation  is  unquestioned,  and 
indeed  is  absolutely  necessary.^  But  in  matters  involving  dis- 
cretion there  are  decisions  to  the  effect  that  the  directors  can- 

The  clear  w^eight  of  authority, 


not  delegate  that  discretion.' 

iHandley  v.  Stiitz,  139  U.  S.  417 
(1891).  The  records  of  the  stockhold- 
ers' meetings  may  be  used  to  show 
the  purpose  of  a  stockholder's  reso- 
lution. Wiley  V.  Athol,  150  Mass.  426 
vl890). 

2  Directors  may  authorize  two  of 
their  number  to  execute  corporate 
notes  to  a  person.  Leavitt  v.  Oxford, 
etc.  Co.,  3  Utah,  265  (1883).  Or  ap- 
point an  agent  to  execute  a  deed. 
Arms  V.  Conant,  36  Vt.  744  (1864). 
Where  various  corporations  appoint 
a  committee  to  carry  on  litigation, 
tliey  are  each  liable  for  the  attor- 
ney's fees,  the  attorneys  having  no 
knowledge  of  a  limitation  of  the 
powers  of  the  committee  in  the  mat- 
ter, Prindle  v.  Washington  L.  Ins. 
Co.,  73  Hun,  448  (1893).  Directors 
having  power  to  fix  the  rates  of  their 
railroad  may  delegate  that  power  to 
agents.  IManchester,  etc.  R.  R.  v. 
Fisk,  33  N.  H.  297  (1856).  See  also 
many  cases  in  the  following  sections 
of  this  work.  The  corporation  may 
authorize  its  president  to  sell  and  as- 
sign its  negotiable  paper.  Stevens  v. 
Hill,  29  Me.  133  (1848);  Northampton 
Bank  v.  Pepoon,  11  Mass.  288  (1814). 
Nearly  all  corporate  acts  are  done  by 
means  of  subordinate  agents.  Such 
delegations  of  authority  are  neces- 
sary. See  Manchester  R'y  v.  Fisk,  33 
N.  H.  297  (1856).     Difficulty  occurs 


in  defining  the  line  which  separates 
powers  that  may  be  delegated  from 
those  which  may  not  be.  See  Lyon 
V.  Jerome,  26  Wend.  485  (1841);  Gillis 
V.  Bailey,  21  N.  H.  149  (1850).  A  cor- 
poration owning  water- works  outside 
of  a  city  may  agree  to  furnish  water 
to  one  inside  the  city,  the  general 
distribution  of  the  water  to  be  under 
the  joint  control  of  two  agents,  each 
corporation  appointing  one  and  the 
profits  to  be  divided  equally.  San 
Diego  Water  Co.  v.  San  Diego  Flume 
Co.,  108  Cal.  549  (1895).  See  also  g  712, 
supra. 

3  The  directors'  duty  to  pass  on 
paper  offered  for  discount  cannot  be 
delegated  in  Louisiana.  Percy  v.  Mil- 
laudon,  3  La.  568  (1832).  Cf.  Morse, 
Banks  and  Banking,  108.  Directors 
having  power  to  purchase  stock  can- 
not delegate  that  power  to  a  general 
manager.  No  ratification  arises  from 
the  fact  that  the  purchase  was  en- 
tered on  the  books.  Cartmell's  Case, 
L.  R.  9  Ch.  691  (1874).  Directors  can- 
not delegate  to  two  of  their  number 
the  question  of  whether  a  conditional 
subscription  to  shares  should  be  ac- 
cepted. Howard's  Case,  L.  R.  1  Ch. 
561  (1866).  Two  directors  acting  as 
agents  to  receive  calls  have  no  power 
to  waive  a  forfeiture  of  stock  and  .re- 
ceive the  calls  thereon.  Card  v.  Carr, 
1  C.  B.  (N.  S.)  197  (1856).     Directors 


1501 


715.] 


HOW    COKPOKATE    COXTKACTS    ARE    MADE.        [CH.  XLIII. 


however,  holds  that  the  powers  of  a  board  of  directors  may  be 
delegated  to  an  executive  committee  of  that  board,  and  the  acts 
and  contracts  of  such  a  committee  may  be  made  binding  on  the 
corporation.^ 


cannot  delegate  to  a  committee  the 
power  to  forfeit  and  sell  stock  for 
non-payment  of  calls.  York,  etc. 
R.  R.  V.  Ritchie,  40  Me.  425  (1855). 
A  Pennsylvania  railroad  corporation 
cannot  authorize  its  board  of  direct- 
ors to  delegate  to  an  executive  com- 
mittee the  location  of  the  routa 
Weidenfeld  v.  Sugar,  etc.  R.  R.,  48 
Fed.  Rep.  615  (1892).  In  Gillis  v. 
Bailey,  21  N.  H.  149  (1850),  it  was  held 
that  a  board  of  directors  could  not 
delegate  to  an  agent  the  power  to 
lease  various  pieces  of  property 
owned  by  the  corporation.  Power 
to  make  assessments  cannot  be  dele- 
gated by  the  directors.  Farmers', 
etc.  Ins.  Co.  v.  Chase,  56  N.  H.  341 
(1876);  Silver  Hook  Road  v.  Greene, 
12  R.  I.  164  (1878),  where  the  delega- 
tion was  to  tlie  treasui'er.  But  see 
Read  v.  Memphis,  etc.  Co.,  9  Heisk. 
(Tenn.)  545  (1872),  where  such  delega- 
tion to  the  president  was  upheld.  Cf. 
Lindley,  Companies,  p.  156.  In  Tem- 
pel  V.  Dodge,  89  Tex.  68  (1895),  it  was 
held  that  a  corporation  had  no  right 
to  create  by  its  by-laws  an  executive 
committee  to  exercise  the  powers  of 
the  board  of  directors. 

1  An  executive  committee  may  be 
appointed  under  the  statutory  power 
of  tlie  company  "  to  appoint  such  sub- 
ordinate officers  and  agents  as  the 
business  of  the  corporation  shall  re- 
quire." The  executive  committee 
may  delegate  to  one  of  their  number 
the  indorsing  of  checks,  etc.  Sheri- 
dan, etc.  Light  Co.  v.  Chatham  Nat. 
Bank,  127  N.  Y.  517  (1891).  A  con- 
tract between  two  railroads,  by  which 
one  was  given  the  right  to  rtm  over 
the  tracks  of  the  other,  is  legal,  al- 
tliough  it  is  executed  by  the  author- 
ity only  of  the  executive  committee 


and  of  a  meeting  of  the  stockholders, 
the  court  saying  the  determination 
of  the  management  of  the  corporate 
affairs  rests  with  its  stockholders,  and 
that  the  stockholders  had  the  power 
to  authorize  the  board  of  directors  to 
delegate  the  power  to  the  executive 
committee  to  do  any  and  all  acts 
which  the  board  itself  was  authorized 
to  do.  Union,  etc.  R'y  v.  Chicago,  etc. 
R'y,  163  U.  S.  564,  597  (1896).  Where 
a  by-law  gives  to  the  directors  the 
"  whole  charge  and  management  of 
the  property,"  and  the  directors  are 
also  authorized  to  have  an  executive 
committee  to  do  any  business  which 
the  board  itself  might  do,  and  the 
board  authorizes  the  executive  com- 
mittee to  exercise  all  the  powers  of 
the  board  when  the  board  is  not  in 
session,  a  contract  of  the  executive 
committee,  ratified  at  a  meeting  of 
the  stockholders,  to  allow  another 
railroad  to  have  the  joint  use  of  the 
company's  bridge  and  terminals,  is 
legal  and  binding.  Union  Pac.  R'y 
V.  Chicago,  etc.  R'y,  51  Fed.  Rep.  309 
(1892) ;  Chicago,  etc.  R'y  v.  Union  Pac. 
R'y,  47  Fed.  Rep.  15  (1891).  See  also 
Black  River  Imp.  Co.  v.  Holway,  85 
Wis.  344  (1893),  and  Hoyt  v.  Thomi> 
son's  Executor,  19  N.  Y.  207  (1859), 
where  the  committee  consisted  of 
any  five  or  more  directors  who  at- 
tended meetings  of  which  notice  was 
given  to  all.  See  also  Hoyt  v.  Shelden. 
8  Bosw.  267  (1858). 

The  right  of  a  board  of  directors 
to  delegate  its  powers  to  an  execu- 
tive committee  was  raised  but  not 
fully  passed  upon  in  Metropolitan, 
etc.  Co.  V.  Domestic,  etc.  Co.,  43  N.  J. 
Eq.  626  (1888),  where  it  was  remarked 
that  the  rigidity  of  the  old  rule  pro- 
hibiting such  delegation  has  been 


1502 


CH.  XLIII.]        HOW    COKPOEATE    COXTKACTS   AHE   MADE. 


[§  T15. 


The  majority  of  the  directors  cannot,  however,  exclude  the 
minority  from  the  meetings  and  from  being  heard,  by  delegat- 
ing power  to  a  committee,  and  "  even  if  the  minority  had  a 
voice  given  to  them,  stiU,  if  there  existed  a  combination  among 


somewhat  relaxed.  "  The  managers 
might,  undoubtedly,  clothe  a  com- 
mittee, in  the  intervals  between  the 
sittings  of  the  board,  with  all  their 
own  authority  to  conduct  the  ordi- 
nary business  of  the  company."  But 
it  seems  that  this  executive  commit- 
tee cannot  delegate  its  power  to  one 
of  their  number.  Olcott  v.  Tioga 
R.  R.,  27  N.  Y.  546,  558  (1863).  The 
by-laws  may  authorize  the  directors 
to  delegate  their  powers  to  a  com- 
mittee. Harris's  Case,  L.  R  7  Ch, 
587  (1872),  where  the  committee  al- 
lotted shares.  Directors  may  dele- 
gate to  a  committee  power  to  sell 
corporate  property,  and  a  mortgage 
given  by  the  committee  is  valid. 
Certainly  so  where  the  Board  of  di- 
rectors subsequently  accepted  the 
papers  connected  with  it.  Burrill  v. 
Nahant  Bank,  43  Mass.  163  (1840). 
In  Andres  v.  Fry,  45  Pac.  Rep.  534 
(Cal.,  1896),  the  contract  of  the  ex- 
ecutive committee  authorized  to  pur- 
chase patent-rights  was  declared 
legaL  The  constitution  of  an  incor- 
porated camp-meeting  association 
may  authorize  an  executive  commit- 
tee and  give  it  power  to  make  regu- 
lations as  to  the  use  of  the  grounds. 
Round  Lake  Assoc,  v.  Kellogg,  141 
N.  Y.  348  (1894).  Where  the  by-laws 
authorize  the  directors  to  transact 
business  through  a  committee,  that 
committee  may  consist  of  one  per- 
son. Re  Tourine  Co.,  L.  R.  25  Ch.  D. 
118  (1883).  An  employee  of  a  com- 
pany who  sues  for  services,  under  a 
written  contract  made  with  the 
"  chairman "  and  "  managing  di- 
rector," may  collect;  their  authority 
is  presumed  as  agents  or  executive 
committer  Totterdell  v.  Fareham 
Brick  Co.,  L.  R  1  C.  P.  674  (1866).  In 


New  York  it  is  clearly  held  that  the 
directors  of  a  banking  or  loan  and 
trust  company  may  appoint  an  ex- 
ecutive committee  and  authorize  it 
to  act  for  the  board  of  directors,  and 
that  the  acts  of  this  committee  are 
as  binding,  valid,  and  effective  as 
though  they  had  been  authorized 
by  the  board  of  directors  directly. 
Palmer  v.  Yates,  3  Sandf.  137  (1849). 
Cf.  Bank  Com'rs  v.  Bank  of  Buffalo, 
6  Paige,  497  (1837).  In  Bank  of  Co- 
lumbia V.  Patterson's  Adm'r,  7 
Cranch,  299  (1813),  the  right  of  the 
directors  to  delegate  their  power  to 
contract  to  a  committee  was  not 
questioned-  Stockholders  cannot 
elect  a  committee  and  compel  the 
directors  to  act  with  that  committee 
in  corporate  matters.  Boot,  etc.  Ca 
V.  Dunsmore,  60  N.  H.  85  (1880).  It  is 
fraudulent  for  an  executive  commit- 
tee to  vote  large  compensation  to 
themselves  for  services  as  promoters. 
Blatchford  v.  Ross,  54  Barb.  42  (1869). 
In  St.  Louis,  etc.  Assoc,  v.  Augvistin, 
2  Mo.  App.  123  (1876),  a  loan  commit- 
tee contracted  for  the  corporation. 
Where  the  executive  committee  can 
act  only  when  the  president  is  pres- 
ent, action  without  his  presence  is 
void.  Corn,  etc.  Bank  v.  Cimiber- 
land,  etc.  Co.,  1  Bosw.  436  (1857).  As 
to  committees  of  municipal  corpora- 
tions, see  Dillon,  Mun.  Corp.,  g§  60, 
874.  Contracts,  etc.,  by  an  executive 
committee  have  often  been  recog- 
nised as  valid.  See  Tracy  v.  Guthrie, 
etc.  Soc,  47  Iowa,  27  (1877).  A  stock- 
holder's request  to  such  a  committee 
to  bring  an  action  to  remedy  a  cor- 
porate wrong  is  siifRcient.  Hazard 
V.  Durant,  11  R.  L  196  (1875).  The 
committee's  consent  to  an  arbitration 
may  be  ratified  by  the    company. 


1503 


§  no.] 


HOW    CORrOEATE    C025'TEACTS    ARE    IMADE.        [CII.  XI.III. 


the  majorit}^,  before  that  voice  was  heard,  to  overbear  it,"  the 
acts  of  such  a  body  would  be  illegal.^  Where  the  board  of  di- 
rectors delegates  to  a  committee  the  power  to  act  for  it,  due 
notice  of  meetings  of  the  executive  committee  must  be  given 
to  all  its  members,  but  a  majority  of  the  committee  sulTices  to 
constitute  a  meeting  and  proceed  to  business,  and  a  majority 
of  that  majority  binds  the  committee,  the  directors,  and  the 
corporation  by  its  vote.^    An  auditing  committee  with  the 


Fiyeburg  Canal  v.  Fiye,  5  IMe.  38 
(1827).  Although  a  contract  is  irreg- 
xilarly  made  by  the  executive  com- 
mittee of  a  corporation,  there  being 
no  notice  and  no  quorum,  yet,  by  ac- 
cepting the  benefits  of  the  contract 
afterwards,  the  company  is  bound. 
Metropolitan,  etc.  Co.  v.  Domestic, 
etc.  Co.,  43  N.  J.  Eq.  626  (1888).  In 
Curtiss  V.  Leavitt,  15  N.  Y.  1  (1857),  a 
finance  committee  had  authorized 
the  issue  of  bonds.  The  charter  re- 
quired a  resolution  of  the  board  of 
durectors.  The  court  held  that  ac- 
quiescence cured  the  defect.  In  Tay- 
lor V.  Agricultural  Assoc,  68  Ala.  229 
(1880),  the  executive  committee  was 
provided  for  by  charter.  A  commit- 
tee authorized  to  settle  with  a  per- 
son cannot  also  settle  with  a  firm  in 
which  he  is  interested,  but  the  com- 
pany may  ratify.  Merchants',  etc. 
Co.  V.  Rice,  70  Iowa,  14  (1886).  The 
acts  of  the  executive  committee  may 
be  construed  to  be  subject  to  the  ap- 
proval of  the  next  meeting  of  the 
board  of  directors.  Indianapolis,  etc. 
R.  R.  V.  Hyde,  122  Ind.  188  (1890).  An 
executive  committee  having  the  gen- 
eral direction  and  superintendence 
of  the  affairs  of  the  company  have 
no  power  to  issue  stock,  the  whole 
capital  stock  being  already  issued. 
Ryder  v.  Bushwick  R.  R.,  134  N.  Y. 
83  (1892).  A  person  sued  on  a  tort 
cannot  raise  the  objection  that  the 
proceedings  of  an  executive  commit- 
tee or  board  of  directors  were  irregu- 
lar, or  that  stockholders  did  not  con- 
sent to  a  contract.    Farnsworth  v. 


Western,  etc.  Co.,  6  N.  Y.  Supp.  735 
(1889).  See  also  Black  River  Imp.  Ca 
V.  Holway,  85  Wis.  344  (1893). 

1  Great  Western  R'y  v.  Rushout,  5 
De  G.  &  Sm.  290,  310  (1852). 

2  Burleigh  v.  Ford,  61  N.  H.  360 
(1881);  Metropolitan,  etc  Ca  v.  Do- 
mestic, etc  Co.,  43  N.  J.  Eq.  626  (1888). 
Such  also  is  the  case  with  municipal 
corporations.  State  v.  Jersey  City, 
27  N.  J.  L.  493  (1859);  Junkins  v. 
Douglity  Falls,  etc  Dist.,  39  Me.  220 
(1855).  Th^  directors  may  delegate 
to  a  committee  the  power  to  procure 
plans  and  let  a  contract.  A  majority 
of  that  committee  may  act  and  bind 
the  corporation.  A  third  party  is 
justified  in  acting  on  the  ostensible 
authority  of  the  committee.  McNeil 
V.  Boston  Chamber  of  Com.,  154  Mass. 
277  (1891).  A  committee  appointed 
by  the  directors  cannot  act  unless  all 
are  present,  although  a  majority  may 
govern.  Ee  Liverpool,  etc.  Assoc,  63 
L.  T.  Rep.  873  (1890).  Where  many 
persons  authorize  eight  to  act  as  a 
managing  committee,  those  persons 
are  not  liable  for  debts  contracted  by 
a  meeting  of  six  of  that  committee. 
Brown  v.  Andrews,  13  Jur.  938  (1849), 
Power  to  an  executive  committee  of 
directors  "to  do  all  acts  necessary  for 
the  prosperity  "  does  not  authorize 
the  purchase  of  real  estate  by  a  ma- 
jority of  the  executive  committee. 
The  company  is  not  bound  by  same 
majority  improving  the  land.  Tracy 
V.  Guthrie,  etc.  Soc,  47  Iowa,  27  (1877). 
The  minority  of  the  committee  cer- 
tainly cannot  act.    Trott  v.  Warren, 


1504 


CH.  XLIII.]        HOW    COKPOKATE    CO^'TKACTS   ARE    MADE.  [§  T16. 

power  to  pay  or  reject  claims  have  no  power  to  rescind  or  set- 
tle contracts,  or  determine  the  future  action  of  the  company. 
§  716  President  — His  iwiver  to  contract  for  the  corporation. 
The  president  of  a  corporation  has  no  power  to  buy,  sell,  or 
contract  for  the  corporation,  nor  to  control  its  property,  funds, 
or  management.  This  is  a  rule  which  prevails  everywhere 
excepting  possibly  the  state  of  Illinois.  Both  the  decisions  and 
the  reasoning  of  the  Illinois  courts  tend  to  reLax  the  rule  given 

above.^  ,        .-.^^ 

It  is  true  that  the  board  of  directors  may  expressly  author- 
ize the  president  to  contract;  or  his  authority  to  contract  may 
arise  from  his  ha^dng  assumed  and  exercised  that  power  in  the 
past-  or  the  corporation  may  ratify  his  contract  or  accept  the 
benefits  of  it  and  thereby  be  bound.    But  the  general  rule  is 


11  Me.  227  (1834).   The  managing  com- 
mittee of  an  unincoi-porated  associa- 
tion may  legally  resolve  that  checks 
signed  by  any  three  of  them  shall  bind 
aU.  Maitland's  Case,  4  De  G.,  M.  &  G. 
769  (1853).    The  executive  committee 
cannot  delegate  their  powers  to  one 
of  their  number.    Cook  v.  Ward,  L. 
R  2  C.  P.  D.  225  (1877).  See  also  Lyon 
V.  Jerome,  26  Wend.  485  (1841),  where 
canal  commissioners  delegated  their 
powers  to  an  engineer.    One  of  two 
supervisors  cannot  contract.    Cooper 
V.  Lampeter,  8  Watts  (Pa.),  125  (1839). 

1  Skinner  v.  Walter,  etc.  Co.,  140 
N.  Y.  217  (1893). 

2  The  president  and  general  man- 
ager may  together  bind  an  insurance 
company  to  an  agreement  that  its 
mortgagor  may  redeem  even  after 
foreclosure.  Union  :Mut.  etc.  Ins.  Co. 
V  W^hite,  106  111.  67  (1883).    The  presi 


Irwin  V.  Bailey,  8  Biss.  523  (1879); 
S.  C,  13  Fed.  Cas.  114    A  judgment 
note  of  a  corporation  may  be  exe- 
cuted by  its  president  and  secretary. 
It  is  good  as  a  mere  note,  even  though 
not  as  a  judgment  note.    Matsou  v. 
Alley,  141  IlL  284  (1892).    A  coriwrate 
note  signed  by  the  president  and  sec- 
retary, giving  the  payee  the  right  to 
enter  judgment,  is  sufficient  to  sus- 
tain such  a  judgment  although  the 
note  was  not  under  seal  Snyder  Bros. 
V.  Bailey,  46  N.  E.  Rep.  452(111, 189G). 
A  duly  executed  contract  of  a  corpo- 
ration to  give  a  judgment  note  is  au- 
thority to  the  president  to  give  that 
note.    McDonald  v.  Chisholm,  131  IlL 
273  (1890).  The  president  lias  no  power 
to  agi-ee  that  an  absolute  subscrip- 
tion for  stock  shall  be  changed  so  as 
to  be  conditional    Morgan  County 
V.  Thomas,  76  III  120  (1875).    A  bank 


«'  White  106  111.  67  (1»»3).     inepresi-     i/.  j-iiv..x."o, -v         - 

dentofarailroadcompanvhaspower    president  may    assign  a  judgment 

ir -If  i;r  p.tr  r  a  ^^f^^^Ei 

and  secretary  is  valid  where  all  the    faulting  teller.    Bank  v.  Griffin,  48 


stockholders  join  also  in  the  deed. 
Hull  V.  Glover,  126  IlL  122  (1888).  The 
president  of  a  railroad  company  may 
assign  notes  and  mortgages  given  to 
it  to  aid  in  constructing  the  road. 


N.  E.  Rep.  154  (111.,  1897).  The  presi- 
dent is  presumed  to  have  authority 
to  assign  a  chattel  mortgage.  Ander- 
son V.  South,  etc.  Co.,  50  N.  E.  Rep. 
655  (IlL,  1898> 


95 


1505 


§  nc] 


now    COErORATE    CONTKACTS   ARE    MADE.        [cn,  XLIII. 


that  the  president  cannot  act  or  contract  for  the  corporation 
any  more  than  any  other  one  director.  This  question  has  fre- 
quently been  before  the  courts,  and  many  decisions  have  been 
rendered  in  resrard  to  it.^ 


i"In  the  absence  of  anything  in 
the  act  of  incorporation  bestowing 
special  power  upon  the  president,  he 
he  has  from  his  mere  official  station 
no  more  control  over  the  corporate 
property  and  funds  than  any  other 
director."  Titus  v.  Cairo,  etc.  R  R., 
37  N.  J.  L.  98  (1874).  The  president 
has  no  authority  to  direct  the  treas- 
urer to  refuse  to  receive  payments  of 
subscriptions.  Potts  v.  Wallace,  146 
U.  S.  689  (1892).  The  president  has 
no  power  to  employ  an  architect  to 
prepare  plans,  and  the  company  is 
not  liable  therefor.  Wait  v.  Nashua, 
etc.  Assoc,  23  Atl.  Rep.  77  (N.  H., 
1891).  A  president  has  no  inherent 
power  to  execute  a  mortgage.  Alta 
Silver  Min.  Co.  v.  Alta  Placer  Min. 
Co.,  78  Cal.  629  (1889).  The  president 
has  no  implied  power  to  mortgage 
the  corporate  property.  National 
State  Bank  v.  Vigo,  etc.  Bank,  141  Ind. 
352  (1895).  The  president  has  no  power 
to  mortgage,  even  though  he  has  been 
given  power  to  pledge  notes  and  con- 
tracts. Currie  v.  Bowman,  25  Oreg. 
364  (1894).  The  president  has  no  in- 
herent authority.  Brush,  etc.  Co.  v. 
City,  etc.  Montgomery,  21  S.  Rep.  960 
(Ala.,  1897).  The  president  has  no 
authority  to  increase  the  price  of 
construction  work.  Grant  v.  Duluth, 
etc.  R'y,  69  N.  W.  Rep.  23  (Minn., 
1896).  The  president  and  secretary 
have  no  inherent  power  to  execute 
notes  in  the  name  of  the  corporation. 
Estes  V.  German  Nat.  Bank,  62  Ark. 
7  (1896).  The  president  has  no  power 
to  assign  a  patent-right  belonging  to 
the  company  to  pay  a  corporate  debt, 
where  there  is  no  meeting  of  the 
board  of  directors  to  authorize  the 
same.  Kansas,  etc.  Co.  v.  Devol,  73 
Fed  Rep.  717  (1896).    The  president 


1506 


has  no  power  to  confess  judgment 
for  tlie  corporation.  Raub  v.  Blairs- 
town  Creamery  Assoc,  56  N.  J.  L. 
262  (1893).  A  president  and  secre- 
tary have  no  implied  power  to  give  a 
corporate  note.  Edwards  v.  Carson 
Water  Co.,  21  Nev.  469  (1893).  The 
president  cannot  bind  the  corpora- 
tion by  his  agreement  that  it  will 
pay  the  debts  of  a  person.  Hamilton 
V.  Bates,  35  Pac.  Rep.  304  (Cal.,  1893). 
Tlie  president  has  no  power  to  sell 
treasury  stock.  Be  Utica,  etc.  Co., 
154  N.  Y.  268  (1897).  In  Powers  t\ 
Schlicht,  etc  Ca,  23  N.  Y.  App.  Div. 
380  (1897),  the  court  stated  tliat  the 
president  of  a  business  corporation 
has  implied  power  to  make  contracts 
in  its  behalf.  The  president  of  a  rail- 
road company  has  no  inherent  au- 
thority to  negotiate  a  loan  of  $150,0iJ'> 
and  agree  to  pay  ten  per  cent  tliereof 
as  brokerage  Tobin  v.  Roaring,  etc. 
R  R.,  86  Fed.  Rep.  1020  (1898).  The 
fact  that  a  person  buying  land  is 
president  of  a  company  and  gives  a 
draft  on  the  company  in  part  pay- 
ment does  not  make  it  a  purchase 
by  the  company  for  which  it  is  lia- 
ble. Re  Seymour,  83  Mich.  490  (1890  v. 
The  president  of  a  literaiy  and  bibli- 
cal institution  has  no  power  to  buy 
Ivunber  for  it,  and  it  is  not  liable 
therefor  although  it  has  used  it, 
where  some  of  the  directors  had 
agreed  among  themselves  to  pay  for 
the  lumber.  Lyndon  Mill  Co.  v.  Lyn- 
don, etc.  Inst.,  22  Atl.  Rep.  575  (Vt., 
1891).  A  president  of  a  bank  cannot 
agree  that  sm-eties  on  paper  given 
to  the  bank  will  not  be  held  liable. 
First  Nat.  Bank  v.  Bennett,  33  Mich. 
520  (1876).  "It  is  not  within  the  au- 
thority of  the  president  of  a  bank, 
when   he  discounts    paper   for  the 


CH.  XLIII.]        HOW    COEPOEATE   CONTEACTS   AEE    MADE. 


[§  'i'16. 


A  large  number  of  the  cases  are  given  in  the  notes  below. 
The  question  seems  to  have  arisen  in  many  forms,  and  the  great 
weight  of  authority  holds  that  a  president  has  no  inherent  power 


bank,  to  promise  the  maker  that  he 
need  not  pay  it."  First  Nat.  Bank  v. 
Tisdale,  18  Hun,  151  (1879);  aflf'd,  84 
N.  Y.  655.  The  president  cannot  bor- 
row money  for  the  company  unless 
the  charter  or  the  board  of  directors 
authorizes  him.  Life  &  F.  Ins.  Co.  v. 
Mechanics'  F.  Ins.  Co.,  7  Wend.  31 
(1831). 

Although  a  note  is  signed  by  the 
president,  secretary,  and  treasurer  of 
a  religious  corporation,  yet  it  may  be 
showTi  that  they  were  not  authorized 
by  the  board  of  trustees  to  sign. 
People's  Bank  v.  St.  Anthony's,  etc. 
Church,  109  N.  Y.  512  (1888).  The 
president  and  cashier  cannot  agree 
with  an  indorser  that  he  will  not  be 
held  liable.  Bank  of  U.  S.  v.  Dunn,  6 
Pet.  51  (1832);  Bank  of  :Metropolis  v. 
Jones,  8  Pet.  12  (1834).  The  president 
of  a  bank  has  no  power  to  release  a 
claim.  Olney  v.  Chadsey,  7  R.  I.  224 
(1862);  Hodges  v.  First  Nat.  Bank,  22 
Gratt.  (Va.)  51  (1872).  The  president 
and  cashier  have  no  power  to  execute 
a  mortgage.  Leggett  v.  New  Jersey, 
eta  Co.,  1  N.  J.  Eq.  541  (1832).  Nor 
has  the  president  alone  that  power. 
Corbett  v.  Woodward,  5  Sawyer,  403 
(1879);  S.  C,  6  Fed.  Cas.  531.  Tlie 
president  of  a  bank  has  no  power  to 
sell  and  assign  a  note  held  by  it. 
Hallowell,  etc.  Bank  v.  Hamlin,  14 
Mass.  178  (1817).  The.president  of  a 
national  bank  cannot  bind  it  by  his 
purchase  of  bonds  and  stock  for  it. 
First  Nat.  Bank  v.  Hoch,  89  Pa.  St. 
324  (1879).  The  president  of  a  rail- 
road corporation  has  no  power  to  let 
a  constixiction  contract.  Templin  v. 
Chicago,  etc.  R'y,  73  Iowa,  548  (1887); 
Griffith  V.  Cliicago,  etc.  R.  R,  74  Iowa, 
85  (1888).  The  president  and  a  director 
of  a  miner's  water  supply  company 
have  no  power  to  purchase  land  for 
an  extension  of  the  works,  but  the 


board  of  directors  may  ratify  the  pur- 
chase. Blen  V.  Bear,  etc.  Co.,  20  Cal. 
602  (1862).  The  president  of  a  ditch 
company  has  no  power  to  exchange 
half  of  its  ditch  for  half  of  the  ditch 
of  another  company.  Bliss  v.  Kaweah, 
etc.  Co.,  65  CaL  502  (1884).  A  railroad 
president  cannot  sell  its  ties.  Wal- 
worth, etc.  Bank  v.  Farmers',  etc. 
Trust  Co.,  14  Wis.  325  (1861).  The 
president  cannot  execute  a  note  for 
the  company.  Bacon  v.  Mississippi 
Ins.  Co.,  31  Miss.  116  (1856).  The  presi- 
dent of  a  railroad  company  cannot 
give  a  chattel  mortgage  on  one  of  its 
engines,  even  though  he  is  also  its 
"  business  and  financial  agent."  Luse 
V.  Isthmus,  etc.  R'j',  6  Oreg.  125(1876). 
If  the  president  of  a  bank  sells  its 
securities  he  is  liable  to  it  for  any 
loss  incurred  thereby.  First  Nat. 
Bank  v.  Lucas,  21  Neb.  280  (1887). 
The  president  of  a  bank  has  no  power 
to  compromise  a  debt  due  to  it  from 
an  insolvent  firm.  Wheat  v.  Bank  of 
Louisville,  5  S.  W.  Rep.  305  (Ky.,  1887). 
The  president  of  a  Imnber  company 
has  no  power  to  employ  a  general 
agent  in  another  part  of  the  country. 
The  latter  can  hold  the  company 
liable  for  his  salary  only  by  proving 
that  at  least  a  majority  of  the  direct- 
ors knew  thereof  and  acquiesced. 
Murray  v.  Nelson  Lvunber  Co.,  143 
Mass.  250  (1887).  The  president  of  a 
railroad  cannot  sell  its  bonds.  Titus 
V.  Cairo,  etc.  R.  R.,  37  N.  J.  L.  98 
(1874).  The  president  has  no  power 
to  sell  goods  imless  he  is  specially  au- 
thorized or  has  made  similar  sales 
without  objection.  Pittsburgh  Melt- 
ing Co.  V.  Reese,  118  Pa.  St.  355  (188«). 
The  president  of  a  company  cannot 
agree  for  it  to  redeem  certain  out- 
standing claims  against  it  —  "labor 
tickets."  Stanley  v.  Sheffield,  etc. 
Co.,  83  Ala.  260  (1888).   The  president 


1507 


§  ne.] 


HOW    COEPOKATE   COIfTEACTS   ARE    MADE.        [CH.  XLIII. 


to  represent  or  contract  for  the  corporation.  His  duties  are 
confined  to  presiding  and  to  voting  as  a  director.  The  fact, 
however,  that  he  is  almost  always  the  corporate  officer  who  is 

cannot  increase  the  pay  allowed  to  a    (1877);   affirmed,  75  N.  Y.  1.    A  di- 


director  by  a  vote  of  the  directors. 
Hodges  V.  Rutland,  etc.  R.  R.,  29  Vt. 
220  (1857);  Bailey  v.  Buffalo,  etc.  R.  R, 
14  Hun,  483  (1878).  A  president  au- 
thorized to  execute  a  mortgage  can- 
not insert  unvisual  terms  —  such  as 
that  the  principal  sum  should  be- 
come due  at  the  option  of  the  bond- 
holder in  case  of  non-payment  of 
interest.  Jesup  v.  City  Bank,  etc.,  14 
Wis.  331  (1861).  The  president  and 
secretary  cannot  issue  drafts  in  the 
company's  name.  Dabney  v.  Stevens, 
40  How.  Pr.  341  (1870).  Misrepresen- 
tations of  the  president  as  to  property 
which  the  company  sells  are  not 
binding  upon  it.  Crump  v.  U.  S.  ]\Iin. 
Co.,  7  Gratt.  (Va.)  353  (1851).  The 
president  and  cashier  cannot  even 
conjointly  sell  the  safe  of  a  bank. 
Asher  v.  Sutton,  31  Kan.  286  (1884). 
One  who  is  president,  treasurer,  and 
general  manager  cannot  confess 
judgment  for  the  company,  even 
though  he  owns  all  but  two  shares  of 
the  stock.  Stokes  v.  New  Jersey,  etc. 
Co.,  46  N.  J.  L.  237  (1884).  Nor  give  a 
mortgage.  England  v.  Dearborn,  141 
Mass.  590  (1886).  Nor  give  accommo- 
dation or  renewal  notes.  McClellan 
V.  Detroit,  etc.  Works,  56  Mich.  579 
(1885).  The  president  of  a  bank  has 
no  power  to  transfer  its  paper.  Smith 
V.  Lawson,  18  W.  Va.  213,  228  (1881). 
The  president  of  a  manufacturing 
company  cannot  buy  goods  for  it. 
Westerfield  v.  Radde,  7  Daly,  326 
(1877).  Cf.  Silva  v.  Metropolitan,  etc. 
Co.,  42  N.  Y.  Super.  Ct.  307  (1877). 
Where  a  contract  to  build  a  railroad 
is  made  by  contractors  with  a  com- 
mittee of  directors  duly  authorized 
to  make  it,  a  provision  against  sub- 
letting cannot  be  waived  by  the  presi- 
dent of  the  railroad  and  a  director. 
Western  R.  R.  u  Bayne,  11  Hun,  166 


rector  is  liable  to  his  bank  on  a  note 
given  to  it  by  him,  although  tlie  presi- 
dent, who  has  purchased  stock  of  the 
director,  cancels  the  note  in  payment 
for  the  stock  and  considers  himself 
indebted  to  the  bank  for  that  amount. 
There  was  no  ratification  by  the  bank. 
Rhodes  V.  Webb,  24  Minn.  293  (1877). 
A  bank  receiving  funds  from  its  pras- 
ident  in  payment  of  his  debts  to  it, 
which  funds  he  liad  fraudulently  ob- 
tained from  another  bank  by  using 
his  standing  as  president  of  tlie  for- 
mer, is  bound  to  pay  over  the  same 
to  the  defrauded  bank,  where  such 
president  had  complete  control  of 
the  former  bank.  City  Nat.  Bank  v. 
National  Park  Bank,  33  Hun,  105 
(1884). 

Brokers  employed  by  the  president 
cannot  hold  the  corporation  liable, 
even  though  the  corporation  has  had 
the  benefit  of  their  services,  tlie 
board  of  directors  having  no  knowl- 
edge thereof.  Twelfth  St.  Market 
Co.  V.  Jackson,  103  Pa.  St.  269  (1883); 
De  Bost  V.  Albert  Palmer  Co.,  35  Hun, 
386  (1885);  Allegheny  County  Work- 
house V.  Moore,  95  Pa.  St.  408  (1880k 
in  the  last  case  the  superintendent 
joined  in  employing  the  broker.  Not 
even  the  president,  secretary,  and 
treasurer  can  give  a  note  in  tlie  name 
of  a  religious  corporation.  People's 
Bank  v.  St.  Anthony's,  etc.  Church, 
39  Hun,  498  (1886).  A  president  au- 
thorized by  resolution  of  the  board  of 
directors  to  sell  bonds  cannot  loan 
them ;  if  he  does  so  it  is  a  conversion 
of  the  property  of  the  cori)oration. 
Second  Ave.  R.  R.  u  Mehrback,  46 
N.  Y.  Super.  Ct.  267  (1883).  The 
president  of  an  insurance  company 
cannot  indorse  and  transfer  notes. 
]Marine  Bank,  etc.  v.  Clements,  3  Bosw. 
600  (1858).    But  in  an  earlier  case  it 


1508 


en.  XLIII.]        HOW    COKPOKATE   CONTRACTS    AEE   MADE. 


[§  ne. 


directed  to  sign  the  corporate  contracts  that  have  been  author- 
ized by  the  board  of  directors  has  led  to  an  enlargement  of  his 
importance  as  a  corporate  officer.    Hence  the  rule  has  arisen 


was  held  that  the  indorsee  in  good 
faith  was  protected.  Caiyl  v.  Mc- 
Elrath,  3  Sandf.  176  (1849).  A  bank 
president  has  no  implied  authority 
from  the  bank  to  agree  to  pay  inter- 
est on  a  particular  deposit,  there 
being  no  evidence  of  special  au- 
thority nor  of  a  bank  custom  to 
tliat  effect.  The  president  of  a  cor- 
poration has  no  implied  authority  to 
check  corporate  funds  out  of  the 
bank  unless  there  is  an  established 
usage  to  that  effect.  Fulton  Bank  v. 
New  York,  etc.  Canal  Co.,  4  Paige,  127 
(1833).  The  president,  secretary,  and 
general  agent  cannot  issue  the  cor- 
porate notes.  McCullough  v.  Moss, 
5  Denio,  567  (1846).  Cf.  Mossu  Rossie, 
etc.  Co.,  5  Hill,  137  (1843).  A  railroad 
president  cannot  contract  to  pay  a 
commission  to  a  promoter  who  in- 
duces a  contractor  to  build  the  road. 
Risley  v.  Indianapolis,  etc.  R.  R,  1 
Hun,  202  (1874);  rev'd  on  other  points, 
62  N.  Y.  240.  The  president  cannot 
employ  workmen.  Mt.  Sterling,  etc. 
Co.  V.  Looney,  1  Mete.  (Ky.)  550  (1858). 
Nor  agree  to  pay  a  salary.  Murray 
V.  Nelson  Lumber  Co.,  143  Mass.  250 
(1887);  Wood,  Railw.  Law,  pp.  436- 
439.  The  president  may  accept  a  con- 
ditional subscription  to  stock.  Pitts- 
burgh, etc.  R.  R.  V.  Stewart,  14  Pa.  St. 
54  (1861).  A  president  of  a  bank  may 
bind  it  by  his  agreement  with  an 
indorser  of  a  note  that  the  maker  of 
a  note  will  not  give  a  mortgage,  and 
that  the  indorser  will  not  be  held 
liable.  Cake  v.  Potts ville  Bank,  116 
Pa.  St.  264  (1887).  A  tender  of  calls 
on  stock  may  be  made  to  the  presi- 
dent in  order  to  avoid  a  forfeiture. 
Mitchell  V.  Vermont,  etc.  Co.,  67  N.  Y. 
280  (1876).  Where  the  corporation 
is  merely  an  intermediary  of  title  to 
a  note,  less  strict  proof  is  required. 


Brown  v.  Donnell,  44  Me.  421  (1860). 
The  company  is  liable  to  an  architect 
who  has  done  work  at  the  instance 
of  the  president  and  two  directors. 
Hooker  v.  Eagle  Bank,  30  N.  Y.  83 
(1864).  The  president  cannot  lease 
land.  Yellow,  etc.  Co.  v.  Stevenson, 
5  Nev.  224  (1869).  A  telegram  from 
the  president  authorizing  an  agent  to 
contract  is  insufficient  proof  of  au- 
tliority.  Felton  v.  McClane,  46  N.  Y. 
Super.  Ct.  53  (1880).  Where  he  is 
authorized  to  discharge  one  mort- 
gage, the  company  is  not  bound  by 
his  mistake  in  discharging  two  mort- 
gages. Smith  V.  Smith,  117  Mass.  73 
(1875);  Mobile,  etc.  R'y  v.  Gilmer, 
85  Ala.  422  (1888).  The  president  of 
a  national  bank  has  no  power  in- 
herent in  his  office  to  execute  a  note 
in  the  name  of  the  bank.  National 
Bank,  etc.  v.  Atkinson,  55  Fed.  Rep.  405 
(1893).  The  president  cannot  be  held 
personally  liable  for  plans  which  he 
orders  for  the  corporation,  unless 
want  of  authority  to  give  the  order 
is  shown.  Johnson  v.  Armstrong,  83 
Tex.  325  (1892).  The  president  has  no 
power  to  modify  a  resolution  of  the 
board  that  certain  notes  shall  be  sub- 
ject to  the  joint  order  of  himself  and 
the  secretary.  Tradesmen's  Nat. 
Bank  v.  Manhattan  Lumber  Co.,  18 
N.  Y.  Supp.  920  (1892).  The  president 
of  a  national  bank  has  power  to  take 
property  in  payment  of  a  debt  and 
bind  the  bank  to  pay  off  a  lien  on  it. 
Panhandle  Nat.  Bank  v.  Emery,  73 
Te.x.  498  (1890).  The  president  of  a 
national  bank  has  no  power  to  bind 
it  to  accept  drafts  in  the  future 
drawn  by  a  railroad  company,- wliei'9 
the  party  relying  thereon  knew  that 
the  bank  directors  objected.  Stall- 
cup  V.  National  Bank,  15  N.  Y.  St. 
Rep.   39  (1888).    The   president  and 


1509 


716.] 


HOW    COKPOEATE   CONTEACTS   AEE    MADE.        [CH.  XLin. 


in  iN'ew  York  tliat  a  contract,  which  apparently  is  a  corporate 
contract,  being  duly  signed  by  the  president,  is  presumed  to  be 


managing  agent  renders  his  corpora- 
tion liable  for  a  bonus  of  stock  in 
another  corporation  which  he  gives 
secretly  and  corruptly  to  the  agent 
of  the  latter  corporation  in  order  to 
get  a  contract  for  the  former  corpo- 
ration. Grand  Rapids,  etc.  Co.  v. 
Cincinnati,  etc.  Co.,  45  Fed.  Eep.  G71 
(1891),  holding  the  former  corporation 
liable  for  the  x^ar  value  of  the  stock, 
inasmuch  as  it  was  the  original  issue 
of  that  stock.  Wliere  an  executor  is 
president  of  a  corporation,  no  formal 
demand  for  payment  of  a  claim  by 
the  corporation  against  the  estate 
need  be  made.  Brown  v.  Brown,  58 
Conn.  85  (1889). 

Tlie  president  and  secretary  of  a 
corporation  are  presumed  to  have  au- 
thority to  execute  a  promissory  note 
in  the  name  of  the  corporation,  and 
the  holder  of  such  note  will  not  be 
affected  by  the  fact  that  sucli  author- 
ity did  not  exist  unless  he  is  shown 
to  have  had  notice  thereof.  Ameri- 
can, etc.  Bank  v.  Oregon,  etc.  Co.,  55 
Fed.  Rep.  265  (Oreg.,  1893).  A  bank 
may  reclaim  money  paid  by  the  cash- 
ier on  overdrafts  of  the  president  to 
pay  his  private  debts,  sucli  overdrafts 
not  having  been  authorized  by  the 
board  of  directors.  Dowd  v.  Steplien- 
son,  105  N.  C.  467  (1890).  A  corporate 
deed  by  the  president  conveying 
what  he  owns  personally  does  not 
estop  him  from  claiming  the  prop- 
erty. Carothers  v.  Alexander,  74  Tex. 
309  (1889).  Where  the  president  of  a 
bank  receives  money  on  deposit  from 
himself  as  attorney  and  subsequently 
withdraws  it  and  misappropriates  it, 
the  bank  is  liable.  Smith  v.  Ander- 
son, 57  Hun,  72  (1890).  An  offer  of  a 
corporation  to  sell  out  in  considera- 
tion of  stock  in  another  corporation, 
the  latter  to  pay  all  existing  debts,  is 
not  enforceable  by  the  former  com- 

15 


pany  where  the  latter  company  ao^ 
cepted  the  ofler  on  condition  that  the 
debts  should  not  exceeil  a  certain 
amount.  Not  even  tlie  assent  of  the 
president  of  the  former  company  to 
the  condition  is  suflicient.  Bi-.SpooI, 
etc.  Co.  V.  Acme  Mfg.  Co.,  153  Mass. 
401(1891).  The  president  of  u  bank 
has  no  implieil  power  to  borrow 
money  for  it.  Western  Nat.  Bank  v. 
Armstrong,  153  U.  S.  840  (1893).  As 
to  the  declarations  or  admissions  of 
the  president,  see  g  72G,  infra,  Tlie 
president  has  no  power  to  emi)loy  an 
architect.  Mathias  v.  Wliite  S.  S. 
Assoc,  48  Pac.  Rep.  024  (Mont.,  1897). 
The  president  and  secretary  liave  no 
power  to  buy  macliiiiery  for  tlie  cor- 
poration. Des  Moines,  etc.  Co.  v.  Til- 
ford,  etc.  Co.,  70  N.  W.  Rep.  839  (S.  D., 
1897).  In  Ford  v.  Hill,  92  Wis.  188 
(189G),  the  court  held  tliat  the  presi- 
dent had  no  inlierent  power  to  con- 
fess judgment,  but  tliat  under  tlie 
circumstances  of  the  case  tlie  court 
would  not  set  the  judgment  aside. 
TJie  president  and  secretary  have  no 
power  to  sell  the  pi'operty  of  tlie  cor- 
poration or  to  authorize  anybody  else 
to  sell  it.  Johnson  v.  Sage,  44  Pac. 
Rep.  041  (Idaho,  1890).  The  president 
has  no  power  to  waive  the  purchase- 
naoney  mortgage  of  the  corporation 
upon  land  sold  by  the  corporation. 
Franco-Texan  Land  Co.  v.  McCor- 
mick,  85  Tex.  410  (1893).  A  resolution 
authorizing  the  president  to  sign 
checks,  drafts,  etc.,  does  not  author- 
ize an  indorsement  of  commercial 
paper  by  him  in  the  company's  name 
and  in  its  behalf.  Hitchings  v.  St. 
Louis,  etc.  Co.,  08  Hun,  33  (1893).  A 
corporation  is  not  liable  for  commis- 
sions promised  by  its  president  to  a 
broker,  even  though  a  sale  resulted. 
Bright  V.  Canadian,  etc.  Co.,  83  Hun, 
483  (1895). 
10 


CH.  XLni.]        HOW   COEPOEATE    CONTEACTS   AEE   MADE. 


[§  T16. 


a  corporate  contract  until  the  want  of  authority  of  the  presi- 
dent is  shown  by  the  corporation.^ 

A  person  taking  a  company's  note  from  the  president  in  pay- 
ment of  an  individual  debt  is  bound  to  inquire  into  the  regu- 
larity of  the  issue  of  the  note.^ 

A  president,  however,  may  employ  an  attorney  for  the  com- 
pany, and  authorize  him  to  prosecute  or  defend  a  case.'  And 
in  all  cases  the  president  binds  the  corporation  by  his  acts  and 


1 "  Where  a  contract  made  in  the 
name  of  a  corporation  by  its  presi- 
dent is  one  the  corporation  has  iiower 
to  authorize  its  president  to  make,  or 
to  ratify  after  it  has  been  made,  the 
burden  is  upon  the  corporation  of 
showing  that  it  was  not  authorized 
or  ratified."  Patterson  v.  Robinson, 
116  N.  Y.  193  (1S89);  Chemical  Nat. 
Bank  v.  Kohner,  85  N.  Y.  189  (1881); 
Lee  V.  Pittsburgh  Coal,  etc.  Co.,  56 
How.  Pr.  373  (1877);  aff'd,  75  N.  Y. 
<J01.  AVhere  a  bank  and  a  mill  com- 
pany liave  the  same  individual  as 
president,  his  action  as  representing 
the  bank  in  regard  to  the  application 
of  moneys  to  particular  paper  due 
from  the  mill  to  the  bank  is  valid 
and  binding  on  the  bank,  if  fair  and 
reAsonable.  Patterson  v.  Robinson, 
116  N.  Y.  193  (1889).  The  signature 
of  the  president  and  secretary  of  a 
religious  corporation  does  not  raise 
any  presumption  as  to  its  being  the 
vote  of  the  corporation.  Columbia 
Bank  v.  Gospel  Tabernacle,  127  N.  Y. 
861  (1891);  People's  Bank  v.  St.  An- 
thony's, etc  Church,  109  N.  Y.  512 
(1888). 

-  Wilson  V.  Metropolitan,  etc.  Ry, 
120  N.  Y.  145  (1890).  See  also  g  293, 
siqjra. 

3  American  Ins.  Co.  v.  Oakley,  9 
Paige,  496  (1842);  Mumford  v.  Haw- 
kins, 5  Denio,  355  (1848);  Potter  v. 
New  York  Inf.  Asylum,  44  Hun,  367 
(1887).  He  may  also  employ  special 
counsel-  Davis  v.  Memphis,  etc.  R'y, 
22  Fed.  Rep.  883  (1883) ;  Recamier  Mfg. 
Co.  V.  Seymour,  5  N.  Y.  Supp.  648 
(1889),  holding  that  he  may  do  so, 


though  the  suit  is  by  the  corporation 
against  the  board  for  fraud.  Cotv- 
tra.  Bright  v.  ^Metairie  Cem.  Assoc, 
33  La.  Ann.  58  (1881).  The  president 
may  bring  a  writ  of  entry  to  fore- 
close a  mortgage.  Smitli  Charities 
V.  Connolly,  157  Mass.  272  (1892).  The 
president  cannot  authorize  an  at- 
torney to  accept  service  where  the 
board  of  directors  were  accustomed 
to  vote  on  the  employment  of  attor- 
neys. Bridgeport  Sav.  Bank  v.  El- 
dredge,  28  Conn.  556  (1859).  The 
president  and  secretary  authorized 
to  execute  a  mortgage  have  no  au- 
thority to  insert  a  provision  to  pay 
the  attorney  fee  in  case  of  foreclos- 
ure. Ratification  of  the  mortgage 
by  the  directors  without  knowledge 
of  such  provision  is  not  ratification 
thereof.  Pacific,  etc.  Mill  v.  Dayton, 
etc  R'y,  5  Fed.  Rep.  852  (1881).  The 
case  of  Ashuelot,  etc.  Co.  v.  Marsh, 
55  Mass.  507  (1848),  holds  that  the 
president  cannot  cause  an  action  to 
be  commenced.  Where  the  presi- 
dent is  dead  the  vice-president  may 
employ  an  attorney.  Coleman  v. 
West,  etc  Cc,  25  W.  Va.  148  (1884). 
A  hold-over  president  and  manager 
for  sixteen  years  may  institute  a  suit 
in  behalf  of  the  corporation.  Lucky 
Queen  ^Min.  Co.  v.  Abraham,  26  Oreg. 
28*2  (1894).  The  president  and  gen- 
eral manager  may  engage  an  attor- 
ney to  give  advice  in  company's  mat- 
ters. Dallas,  etc.  Co.  v.  Crawford,  44 
S.  W.  Rep.  875  (Tex.,  1898).  A  bank 
president  has  no  power  to  em])loy  an 
attorney.  Pacific  Bank  v.  Stone,  53 
Pac  Rep.  634  (CaL,  1898). 


1511 


ne.] 


HOW    COEPORATE    C0NTEACT3   AKE    MADE.        [cil.  XLIII. 


contracts  when  he  is  expressly  authorized  to  so  act  or  contract,* 
or  when  he  has  been  permitted  by  the  corporation  for  some 
time  to  act  and  contract  for  it.^    Thus,  where  the  president 


1  Under  express  power  to  have  full 
control  of  the  business,  the  president 
may  purchase  materials.     Castle  v. 
Belfast,  etc.  Co.,  72  Me.  167  (1881). 
Under  power  to  adjust  and  pay  losses 
he  may  transfer  papers.     Baker  v. 
Cotter,  45  Me.  236  (1858);  Aspinwall 
V.  Meyer,  2  Sandf.  186;  S.  C,  3  N.  Y. 
290  (1850),  where  the  express  power 
was  very  general.    Express  author- 
ity, of  course,  may  be  given  to  the 
president  to  sell  and  assign  the  secu- 
rities of  the  corporation.    Mitcliell  v. 
Deeds,  49  III  416  (1867).    Authority 
to  the  president  to  boiTOw  includes 
authority  to  give  ordinary  securities, 
i.  e.,  bonds,  notes,  acceptances,  and 
collaterals.    A  person  dealing  with 
him  may  rely  on  it.     He  is  not  bound 
to  know  that  the  president's  author- 
ity has  been  revoked.    Hatch  v.  Cod- 
dington,  95  A  S.  48  (1877).    Where 
the  president  has,  by  by-laws,  author- 
ity to  make  a  contract,  and  does 
make  one,  and  it  is  signed  by  him  as 
such,  though  no  corporate  seal  arM. 
no  resolution  are  recited,  the  presi- 
dent may  compromise  and  release 
the  same.    Six  months'  delay  by  di- 
rectors in  repudiating  the  compro- 
mise after  knowledge  is  a  fatal  delay. 
Rolling  MiU  v.  St.  Louis,  etc.  R  R., 
120  U.  S.  256  (1886).    Parol  authority 
to  the  president  suffices  to  enable 
him  to  pay  out  money.    New  Orleans 
Bldg.  Co.  V.  Lawson,  11  La.  34  (1837). 
Although   the   president    is    given 
power  to  make  a  contract,  yet  the 
directors  may  make  it,  and  their  ac- 
tion overrules  his.    East,  etc.  Co.  v. 
Brower,  80  Ga.  258  (1888).     Author- 
ity to  sell  gives  authority  to  contract 
to  sell.    Augusta  Bank  v.  Hamblet, 
•  35  Me.  491  (1853).    Officers  authorized 
to  give  a  note  cannot  agree  to  pay 
attorney  fees.     Hardin  v.  Iowa,  etc. 
Co.,  78  Iowa,  726  (1889).    The  author- 


1513 


ity  of  a  president  to  sell  or  lease  gives 
him  power  to  point  out  and  make 
representations  as  to  the  boundaries. 
Holmes   v.  Turner's    Falls  Co.,   150 
Mass.  535  (1890).     The  president  who 
makes  an  assignment  of  the  com- 
pany's assets  for  the  benefit  of  cred- 
itors under  a  resolution  of  the  board 
of  directors  cannot  afterwards  attack 
it.    Re  George  T.  Smitli,  etc.  Co.,  86 
Mich.  149  (1891).    The  authority  of 
the  president  to  buy  property  gives 
authority    also    to    buy    on    credit. 
Arapahoe,  etc.  Co.  v.  Stevens,  13  Colo. 
534  (1889).     Under  a  by-law  giving 
him  authority,  the  president  may  pur- 
chase on  credit.    Siebe  v.  Joshua,  etc. 
Works,  86  CaL  390  (1890).    An  assign- 
ment of  a  corporate  claim  by  the 
manager  and  president  in  the  regu- 
lar course  of  business,  and  with  the 
knowledge  and  consent  of  the  board 
of  directors,  is  sufficient.     Greig  v. 
Riordan,  99  CaL  316  (1893).    Under  a 
broad  power  given  to  the  president 
to  make  contracts  he  may  take  a 
lease  of  property.     Hawley  v.  Gray, 
etc.  Co.,  106  CaL  337  (1895). 

2  Where  the  president  of  a  construc- 
tion company  takes  entire  charge  of 
its  business,  and  is  allowed  so  to 
do  by  the  directors,  the  company  is 
bound  by  notes  given  in  the  corpo- 
rate name  by  him  for  the  company's 
business.  "The  execution  of  the 
paper  covild  not  be  held  to  be  in  ex- 
cess of  the  powers  given,  and  it  was 
clearly  the  duty  of  the  directors  to 
give  contrary  instructions,  if  they 
wished  to  withdraw  the  general  man- 
agement from  the  president;  and  to 
disaffirm  the  action  of  their  agents 
promptly  and  at  once,  if  they  ob- 
jected to  it."  Fitzgerald,  etc.  Co.  v. 
Fitzgerald,  137  U.  S.  98,  109  (1890). 
The  president  binds  the  company 
when  he  does  all  the  business  with 


OH.  2XIII.]       HOW    CORPORATE    CONTKACTS   ARE   MADE. 


[§  n&. 


had  been  accustomed  to  act  and  contract  for  the  company  with- 
out express  authority,  and  his  acts  had  always  been  accepted, 


the  knowledge  and  consent  of  the 
directors.    McComb  v.  Barcelona,  etc. 
Assoc.,    134    N.    Y.    598,   608  (1892). 
Where  for  eight  years  the  president 
has  been    allowed  to   manage  and 
carry  on  the  whole  business  of  the 
company,  and  to  indorse  its  name  to 
notes  in  order  to  raise  money  for  the 
business,  and  the  company  had  no 
cash  capital  and  no  other  way  of  ob- 
taining money,  it  is  for  the  jury  to 
say  whether  the  company  is  bound 
by  such    an    indorsement   by  him. 
Fifth  Nat  Bank  v.  Navassa,  etc.  Co., 
119  N.  Y.  256  (1890).     Cf.  National 
Bank  v.  Navassa  Phosphate  Co.,  56 
Hun,   136  (1890).    Where  for  many 
5'ears  the  president  has  managed  a 
company,  the   company's  note  exe- 
cuted  by  him  binds  the   company 
without  special  authority.     Martin  v. 
Niagara,  etc.  Co.,  122  N.  Y.  105(1890), 
aff'g  44  Hun,  130  (1887).    Where  the 
president  for  several  years  has  run 
the  company,  borrowed  money  for  it, 
and  given  its  notes,  etc.,  and  the  by- 
laws give  him  "general  supervision 
over  the  property  and  affairs  of  the 
corporation,"    the    company's    note 
made  by  him,  and  an  assignment  of 
•'$150,000  of  such  good  and  collect- 
ible accounts  now  existing  or  that 
shall  hereafter  acci-ue  or  be  acquired 
in  the  conduct  of  the  business,"  are 
valid.    Preston  Nat.  Bank  v.  George 
T.  Smith,  etc.  Co.,  84  Mich.  364  (1890). 
A  president  who   has  been    accus- 
tomed to  issue  corporate  notes  may 
bind  the  corporation  by  a  similar 
nota    McDonald  v.  Chisholm,  131  111. 
273  (1890). 

A  general  understanding  that  the 
president  and  secretary  shall  manage 
the  business  and  make  contracts,  and 
their  open  and  public  assumption  of 
that  power,  with  the  knowledge  and 
acquiescence  of  the  directors,  are 
equal  to  a  vote  of  the  directors  au- 


thorizing them  to  make  contracts. 
Sherman,  etc.  Co.  v.  Morris,  43  Kan. 
282  (1890).    Where  the  president  and 
secretary  of  a  mining  company  have 
for  a  long  time  signed  checks,  and 
they  have  been  paid  by  a  bank,  they 
may  continue  to  draw  checks  and 
the  bank  must  pay  them.    The  corpo- 
ration is  liable  for  overdrafts  caused 
thereby.     Mining  Co.  v.  Angelo,  etc. 
Bank,  104  U.  S.  192  (1881).   A  uniform 
practice  of  a  company  for  several 
months  previous  to  the  transfer  of  a 
corporate  note  by  its  president,  in 
cases  of  notes  negotiated  for  the  pur- 
pose of  raising  money  to  carry  on  its 
legitimate  basiness,  where  such  notes 
were  payable  to  the    company,  to 
have  them  indorsed  by  the  president, 
is  sufficient  authority  for  his  indorse- 
ment.   Marine  Bank  v.  Clement,  31 
N.  Y.  33  (1805).    See  also,  in  general, 
Chicago,  etc.  R'y  v.  James,  24  Wis. 
388    (1809);    First    Nat.    etc.    Bank 
V.  North,  etc.  Co.,  86  Mo.  125  (1885), 
where  the  president  and  secretary 
were   accustomed    to    make   notes. 
Where  the    board  of  directors  for 
three  years  relinquishes  to  the  presi- 
dent the  exclusive  management  of 
the  business  of  the  coi-poration  and 
the  purchase  of  all  classes  of  articles, 
giving  corporate  notes,  bills,  and  se- 
curities therefor;  and  then  the  di- 
rectors took  charge  and  for  several 
years  continued  business  without  re- 
pudiating his  acts,  his  purchase  of 
locomotives   and    giving    corporate 
notes    therefor    while    he    was    in 
charge  binds  the    corporation.     01- 
cott  V.  Tioga  R.  R.,  27  N.  Y.  546  (1863). 
If  accustomed  so  to  do,  the  president 
may  settle  an  account  and  take  a 
due-bill  in  payment.    Dougherty  v. 
Hunter,  54  Pa.  St.  380  (1867).    Where 
the  president  has  been  accustomed 
to  make  and  indorse  paper,  the  cor- 
poration will  be  bound,  even  though 


1513 


T16.] 


HOW    COKPOKATE    CONTKACTS    AKE    MADE.        [cn.  XLIII. 


his  order  to  a  contractor  to  stop  work  binds  the  company.^  So 
also  the  company  is  bound  when  it  ratifies  or  accepts  the  con- 
tract after  it  is  made,  or  accepts  the  benefit  of  the  contract. 
Havin'3'  knowingly  received  the  benefit  of  a  contract  made 
and  carried  out  by  the  president,  even  without  authority,  the 
corporation  must  perform  on  its  part.^     The  authority  of  the 


the  directors  supposed  that  all  busi- 
ness had  been  stopped.  National 
Park  Bank  v.  German,  etc.  Co.,  53 
N.  Y.  Super.  Ct.  367  (1886).  Where 
the  president  has  several  times  been 
authorized  to  pledge  corporate  secu- 
rities, and  now  does  so  without  spe- 
cial authorization,  and  a  majority 
of  the  directors  ratify  the  act,  not  in 
meeting,  but  sepai-ately,  the  jjledge 
is  legal  Bibb  v.  Hall,  101  Ala.  79 
(1893).  Where  the  president  owns 
practically  all  the  stock,  and  for 
years  has  managed  the  business 
without  any  meeting  of  the  board 
of  directors,  a  sale  of  the  corporate 
property  by  him  is  legal.  McElroy 
V.  Minnesota,  etc.  Co.,  71  N.  W.  Rep. 
653  (Wis.,  1897).  The  authority  of 
the  president  to  discharge  mortgages 
may  be  sliown  by  the  fact  that  lie 
has  done  so  many  times  before. 
Swasey  v.  Emerson,  168  Mass.  118 
(1897).  The  power  of  a  president  of 
a  bank  to  rediscount  paper  may  arise 
from  his  having  done  so  for  a  long 
time  to  the  knowledge  of  the  board 
of  directors.  U.  S.  Nat.  Bank  v.  First 
Nat.  Bank,  79  Fed.  Rep.  296  (1897). 
Where  the  president  of  a  bank  is 
practically  manager,  he  may  settle  a 
claim  by  taking  an  assignment  of  a 
judgment.  First  Nat.  Bank  v.  New, 
i|146  Ind.  411  (1896).  Long  usage  may 
give  the  president  authority.  Estes 
V.  German  Nat.  Bank,  62  Ark.  7  (1896); 
Missouri  Pac.  R'y  v.  Sidell,  67  Fed. 
Rep.  464  (1895).  Where  the  president, 
who  is  also  general  manager  and 
financial  agent,  is  accustomed  to  bor- 
row money  for  the  corporation,  he 
binds  the  company  by  a  loan,  even 
though  he  misapplies  the  proceeds. 


Kraft  V.  Freeman,  etc.  Co.,  87  N.  Y. 
628  (1881).  If  he  has  been  accus- 
tomed for  a  long  time  to  sign  notes, 
a  person  taking  a  note  witliout  his 
signature  is  not  protected.  Davis, 
etc.  Co.  V.  Best,  105  N.  Y.  59  (1887). 
The  president  has  no  implied  power 
to  sell  the  lands  of  the  company,  and 
the  power  given  by  usage  to  former 
presidents  to  sell  and  take  a  pur- 
chase-money lien  does  not  give  power 
to  sell  without  retaining  that  lien. 
Fitzhugh  V.  Franco-Texas  Land  Co., 
81  Tex.  306  (1891).  The  president, 
even  though  he  is  also  manager,  head 
and  majority  stockholder,  cannot 
bind  the  corporation  by  his  state- 
ment that  tlie  corporation  was  to 
indemnify  him  from  loss  on  certain 
indoi'sements  made  by  him.  Minne- 
apolis Trust  Co.  V.  Clark,  47  Minn. 
108  (1891).  Where  the  board  of  di- 
rectors allow  one  of  its  officers  the 
exclusive  management  of  its  affairs, 
the  company  is  bound  by  its  acts. 
Da  vies  v.  New  York  Concert  Co.,  13 
N.  Y.  Supp.  739  (1891);  Sparks  v.  Dis- 
patch Transfer  Co.,  104  Mo.  531  (1891). 
Although  the  president  has  been  ac- 
customed to  issue  corporate  notes, 
yet,  if  the  bank  taking  the  note  in 
question  knew  that  the  proceeds 
were  to  be  used  by  him  in  his  pri- 
vate business,  the  note  cannot  be  en- 
forced. Third  Nat.  Bank  v.  Marine 
Lumber  Co.,  44  Minn.  65  (1890). 

1  Leroy,  etc.  R.  R,  v.  Sidell,  66  Fed. 
Rep.  27  (1895). 

-  Pittsburgh,  etc.  R'y  v.  Keokuk 
Bridge  Co.,  131  U.  S.  371  (1889). 
Where  the  president  bought  railroad 
iron  without  authority  so  to  do,  but 
the  directors  stood  by  and  allowed 


1514 


CH.  XLIII.]        HOW    COKPORATE    CONTEACTS   AEE    MADE. 


[§  T16. 


president  of  a  railroad  to  take  a  lease  of  a  liotel  in  behalf  of 
the  company  may  be  inferred  from  the  facts  of  his  signing, 
sealing,  and  delivering  the  instrument,  and  of  the  company's 


the  corporation  to  use  it,  tbe  com- 
pany is  Liable  for  the  price.    Scott  v. 
Middleton,  etc.  R.  R,  86  N.  Y.  200 
(1881).    If  a  corporation  retains  and 
uses  money  borrowed  for  it  by  its 
officer  in  excess  of  his  authority,  it 
ratifies  the   transaction,  and  is  lia- 
ble.   Willis  V.   St.   Paul  Sanitation 
Co..  53  Minn.  370  (1893).    A  pledge  of 
bonds  by  the  president  is  ratified  by 
the  directors  knowing  thereof  and 
accepting  the  proceeds.  Prentiss,  etc. 
Co.  V.  Godchaux,  60  Fed.  Rep.  224 
<1894).    A  bank  is  liable  for  money 
received,  and  used  by  it  in  its  busi- 
ness, even  though  the  president  was 
not  authorized  to  boiTow  it.    Blanch- 
ard  V.  Commercial  Bank,  75  Fed.  Rep. 
249  (1896).     A  bank  cannot  enforce 
notes  which  its  president  obtains  for 
it   by    misrepresentations    inducing 
tiie  maker  of  the  notes  to  give  them 
in  exchange  for  the  notes  of  a  worth- 
less party.    "Wilson  v.  Pauly,  72  Fed. 
Rep.  129  (1896).    The  president  may 
release  a  mortgage  where  a  majority 
of  the  directoi-s  separately  author- 
ized it.  and  the  stockholders  in  meet- 
ing assembled  gave  him  general  au- 
thority.   Smith  V.  Wells,  etc.  Co.,  46 
N.  E.  Rep.  1000  (Ind.,  1897).    By  ac- 
quiescence of  the  board  of  directors, 
the  president's  contract  employing 
an  editor  and  manager  of  a  news- 
paper may  bind  the  company.    Jones 
r.  Williams,  39  S.  W.  Rep.  486  (Mo., 
V'i'd'i).     Allowing  the  contract  to  be 
completed  cures  any  defect  of  power 
on  the  part  of  the  president  to  make 
the    contract.     Omaha,   etc.   Co.    v. 
Burns,  49  Neb.  229  (1896).    Accepting 
the   benefit  of  the  president's  con- 
tract cures  any  defect  in  his  author- 
ity.   Davies  v.  Harvey  Steel  Co.,  6 
N.  Y.  App.  Div.  166  (1896).    By  ac- 
cepting a  deed  of  a  right  of  way  a 
corporation    accepts    written    cove- 


nants which  its  president  made  in 
connection  therewith.    Mobile,  etc. 
R'y  V.  Gilmer,  85    Ala.  422   (1888). 
Where  the  president,  as  the  finan- 
cial manager,  pledges  the  company's 
bonds,  and  for  more  than  a  year  such 
pledge  continues  without  objection, 
the  pledge  is  ratified.    Illinois  T.  & 
S.  Bank  v.  Pacific  R'y,  49  Pac.  Rep. 
197  (Cal.,  1897).    Although  the  by- 
laws require  notes  to  be  signed  by 
the  secretary,  yet  by  acquiescence  a 
note  signed  by  the  president  alone 
may  bind  the  corporation.    Illinois 
T.  &  S.  Bank  v.  Pacific  R'y,  49  Pac. 
Rep.  197  (Cal.,  1897).    A  cliattel  mort- 
gage given  by  the  president  and  treas- 
vu-er,  without  previous  autliority  from 
the  directors,  may  be  validated  by 
the  corporation  accepting  the  ben- 
efit of  the  same.    Edelhoff  v.  Horner, 
etc.  Co.,  39  Atl.  Rep.  314  (Md.,  1898). 
A  contract  made  by  the  president 
without  authority  may  be  considered 
ratified  by  the  fact  that  the  direct- 
ors individually  knew  of  the  same, 
although  they  did  not  act  upon  the 
matter  as  a  board.    Henry  v.  Col- 
orado, etc.  Co.,  51  Pac.  Rep.  90  (Colo., 
1897).    A  railroad  contractor  may  en- 
force his  construction  contract  with 
a  railroad  corporation,  altliough  he 
made  it  with  the  president,  and  the 
board  of  directors  did  not  pass  ujKjn 
it,  where  the  contractor  proceeded 
to  perform.    The  contractor  was  jus- 
tified in  stoi^ping  work  when  he  was 
not  paid  according  to  the  contract. 
Cvmningham  v.  Massena,  etc.  R.  R., 
63  Hun,  439  (1892).     Acqmescence  in 
sales  by  the  president,  where  a  vend- 
or's lien  was  retained,  does  not  sus- 
tain a  sale  by  him  without  retaining 
such  a  lien.     Fitzhugh   v.  Franco- 
Texas  Land  Co.,  81  Tex.  306  (1891). 
Altliough  the  president  accepts  in 
the  corporate  name  a  draft  drawn  on 


1515 


§  no.] 


HOW    CORPORATE    CONTRACTS   ARE    ISIADE.        [cil.  XLIII, 


entering  into  possession  under  the  lease  and  exercising  acts  of 
ownership  and  control  over  the  demised  premises,  even  if  the 


him  personally,  yet  where  the  bank 
of  the  corporation  pays  tlie  draft  and 
charges  it  to  the  corporation,  and  the 
latter  acquiesces  for  nine  months,  it 
cannot  hold  tlie  bank  liable.  Mc- 
Laren V.  First  Nat.  Bank,  76  Wis.  259 
(1890).  Ratification  of  the  president's 
contract  with  an  attorney.  Merrill 
V.  Consumers'  Coal  Co.,  114  N.  Y.  216 
(1889).  A  transfer  of  all  the  property 
by  the  president  is  valid  where  the 
directors  and  all  the  stockholders 
knew  of  it  and  assented  to  it.  Fort 
Worth  Pub.  Co.  v.  Hitson,  80  Tex.  216 
(1890).  Tlie  company,  by  accepting 
and  using  the  property  purchased 
by  the  president  without  authority, 
thereby  ratifies  the  purchase.  West 
Salem  Land  Co.  v.  Montgomery  Land 
Co.,  89  Va.  192  (1892).  That  stock- 
holders may  ratify  and  validate  notes 
given  by  the  president,  see  Martin  v. 
Niagara,  etc.  Mfg.  Co.,  44  Hun,  130 
(1887);  aff'd,  122  N.  Y.  165.  The  con- 
tracts of  the  presi(||ent  may  be  rati- 
fied subsequently  by  the  board  of 
directors.  Wehrhane  v.  Nashville, 
etc.  R.  R.,  4  N.  Y.  St.  Rep.  541  (1880). 
For  a  clear  statement  of  this  princi- 
ple, see  Dabney  v.  Stevens,  40  How. 
Pr.  341  (1870).  Rates  as  advertised 
by  the  president  bind  the  railroad 
when  it  continues  to  accept  them. 
Willard  v.  Gould,  32  N.  H.  230  (1850). 
The  presidents  unauthorized  con- 
tracts, when  known  to  and  acted 
upon  by  the  directors  and  corpora- 
tion, are  binding.  Peny  v.  Simpson, 
etc.  Co.,  37  Conn.  520  (1871). 

Where  the  president  of  a  bank  in- 
structs its  correspondent  bank  to 
charge  to  the  former  a  debt  due  by 
him  to  the  latter  bank,  and  the  ac- 
counts of  the  latter  to  the  former 
bank  showed  to  that  effect,  and  no 
objection  is  made,  the  former  bank 
is  bound.  Burton  v.  Burley,  9  Biss. 
253  (1880).    A  lease  by  the  president 


and  treasurer  without  authority  may 
be  ratified  by  the  stockliolders. 
Mount  Washington  Hotel  Co.  v. 
Marsh,  63  N.  IL  230  (1884).  Or  a 
mortgage.  Martin  v.  Niagara,  etc. 
Co.,  44  Hun,  130  (1887).  A  bank  is 
liable  on  an  agreement  of  its  presi- 
dent to  give  a  person  ten  shares  of 
stock  if  he  would  deposit  with  it,  the 
deposits  having  been  mada  Rich  v. 
State  Nat.  Bank,  7  Neb.  201  (1878). 
Where  the  company  acquiesces  in 
work  done  by  contract  with  the  pres- 
ident it  is  liabla  Grape  Co.  v.  Small, 
40  Md.  395  (1874).  The  company  may 
ratify  a  mortgage  given  by  him. 
Krider  v.  Western  College,  31  Iowa, 
547  (1871);  Sherman  v.  Fitch,  98  Mass, 
59  (1867),  where  all  but  one  of  the  di- 
rectors knew  and  acquiesced.  The 
acquiescence  of  a  minority  of  the  di- 
rectors is  insufficient.  Yellow,  etc. 
Co.  V.  Stevenson,  5  Nev.  224  (18G9). 
Acceptance  of  the  property  pur- 
chased, with  knowledge,  is  ratifica- 
tion.  Dent  v.  North,  etc.  Co.,  49  N.  Y. 
890  (1872).  Tlie  failure  of  the  presi- 
dent to  repudiate  at  once  an  agent's 
unauthorized  act  is  ratification.  First 
Nat.  Bank  v.  Fricke,  75  Mo.  178  (1881) ; 
Alabama,  etc.  R.  R.  v.  Kidd,  29  Ala. 
221  (1856).  See  also  §  727,  infra,  on 
notice.  Ratification  of  a  president's 
acts  may  arise  by  long  use  of  the  re- 
sults, even  though  the  directoi^  ex- 
pressly repudiated  the  acts,  but  did 
not  notify  the  other  party.  Belle- 
ville Sav.  Bank  v.  Winslow,  35  Fed. 
Rep.  471  (1888).  It  is  a  sufficient  rat- 
ification if  the  directors  discuss  the 
matter  at  a  meeting,  though  they 
take  no  action.  Walworth,  etc.  Bank 
V.  Farmers',  etc.  Co.,  16  Wis.  629  (1883). 
A  corporate  agent  with  full  powers 
may  ratify  the  president's  act.  Peny 
V.  Simpson,  etc.  Co.,  37  Conn.  520 
(1871).  Acquiescence  of  the  board  of 
directors  may  cure  the  omission  of  a 


1516 


CH.  XLHI.]        HOW    COKPOKATE    CONTEACTS    ABE   MADE. 


[§  nr. 


minutes  of  the  company  failed  to  disclose  such  authority  ex- 
pressly given.^ 

The  same  rules  apply  to  a  vice-president  that  apply  to  the 
president  on  this  subject.^ 

§  717.  Secretary  and  treasurer  —  Their  poiver  to  contract  for 
the  corporation. —  The  secretary  of  a  corporation  has  no  power, 
merely  as  secretary  of  the  company,  to  make  contracts  for  it.' 


previoTis  resolution  as  required  by 
the  charter  in  the  issue  of  the  bonds. 
Curtis  V.  Leavitt,  15  N.  Y.  1  (1857), 
the  court  saying  of  the  board  (p.  49) : 
"They  may  previously  resolve;  they 
may  subsequently  acquiesce;  they 
may  expressly  ratify;  they  may  in- 
tentionally receive  and  appropriate 
the  proceeds  of  the  unauthorized 
transaction,  and  so  put  it  out  of  their 
power  to  dispute  its  validity." 

1  Jacksonville,  etc.  Nav.  Co.  v. 
Hooper,  160  U.  S.  514  (189G). 

-  The  vice-president  of  a  bank  may, 
by  reason  of  having  for  a  long  time 
conducted  the  basiness  of  the  bank, 
have  power  to  assign  a  judgment 
owned  by  the  bank.  Cox  v.  Robinson, 
82  Fed.  Rep.  277  (1897).  The  vice-pres- 
ident may  sign  a  corporate  deed  if  the 
president  refuses  to  do  so.  Smith  v. 
Smith,  63  Ilk  492  (1872).  The  fact 
that  a  vice-president  swears  to  a 
complaint  does  not  raise  a  pre- 
sumption that  the  company  author- 
ized its  service.  American  Water- 
works Co.  V.  Venner,  18  N.  Y.  Supp. 
379  (1892).  The  vice-president  may 
make  an  assignment  for  the  benefit 
of  creditors,  where  he  is  authorized 
"to  use  all  means  and  do  all  acts  and 
make  all  deeds  by  him  deemed  neces- 
sary or  proper  to  serve  the  best  in- 
terest of  the  association,  and  to  use 
the  corporate  seal  for  such  purpose." 
Huse  V.  Ames,  104  Mo.  91  (1891).  The 
vice-president  has  no  power  to  sell 
the  bonds  of  the  company,  even 
though  he  is  a  director,  member  of 
tlie  executive  committee,  and  on^of 
the  two  persons  who  "run  "  the  com- 


pany. The  purchasers  are  not  bona 
fide.  American  L.  &  T.  Co.  v.  St. 
Louis,  etc.  R'y,  42  Fed.  Rep.  819  (1890). 
It  may  be  proved  that  the  vice-presi- 
dent had  authority  to  accept  a  draft, 
altliough  drawn  by  himself  upon  the 
company.  Rumbough  v.  Southern 
Imp.  Co.,  106  N.  C.  461  (1890).  A  suit 
is  presumed  to  be  authorized  where 
the  vice-president  swears  to  the  plead- 
ing. Lacaze  v.  Creditoi-s,  46  La.  Ann. 
237  (1894).  The  vice-president's  con- 
tracts may  be  ratified  by  the  direct- 
ors. Dallas  V.  Columbia,  etc.  Co.,  158 
Pa.  St.  444  (1893).  The  vice-president 
may,  in  certain  circumstances,  em- 
ploy counsel.  Streeton  v.  Robinson, 
102  Cal.  542  (1894).  The  vice-president 
has  no  power  to  sign  notes.  Morris 
V.  Griflath,  etc.  Co.,  69  Fed.  Rep.  131 
(1895).  As  to  the  powers  of  a  vice- 
president,  see  also  Missouri,  etc.  R'y 
V.  Faulkner,  88  Tex.  649  (1895). 

3  The  secretary  has  no  power  to  as- 
sign the  company's  claims  for  goods 
sold  by  it.  Tlie  assignee's  rights  are 
not  perfected  by  the  directors'  reso- 
lution made  after  he  sues  on  the  ac- 
count. Read  v.  Buffum,  79  CaL  77 
(1889).  The  secretary  of  a  religious 
corjKjration  cannot  contract  for  pav- 
ing for  the  corporation.  Thomason 
V.  Grace,  etc.  Church,  45  Pac.  Rep. 
838  (Cal.,  1896).  The  secretary  has 
no  implied  power  to  bind  the  com- 
pany. Wolf  V.  Davenport,  etc.  R.  R., 
93  Iowa,  218  (1895).  He  cannot  sell 
and  assign  its  notes,  Blood  v.  Mar- 
cuse,  38  Cal.  590  (1869);  nor  sign  a 
draft  for  it.  First  Nat.  Bank  v.  Hogan, 
47  Mo.  472  (1871);  nor  purchase  iron 


1517 


Y17.] 


now    COKPOKATE    C0NTEACT8    ARE    MADE.        [cH.  XLIII. 


The  secretary,  however,  is  one  of  the  general  managing  agents, 
and  in  the  discharge  of  his  customary  duties  represents  tlie 
corporation.^  The  corporation  may,  of  course,  expressly  author- 
ize the  secretary  to  contract  for  it,  or  may  accept  and  ratify 
his  contracts  after  they  are  made.^ 

The  treasurer  of  a  corporation  has  no  power,  merely  by  rea- 
son of  his  office  as  treasurer,  to  contract  for  the  corporation.' 


for  it,  "Williams  v.  Chester,  etc.  R.  R., 
15  Jur.  828  (1850);  nor  accept  a  bill  of 
exchange,  Neale  v.  Turton,  4  Bing. 
149  (1827);  nor  bind  it  to  pay  a  debt 
of  an  old  company  whose  property 
it  purchased  upon  a  reorganization, 
American,  etc.  Ry  v.  Miles,  52  IlL  174 
(1869) ;  nor  rent  a  place  for  the  com- 
pany, Ridley  v.  Plymouth,  etc.  Co., 
2  Exch.  711  (1848);  nor  accept  ac- 
commodation paper,  Farmers',  etc. 
Bank  v.  Empire,  etc.  Co.,  5  Bosw.  275 
(1859);  nor  purchase,  Kingsbridge 
Flour  Mill  Co.  v.  Plymouth,  etc.  Co., 
2  Exch.  718  (1848).  Where  the  assist- 
ant secretary  signs  a  mortgage  in- 
stead of  the  secretary,  it  is  sufficient 
to  prove  that  he  was  the  de  facto  as- 
sistant secretary.  Augusta,  etc.  R.  R. 
V.  Kittel,  52  Fed.  Rep.  63  (1892). 

1  Hastings  u.  Brooklyn  Life  Ins.  Co., 
138  N.  Y.  473  (1893). 

2  Hill  V.  Manchester,  etc.  Co.,  5  B. 
&  Ad.  866  (1833),  where  the  secretary 
was  authorized  to  affix  the  coi-porate 
seal;  New  England,  etc.  Ins.  Co.  v. 
De  Wolf,  25  Mass.  56  (1829),  where 
the  company  accepted  the  benefits. 
A  note  signed  by  the  corporate  sec- 
retary as  directed  by  the  president, 
the  money  therefor  being  used  by 
the  corporation,  is  enforceable  against 
it.  Jansen  v.  Otto  Stietz,  etc.  Co.,  1 
N.  Y.  Supp.  605  (1888).  Although  cor- 
porate notes  given  by  the  secretary  to 
a  bank  are  unauthorized,  yet  if  the 
money  was  used  regularly  in  the  busi- 
ness of  the  company  it  is  liable. 
Pauly  V.  Pauly,  107  Cal.  8  (1895). 
Where  the  secretary  has  been  per- 
mitted to  sell  the  notes  of  the  corpo- 


ration, a  transfer  of  a  note  by  hira 
to  a  bank  makes  the  latter  a  bona 
fide  purchaser,  tlie  corporation  being 
the  payee.  Commercial  Nat.  Bank  v. 
Brill,  37  Neb.  626  (1893).  The  secre- 
tary  has  power  to  mdorse  the  com- 
pany's note  for  discount  or  sale 
where  for  a  long  time  he  has  been 
allowed  to  do  so.  Blake  v.  Domestic, 
etc.  Co.,  38  Atl.  Rep.  241  (N.  J.,  1897 1. 
3  The  treasurer  has  no  power  to  bor- 
row money  and  give  the  corporate 
note  thei'efor,  and  the  company  is  not 
liable  where  the  money  was  paid  into 
the  corporate  treasury  and  imme- 
diately embezzled  by  the  treasurer. 
Craft  V.  South  Boston  R.  R.,  150  Mass. 
207  (1889).  A  treasurer  has  no  power 
to  sign  the  corporate  name  to  prom- 
issory notes  unless  he  is  expressly 
given  that  power.  If  the  note  i.s 
made  payable  to  his  own  order,  the 
purchaser  of  it  must  take  notice  that 
it  was  issued  without  authority. 
Chemical  Nat.  Bank  v.  Wagner,  20 
S.  W.  Rep.  535  (Ky.,  1892).  Notes  of 
a  cattle  company  purporting  to  be 
signed  by  it  through  its  treasurer  are 
presumed  to  have  been  authorized. 
Corcoran  v.  Snow  Cattle  Co.,  151 
Mass.  74  (1890).  Where  a  corporation 
repudiates  a  pledge  of  stock  made  by 
its  treasurer,  it  cannot  sue  the  pledgee 
for  the  money  received  by  the 
pledgee  upon  a  sale  of  the  stock  by 
the  latter.  Holden  v.  Metropolitan 
Nat.  Bank,  151  Mass.  112  (1890).  The 
treasurer  cannot,  upon  the  sale  of  a 
note  held  by  the  company,  indorse 
the  note  so  as  to  render  the  company 
liable,  even  though   a  trustee  was 


1518 


CH.  XLIII.]        HOW    COEPOKATE    CONTKACTS   AKE   MADE. 


[§  m. 


But  if  the  treasurer  has  been  accustomed  to  make  certain  con- 
tracts for  the  corporation,  and  the  corporation  acquiesced  in 
them,  it  is  bound  by  a  new  contract  of  that  kind  entered  into 
by  him.^  It  is  for  the  jury  to  decide  whether  such  a  custom 
exists.^  A  treasurer  has  no  power  to  indorse  the  company's 
note  for  discount  or  sale,  but  if  allowed  to  do  so  for  a  long 
time  such  indorsements  are  legal.'    If  the  treasurer  is  accus- 

aware  thereof,  the  opening  of  an  ao-    v.  Upton,  134  Mass.  177  (1883).     CoiV' 


count  with  the  bank  being  unknown 
to  the  company.  Columbia  Bank  v. 
Gospel  Tabernacle,  57  N.  Y.  Super. 
Ct.  149  (1889).  A  treasurer  has  no 
power  to  issue  corporate  notes,  and 
where  he  does  so,  the  proceeds  being 
used  to  pay  his  personal  debt  to  the 
corporation,  the  notes  are  not  bind- 
ing on  the  company.  First  Nat. 
Bank  v.  Council  Bluffs,  etc.  Co.,  56 
Hun,  412  (1890).  The  corporate  in- 
dorsement of  a  note  by  the  treasurer 
without  authority  and  for  accommo- 
dation does  not  bind  the  corpora- 
tion. Wahlig  V.  Standard,  etc.  Co., 
9  N.  Y.  Supp.  739  (1890).  The  treas- 
urer has  no  inlierent  authority  to  in- 
dorsa  Security  Bank  v.  Kingsland, 
5  N.  Dak.  2G3  (1895).  The  treasurer 
has  no  implied  power  to  make  a  cor- 
porate note.  Oak,  etc.  Co.  v.  Foster. 
7  N.  M.  050  (1895).  The  treasurer  of 
a  manufacturing  corporation  has  no 
implied  power  to  bind  the  corpora- 
tion as  an  accommodation  indorser, 
and  a  person  taking  the  note  with 
notice  cannot  enforce  such  indorse- 
ment. Usher  v.  Raymond  Skate  Co., 
163  Mass.  1  (1895).  An  arbitration 
agreed  to  by  the  treasurer  was  sus- 
tained in  Remington  Paper  Co.  v. 
London  Assur.  Corp.,  12  N.  Y.  App. 
Div.  218  (189G).  A  demand  for  rent 
may  properly  be  made  on  the  secre- 
tary and  treasurer.  State  v.  Felton, 
52  N.  J.  L.  161  (1889).  He  cannot  com- 
promise or  relinquish  its  claims, 
Carver  Co.  v.  Manufacturers',  etc.  Co., 
72  Mass.  214  (1856);  nor  sell  and  in- 
dorse its  paper,  Bradley  v.  Warren, 
etc.  Bank,  127  Mass.  107  (1879);  Holden 

15 


tra,  Perkins  v.  Bradley,  24  Vt.  66 
(1851);  nor  assume  the  debt  of  a  third 
person.  Stark  Bank  v.  U.  S.  Pottery 
Co.,  34  Vt.  144  (1861);  nor  sell  and  as- 
sign a  mortgage  owned  by  the  corpo- 
ration, even  though  he  uses  the  cor- 
porate seaL  Jackson  v.  Campbell,  5 
Wend.  572  (1830).  He  may  employ 
an  attorney  to  collect  unjiaid  bills. 
Bristol,  etc.  Bank  v.  Keary,  128  Mass. 
298  (1880).  He  cannot  give  a  release 
under  seal.  Dedham  Inst.  v.  Slack, 
60  Mass.  408  (1850).  He  may  accept 
money.  Brown  v.  Winnissimmet  Co., 
93  Mass.  326  (1865).  As  to  admissions 
by  him,  see  §  726,  infra. 

*The  treasurer  has  no  inherent 
power  to  sign  and  indorse  corporate 
notes,  but  long  usage  may  constitute 
such  authority.  Page  v.  Fall  River, 
etc.  R.  R.,  31  Fed.  Rep.  257  (1887);  Les- 
ter V.  Webb,  83  Mass.  34  (1861),  where 
the  treasurer  indorsed  a  note ;  Bank 
of  Attica  V.  Pottier,  etc.  Co.,  1  N.  Y. 
Supp.  483  (1888);  Partridge  v.  Badger, 
25  Barb.  146  (1857);  Foster  v.  Ohio, 
etc.  Co.,  17  Fed.  Rep.  130  (1883),  where 
he  gave  a  note.  Where  the  secretary 
and  treasurer  have  been  accustomed 
to  manage  the  entire  business  and 
make  contracts,  a  contract  entered 
into  by  them  for  the  company  is 
legal  and  enforceabla  Moore  v.  H. 
Gaus  Co.,  113  Mo.  98  (1892). 

2  Foster  v.  Ohio,  etc.  Co.,  17  Fed. 
Rep.  130  (1883);  Fifth,  etc.  Bank  v. 
First  Nat.  Bank,  48  N.  J.  L.  513  (1886), 
where  the  treasurer  pledged  securi- 
ties. 

3  Blake  v.  Domestic,  etc.  Co.,  38  AtL 
Rep.  241  (N.  J.,  1897). 

19 


§  T17.] 


HOW    COKPOKATE   CONTKACTS    AKE   MADE.        [CH.  XLIII. 


tomed  to  act  as  the  managing  agent  of  the  corporation  he  can 
sell  its  property,^  and  borrow  money  and  give  security .^  The 
treasurer  binds  the  corporation  by  a  contract  which  he  is  ex- 
pressly authorized  to  make.'  The  secretary  and  treasurer  can- 
not even  conjointly  bind  the  corporation  by  their  purchases  of 
the  article  in  which  it  deals;*  noi*  can  they  borrow  money  for 
the  corporation ;  ^  nor  release  the  maker  of  a  note  to  the  corpo- 
ration.^ But  if  the  company  acquiesces  in  a  contract  made  by 
either  or  both  of  these  olficers  it  is  bound,''  By  usage  the  treas- 
urer may  have  power  to  sell  goods.^  In  Massachusetts  it  is 
held  that  the  treasurer  of  a  trading  or  manufacturing  company 


1  Phillips  V.  Campbell,  43  N.  Y.  271 
(1870). 

^Fay  V.  Noble,  66  Mass.  1  (1853); 
Fifth,  etc.  Bank  v.  First  Nat.  Bank, 
48  N.  J.  L.  513  (1886). 

3  Odd  Fellows  v.  Bank  of  Sturgis,  42 
Mich.  461  (1880X  where  the  authority 
was  oral;  Gafford  v.  American,  etc. 
Co.,  77  Iowa,  736  (1889).  Funds  drawn 
out  by  the  treasurer  on  the  express 
authority  of  the  directors  and  kept 
apart  from  his  funds  are  held  by  him 
at  the  risk  of  the  corporation.  But- 
ler V.  Duprat,  51  N.  Y.  Super.  Ct.  77 
(1884). 

*  Alexander  v.  Cauldwell,  83  N.  Y. 
480  (1881),  where  a  coal  company  was 
held  not  liable  for  coal  so  purchased, 
there  being  no  evidence  that  the  cor- 
poration authorized  it,  or  used  it,  or 
ratified  it.  Cf.  Alexander  v.  Brown, 
9  Hun,  641  (1877).  The  secretary  and 
treasurer  has  no  power  to  sell  machin- 
ery of  the  company.  Winsted,  etc. 
Co.  V.  New  Britain,  etc.  Co.,  38  Atk 
Rep.  310  (Conn.,  1897). 

5  Adams  v.  Mills,  60  N.  Y.  533  (1875). 

^Moshannon,  etc.  Co.  v.  Sloan,  7 
Atl.  Rep.  102  (Pa.,  1885). 

''St.  James's  Parish  v.  Newbury- 
port,  etc.  R.  R.,  141  Mass.  500  (1886), 
where  the  treasurer  gave  an  obliga- 
tion under  seal  and  reported  it  in  his 
reports,  and  a  committee  approved. 
If  the  company  ratifies  a  contract 
made  by  the  president  and  secretary. 


the  company  may  compel  its  officers 
to  give  it  the  benefit  of  the  contract. 
Church  V.  Sterling,  16  Conn.  388  (1844). 
Accepting  the  benefit  of  an  insurance 
contract  made  by  tlie  secretary  and 
president  accepts  the  contract  itself. 
Emmet  v.  Reed,  8  N.  Y.  312  (1853). 
An  indorsement  by  the  secretary, 
with  the  knowledge  and  acquies- 
cence of  the  directors,  is  binding. 
Williams  v.  Cheney,  69  Mass.  215 
(1855).  So,  also,  where  he  pledges 
bonds  with  their  knowledge  and  ac- 
quiescence. Darst  V.  Gale,  83  IlL  136 
(1876).  And  see  Durar  v.  Hudson, 
etc.  Ins.  Co.,  24  N.  J.  L.  171  (1853),  in 
insurance  contracts;  and  Conover  v. 
Mutual  Ins.  Co.,  1  N.  Y.  290  (1848), 
where  he  was  accxistomed  to  contract 
for  the  company;  Chicago  Bldg.  Soc. 
V.  CroweU,  65  IlL  453  (1872);  Talla- 
dega Ins.  Co.  V.  Peacock,  67  Ala.  253 
(1880),  where  the  secretary  was  ac- 
customed to  sign  notes.  Where  a 
corporation  uses  a  wharf  under  a  con- 
tract made  by  its  treasurer,  it  is  liable 
for  the  contract  price.  Taylor  v.  Al- 
bemarle, etc.  Co.,  105  N.  C.  484  (1890). 
Taking  the  benefit  of  a  piece  of  stat- 
uary for  advertising  pui'poses  binds 
it  to  pay  therefor,  though  the  treas- 
urer made  the  contract.  Ellis  v. 
Howe,  etc.  Co.,  12  Daly,  78  (1880). 

8  Nashua,  etc.  Co.  v.  Chandler,  etc 
Co.,  166  Masa  419  (1896). 


1520 


OH.  XLIII.]       HOW   COEPOKATE   COIfTEACTS  AEE   MADE. 


[§  ns. 


lias  implied  power  to  execute  notes  in  behalf  of  the  corporation, 
and  the  Ijona  fide  holder  of  such  notes  may  enforce  them ;  and 
this  rule  applies  to  a  gas-light  company.^  And  in  Yermont  it  is 
held  that  the  treasurer  has  power  to  buy,  where  the  company's 
letterheads  direct  that  all  correspondence  be  addressed  to  him.^ 
§  718.  CasMer  —  TJie  extent  of  Ms  poiuers. —  The  cashier  of  a 
bank  has  greater  inherent  powers  than  any  other  corporate  au- 
thority excepting  the  board  of  directors.  By  virtue  of  his  office 
he  performs  many  and  important  acts  for  the  bank.  He  may 
pledge  the  bank's  securities ; '  and  sell  and  assign  its  paper ;  * 
and  extend  the  payment  of  a  note ;  ®  and  certify  checks ;  ^  and 
may  bind  the  bank  by  various  other  acts.'  But  a  cashier  can- 
not authorize  a  person  to  loan  money  to  the  bank,  and  deliver 
it  to  an  agent  to  carry  it  to  a  distant  city ;  ^  nor  any  other  act 


1  Merchants'  Nat.  Bank  v.  Citizens' 
Gas  Light  Co.,  159  Mass.  505  (1893). 

2  Woodbury  Granite  Co.  v.  Miilli- 
ken,  66  Vt  465  (1894). 

3  Coats  V.  Donnell,  94  N.  Y.  168 
(1883);  Barnes  v.  Ontario  Bank,  19 
N.  Y.  152  (1859);  Donnell  v.  Lewis 
County  Sav.  Bank,  80  Mo.  165  (1883). 
As  to  the  power  of  the  cashier  to  bor- 
row money  for  the  bank,  compare 
Coats  V.  Donnell,  94  N.  Y.  168  (1883), 
with  Western  Nat.  Bank  v.  Arm- 
strong, 153  XJ.  S.  346  (1893). 

<  Smith  V.  Lawson,  18  W.  Va.  212, 
227  (1881);  Wild  v.  Bank,  3  Mason, 
505  (1825);  S.  C,  29  Fed.  Cas.  1215;  La- 
fayette Bank  v.  State  Bank,  4  Mc- 
Lean, 208  (1847);  Everett  v.  United 
States,  6  Port.  (Ala.)  166  (1837); 
Crocket  v.  Young,  9  Miss.  241  (1843). 
He  may  indorse  paper  in  a  private 
bank  after  banking  hours.  Bissell  v. 
First  Nat.  Bank,  69  Pa.  St.  415  (1871). 

5  Wakefield  Bank  v.  Truesdell,  55 
Barb.  602  (1864). 

6  Merchants'  Bank  v.  State  Bank,  10 
Wall  604  (1870);  Cooke  v.  State  Nat. 
Bank,  52  N.  Y.  90  (1873).  A  bona  fide 
holder  of  a  certificate  of  indebted- 
ness issued  by  him  is  protected.  Cit- 
izens', etc.  Bank  v.  Blakesley,  42  Ohio 
St.  645  (1885). 


■^  A  bank  is  liable  for  the  embezzle- 
ment by  a  cashier  of  a  special  deposit 
of  bonds.  First  Nat.  Bank  v.  Dunbar, 
118  EL  625  (1886).  See  also  Caldwell 
V.  National  Mohawk  Bank,  64  Barb. 
333  (1869),  and  §  681,  mpra.  He  may 
sell  assets  to  pay  a  debt,  and  may 
guarantee  the  priority  of  a  mortgage. 
Peninsular  Bank  v.  Hanmer,  14  Mich. 
208  (1866).  He  may  employ  an  attor- 
ney. Root  V.  Olcott.  42  Hun,  536 
(1886);  Potter  v.  New  York  Inf.  Asy- 
lum,  44  Hun,  367  (1887);  Western 
Bank  v.  Gilstrap,  45  Mo.  419  (1870), 
where  the  other  oflficers  were  absent; 
Mumford  v.  Hawkins,  5  Denio,  355 
(1848).  The  president  and  cashier  are 
presumed  to  have  authority  to  com- 
promise a  debt.  Chemical  Nat.  Bank 
V.  Kohner,  85  N.  Y.  189  (1881).  He 
may  transfer  stock  held  in  pledge. 
Matthews  v.  Massachusetts  Nat.  Bank, 
1  Holmes,  396  (1874);  S.  C,  16  Fed. 
Cas.  1113.  A  bona  fide  holder  may 
enforce  accommodation  paper  in- 
dorsed by  him.  City  Bank  v.  Perkins, 
29  N.  Y.  554  (1804);  Bank  of  Genesee 
V.  Patchin  Bank,  19  N.  Y.  312  (1859); 
Faneuil  Hall  Bank  v.  Bank  of 
Brighton,  82  Mass.  534  (1860). 

8  In  no  case  has  the  term  "  ordinary 
business  "  "  been  judicially  allowed 


96 


1521 


§  718.]  HOW   COEPOKATE  C0NTEACT8   AEE   MADE.        [CH.  XLin. 


which  is  not  in  the  regular  course  of  business.'  A  bank  may 
borrow  money,  but  it  is  so  unusual  that  the  loaner  must  inquire 
into  the  authority  of  the  oificer  or  agent  acting  for -the  bank 
which  borrows  the  money.  Special  authority  or  ratification  by 
the  board  of  directors  must  be  shown.^  A  bank  has  no  power 
to  buy  stock  in  an  insurance  company,  and  the  cashier  of  tlic 
bank  has  no  authority  to  take  stock  in  payment  of  a  debt.' 
Where  a  director  of  a  bank  delivers  bonds  to  the  cashier  as 
security  for  a  debt,  and  the  cashier  pledges  them  to  the  bank  to 
secure  his  own  debt,  the  court  will  hold  that  the  bank  holds  the 
bonds  as  security  for  the  creditor's  debt  and  not  for  the  cashier's 
debt.*  The  cashier  of  a  bank,  in  answering  an  inquiry  as  to  the 
responsibility  of  a  third  person,  need  not  disclose  the  fact  that 
the  bank  has  a  mortgage  on  the  property  of  such  person.*  A 
cashier  has  no  right  to  agree  that  a  note  discounted  by  another 
bank  for  a  company  in  which  he  is  personally  interested  shall 
be  charged  up  to  his  bank  in  case  of  non-payment."  Although 
a  cashier  does  an  act  in  excess  of  his  powers,  yet  if  the  board 
of  directors  ratify  it  or  accept  its  benefits  the  corporation  is 
bound.'' 


to  comprehend  a  contract  made  by  a 
cashier,  without  an  express  delega- 
tion of  power  from  a  board  of  direct- 
ors to  do  so,  which  involves  the  pay- 
ment of  money,  unless  it  be  such  as 
has  been  loaned  in  the  usual  and 
customary  way.  Nor  has  it  ever  been 
decided  that  a  cashier  coiild  purchase 
or  sell  the  property  or  create  an 
agency  of  any  kind  for  a  bank  which 
he  had  not  been  authorized  to  make 
by  those  to  whom  had  been  confided 
the  power  to  manage  its  business, 
both  ordinary  and  extraordinary." 
U.  S.  V.  City  Bank  of  Columbus,  21 
How.  356  (1858). 

1  He  cannot  bind  the  bank  by  in- 
dorsing the  bank's  name  as  an  accom- 
modation indorser  to  his  own  nota 
West  St.  Louis  Sav.  Bank  v.  Shawnee 
County  Bank,  95  U.  S.  557  (1877).  A 
cashier  may  indorse  bank  paper  to 
any  one  except  himself.  Preston  v. 
Cutter,  64  N.  H.  461  (1888). 

2  Western  Nat  Bank  v.  Armstrong, 


152  U.  S.  346  (1893).  Although  tlie 
officers  of  a  bank  have  no  power  to 
borrow  money  from  the  bank  witli- 
out  special  authority  from  the  board 
of  directors,  yet  if  for  a  long  time 
they  have  been  accustomed  to  do  so, 
this  is  the  same  as  though  express 
authority  had  been  given.  Arm- 
strong V.  Chemical  Nat.  Bank,  83  Fed. 
Eep.  556  (1897). 

'  Bank  of  Commerce  v.  Hart,  37 
Neb.  197  (1893). 

<  Detroit,  etc.  Co.  v.  Third,  etc. 
Bank,  69  N.  W.  Rep.  726  (Midi.,  1897). 

5  First  Nat.  Bank  v.  Marshall,  etc. 
Bank,  83  Fed.  Rep.  725  (1897). 

6  Ft.  Dearborn  Nat.  Bank  v.  Sey- 
mour, 73  N.  W.  Rep.  724  (IVIinn.,  1898). 

7  Martin  v.  Webb,  110  U.  S.  7  (1884), 
where  the  cashier  had  canceled  a 
deed  of  trust;  Payne  v.  Commercial 
Bank,  14  Miss.  24  (1846);  Bank  of 
Pennsylvania  v.  Reed,  1  Watts  &  S. 
(Pa.)  101  (1841);  Ryan  v.  Dunlop,  17  111. 
40  (1855),  where  he  satisfied  a  mort- 


1523 


CH.  XLIII.]        HOW    COKPOKATE    CONTKACTS   AEE   MADE. 


[§  T19. 


§  Y19.  General  tnanagerj  superintendent^  and  general  agent  — 
Their  power  to  contract  for  tlie  corporation. —  The  general  man- 
ager of  a  corporation  has  no  power  to  make  and  deliver  the 
promissory  note  of  the  company ;  ^  nor  can  he  indorse  the  com- 
pany's name  on  commercial  paper,^  except  possibly  in  payment 


gage;  Kelsey  v.  National  Bank,  69 
Pa.  St.  426  (1871),  where  he  oflfered  a 
reward  with  the  knowledge  and 
acquiescence  of  the  directors;  Medo- 
mak  Bank  v.  Curtis,  24  Me.  36  (1844), 
where  the  bank  claimed  the  benefit 
of  a  contract;  U.  S.  Bank  v.  Dand- 
ridge,  12  Wheat,  64  (1827),  where  a 
cashier's  bond  in  possession  of  a  bank 
was  held  to  have  been  accepted  by 
the  bank,  though  no  vote  accepting 
it  was  to  be  found  in  its  records; 
Bank  of  Lyons  v.  Demmon,  Hill  &  D. 
Supp.  (N,  Y.)  398  (1844j,  where  the 
president  and  secretary  sold  stock 
and  agreed  to  purchase  it  if  the 
vendee  desired.  He  cannot  assign 
non-negotiable  paper.  Barrick  v.  Aus- 
tin, 21  Barb.  241  (1855).  As  to  the 
power  of  the  cashier  and  president 
together  to  pledge  paper  for  an  ante- 
cedent debt,  see  Tennessee  v.  Davis, 
50  How.  Pr.  447  (1874).  As  to  the 
power  of  the  cashier  to  take  payment 
in  other  notes,  etc.,  see  Sandy  River 
Bank  v.  ^Merchants',  etc.  Bank,  1  Biss. 
146  (1857);  S.  C,  21  Fed.  Cas.  35G.  A 
cashier  has  no  power  to  agree  with  an 
indorser  of  a  note  to  a  bank  that  he 
shall  not  be  liable.  Tliompson  v.  Mc- 
Kee,  5  Dak.  172  (1888);  Bank  of  Me- 
tropolis V.  Jones,  8  Pet  12  (1834); 
Bank  of  U.  S.  v.  Dunn,  6  Pet.  51 
(1832).  A  person  taking  a  note  from 
the  cashier  on  the  latter's  personal 
debt  cannot  hold  the  bank  liable  on 
the  latter's  indorsement  of  the  note 
as  cashier.  West  St.  Louis  Sav.  Bank 
V.  Shawnee,  etc.  Bank,  3  DHL  403 
(1874);  S.  C,  29  Fed.  Cas.  831;  S.  C,  95 
U.  S.  557.  A  cashier  cannot  assign 
corporate  notes  to  a  depositor  in  pay- 
ment of  a  deposit.  Schneitman  v. 
Noble,  75  Iowa,  120  (1888).    He  can- 


not render  the  charter  forfeitable  by 
taking  payment  on  subscriptions  in 
an  illegal  manner.  State  v.  Commer- 
cial Bank,  14  Mass.  218  (1846).  A 
bank  may  be  bound  by  a  release  of  its 
cashier  upon  a  note  signed  by  the 
cashier  and  several  others,  where  the 
cashier  pays  his  part  of  the  note  and 
erases  his  name  from  the  note,  and 
such  facts  become  known  to  the 
board  of  directors.  First  Nat.  Bank  v. 
Shook,  45  S.  W.  Rep.  338  (Xenn.,  1898). 

1  New  York,  etc.  Mine  v.  Negaunee 
Bank,  39  Mich.  644  (1878),  in  which 
case  the  note  was  held  not  enforce- 
able, although  the  general  manager 
had  often  drawn  drafts  on  the  com- 
pany. See  Re  Cunningham,  L.  R. 
36  Ch.  D.  532.  Wliere  a  corporation 
and  a  firm  are  practically  one  and 
the  same  concern,  and  the  same 
man  signs  for  both,  his  signature 
of  the  corporate  name  to  the  firm 
obligation  is  binding  on  the  corpora- 
tion. National  Bank,  etc.  v.  John,  etc. 
Sons,  33  S.  W.  Rep.  415  (Ky.,  1895).  A 
general  manager  is  presumed  to  have 
authority  to  sign  a  corjjorate  nota 
Citizens'  Nat.  Bank  v.  Wintler,  14 
Wash.  558  (1896).  The  president  and 
general  manager  has  no  imi)lied 
power  to  issue  notes.  The  fact  tliat 
he  lias  done  so  before  is  immaterial, 
where  all  of  the  directors,  excepting 
one,  were  ignorant  of  such  acts.  El- 
well  V.  Puget  Sound,  etc.  R.  R.,  7 
Wash.  487  (1893).  The  general  man- 
ager of  a  telegraph  company  has  no 
implied  authority  to  make  a  note 
for  it  and  in  its  nama  Helena  Nat. 
Bank  v.  Rocky,  etc.  TeL  Co.,  51  Paa 
Rep.  829  (Mont,  1898). 

2  Accommodation  acceptances,  ac- 
cepted in  the  corporate  name  by  the 


1533 


§  no.] 


HOW   COHrOEATE    CO^ITRACTS   ARE   MADE.        [CH.  XLIII. 


of  debts ;  *  nor  can  lie  cliange  the  terms  of  a  sealed  contract  of 
the  corporation ; "  but  he  may  give  a  note  in  payment  of  wages 
due ;  ^  and  he  may  accept  a  draft.*  There  is  grave  doubt  as  to 
whether  he  may  borrow  money  and  give  a  lien  or  chattel  mort- 
gage therefor.'    A  general  manager  has  power  to  borrow  money 


manager  of  the  corporation  without 
the  knowledge  of  the  directors,  are 
not  enforceable,  though  tlie  manager 
had  at  times  drawn  notes  to  meet 
expenses.  Merchants'  Nat.  Bank  v. 
Detroit,  etc.  Works,  68  Mich.  C20 
(1888).  The  power  of  a  manager  to 
borrow  money  for  the  company  by 
giving  his  own  note  and  Indorsing 
the  company's  name  to  it  is  a  ques- 
tion for  the  jury.  The  books  of  the 
company  are  evidence  to  prove  that 
the  com2)any  received  the  money. 
The  jury  may  decide  that  his  author- 
ity might  be  "either  authority  or 
subsequent  ratification,  and  that  it 
could  be  evidenced  by  general  course 
of  business  as  well  as  by  resolution." 
Huntington  v.  Attrill,  118  N.  Y.  3G5 
(1890).  A  general  manager  has  no 
power  to  guarantee  in  the  corporate 
name  the  payment  of  a  third  person's 
note.  Dobson  v.  More,  164  III  110 
(1896).  A  general  manager  has  no 
inherent  power  to  indorse  the  com- 
mercial paper  coming  to  the  com- 
pany. The  by-laws  are  admissible 
on  the  subject.  Railway  Equip,  etc. 
Co.  V.  Lincoln  Nat.  Bank,  82  Hun,  8 
(1894).  But  he  may  accept  a  draft  if 
he  is  accustomed  so  to  do.  Munn  v. 
Commission  Co.,  15  Johns.  44  (1818). 
And  the  general  agent  of  a  bank 
may  indorse.  Merchants'  Bank  v. 
Central  Bank,  1  Ga.  418  (1846).  Where 
there  is  no  treasurer,  the  general  man- 
ager or  a  director  may  sign  the  cor- 
porate name  to  negotiable  paper  for 
collectioru  Craig  Medicine  Co.  v. 
Merchants'  Bank,  59  Hun,  561  (1891). 
Where  the  power  to  indorse  notes  is 
given  by  the  by-laws  to  the  president 
and  vice-president,  a  general  man- 
ager does  not  have  that  power,  al- 


though he  has  drawn  checks  and 
previously  indorsed  two  notes,  but 
without  the  knowledge  of  tlie  board 
of  directors.  Davis  v.  Rockingham 
Investment  Co.,  89  Va.  290  (1892). 

1  McKiernan  v.  Lusgan,  56  CaL  61 
(1880,:  Seeley  v.  San  Jose,  59  CaL  22 
(1881). 

2Boynton  v.  Lynn,  etc  Co.,  124 
Mass.  197  (1878). 

3  Bates  V.  Keith,  etc.  Co.,  48  Mass. 
224  (1843). 

*  Hascall  v.  Life.  etc.  Assoc.,  5  Hun, 
151  (1875);  aff'd,  66  N.  Y.  616. 

*  The  general  agent  and  treasurer 
may  borrow  money  and  give  a  chat- 
tel mortgage  as  security.  Fay  v. 
Noble.  66  Mass.  1  (1853).  The  super- 
intendent of  a  mine  cannot  borrow 
money  for  the  company.  Union,  etc. 
Co.  V.  Rocky  Blountuin  Nat.  Bank,  1 
Colo.  531  (1872).  Where  a  superin- 
tendent borrows  money  for  himself, 
giving  a  lien  on  corporate  property 
as  security,  the  parties  loaning  the 
money  with  knowledge  of  these  facts 
cannot  hold  the  company  liable. 
Planters',  etc.  Co.  v.  Olmstead,  78  Ga. 
586  (1887).  The  well-considered  case 
of  WhitweU  V.  Warner,  20  Vt.  425 
(1848),  holds  that  the  general  man- 
ager cannot  give  a  lien  to  secure  the 
price  of  goods  which  he  pui'chases; 
but  it  is  held  that  if  the  company 
uses  the  goods,  even  without  knowl- 
edge of  the  hen,  the  vendors  may  pur- 
sue the  goods  or  the  proceeds  realized 
therefrom.  In  Leonard  v.  Burling- 
ton, etc.  Assoc,  55  Iowa,  594  (1881),  it 
is  held  that  he  may  borrow  money, 
and  the  company  is  liable  if  it  has 
used  the  money.  A  superintendent's 
mortgage  was  upheld  in  Poole  r.  West, 
etc  Assoc,  30  Fed.  Rep.  513  (1887). 


1524 


CH.  XLIII.]        HOW    COKPORATE    CONTRACTS   ARE   MADE. 


[§  '^15. 


to  meet  corporate  bills  in  due  course  of  business.^  The  presi- 
dent and  general  manager  of  an  insolvent  corporation  has  no 
power  to  give  a  preference ;  ^  nor  can  he  transfer  all  its  assets 
to  one  creditor  in  payment  of  his  claim,  even  though  the  by- 
laws gave  him  entire  charge  of  the  business,  subject  to  the  ap- 
proval of  the  board  of  directors.'  A  general  manager  may  give 
a  mortgage  where  he  has  the  power  to  sell  the  property  and 
carry  on  the  entire  business.* 

It  has  been  held  that  he  may  waive  demand  and  notice  of  a 
note  indorsed  by  the  company;  *  may  also  employ  an  attorney ;  ® 
may  render  the  company  liable  for  overpayment  of  a  check  by 
mistake  of  the  bank;'  may  contract  for  the  use  of  a  patent;^ 
may  render  the  company  liable  for  an  illegal  use  of  the  word 
*'  patented ;  " '  and  may  enter  into  various  contracts  which  per- 
tain to  the  regular  course  of  his  business.^"   Where  the  president 


iRosemond  v.  Northwestern,  eta 
Co.,  G2  Minn.  374  (1895). 

2  Dooley  v.  Pease,  79  Fed.  Rep.  860 
(1897). 

»  Hadden  v.  LinviUe,  33  Atl.  Rep.  37 
(Md.,  1897). 

♦Thayer  v.  Nehalem  Mill  Co.,  51 
Pac.  Rep.  203  (Oreg.,  1897). 

6  Whiting  V.  Smith,  etc.  Co.,  39  Me. 
316  (1855). 

6  St.  Louis,  etc.  R  R.  v.  Grove,  39 
Kan.  731  (1888);  Frost  v.  Domestic, 
etc.  Co.,  133  Mass.  563  (1882);  South- 
gate  V.  Atlantic,  etc.  R  R,  61  ]\Io.  89 
(1875).  A  general  manager  may  em- 
ploy an  attorney.  Gulf,  etc.  R'y  v. 
James,  73  Tex.  12  (1889).  The  general 
manager  may  execute  an  appeal 
bond.  Sarmiento  v.  Davis,  etc.  Co., 
105  Mich.  300  (1895). 

7  Kansas,  etc.  Co.  v.  Central  Bank, 
34  Kan.  635  (1886). 

8  Eureka  Co.  v.  Bailey  Co.,  11  Wall 
488  (1870). 

» Tompkins  v.  Butterfield,  25  Fed- 
Rep.  556  (1885). 

10  Where  a  firm  is  turned  into  a  cor- 
poration the  latter  may  assume  a 
contract  of  the  former,  for  the  pur- 
chase of  lumber,  by  adopting  it 
through  its  manager.    Pratt  v.  Osh- 


kosh  Match  Co.,  89  Wis.  406  (1895). 
The  president  and  general  manager 
may  agree  that  the  stage  company 
will  be  co-owner  of  a  stage  line  with 
another.  Calvert  v.  Idaho  Stage  Co., 
25  Greg.  412  (1894).  A  local  manager 
of  a  branch  store  is  a  general  man- 
ager to  the  extent  of  having  power 
to  take  a  lease  of  a  store  for  five 
years.  Phillips,  etc.  Co.  v.  Whitney, 
109  Ala.  645  (1896).  The  general  agent 
of  a  cattle-feeding  company  has 
power  to  buy  feed.  Powder  River, 
etc.  Co.  V.  Lamb,  38  Neb.  339  (1893). 
Although  the  company  owes  a  bank 
money  secured  by  mortgage,  the 
manager  and  secretary  may  deposit 
the  company's  money  and  agree  that 
it  may  be  drawn  out  free  from  the 
mortgage.  IMerchants',  etc.  Bank  v. 
Hei-vey  Plow  Co.,  45  La.  Ann.  1214 
(1893).  The  general  manager  and 
treasurer  has  no  power  to  turn  over 
the  whole  property  to  a  corporate 
creditor,  even  though  he  ran  all  the 
business  of  the  company.  First  Nat. 
Bank,  etc.  v.  Asheville,  etc.  Co.,  116 
N.  C.  827  (1895).  Where  the  general 
manager  of  a  corporation  owning  a 
mine  and  reduction  mill  causes  la- 
borers to  work  in  the  company's  mine 


1525 


§  n9.] 


HOW   CORPORATE    CONTRACTS   ARE   MADE.        [CH.  XLIII. 


is  also  general  manager  and  has  entire  charge  of  the  business 
of  a  corporation,  he  may  bind  it  by  his  contract  to  pay  for  pro- 


and  mill,  and  also  to  open  a  mine  of 
his  own,  all  without  the  knowledge 
of  the  company  or  of  the  employees, 
who  supposed  they  were  working  for 
the  company,  the  company  is  liable 
for  their  wages.  Oro,  etc.  Co.  v.  Kai- 
ser, 4  Colo.  App.  219  (1893).  A  general 
manager  authorized  to  pay  commis- 
sions on  receipts  from  sales  may 
agree  to  pay  commissions  on  sales 
Irrespective  of  the  receipts.  Ameri- 
can, etc.  Co.  V.  Mavirer,  10  Atl.  Rep. 
762  (Pa..  1887).  A  contract  for  a  cor- 
poration by  its  general  superintend- 
ent to  give  a  right  of  way  to  another 
railroad  may  become  binding  by  ac- 
quiescence. Alabama,  etc.  R.  R.  v. 
South,  etc.  R  R.,  84  Ala.  570  (1887). 
The  president  and  manager  of  a  mill- 
ing company  cannot  purchase  flour. 
Getty  V.  Barnes,  etc.  Co.,  40  Kan.  281 
(1888).  As  to  insm-ance  agents,  see 
Insurance  Co.  v.  McCain,  96  U.  S.  84 
(1877).  A  treasurer  of  a  corporation 
not  authorized  to  sell  any  part  of  its 
property,  but  who  was  its  sole  man- 
aging agent,  may  pass  a  valid  title 
of  personal  property  to  a  vendee  as 
against  the  claim  of  one  who  levied 
upon  it  under  a  judgment.  Phillips 
V.  Campbell,  43  N.  Y.  271  (1870).  A 
general  manager  has  implied  power 
to  make  a  time  contract  of  employ- 
ment. Stahlberger  v.  New  Hartford 
Leather  Co.,  92  Hun,  245  (1895).  A 
general  manager  has  no  power  to  en- 
gage an  employee  for  five  years.  Ca- 
macho  v.  Hamilton,  etc.  Co.,  2  N.  Y. 
App.  Div.  369  (1896).  An  executive 
oflScer  having  power  to  employ  per- 
sons does  not  thereby  have  power  to 
employ  a  person  for  life.  Carney  v. 
New  York  L.  Ins.  Co.,  19  N.  Y.  App. 
Div.  160  (1897).  The  managing  agent 
may  employ  a  person,  but  not  for  a 
long  time  in  the  futiire.  Smith  v. 
Cook,  etc.  Assoc,  12  Daly,  304  (1884). 
He  cannot  employ  a  broker.    Alle- 


gheny, etc.  Co.  V.  Moore,  95  Pa,  St. 
412  (1880).  The  general  manager  of 
a  mining  company  has  no  inherent 
power  to  contract  for  it  for  machin- 
ery. Victoria,  etc.  Co.  v.  Fraser,  2 
Colo.  App.  14  (1892).  The  general 
manager  of  a  live-stock  company  has 
implied  power  to  sell  a  part  of  such 
stock.  Hamm  v.  Drew,  83  Tex.  77 
(1892).  Long  acquiescence  in  a  per- 
son's assuming  to  act  for  the  com- 
pany is  the  same  as  expressly  autlior- 
izing  his  action-  Craig  Medicine  Co. 
V.  Merchants'  Bank,  59  Hun,  560 
(1891).  A  general  manager  has  no 
power  to  deed  the  company's  real 
estate,  and  a  pvirchaser  other  than  a 
bona  fide  one  from  the  vendee  can- 
not retain  the  title.  Allowance  w*as 
made  for  improvements.  Especially 
is  the  deed  invalid  where  the  grantee 
was  a  director.  Schetter  v.  Southern, 
etc.  Co.,  19  Greg.  192  (1890).  The 
president  and  general  manager  of  a 
lumber  company  may  engage  a  law- 
yer for  the  season.  Ceeder  v.  Loud, 
etc.  Co.,  86  Mich.  541  (1891).  Where 
the  president  carries  on  the  negotia- 
tions in  regard  to  a  contract,  and 
also  the  modifications  of  that  con- 
tract, and  is  the  manager  and  in 
control,  and  as  manager  assents  to 
the  modifications,  the  company  is 
boufid  thereby.  Nichols  v.  Scranton 
Steel  Co.,  137  N.  Y.  471  (1893).  A 
general  manager  has  no  power  to 
sell  rights  for  a  particiilar  state,  and 
a  power  of  attorney  which  has  been 
revoked  is  insufficient  to  be  relied 
upon.  Johnson  v.  Alabama,  etc.  Co., 
90  Ala.  505  (1890).  Where  the  by- 
laws  give  the  general  manager  power 
to  sell,  he  has  power  to  sell  the  prod- 
uct for  a  certain  space  of  time  in 
the  future.  Robert,  etc.  Miu.  Co.  v. 
Omaha,  etc.  Co.,  16  Colo.  118  (1891). 
For  a  discussion  of  what  constitutes 
the  appointment  of  a  resident  gen- 


1526 


CH.  XLIII.]        HOW    COEPOKATE    COXTEACTS   AEE    MADE. 


[§  719. 


moting-expenses.^  The  by-laws  may  give  to  the  general  manager 
230wer  to  carry  on  the  business  of  the  company.^  Although  a 
general  manager  exceeds  his  authority  in  agreeing  to  an  arbi- 
tration, yet,  if  the  company  does  not  repudiate  his  agreement 
promptly,  it  is  bound.'  A  managing  director  may,  by  a  by- 
law, be  given  the  powers  of  the  board.  An  outside  party  need 
not  inquire  as  to  whether  his  appointment  was  validly  made, 
and  may  assume  that  such  director  has  the  powers  which  the 
board  might  delegate  to  him.* 

A  railroad  superintendent  may  employ  a  physician  in  cases 
of  accident,'  and  may  offer  rewards  for  the  conviction  of  per- 


eral  agent  by  a  corporation,  see  Rath- 
bun  V.  Snow,  123  N.  Y.  3-13  (1890).  A 
general  manager  has  no  power  to 
employ  a  person  on  a  long-time  con- 
tract. Smith  V.  Co-operative,  etc. 
Assoc,  12  Daly,  804  (1884).  Where  a 
superintendent  negotiates  sales  and 
the  president  fixes  the  price,  the  cor- 
poration is  responsible  for  the  super- 
intendent's representations.  Decker 
V.  Gutta  Percha,  etc.  Co.,  61  Hun,  516 
(1891). 

1  Oakes  v.  Cattaraugus  Water  Co., 
143  N.  Y.  430  (1894). 

2  Burden  v.  Burden,  8  N.  Y.  App. 
Div.  160  (1896).  A  general  manager 
authorized  to  "take  full  charge  of 
the  company's  business,  and  to  enter 
into  such  negotiations  and  contracts 
as  he  thinks  best  for  the  company's 
interest,"  may  appoint  a  local  agent 
and  empower  him  to  hire  a  barga 
Tennessee  River  Transp.  Co.  v.  Kava- 
naugh,  101  Ala.  1  (1893). 

'  Central  Trust  Co.  v.  Ashville  Land 
Co.,  72  Fed.  Rep.  361  (1896).  Where 
a  corporation  allows  its  manager  to 
largely  control  its  business,  it  is  Liable 
on  a  contract  made  by  him  in  the 


thereof  made  by  the  superintendent 
without  authority,  but  on  the  con- 
trary allows  the  lessee  to  proceed  and 
receives  the  rent,  he  thereby  ratifies 
the  lease.  Bicknell  v.  Austin  Min. 
Co.,  62  Fed.  Rep.  432  (1894). 

♦Biggerstaff  v.  Rowatt's  Wharf, 
[1896]  2  Cli-  93. 

5  Pacific  R  R  V.  Thomas,  19  Kan. 
257  (1877);  Toledo,  etc.  R'y  v.  Rod- 
rigues,  47  IlL  188  (1868);  Atlantic, 
etc.  R.  R  V.  Reiser,  18  Kan.  458  (1877). 
Contra,  Stephemson  v.  New  York,  etc. 
R  R,  2  Duer,  341  (1853);  Slmver  v. 
Stevens,  12  Pa.  St.  258  (1849),  holding 
that  the  agent  of  a  stage  line  cannot. 
A  yardmaster  cannot  employ  a  phy- 
sician for  the  company.  Marquette, 
etc.  R  Pu  V.  Taft,  28  Mich.  289  (1873). 
Nor  an  engineer.  Cooper  f.  New  York, 
etc.  R  R,  6  Hun,  276  (1875).  Nor  a 
station  agent.  Tucker  v.  St.  Louis, 
etc.  R.  R,  54  Mo.  177  (1873);  Cox  v. 
Midland,  etc.  R  R.,  3  Exch.  208  (1849). 
Unless  the  superintendent  ratifies  it 
by  silence  upon  being  notified  thereof. 
Cairo,  etc.  R.  R  v.  Mahoney,  82  111. 
73  (1876);  Toledo,  etc.  R  R  u  Prince, 
50  ni.  26  (1869).    The  general  man- 


name  of  the  company,  and  in  the  "  ager  cannot  render  the  company  lia- 


line  of  its  business.  Carrigan  v.  Port 
Crescent  Imp.  Co.,  6  Wash.  590  (1893). 
So  also  as  to  its  president  and  secre- 
tary. Duggan  V.  Pacific  Boom  Co.,  6 
Wash.  593  (1893).  Where  a  party  who 
buys  a  mine  does  not  object  to  a  lease 

1527 


ble  for  medical  services  rendered  on 
an  occasion  of  a  private  brawL  Dale 
V.  Donaldson  Lvunber  Co.,  48  Ark.  188 
(1887);  Wood,  Railw.  Law,  pp.  43^ 
444 


§  720.] 


HOW   CORPORATE   CONTRACT'S  ARE   MADE.        [CH.  XLIIT. 


sons  obstructing  tlie  tracks.*  A  general  freight  agent  may 
agree  to  give  rebates.^  It  has  been  held  that  a  superintendent 
has  not  the  powers  of  a  general  manager.''  The  superintend- 
ent may,  of  course,  be  given  express  powers  to  contract.''  If 
the  company  ratifies  the  contract  or  accepts  its  benefits  the 
contract  becomes  binding.' 

§  Y20.  Subordinate  agents — Their  power  to  contract. —  It  is 
a  general  rule  that  a  corporate  agent,  like  the  agent  of  an  in- 
dividual, can  make  only  such  contracts  as  he  is  expressly  au- 
thorized to  make,  or  such  contracts  as  pertain  to  the  duties 
which  the  corporation  imposes  upon  him.  It  is  true,  also,  that 
the  corporation  may  ratify  and  confirm  a  contract  which  an 
unauthorized  agent  has  made  in  its  name ;  and  this  ratification 
may  be  by  express  vote  of  the  directors,  or  it  may  be  implied 
by  an  acceptance  of  the  benefits  to  the  corporation.  The  sub- 
ordinate agents  of  a  corporation  may  be  of  great  variety :  tell- 
ers, engineers,  stewards,  station  agents,  local  agents,  freight 
agents,  roadmasters,  clerks,  attorneys,  and  miscellaneous  agents. 
Yarious  decisions  on  their  powers  are  given  in  the  notes.' 


1  Central,  etc.  Co.  v.  Cheatham,  80 
Ala.  293  (1888). 

2  Kansas  Pac.  R'y  v.  Bayles,  19  Colo. 
348  (1894). 

3  Adriance  v.  Roome,  52  Barb.  399 
(1868),  holding  that  the  superintend- 
ent cannot  borrow  money  and  agree 
to  make  payment  in  iron. 

4  Where  the  by-laws  give  the  presi- 
dent and  superintendent  power  to 
make  a  contract,  they  have  power 
to  release  that  contract.  Directors 
knowing  of  release  must  act  promptly 
if  they  intend  to  question  its  valid- 
ity. Indianapolis,  etc.  Co.  v.  St.  Lo;iis, 
etc.  R  R,  26  Fed.  Rep.  140  (1886); 
aflE'd,  120  U.  S.  256.  A  general  power 
authorizes  the  purchase  of  a  house 
and  the  giving  of  a  mortgage. 
Shaver  v.  Bear,  etc.  Co.,  10  CaL  396 
(1858). 

6  Kickland  v.  Menasha,  etc.  Co.,  68 
Wis.  34  (1887),  where  the  superintend- 
ent and  a  director  took  a  deed  and 
agreed  to  pay  an  extra  price;  De- 
spatch Line  v.  Bellamy  Mfg.  Co.,  12 


N.  H.  205  (1841),  where  he  gave  a 
mortgage  and  tlie  company  received 
the  money;  Lyndeborough,  etc.  Co.  v. 
Massachusetts,  etc.  Co.,  Ill  Mass.  315 
(1873),  where  he  bought  glass  and  the 
directors  acquiesced;  Seeley  v.  San 
Jose,  etc.  Co.,  59  CaL  22  (1881),  where 
he  and  the  president  gave  a  note; 
Goodwin  v.  Union,  etc.  Co.,  34  N.  H. 
378  (1857),  where  he  and  the  presi- 
dent employed  workmen;  Starr  v. 
Gregory,  etc.  Co.,  6  Mont.  485  (1887), 
where  he  accepted  a  mill;  Union, 
etc.  Co.  V.  Rocky  Moimtain  Nat. 
Bank,  2  Colo.  565  (1875);  affirmed,  96 
U.  S.  640,  where  a  loan  of  the  bank's 
money  was  made  by  him  and  the 
president.  Ratification  cannot  be  by 
the  same  persons  who  assume  power 
to  contract.  Tracy  v.  Guthrie,  etc. 
Soc,  47  Iowa,  27  (1877). 

6  An  inqtiiry,  by  a  purchaser  of  stock, 
of  corporate  officers,  as  to  whether  it 
was  full-paid  stock  must  be  made  of 
officers  having  authority  to  speak  for 
the  corporation.  Browning  v.  Hinkle, 


1528 


CH.  XLIII.]        HOW    CORPOKATE    COXTEACTS   AKE   MADE.  [§  T20. 

These  decisions  show  that  a  corporation  is  bound  by  its  agents' 
acts  only  when  a  partnership  would  be  bound  under  similar 
circumstances.    And  in  general  the  corporation  may  ratify  and 


48  Miim.  544  (1893).    The  financial 
agent  may  give  notes  in  accordance 
with   a   corporate    contract.     Case 
Mfg.   Co.  V.  Coxman,  138  U.  S.  431 
(1891);  Wilson  v.  Kings,  eta  R'y,  114 
N.  Y.  487  (1889).    The  cashier  and 
clerk  of  a  lumber  company  cannot 
agree  to  give  a  customer  a  carload  of 
lumber  in  case  certain  other  lumber 
is  not  satisfactory.    Delta  Lumber 
Co.  V.  Williams,  73  Mich.  8G  (1888). 
The  local  manager  of  a  branch  bank 
renders  it  liable  for  his  embezzle- 
ment of  depositor's  funds,  wliich  he 
induces  the  depositor  to  give  to  him 
to  pay  a  lien  of  the  bank  on  the  prop- 
erty.   Thompson  v.  Bell,  2G  Eng.  L. 
&Eq.  536  (1854).    The  receiving  teUer 
of  a  savings  bank  has  no  power  to 
bind  the  bank  not  to  pay  out  money 
deposited  in  one  name,  except  upon 
the  order  of  three  other  persons.    The 
bank  is  protected  in  paying  on  the 
check  of  a  person  in  whose  name  the 
deposit  is   made.    Riley  u   Albany 
Sav.   Bank,  36  Hun,  513  (1885).    A 
teller's  certification  of  a  check  in  bad 
faith  does  not  bind  the  bank,  Mussey 
V.  Eagle  Bank,  50  Mass.  306  (1845); 
unless  it  is  in  the  liands  of  a  bona 
fide  indorsea    Farmei-s',  etc.  Bank  v. 
Butchers',  etc.  Bank,  16  N.  Y.  125 
(1857);  Farmers',  etc.  Bank  v.  Butch- 
ers', etc.  Bank,  14  N.  Y.  624  (1856).    As 
to    certification  of  check,  see  also 
Meads  v.  Merchants'  Bank,  25  N.  Y. 
143  (1862);  Cooke  v.  State,  etc.  Bank, 
53  N.  Y.  96  (1873);  in  the  latter  case 
the  certification  being  by  the  cash- 
ier.   Where  a  depositor  sends  deposr 
its  by  the  bank's  book-keeper  without 
the  bank-book,  the  bank  is  not  liable 
for  the  book-keeper's  fraud-    Man- 
liattan  Co.  v.  Lydig,  4  Johns.  377 
(1809).    A  teller  may  receive  a  spe- 
cial deposit  of  valuables.    Patterson 
V.  Syracuse  Nat.  Bank,  80  N.  Y.  82 


(1880).    It  may  be  a  question  for  the 
jury  as  to  whether  the  foreman  of 
the  works  of  a  foreign  corporation 
may  employ  workmen  on  long  time. 
Timison  v.  Detroit,  etc.  Co.,  73  ]Mich. 
453  (1889).    Where  a  bank  owning 
railroad  bonds  allows  its  agent  to  ex- 
change them  for  stock  in  a  reorgan- 
ized company,  it  is  bound.    Deposit 
Bank  v.  Barrett,  13  S.  W.  Rep.  337 
(Ky.,  1890).    A  caterer  may  hold  a 
club  responsible  for  food,  etc.,  fur- 
nished to  its  guests  under  the  author- 
ized contract  of  the  hoiise  committee. 
Deller  v.  Staten  Island,  etc.  Club,  9 
N.  Y.  Supp.  876  (1890). 

The  following  decisions  are  con- 
cerning railroad  agents:  The  engi- 
neer of  a  railroad  company  may  have 
authority  to  modify  a  construction 
contract  or  enter  into  a  new  con- 
tract   Henderson  Bridge  Co.  v.  Mo- 
Grath,  134  U.  S.  260  (1890).    The  civil 
engineer  of  a  raQroad  cannot  employ 
a  station  agent.    WilUs  v.  Toledo, 
etc.  R'y,  73  Midi.  160  (1888 1.    The  en- 
gineers of  a  railroad  company  can- 
not bind  it  to  an  agi-eement  to  pay 
the  construction  contractors  extra 
pay.    Woodruff   v.    Rochester,    etc 
R.  R.,  108  N.  Y.  3»  (1888).    The  con- 
struction engineer  of  a  railroad  has 
no  power  to  vary  the  construction 
contract    Campbell    v.    Cincinnati 
Southern  R'y,  6  S.  W.  Rep.  337  (Ky., 
1888).    A  person  whom  the  railroad 
holds  out  as  the  general  freight  agent 
of  the  company  may  bind  it  by  his 
contracts  relative  to  freight.    Baker 
u  Kansas  City,  etc.  R  R.,  91  i\Io.  153 
(1887).    A  roadmaster  of  a  railway 
lias  power  to  purchase  such  material 
as  he  uses,  and  the  company  is  liable 
therefor  where  the  material  has  been 
used.    Walker  v.  Wilmington,  etc 
R.  R.,  26  S.  C.  80  (1887).    A  statioq 
agent  may  contract  that  goods  will 


1529 


§  720.] 


HOW   COErOEATE    CONTRACTS    AEE   MADE.        [CH.  XLIII. 


adopt  tlie  unauthorized  acts  of  an  agent.*  There  are  no  arbi- 
trary rules  as  to  the  mode  of  making  a  corporate  contract.  A 
contract  may  be  inferred  from  corporate  acts  and  customs  with- 


be  delivered  at  a  certain  tima  Blod- 
gett  V.  Abbot,  73  Wis.  516  (1888).  See 
also  Wood,  Railw.  Law,  pp.  444-454. 
The  following  decisions  concern 
miscellaneous  agents  and  powers: 
An  agent  with  power  to  give  and  in- 
dorse notes  may  waive  notice  of  pro- 
test, etc.  Whitney  v.  South,  etc.  Co., 
39  Me.  316  (1855).  A  resident  agent 
of  a  mining  company  has  no  implied 
authority  to  borrow  money  on  ac- 
count of  the  corporation  to  pay  ar- 
rears of  wages  due  the  workmen  in 
the  mines.  Hawtayne  v.  Bourne,  7 
M.  &  W.  595  (1841).  An  agent  attend- 
ing to  the  daily  routine  of  the  busi- 
ness of  a  corporation  cannot  create 
a  general  lien  upon  its  property  to 
secure  a  creditor,  unless  by  the  ap- 
proval of  the  board  of  directors. 
Whitewell  u  Warner,  20  Vt.  425  (1848). 
An  agent  employed  to  promote  the 
interests  of  a  corporation  in  every 
way  has  no  authority  to  purchase 


land  for  it.  Bocock  v.  AllegHany,  etc. 
Co.,  82  Va.  913  (1887).  Where  a  corpo- 
ration agent  buys  land  for  the  com- 
pany at  a  certain  price,  and  agrees 
that  the  company  will  pay  also  the 
vendor  one-half  of  its  profits  upon 
sale  of  said  land,  the  company  is 
bound  by  this  latter  parol  agreement. 
Kickland  v.  Menasha,  etc.  Co.,  68  Wis. 
34  (1887).  Persons  expending  m.oney 
for  a  corporation  under  the  direction 
of  authorized  corporate  oflicers  may 
hold  the  corporation  liable.  Topeka, 
etc.  Assoc.  V.  Martin,  39  Kan.  750 
(1888).  An  agent  of  a  lumber  com- 
pany cannot  pay  debts  due  the  com- 
pany by  boarding  them  out.  St. 
John,  etc.  Co.  v.  Comwell,  52  Kan. 
712  (1894).  A  sewing-machine  com- 
pany's agent  to  sell  machines  has  no 
power  to  trade  the  company's  horse, 
but  ratification  suffices.  Singer  Mfg. 
Co.  V.  Belgart,  84  Ala.  519  (1888).  Acts 
of  local  insurance  agents  appointed 


1  Essex  Tump.  Co.  v.  Collins,  8 
Mass.  292  (1811);  Hayden  v.  Middle- 
sex Turnp.  Co.,  10  Mass.  403  (1813); 
White  V.  Westport  Cotton  Mfg.  Co., 
18  Mass.  220  (1822);  Bulkley  v.  Derby 
Fishing  Co.,  2  Conn.  252  (1817);  Peter- 
son V.  New  York,  17  N.  Y.  449  (1858); 
Canal  Bridge  v.  Gordon,  18  Mass.  297 
(1823);  Baker  v.  Cotter,  45  Me.  236 
(1858);  Bennett  v.  Maryland  F.  Ins. 
Co.,  14  Blatchf.  422  (1878);  S.  C,  3 
Fed.  Cas.  229;  Church  v.  Sterling,  16 
Conn.  388  (1844) ;  Pennsylvania  Bank 
V.  Reed,  1  Watts  &  S.  (Pa.)  101  (1841); 
Hayward  v.  Pilgrim  Soc,  38  Mass. 
270  (1838);  Despatch  Line  v.  Bellamy 
Mfg.  Co.,  12  N.  H.  205  (1841);  Planters' 
Bank  v.  Sharp,  4  Sm.  &  M.  (Mis&)  75 
j[1844);  Burrill  v.  Nahant  Bank,  43 
Mass.  167  (1841);  Fox  v.  Northern 
Liberties,  3  Watts  &  S.  (Pa.)  103 
(1841) ;  New  Hope,  etc.  Co.  v.  Phenix 


Bank,  3  Comst.  156  (1850);  Alabama, 
etc.  R  R.  V.  Kidd,  29  Ala.  221  (1856); 
Everett  v.  U.  S.,  6  Port  (Ala.)  166 
(1837);  Medoraak  Bank  v.  Curtis,  24 
Me.  38  (1844) ;  Whitwell  v.  Warner,  20 
Vt.  425  (1848);  Trott  v.  Warren,  11 
Me.  227  (1834);  Detroit  v.  Jackson,  1 
Doug.  (Midi.)  106  (1842);  Merchants' 
Bank  v.  Central  Bank,  1  Ga.  428  (1846) ; 
Hoyt  V.  Bridgewater  Copper  Co.,  6 
N.  J.  Eq.  253  (1847);  Durar  v.  Hudson, 
etc.  Ins.  Co.,  24  N.  J.  L.  171  (1853); 
Moss  V.  Rossie  Lead  Co.,  5  Hill,  137 
(1843);  Brown  u  Winnissimmet  Co., 
93  Mass.  326  (1865) ;  Sherman  v.  Fitch, 
98  Mass.  59  (1867);  Lyndeborough 
Glass  Co.  V.  Massachusetts  Glass  Co., 
Ill  Mass.  315  (1873);  Moss  v.  Averell, 
6  Seld.  449  (1853);  Olcott  v.  Tioga  R. 
R.,  27  N.  Y.  546  (1863);  Shaver  v. 
Bear  River,  etc.  Co.,  10  CaL  396  (1858). 


1530 


CH.  XLIII.]        HOW    COEPOKATE    CONTKACTS   AKE   ilADE. 


[§  T20. 


out  a  vote  or  formal  act.^    It  is  not  necessary  that  such  as- 
sent and  acceptance  be  under  seal  or  in  writing  or  be  spread 

by  the  general  agent  of  a  foreign 
insurance  company  are  binding  on 
such  company,  such  acts  being  within 
the  express  powers  given  him  by  the 
general  agent  thereia  to  solicit  or 
take  insurance.  Kuney  v.  Amazon 
Ins.  Co.,  36  Hun,  66  (1885).  In  Rice 
V.  Peninsular  Club,  53  Mich.  87  (1883), 
Cooley,  J.,  said:  "A  party  dealing 
with  the  agent  of  a  corporation  must 
at  his  peril  ascertain  wliat  authority 
the  agent  possesses,  and  is  not  at  lib- 
erty to  charge  the  corporation  by  re- 
lying upon  the  agent's  assumption 
of  authority."  The  club  is  not  liable 
for  tlie  steward's  purchases.  The 
powers  of  an  agent  appointed  for  a 
special  purpose  cease  when  the  ob- 
ject of  his  appointment  is  accom- 
plished. Seton  V.  Slade,  7  Ves.  265, 
276  (1802).  A  subordinate  agent  can- 
not employ  an  attorney  for  the  com- 
pany. Maupin  v.  Virginia,  etc.  Co., 
78  Mo.  24  (1883).  Nor  can  he  make 
the  corporation  liable  for  the  debt  of 
another.  Rehm  v.  King,  etc.  Co.,  16 
Kan.  277  (1876).  Nor  make  a  note  for 
the  company.  Benedict  'v.  Lansing, 
5  Denio,  283  (1848).  If  the  purchaser 
of  corporate  bonds  knows  that  the 
agent  is  selling  for  his  own  purposes 
he  is  not  protected.  Chew  v.  Henri- 
etta, etc.  Co.,  2  Fed  Rep.  5  (1880). 


Secret  instructions  to  a  general  in- 
surance agent  do  not  bind  a  person 
dealing  with  him.  Insurance  Co.  v. 
McCain,  96  U.  S.  84  (1877).  So  also  as 
to  a  cashier.  Merchants'  Bank  v. 
State  Bank,  10  Wall.  604,  650  (1870). 
A  grantor  to  a  corporation  cannot 
deny  the  authority  of  the  corporate 
agent  to  accept  tlie  deed.  Case  v. 
Benedict,  63  Mass.  540  (1852).  An 
agent  who  is  accustomed  to  contract 
for  the  company  may  bind  it.  Chris- 
tian University  v.  Jordan,  29  Mo.  68 
(1859);  Mead  v.  Keiler,  24  Barb.  20 
(1857).  Acceptance  of  services  known 
to  officers  binds  the  company.  Lee 
V.  Pittsburgh,  etc.  Co.,  66  How.  Pr. 
875  (1877).  But  the  use  of  a  building 
has  been  held  not  to  constitute  an  ac- 
ceptance of  debts  incurred  in  build- 
ing it.  Ruby  V.  Abyssinian  Soc,  15 
Me.  306  (1839).  Use  of  goods  with 
knowledge  is  acceptance.  Smith  v. 
Hull  Glass  Co.,  11  C.  B.  897, 925  (1852); 
S.  C,  8  C.  B.  668  (1849).  Even  if  the 
agent  gave  a  note  wliich  is  not  bind- 
ing. Emerson  v.  Providence,  etc.  Co., 
12  Mass.  237  (1815).  Acceptance  is 
presumed  where  a  written  statement 
is  placed  before  a  directors'  meeting. 
State  Bank  v.  Comegys,  12  Ala.  773 
(1848).  Satisfaction  by  subsequent 
officers  is  good.    Chouteau  v.  AUen, 


J  Bank  of  Columbia  v.  Patterson,  7 
Cranch,  299,  306  (1813);  Randall  v. 
Van  Vechten,  19  Johns.  60,  65  (1821); 
Haight  V.  Sahler,  30  Barb.  218  (1859); 
Canal  Bridge  v.  Gordon,  18  Mass.  296 
(1823);  Dunn  v.  St.  Andrew's  Ch.,  14 
Johns.  118  (1817);  Mendhamr.  Losey, 
2  N.  J.  L.  252  (1808);  Saddle  River  v. 
Colfax,  6  N.  J.  Eq.  115  (1821) ;  Antipseda 
Bapt  Ch.  V.  IMulford,  8  N.  J.  L.  183 
(1825);  Powell  v.  Newburgh,  19  Johns. 
284  (1821);  Chestnut  Hill  Turnp.  v. 
Rutter,  4  Serg.  &  R  6  (1818);  Amer- 
ican Ins.  Co.  V.  Oakley,  9  Paige,  496 


(1842);  Fister  v.  La  Rue,  15  Barb.  323 
(1853),  where  a  contract  was  inferred 
from  the  acts  of  the  corporate  offi- 
cers; Bulkley  v.  Derby  Fishing  Co., 
2  Conn.  252  (1817);  Witte  v.  Derby 
Fishing  Co.,  2  Conn.  260  (1817);  Pe- 
trie  V.  Wright,  6  Sm.  &  ]^L  (^Miss.)  647 
(1846);  Lime  Rock  Bank  v.  Macom- 
ber,  29  Me.  504  (1849);  Bank  of  Me- 
tropolis V.  Guttschlick,  14  Pet.  19 
(1840)  (contract  inferred  from  acts  of 
officers);  New  York,  etc.  R.  R.  v.  New 
York,  1  Hilt.  587  (1858);  Wood,  Railw. 
Law,  pp.  454-457. 


1531 


V21.] 


HOW    COKrORATE    COin"EACTS    ARE   MADE.        [CH.  XLIII. 


upon  the  records.^  The  acceptance  of  the  consideration  of 
an  unauthorized  contract  by  the  corporation,  however,  without 
knowledge  of  the  terms  of  the  contract  or  of  the  account  upon 
which  it  is  paid,  is  not  in  itself  a  ratification  of  the  contract.' 


B.    THE  FORM   OF   CORPORATE    CONTRACTS THE    CORPORATE   SEAL  IS 

NECESSARY  ONLY  WHEN  THE  SAilE  INSTRUMENT  BY  AN  INDI- 
VIDUAL  MUST   BE   UNDER    SEAL FORMS    OF  THE   BODY   OF  THE 

contract;  ALSO  THE  METHOD  OF  SIGNING  AND  SEALING LIA- 
BILITY OF  OFFICERS  AND  AGENTS  ON  CORPORATE  CONTRAOIS 
WHICH   ARE    INFORMALLY    EXECUTED. 

§  721.  The  corporate  seal  need  not  he  attached  to  a  corporate 
contract  unless  a  similar  contract,  when  made  hy  an  individual, 
toould  require  a  seal. —  This  is  now  the  well-established  rule, 
although  formerly  it  was  supposed  that  a  corporation  could 


70  Mo.  290  (1879).  If  an  agent  with 
authority  to  give  a  note  embezzles 
the  funds  the  company  is  liable. 
Bird  V.  Daggett,  97  Mass.  494  a8C7). 
A  suit  on  a  note  is  a  ratification  of  its 
execution.  Planters'  Bank  v.  Sharp, 
13  Miss.  75  (1844).  An  actuary  of  a 
bank,  who  is  accustomed  so  to  do.  may 
give  the  note  of  the  bank,  especially 
where  the  directors  acquiesce.  Cres- 
weU  V.  Lanahan,  101  U.  S.  347  (1879). 
As  to  insurance  agents,  see  Perkins 
V.  Washington  Ins.  Co.,  4  Cow.  645 
(1825).  Knowledge  of  the  president 
of  drafts  by  an  agent,  and  acquies- 
cence therein,  binds  the  company. 
Gold  Min.  Co.  v.  National  Bank,  96 
U.  S.  640  (1877).  See  §  727,  infra,  on 
notice;  also  Lindley,  Companies, 
p.  159,  etc.  An  agent's  authority  to 
act  for  a  corporation  is  not  termi- 
nated by  the  fact  that  the  members 


of  the  board  of  directors  or  other 
body  which  appointed  have  gone  out 
of  office  by  the  expiration  of  their 
terms  or  by  removaL  Anderson  v. 
Longden,  1  Wheat.  85  (1816) ;  Brown  v. 
Somerset,  11  Mass.  221  (1814);  North- 
ampton Bank  v.  Pepoon,  11  Mass.  294 
(1814);  Dedham  Bank  u.  Chickering, 
20  Mass.  335  (1825);  Exeter  Bank  v. 
Rodgers,  7  N.  n.  21, 33  (1834);  Thomp- 
son  V.  Young,  2  Ohio,  334  (1825).  It 
has  been  held  that  a  mortgage  of  cor- 
porate property  wliich  is  illegal  for 
want  of  authority  may  be  rendered 
valid  by  subsequent  ratification  by 
acts  of  the  legislatura  White  Water, 
etc.  Canal  Co.  v.  Vallette,  21  How. 
414  (1858);  Shepley  v.  Atlantic,  etc. 
Pu  R,  55  Me.  395  (1868);  Richards  v. 
Merrimack,  etc.  R.  R.,  44  N.  H.  127 
(1862),  where  an  act  authorizing  the 
trustees  of  a  mortgage  to  sell  the 


1  Dedham  Bank  v.  Chickering,  20 
IMass.  335  (1825) ;  Union  Bank  v.  Ridge- 
ley,  1  Har.  &  G.  (Md.)  334  (1827);  Bur- 
gess V.  Pue,  2  GiU  (Md.),  11  (1844); 
Apthorp  V.  North,  14  Mass.  167  (1817); 
Smith  V.  Bank  of  Scotland,  1  Dow. 
P.  C.  273  (1841);  Monumoi  Great 
Beach  v.  Rogers,  1  Mass.  159  (1804); 
Amherst  Bank  v.  Root,  43  Mass.  532, 


533  (1841);  Western  R.  R.  v.  Babcock, 
47  Mass.  346  (1843),  and  the  many 
cases  supra.    See  also  §  714,  supra. 

2  Pennsylvania  Co.  v.  Dandridge,  8 
Gill  &  J.  (lyid.)  248  (1836);  Christian 
University  v.  Jordan,  29  Mo.  68  (1859) ; 
Hilliard  v.  Goold,  34  N.  H.  230  (1856), 
and  cases  supra. 


1533 


OH.  XLIII.]       HOW   COKPOKATE   CONTEACTS  AKE  MADE.  [§  T21. 

not  enter  into  a  contract  except  by  attaching  tlie  corporate 
seal  to  a  written  statement  of  that  contract.^ 
It  is  settled  law  that  it  is  not  necessary  to  use  a  seal  in  appoint- 


mortgaged  property  was  held  to  be  a 
ratification;  Shawr.  Norfolk  Coiinty 
R.  Pu,  71  Mass.  163  (1835);  Whitney  u 
Union  Trust  Co.,  65  N.  Y.  576  (1875), 
where  bonds  signed  by  the  treasurer 
instead  of  the  secretary  were  held 
ratified  by  a  subsequent  act  referring 
to  them  as  "  now  a  valid  lien  on  said 
property."  Power  to  act  as  agent  of 
the  corporation  may  be  conferred  by 
a  general  resolution.  Elwell  v.  Dodge, 
33  Barb.  336  (1861). 

1 A  corporate  contract  need  not  be 
in  writing  nor  under  the  corporate 
seal    Leinkauf  v.  Caiman,  110  N.  Y. 
50  (1888).    A  corporation  need  not 
necessarily  have  or  vtse  a  seal  in  mak- 
ing its  contracts.    ^luscatine  Water 
Co.  V.    Muscatine    Lumber    Co.,  85 
Iowa,  113  (1892).     "  The  English  nile 
that  a  corporation  cannot  expressly 
bind  itself  except  by  deed,  unless  the 
act  establishing  it  authorizes  it  to 
contract  in  another  mode,  has  been 
broken  in  upon,  and,  indeed,  entirely 
overturned,  as   a    general    proposi- 
tion, tliroughout  the  United  States; 
and  it  is  here  well  settled  that  the 
acts  of  a  corporation,  evidenced  by 
vote,  written  or  unwritten,  are  as 
completely  binding  upon  it,  and  are 
as  complete  authority  to  its  agents, 
as  the  most  solemn  acts  done  imder 
the  corporate  seal;  that  it  may  as 
well  be  bovmd  by  express  promises 
through  its  authorized  agents  as  by 
deed;  and  that  promises  may  as  well 
be  imphed  from  the  acts  of  its  agents 
as  if  it  had  been  an  individual; "  cit- 
ing many  cases.  Davenport  v.  Peoria, 
etc   Co.,   17  Iowa,  276    (1864).     See 
also  Bank  of  U.  S.  v.  Dandridge,  13 
Wheat.  64  (1827);  Gottfried  v.  lililler, 
104  U.  S.  521  (1881);  Barry  v.  Mer- 
cliants'  Exchange  Co.,  1  Sandf.  Ch. 
280  (1844) ;  Hoag  v.  Lamont,  60  N.  Y. 
96  (1875);  McCullough  v.  TaUadega 


Ins.  Co.,  46  Ala.  376  (1871);  Auerbach  v. 
Le  Sueur  Mill  Co.,  28  Mum.  291  (1881) ; 
P^cme,  etc.  R.  R.  v.  Farmers'  Loan 
&  T.  Co..  49  IlL  331  (1868);  Bulkley  v. 
Briggs,  30  Mo.  453  (1860);  New  Eng- 
land F.  &  M.  Ins.  Co.  V.  Robinson,  25 
Ind.  535  (1865);  Hamilton  v.  Lycom- 
ing Ins.  Co.,  5  Pa.  St.  339  (1847);  Muir 
V.  LouisviUe,  etc.  Canal  Co.,  8  Dana 
(Ky.),  161  (1839);  Henning  v.  U.  S. 
Ins.   Co.,  47  Mo.   425  (1871);   Salem 
Bank  v.  Gloucester,  17  Mass.  1  (1820); 
Gloucester  Bank  v.  Salem  Bank,  17 
Mass.  33  (1820);  Foster  v.  Essex  Bank, 
17  Mass.  479  (1821);  Smith  v.  Lowell 
Meeting-house,  25  Mass.  178  (1829); 
Limerick  Academy  v.  Davis,  11  Mass. 
113  (1814);  Farmmgton  Academy  u 
Allen,  14  Mass.  173  (1817);  Amherst 
Academy  v.   Cowels,   23    Mass.   427 
(1828);    Kennedy   v.   Baltimore  Ins. 
Co.,  3  Har.   &  J.   (Md.)  367  (1813); 
Stone  V.  Berkshire,  etc.  Soc,  14  Vt. 
86  (1842);  Episcopal,  etg.  Soc.  v.  Need- 
ham,  etc.  Chm-ch,  18  Mass.  372(1823); 
Banks  v.  Poitiaux,  3  Rand.  (Va.)  136 
(1825);  Bank  of  Columbia  v.  Patter- 
son, 7  Cranch,  299  (1813);  Randall  r. 
Van  Vechten,   19  Jolms.   60  (1821); 
Gooday  v.  Colchester  R"y,  17  Beav. 
133    (1852);    Magill  v.  Kauffman,  4 
Serg.  &  R.  317  (1818);  Dunn   v.  St. 
Andrew's  Church,  14  Jolins.  118  (1817); 
Waller  v.  Bank  of  Kentucky,  3  J.  J. 
Marsli.  (Ky.)    201    (1830);    Western, 
etc.  Co.  V.  First  Nat.  Bank,  47  Pac. 
Rep.  731  (N.  M.,  1897);  Grubbs  v.  Nar 
tional,  etc.  Ins.  Co.,  37  S.  E.  Rep.  464 
(Va.,  1897).    Crawford  v.  Longstreet, 
43  N.  J.  L.  335  (1881),  held  that,  to 
bind  a  corporation  under  a  lease  for 
years,  execution  \mder  its  corporate 
seal  is  not  necessary*    See  also,  in 
general,  Moss  v.  Averill,  10  N.  Y.  449 
(1853).    The  corporate  seal  to  a  note 
is  superfluous.    St.  James's  Parish  v. 
Newburyport,  etc.  R.  R.,  141  Mass. 


1533 


§  T21.] 


HOW   CORPOEATE   CONTEAOTS  AEE  MADE.        [CH.  XLIII. 


ing  agents  or  entering  into  ordinary  contracts  for  the  corpora- 
tion.^ The  supreme  court  of  Illinois  says,  "the  rule  now  is 
that  a  corporation  may  bind  itself,  in  a  matter  within  its  char- 

500  (1886).  On  this  point,  see  also 
§  761,  infra.  The  word  "seal,"  fol- 
lowing the  name  of  the  corporation 
on  an  insurance  policy,  does  not  pre- 
vent the  suit  being  in  assumpsit. 
Grubbs  v.  National,  etc.  Ins.  Co.,  27 
S.  E.  Rep.  464  (Va.,  1897).  Contra, 
Benoist  v.  Carondelet,  8  Mo.  250  (1843) ; 
Clark  V.  Farmers',  etc.  Co.,  14  Wend. 
256  (1836).  See  §  761,  infra.  So  also 
as  to  other  contracts.  It  is  consid- 
ered to  be  the  company's  signature 
Levering  v.  Mayor,  etc.,  7  Humph. 
(Tenn.)  553  (1847).  See  also  §  722, 
infra.  Despatch  Line  v.  Bellamy 
Mfg.  Co.,  12  N.  H.  205  (1841),  a  chattel 
mortgage.  The  oflScers'  seal  to  the 
contract  may  be  disregarded.  Bank, 
etc.  V.  Guttschlick,  14  Pet.  19  (1840); 
Eureka  Co.  v.  Bailey  Co.,  11  Wall. 
488  (1870);  Dubois  v.  Delaware,  etc. 
Co.,  4  Wend.  285  (1830). 

1  Pennsylvania  R.  R  v.  Vandiver, 
42  Pa.  St.  365,  369  (1862);  Bank  of 
Columbia  v.  Patterson,  7  Cranch.  299 
(1813) ;  Lathrop  v.  Commercial  Bank, 
8  Dana  (Ky.),  114  (1839);  Buncombe 
Turnp.  Co.  v.  McCars(yi,  1  Dev.  &  B. 
310  (1835),  holding  that  an  appoint- 
ment need  not  be  under  the  corpo- 
rate seal;  Bates  u  Bank  of  Alabama, 
2  Ala.  452  (1841),  where  the  appoint- 
ment of  an  agent  was  by  vote  of  the 
corporation;  Maine  Stage  Co.  v.  Long- 
ley,  14  Me.  444  (1837),  holding  that 
the  fact  of  agency  may  be  proved 
by  parol.  See  also  Union  Mfg.  Co.  v. 
Pitkin,  14  Conn.  174  (1841);  State 
Bank  v.  Bell,  5  Blackf.  (Ind.)  127  (1839) ; 
Brookville  Ins.  Co.  v.  Records,  5 
Blackf.  (Ind.)  170  (1839);  Bridgeton  v. 
Bennett,  23  Me.  420  (1844),  retaining  an 
attorney  proved  by  his  statement; 
Randall  v.  Van  Vechten,  19  Johns.  60 
(1821);  Antipaeda  Bapt.  Ch.  v.  Mul- 
ford,  8  N.  J.  L.  183  (1825);  Perkins  v. 
Washington    Ins.    Co.,  4   Cow.   645 


(1825);  Lathrop  v.  Scioto  Bank,  8 
Dana  (Ky.),  115  (1839);  New  Haven 
Sav.  Bank  v.  Davis,  8  Conn.  191  (1830), 
vote  of  directors  without  evidence 
under  seal;  Dank  of  Columbia  v. 
Patterson,  7  Cranch,  299  (1813);  An- 
dover  Turnp.  Co.  v.  Hay,  7  Mass.  102 
(1810);  Hayden  v.  Middlesex  Turnp. 
Co.,  10  Mas,s.  397  (1813);  Essex  Tui-np. 
V.  Collins,  8  Mass.  292  (1811);  Wright 
V.  Lanckton,  36  Mass.  288  (1837);  Ban- 
croft V.  Wilmington,  etc.,  5  Houst. 
(Del.)  577  (1876);  Dunn  v.  St.  An- 
drew's Church,  14  Johns.  118  (1817); 
Union  Bank  v.  Ridgley,  1  Har.  &  G. 
(Md.)  324  (1827);  Kennedy  v.  Balti- 
more Ins.  Co.,  3  Har.  &  J.  (Md.)  367 
(1813);  Garrison  v.  Coombs,  7  J.  J. 
Marsh.  (Ky.)  85  (1831);  Legrand  v. 
Hampden-Sidney  College,  5  Munf. 
(Va.)  324  (1817);  Bates  v.  Alabama 
Bank,  3  Ala.  451  (1841);  Stamford 
Bank  v.  Benedict,  15  Conn.  437,  445 
(1843);  Detroit  v.  Jackson,  1  Doug. 
(Mich.)  106  (1843);  St.  Andrew's  Bay 
Land  Co.  v.  MitcheU,  4  Fla.  192  (1851); 
Topping  V.  Bickford,  86  Mass.  120 
(1862).  Parol  evidence  may  prove 
the  creation  of  a  debt  by  the  com- 
pany. Borland  v.  Haven,  37  Fed. 
Rep.  394  (1888).  An  appeal  bond  given 
by  a  corporation  may  be  signed  with- 
out the  corporate  seaL  Campbell  v. 
Pope,  96  Mo.  468  (1888).  Corporations 
may  enter  into  contracts  through 
agents  duly  authorized,  and  such 
contracts  may  be  by  writing  not 
under  seal  or  by  parol,  as  though 
made  by  natural  persons.  See  §  714, 
supra;  also  American  Ins.  Co.  v. 
Oakley,  9  Paige,  496  (1842);  Watson 
V.  Bennett,  12  Barb.  196  (1851);  Ham- 
ilton V.  Lycoming  Ins.  Co.,  5  Pa.  St. 
344(1847);  Union  Bank  v.  Ridgely,  1 
Har.  &  G.  (Md.)  324,  413  (1827);  Hay- 
den V.  IMiddlesex  Turnp.  Co.,  10  Mass. 
401  (1813);  Shotwell  v.  McKown,  5 


1534 


CH.  XLIII.]        HOW    COKPOKATE   COXTEACTS    ARE    MADE. 


[§  ^^21. 


ter  powers,  by  a  writing  not  nnder  seal  to  the  same  extent  as 
an  individual  may."  ^  The  corporate  seal  must  be  used  in 
deeds  and  other  instruments  which  would  require  a  seal  if 
they  were  the  deeds  or  instruments  of  individuals.^ 

Hence  the  law  is  that  a  corporation  may  become  bound  by  a 
contract  which  is  executed  in  any  of  the  following  ways :  by  a 
written  instrument  sealed  with  the  corporate  seal,  and  either 
^Wth  or  without  the  corporate  name  signed  thereto ;  ^  by  an  un- 
sealed written  instrument  signed  with  the  corporate  name ;  by  a 
written  record  of  a  resolution  of  its  directors;  *  by  an  unwritten 
resolution  of  its  directors ;  ^  by  the  oral  agreements  of  its  au- 
thorized agents ;  ^  or  by  ratif3nng,  acquiescing  in,  or  accepting 
the  benefits  of  contracts  made  in  its  name  by  unauthorized 
agents.' 


N.  J.  L.  828  (1820);  and  an  agent  is 
not  personally  liable  on  a  note  signed 
by  him  as  agent.  Merrick  v.  Burling- 
ton, etc.  P.  R.  Co.,  11  Iowa,  74  (1860), 
a  verbal  contract  made  by  an  agent; 
Buckley  v.  Briggs,  30  Mo.  452  (1860); 
Dvuin  V.  St.  Andrew's  Church,  14 
Johns.  118  (1817).  In  England  a  con- 
trary rule  has  been  upheld.  Homer- 
«ham  V.  Wolverhampton  Water- 
works, 0  Exch.  137  (1851);  Diggle  v. 
London  R'y,  5  Exch.  443  (1850);  Cop- 
per Miners u  Fox,  16  Q.  B.  229  (1851); 
Clark  V.  Cuckfield  Union,  11  Eng. 
L.  &  Eq.  442  (1852),  citing  and  re- 
newing other  authorities.  In  Eng- 
land, by  statute  8  &  9  Vict.,  c.  16, 
Bee.  97,  directors  may  contract  by 
parol  on  behalf  of  a  corporation 
where  private  persons  may  make  a 
vaUd  parol  contract.  See  also  Paul- 
ing V.  London,  etc.  R'y,  8  Exch.  868 
(1853).  Cf.  Crampton  v.  Varna  R'y, 
L.  R  7  Ch.  562  (1872).  After  a  con- 
tract for  necessary  work  or  goods  is 
executed  by  the  other  party,  and  ac- 
cepted by  the  corporation,  it  must 
pay  for  the  same  notwithstanding 
the  irregiilarity.  Clark  v.  Cuckfield 
Union,  11  Eng'  L.  «S:  Eq.  442  (1852); 
Doe  V.  Tainere,  12  Q.  B.  1011  (1848). 
Cf.  Lindley,  Companies,  p.  220,  etc. 


1  Green  Co.  v.  Blodgett,  159  III  169 
(1895). 

2  See  §  723,  infra;  Stinchfield  v.  Lit- 
tle, 1  Ma  231  (1821);  New  Haven  Sav. 
Bank  v.  Davis,  8  Conn.  191  (1830); 
Hatch  V.  Barr,  1  Ohio,  390  (1824); 
Brinley  v.  Mann,  56  Mass.  337  (1848); 
Kinzie  v.  Chicago,  3  III  187  (1839),  in 
which  it  is  also  held  that  the  mode  of 
executing  an  instrument  by  a  corpo- 
ration "  is  to  affix  the  seal  with  a  dec- 
laration tliat  it  is  the  seal  of  the  cor- 
poration, and  to  verify  the  act  by  the 
signature  of  the  president  and  secre- 
tary of  the  corporation."  Koehler  v. 
Black  River,  etc.  Co.,  3  Black,  715 
(1862).  The  corporate  seal  must  be 
attached  to  a  deed  in  order  to  make 
it  a  deed.  Allen  v.  Brown,  50  Pac. 
Rep.  505  (Kan.,  1897). 

3  See  §  722,  infra, 

*  See  §  714,  sitpra. 

*  See  §  714,  supra. 

«  See  §§  716-720,  supra,  relative  to 
the'inherent  powers  of  the  president 
and  various  other  corporate  agents  to 
contract.  A  parol  contract  with  a 
corporation  may  be  proved  although 
the  director  with  whom  it  was  n-'^d^ 
is  dead.  South  Baltimore  Co.  t, 
Muhlbach,  69  Md.  395  (1888). 

7  See  g§  716-720,  supra. 


1535 


§  T22.] 


HOW    CORPOKATE    CONTRACTS    AKE    MADE.        [ciI,   XLIII. 


§  722.  Meilwd  of  drafting,  signing,  seaUng,  and  aclcnoivhdg- 
ing  a  corjwrate  deed  or  contract. —  A  deed  or  contract  of  a  cor- 
poration should  be  drawn  so  that  tlie  name  of  tlie  corporation 
appears  in  the  body  of  the  instrument,  and  not  the  name  of  the 
officer  or  agent  who  signs,  seals,  or  acknowledges  it.^  The  name 
of  the  corporati'^n  should  be  signed  to  the  instrument,  and  this 
should  be  followed  by  the  word  "  by  "  and  by  the  name  of  the 
officer  or  person  who  makes  the  signature.^ 


lA  mortgage  made  in  the  presi- 
dent's name,  signed  by  him,  and 
sealed  with  his  own  seal,  is  not  a 
mortgage  although  authorized  by  the 
corporation.  It  operates,  however,  as 
an  equitable  mortgage  as  regards 
subsequent  mortgagees  with  notice. 
Miller  v.  Rutland,  etc.  R.  R,  3G  Vt. 
453  (1863).  See  Hatch  v.  Barr,  1  Ohio, 
180  (1823),  and  §  810,  infra.  A  corpo- 
rate chattel  mortgage  is  good  if  it 
rvms  in  the  corporate  name,  even 
though  the  president  signs  only  his 
own  name.  Sherman  v.  Fitch,  98 
Mass.  59  (1867);  Hamilton  v.  Mc- 
Laughlin, 145  Mass.  20  (1887).  If  so 
drawn  it  is  immaterial  as  to  who 
signs  or  seals.  Wiley  v.  Board  of 
Education,  11  Minn.  371  (1866),  involv- 
ing a  bond.  If  the  statute  authorizes 
the  trustees  to  convey,  their  personal 
deed  suffices.  De  Zeng  v.  Beekman, 
2  Hill,  489  (1842).  Where  the  presi- 
dent has  title  in  his  name  he  may 
convey  as  president.  Vilas  v.  Rey- 
nolds, 6  Wis.  214  (1858).  A  deed 
made  before  incorporation,  to  be  de- 
livered to  the  corporation  after  incor- 
poration, is  good-  Spring,  etc.  Bank 
V.  Hnrlings,  etc.  Co.,  82  W.  Va.  357 
i:i889).  A  deed  to  the  "  trustees  of  the 
First  Baptist  Church  "  passes  title  to 
the  corporation.  Keith,  etc.  Co.  v. 
Bingham,  97  Mo.  196  (1888).  Although 
the  body  of  the  deed  reads,  "  the  pres- 
ident, directors,  etc.,  of,"  followed 
by  the  name  of  the  corporation  as 
grantor,  the  deed  should  be  con- 
strued as  the  deed  of  the  corporation. 
Shaffer  v.  Hahn,  111  N.  C.  1  (1892). 


The  contract  is  signed  sufficiently  to 
satisfy  the  statute  of  frauds  where 
the  name  of  the  corporation  appears 
in  the  body  of  the  instrument.  Ting- 
ley  V.  Bellingham,  etc.  Co.,  5  Wash. 
St.  644  (1893).  Where  a  mortgage 
purports  to  be  by  a  corporation,  but 
is  signed  by  the  president,  treasurer, 
and  secretary  personally,  with  their 
official  titles  following  their  names, 
and  is  acknowledged  the  same  as  they 
would  acknowledge  a  personal  mort- 
gage, and  the  corporate  seal  is  not 
attached,  the  mortgage  is  at  most 
only  an  equitable  mortgage,  and  in 
order  to  be  foreclosed  must  be  alleged 
to  be  such.  Brown  v.  Farmers'  Sup- 
ply Co.,  23  Oreg.  541  (1893).  A  deed 
of  a  coi-poration  not  under  seal  is  not 
a  deed  and  is  void.  Danville  Semi- 
nary V.  Mott,  136  m.  289  (1891).  Tlie 
corporate  seal  must  be  used  In  the 
conveyance  of  corporate  real  estate 
in  Texas.  Shropshire  v.  Behrens,  77 
Tex.  275  (1890).  A  corporation  may 
by  its  cliarter  be  given  the  power  to 
act  as  fill  .attorney  in  fact,  and  it  may 
execute  a  deed  as  such  attorney.  Kil- 
lingsworth  v.  Portland  Trust  Co.,  18 
Oreg.  351  (1890).  See  also  note  2,  p.  1535. 
2  Clark  V.  Farmers',  etc.  Co.,  15 
Wend.  256  (1836).  The  indorsement 
of  a  note  by  signing  the  corporate 
name,  without  adding  by  whom  the 
name  is  signed,  is  good.  Second  Nat. 
Bank  v.  Martin,  82  Iowa,  442  (1891). 
A  deed  of  corporate  land  properly 
dravPTi  in  the  body  of  the  deed,  sealed 
with  the  corporate  seal,  and  properly 
acknowledged,  but  signed  "  M.  Bray- 


1536 


CH.  XLIII.]        HOW    COKPORATE    COXTEACTS    ARE    MADE. 


[§  T22. 


The  courts  will  hold  any  device  or  form  to  be  the  corporate 
seal  if  there  was  an  intent  to  bind  the  corporation,  and  if  the 
device  was  intended  for  the  corporate  seal.^ 


man,  President,  C.  &  F.  R.  R.  Co.,"  etc., 
is  nevertheless  good.  Chouteau  v. 
Allen,  70  Mo.  290  (1879).  Cf.  Taylor 
V.  Agricultural,  etc.  Assoc,  68  Ala. 
229  (1880).  A  corporate  mortgage 
signed  by  the  officers  with  their  own 
names,  followed  by  their  titles  and 
scrolls  for  seals,  is  good.  Johnston  v. 
Crawley,  25  Ga,  316  (1858).  A  lease 
running  to  the  company  is  good 
though  only  its  officers'  names  were 
signed.  Clark  v.  Gordon,  121  Mass. 
330  (1876):  Carroll  v.  St.  Johns,  etc., 
125  Mass.  5G5  (1878).  A  sealed  instru- 
ment to  pay  money,  signed  by  an 
individual's  name,  followed  by  the 
words  "  President  6t  the  New  York 
Banking  Company,"  is  enforceable 
against  it.  Boisgerard  v.  New  York 
Banking  Co.,  2  Sandf.  23  (1844). 

1  Where  a  lease  recites  that  it  is 
given  under  the  corporate  seal,  "in 
the  absence  of  evidence  to  the  con- 
trarj',  the  scroll  or  rectangle  contain- 
ing the  word  '  seal '  will  be  deemed 
to  be  the  proper  and  common  seal  of 
the  company.  A  seal  is  not  neces- 
sarily of  any  particular  form  or  figure. 
.  .  .  Whether  a  mark  or  character 
shall  be  held  to  be  a  seal  depends 
upon  the  intention  of  the  executant 
as  shown  by  the  paper."  Jacksonville, 
etc.  Nav.  Co.  r.  Hooper,  160  U.  S.  514 
(1896).  Where  the  instriunent  recites 
that  it  is  under  seal  it  will  be  pre- 
sumed to  be  a  sealed  instrument,  es- 
pecially where  a  seal  follows  the  name 
of  the  officer  who  signs  It.  So  held 
as  regards  the  statute  of  limitations. 
Rusling  V.  Union,  etc.  Co.,  5  N.  Y. 
App.  Div.  448  (1896);  Christie  v.  Gage, 
2  Thomp.  &  C.  344  (1873),  where  the 
private  seals  of  trustees  of  a  church 
were  held  to  be  the  corporate  seal  to 
a  deed  of  its  property.  To  same  ef- 
fect, Johnston  v.  Crawley,  25  Ga.  316 
(1858) ;  Porter  v.  Androscoggin  R.  R., 


37  Me.  349  (1853);  Taylor  v.  Heggie, 
83  N.  C.  244  (1880).  Cf.  Saxton  v. 
Texas,  etc.  R.  R.,  4  N.  M.  201  (1888); 
South  Baptist  Church  v.  Clapp,  18 
Barb.  35  (1853);  Tenney  v.  Lumber 
Co.,  43  N.  H.  350  (1861).  See  also 
Ransom  v.  Stonington,  etc.  Bank, 
13  N.  J.  Eq.  212  (1860);  Mill-dam 
Foundery  v.  Hovey,  38  Mass.  417 
(1839);  Stebbinsu  Merritt,  04  Mass.  27 
(1852);  Sherman  v.  Fitch,  98  Mass.  59 
(1867);  McDaniels  v.  Flower,  etc.  Co., 
22  Vt.  274  (1850):  Benbow  v.  Cook, 
115  N.  C.  324  (1894) ;  Woodman  v.  York, 
etc.  R.  R..  50  Me.  549  (1861),  where  an 
imprint  in  red  ink  upon  bonds  was 
held  valid:  Ontario  Salt  Co.  v.  Mer- 
chants' Salt  Co.,  18  Grant,  Ch.  (U.  C.) 
551  (1871),  where  simple  wafer  seals 
used  by  corporations  in  executing  a 
deed  were  held  sufficient  in  the  ab- 
sence of  evidence  that  they  were  not 
their  proper  corporate  seals;  Hamil- 
ton V.  Dennis,  12  Grant,  Cli.  (U.  C.) 
325  (1866),  in  which  a  ribbon  woven 
through  slits  in  the  paper,  so  as  to 
appear  at  intervals  opposite  the  sig- 
natures, was  held  sufficient;  Bates  v. 
New  York  Central  R.  R.,  92  Mass.  251 
(1865),  where,  however,  it  was  held 
that  a  fac-simile  printed  in  ink  when 
the  blank  instrument  was  printed  is 
a  mere  scroll  and  not  a  valid  seaL 
The  fac-simile  of  the  seal  of  a  corpo- 
ration printed  on  a  blank  form  is  not 
the  corporate  seaL  McCarthy  v.  Met- 
ropolitan L.  Ins.  Co.,  162  Mass.  254 
(1894).  A  seal  jDrinted  on  the  instru- 
ment is  not  good.  The  comi^any  can- 
not object  to  a  seal  which  it  uses. 
Haven  v.  Grand  Junction,  etc.  Co.,  94 
Mass.  337  (1866).  Cf.  Royal  Bank  v. 
Junctioij,  etc.  R.  R.,  100  Mass.  444 
( 1868),  in  which  a  seal  printed  vipon 
bonds  by  direction  of  the  officers  of 
a  corporation  after  they  had  been 
otherwise  executed,  and  which  pur- 


1537 


§  T22.] 


now    COKrOKATE    CONTIJACTS    ARE    MADE.        [cn,  X  I.I  1 1. 


It  is  no  longer  necessary  that  the  impression  of  a  corporate 
seal  shall  be  made  upon  wax  or  other  adhesive  substance  —  an 
impression  upon  the  paper  itself  being  hekl  sufficient.!  It  is 
not  necessary  that  express  authority,  or  authority  under  seal,  be 
given  to  an  officer  or  agent  to  affix  the  corporate  seal  to  an  in- 
strument; such  powers  may  be  inferred  fnym  the  general  pow- 
ers of  the  officer  or  agent,  the  usual  course  of  business,  and 
similar  circumstances.'^ 


ported  to  bear  the  corporate  seal,  was 
held  valid.  Contra,  Mitchell  v.  Union, 
etc.  Co.,  45  Me.  104  (1858).    The  cor- 
poration   may   have    several    seals. 
Bank  of  Middlebury  v.  Rutland,  etc. 
R.  R.,  30  Vt.  159  (1858),  and  cases  sur 
pra.    An  official  may,  wliile  out  of 
the  state,  cause  a  new  seal  to  be  made 
and  attach  it  to  bonds  of  the  corpo- 
ration out  of  the  state.    Lynde  v. 
Wmnebago  County,  10  Wall.  6  (1872). 
A  blank  wafer  will  do  for  a  seal 
Brinley  v.  IMann,  50  Mass.  337  (1848). 
A  scroll  lias  been  held  good.    Kansas 
City  V.  Hannibal,  etc.  R.  R.,  77  Mo. 
180  (1883).    A  scroll  may  be  a  suffi- 
cient seal  even  though  the  corpora- 
tion has  a  regular  seal.    Thayer  v. 
Nehalem  Mill  Co.,  51  Pac.  Rep.  203 
(Oreg.,  1897).    Contra,  Hendee  v.  Pink- 
erton,  96  Mass.  381  (1867).    A  scroll 
will  do  for  the  corporate  seal  on  an 
appeal  bond.     Sarmiento  v.   Davis, 
etc.  Co.,  105  Mich.  300  (1895).     The 
word  "seal,"  following  the  name  of 
a  president,  is  not  a  sufficient  corpo- 
rate seal  in  a  deed.    Caldwell  v.  Mor- 
ganton  Mfg.  Co.,  28  S.  E.  Rep.  475 
(N.  C,  1897).    The  use  of  a  seal  may 
be  a  sufficient  adoption  of  it  as  the 
corporate  seal    Blood  v.  La  Serena, 
etc.  Co.,  113  Cal.  221  (1896).    Any  seal 
is  presumed  to  be  the  corporate  seal, 
the  signature  of  the  agent  executing 
the  instrument  being  proved,    Penn- 
sylvania Nat.  Gas  Co.  v.  Cook,  123  Pa 
St.  170  (1889).    Where  a  deed  is  exe^ 
cuted  by  the  president  and  secretary 
rmder  their  private  seals,  there  is  a 
flaw  in  the  title  to  the  land.    Mc- 


1538 


Croskey  v.  Ladd,  28  Pac.  Rep.  216 
(Cal.,  1891), 

1  Hendee  v.  Pinkerton,  96  Mass.  381 
(1867),  holding  that  a  distinct  and  visi- 
ble impression  of  a  corporate  seal 
upon  and  into  the  substance  of  the 
paper  is  sufficient  and  valid;  Pillow 
V.  Roberts,  13  How.  472  (1851);  Allen 
V.  Sullivan,  etc.  R  R.,  33  N.  H.  446 
(1855);  Corrigan  v.  Trenton,  etc.  Co., 
5  N.  J.  Eq.  52  (1845).  But  see,  contra. 
Farmers',  etc.  Bankr.  Haight,  3  Hill, 
493  (1842). 

2  Union  Gold  Mm.  Co.  v.  Bank,  3 
Colo.  226  (1873);  Merchants'  Bank  v. 
Goddin,  76  Va.  503  (1882);  Hill  v.  Man- 
chester, etc.  Co.,  5  B.  &  Ad.  866  (1833) ; 
Berks,  etc.  R,  R.  v.  Myers,  6  Serg.  & 
R.  (Pa.)  12  (1820),  holding  that  tlie 
question  of  authority  to  affix  a  cor- 
porate seal  is  for  the  jury;  E[aven  v. 
Adams,  86  Mass.  80  (1862);  Gordon  v. 
Preston,  1  Watts  (Pa.),  385  (1833),  say- 
ing that  power  to  affix  a  seal  carrieii 
with  it  the  power  to  acknowledge 
the    execution    of  the    instrument. 
See,  however,  Hoyt  v.  Thompson,  5 
N.  Y.  320  (1851),  holding    that  the 
usual  duties  and  powers  of  the  presi- 
dent and  cashier  of  a  bank  are  not 
such  as  will  justify  them  in  affixing 
its  corporate  seal  without  express  au- 
thority from  the  directors,     A  cor- 
porate officer  may  execute  a  mort- 
gage for  it  without  being  authorized 
under  the  corporate  seal.    A  mere 
resolution  suffices.    Hopkins  v.  Gal- 
latin, etc.  Co.,  4  Himiph.  (Tenn.)  403 
(1843);  Fitch  v.  Lewiston,  etc,  Co.,  80 
Me.  34  (1888);  New  Haven  Sav.  Bank 


CH, 


XLIII.]        HOW    COKPOEATE   COOTKACTS    ABE   MADE. 


[§  T22. 


The  mere  affixing  of  the  corporate  seal  is  of  itself  sufficient 
execution  of  a  contract  or  deed,  when  properly  affixed  by  a  per- 
son  duly  authorized,  and  no  signature  at  all  need  be  made  or 

^Tf'an  instrument  or  contract  appears  to  be  signed  by  the 
proper  officer  and  the  corporate  seal  appears  to  be  affixed,  the 
courts  will  presume  that  the  seal  is  the  corporate  seal  and  was 
affixed  by  proper  authority,  and  that  the  execution  was  duly 


V.  Davis,  8  Conn.  191  (1830);  Howe  v. 
Keiler,  27  Conn.  538  (1858 1;  Hutchins 
V.  Bvnum,  75  Mass.  367  (1857):  Beck- 
with  V.  Windsor,  14  Conn.  594  (1843). 
Members  of  the  board  of  directors 
may  affix  the  corporate  seal  to  a  mort- 
gage and  acknowledge  the  execution. 
Gordon  v.  Preston,  1  Watts  (Pa.),  385 
(1833).  An  employee  may  be  directed 
to  affix  the  seal.  Royal  Bank  v.  Grand, 
etc.  R  R,  100  Mass.  445  (1868),  where 
it  was  affixed  by  the  printer. 

1  Union   Bridge  Co.  v.  Troy,  etc. 
R.  R,  7  Lans.   240  (1872);  Clark  v. 
Farmers',  etc.  Co.,  15  Wend.  256  (1836). 
Affixing  the  corporate  seal  is  the  reg- 
ular mode  of  executing  a  corporate 
mortgage.    Savannah,  etc.  R  R  v. 
Lancaster,  62  Ala.  555  (1878);  Whit- 
ing r.  Union  Trust  Co.,  65  N.  Y.  576 
(1875),  where  authority  was  given  to 
the  secretary  to  sign  an  instrument, 
and  it  was  held  that  signature  by 
the  treasxurer  did  not  render  it  in- 
valid, since  the  seal  of  the  corpora- 
tion was  sufficient  execution;   Mc- 
Daniels  v.  Flower,  etc.  Co.,  22  Vt.  274 
(1850);    Bason  v.   King's   Mountain 
Min.  Co.,  90  N.  C.  417  (1884),  holding 
that  a  deed  concluding  "  in  witness 
wliereof  the    said    corporation    has 
caused  this  indenture  to  be  signed 
by  the  president  and  attested  by  its 
secretary,  and  its  common  seal  to  be 
affixed."'signed  "  G.  C.  W.,  President," 
with  tl'.e  seal  affixed,  is  a  valid  com- 
mon-law deed;  Shewalter  v.  Pirner, 
55  Mo.  218  (1874);  Miners'  Ditch  Co. 
V.  Zellerbach,  37  Cal.  543  (1860);  Union 
Bridge  Co.  v.  Troy,  etc.  R  R.,  7  Lans. 
240  (1872),  saying,  "it  seems,  a  corpo- 

1539 


rate  seal  being  properly  affixed,  no 
signature  is  necessary;"   Lowett  v. 
Steam  Saw-mill  Assoc,  6  Paige.  54, 
60  (1836);  Bank  of  Vergennes  v.  War- 
ren,  7  Hill,  91   (1845);   Whitney  v. 
Union  Trust  Co.,  65  N.  Y.  576  (1875); 
Campbell  v.  James,  17  Blatchf.  42 
(1879);  S.  C,  4  Fed.  Cas.  1168;  rev'd 
on  other  grounds,  104  U.  S.  357  (1881); 
Lamson,  etc.  Co.  v.  Russell,  112  Mass. 
887    (1873);    Levering   v.    ]\Iayor,  7 
Humph.  (Tenn.)  553  (1847);  Memphis 
V.  Adams,  9  Heisk.  (Tenn.)  518  (1872). 
Where  three  directors,  as  a  commit- 
tee, are  authorized  to  make  a  lease, 
and  the  lease  is  signed  by  two,  and 
the  corporate  seal  is  affixed  by  them, 
it  is  sufficient,  the  third  acquiescing. 
Union  Bridge  Co.  v.  Troy,  etc.  R  R., 
7  Lans.  240  (1872).    But  see  Isham  v. 
Bennington,  etc.  Co.,  19  Vt.  230  (1847), 
holding  that  affixing  a  corporate  seal 
will  not  excuse  default  in  signing  a 
deed  when  signing  is  necessary  by 
statuta    Mandamus  to  an  officer  to 
attach  the  corporate  seal  will  be  de- 
nied if  there  is  any  doubt  as  to  the 
legal  rights  of  the  parties.    People  v. 
Blackhurst,  11  N.  Y.  Supp.  675  (1890). 
At  common  law  a  corporation  signed 
a   contract    by    attaching   its    seal 
thereto.    Globe  Ace.  Ins.  Co.  v.  Reid, 
47.N.  E.  Rep.  947  (Ind.,  1897).    It  is  a 
curious  fact  that  to  this  day  the  great 
Equitable  Life  Insurance  Company 
of  New  York  signs  its  name  to  dis- 
charges of  mortgages  by  simply  at- 
taching  its  seal  thereto,  without  any 
writing  or  other  signature  whatso- 
ever. 


§  722.] 


HOW    COEPOKATE    CONTKACTS    AKE    MADE.        [cn.  XLIIT. 


authorized,  when  proof  is  given  that  the  officers  signed  and 
sealed  the  instrument;^  but  this  presumption  may  be  over- 
thrown by  proof  that  the  seal  was  affixed  without  proper  author- 


.  1  Underbill  v.  Santa  Barbara,  etc. 
Co.,  93  Cal.  300  (1892);  BlcDonald  v. 
Cbisbolm,  131  111.  273  (1890);  Sliernian, 
etc.  Co.  V.  Morris,  43  Kan.  282  (1890); 
MuUanpby  Sav.  Bank  v.  Scbott,  135 
IlL  635  (1891);  Union  Pac.  R'y  v.  Chi- 
cago, etc.  R'y,  51  Fed.  Rep.  309  (1892); 
Bowers  v.  Hecbtman,  45  Minn.  238 
(1891);  Boyce  v.  Montauk,  etc.  Co.,  37 
W.  Va.  73  (1892);  Gorder  v.  Platts- 
moutb  Canning  Co.,  36  Neb.  548  (1893); 
Reed  v.  Bradley,  17  III.  321  (1856); 
Blacksbire  v.  Iowa,  etc.  Co.,  39  Iowa, 
624  (1874);  Southern  Cal.  Colony 
Assoc.  uBustamente,  52  Cal.  192  (1877); 
Wood  V.  Whelen,  93  111.  153  (1879); 
Mickey  v.  Stratton,  5  Sawyer,  475 
(1879);  Thorington  v.  Gould,  59  Ala. 
461  (1877);  Morris  v.  Keil,  20  Minn. 
531  (1874);  Abbott,  Tr.  Ev.  35;  Can- 
andaigua  Academy  v.  McKeclmie,  19 
Hun,  62  (1879);  90  N.  Y.  628:  Union 
Gold  Min.  Co.  v.  Bank,  2  Colo.  226 
(1873);  Mill-dam  Foundery  u  Ilovey, 
38  Mass.  417,  428  (1839);  Malone  v. 
Crescent,  etc.  Co.,  77  Cal.  38  (1888); 
Johnson  v.  Bush,  3  Barb.  Ch.  207 
(1848);  Leggett  v.  New  Jersey  M.  & 
B.  Co.,  1  N.  J.  Eq.  541  (1832);  Parker 
V.  Washoe  Mfg.  Co.,  49  N.  J.  L.  465 
(1887);  Hoyt  v.  Thompson,  5  N.  Y.  320 
(1851);  Hill  V.  Manchester,  etc.  Co.,  5 
B.  &  Ad.  866  (1833);  Chicago,  etc.  R.  R 
V.  Lewis,  53  Iowa,  101  (1880);  Morse 
V.  Beale,  68  Iowa,  463  (1886);  Bliss  v. 
Kaweah,  etc.  Co.,  65  Cal.  502  (1884); 
Goodnow  V.  Oakey,  68  Iowa,  25  (1885); 


Indianapolis,  etc.  R  R.  v.  ^forgans- 
town,  103  HI.  149  (1882);  Solomon'.s 
Lodge  V.  Montmoclin,  58  Ga,  548 
(1877);  St.  Louis  v.  Risley,  28  Mo.  415 
(1859);  St  Jolins  v.  SteinmotK.  18  Pa. 
St.  273  (1852);  Lovell  v.  Steam,  etc. 
A.SSOC.,  6  Paige,  54  (1836);  Bank  of 
Vergennes  v.  Warren,  7  Ulll,  91 
(1845);  Now  England,  etc.  Co.  v.  Gil- 
bert, etc.  R  R.  91  N.  Y.  153  (1883).  A 
coqiorate  deed  twenty-five  years  old, 
reciting  that  it  is  under  seal,  is  pre- 
sumed to  have  been  underseal.thougii 
none  is  present.  Catlett  v.  Starr,  70 
Tex.  485  (1888).  The  seal  is  not  proof 
per  se.  The  signature  of  the  oflicer 
must  be  proved.  Soutliorn,etc.  Assoc. 
V.  Bustamento,  52  Cal.  192  (1877).  The 
presence  of  the  seal  raises  the  pre- 
sumption that  the  contract  was  duly 
authorized.  Andres  v.  Fiy,  45  Pac. 
Rep.  534  (Cal.,  1896).  The  action  of 
the  board  autliorizing  a  deed  need 
not  be  proved  where  the  deed  recites 
that  it  was  executed  by  order  of  the 
board  of  directors.  Caldwell  v.  Mor- 
ganton  i\lfg.  Co.,  28  S.  E.  Rep.  475 
(N.  C,  1897).  Tlie  seal  of  a  corpora- 
tion, like  the  seal  of  an  individual, 
must  be  proved  in  establishing  the  as- 
signment of  a  mortgage,  Jackson  v. 
Pratt,  10  Jolins.  381  (1813).  That  the 
seal  is  the  company's  seal  must  be 
proved.  Den  u Vreelandt,  7  N.  J.  L.  352 
(1800);  Leazure  v.  Hillegas,  7  Serg.  & 
R.  (Pa.)  313  (1821).  "A  corporate  deed 
can  be  proved  only  by  proving  that 


Evans  u  Lee,  11  Nev.  194  (1876);  Cin-  the  seal  affixed  is  the  seal  of  the  cor- 

cinnati,  etc.  R.  R.  v.  Harter,  26  Ohio  poration,  or  that  it  was  affixed  as  the 

St.  426  (1875);  Whitney  u  Union,  etc.  corporate  seal  by  an  officer  of  the 

Co.,  64  N.  Y.  576  (1875);  President,  corporation  or  other  person  thereunto 

etc.  V.  Myers,  6  Serg.  &  R.  (Pa.)  12  duly  authorized."    Osborne  v.  Tunis, 

(1820);  Adams  v.  Creditors,  14  La.  454  25  N.  J.  L.  633,  658  (1856).    A  mort- 


(1840);  Darnell  v.  Dickens,  4  Yerg. 
(Tenn.)  7  (1833);  Burrill  v.  Nahant 
Bank,  43  Mass.  163  (1840);  Flint  v. 
Clinton,  etc.  Co.,  12  N.  H.  434  (1841); 


1540 


gage  with  the  corporate  seal  attached 
is  presumed  to  have  been  regularly 
sealed.  It  is  not  invalidated  by  proof 
that  the  directors  passed  no  resolu- 


CH.  XLIII.]        HOW   COErOKATE    CONTRACTS    AEE   MADE. 


[\ 


•00: 


ity.^     The  corporation,  by  ratification  and  otherwise,  may  easily 
cure  a  defect  as  to  the  sealing.^ 

A  defect  in  the  acknowledgment  of  a  corporate  instrument 
is  overlooked  by  the  courts  if  there  is  sufficient  to  indicate  an 

tion  authorizing  the  use  of  the  seal. 
Fidelity,  etc.  Co.  v.  Shenandoah,  etc. 
R  R.,  32  W.  Va.  244  (1889).  The  sig- 
natiu-e  of  the  president  and  the  seal 
of  the  corporation  does  not  prove  the 
deed.  It  is  necessary  to  prove  that  it 
was  executed  by  the  president.  Walsh 
V.  Barton,  24  Ohio  St.  28, 41  (1873).  Tlie 
execution  and  recording  of  a  deed  by 
a  corporation  is  j^^'i^'ia  facie  evidence 
of  delivery  and  acceptance.  Stokes* 
V.  Detrick,  75  Md.  2.56  (1892).  The 
presence  of  the  seal  is  prima  facie 
evidence  that  the  cprporation  duly 
authorized  the  contract,  Berks,  etc. 
Tump.  Co.  V.  Jlyers,  G  Serg.  &  K.  (Pa.) 
16  (1820);  Parkinson  v.  Parker,  85  Pa. 
St.  313  (1877);  and  that  it  was  attixed 
by  competent  autliority.  St.  John's 
Church  V.  Steinmetz.  18  Pa,  St.  273 
(1852);  Solomon's  Lodge  v.  Montmol- 
lin,  58  Ga,  547  (1877);  Morris  v.  Keil, 
20  Minn.  531  (1874);  Conine  v.  Junc- 
tion, etc.  R.  R,  3  Houst.  (Del.)  288 
(18GG).  Where  a  contract  is  signed 
by  the  second  vice-president  and  as- 
sisttint  secretary,  and  lias  the  seal  at- 
tached, it  is  presumed  to  have  been 
properly  executed.  Gutzeil  v.  Pennie, 
95  Cal.  598  (1892).  W^liere  a  corporate 
deed  is  not  under  seal,  proof  must  be 
given  that  the  corporation  authorized 
the  deecL  Barney  v.  Pforr,  48  Pac. 
Rep.  987  (Cal.,  1897).  A  corporate 
deed  signed  "  J.,  President "  of  the 


corporation,  is  not  sufficiently  signed. 
A  corporate  seal  is  also  necessary. 
Garrett  v.  Belmont  Land  Co.,  94  Tenn. 
459  (1895).  In  Maine  it  has  been  held 
that  the  presence  of  the  corporate 
seal  on  an  instrument  does  not  raise 
a  presumjition  that  the  corporation 
entei-ed  into  the  contract.  Morrison 
V.  Wilder  Gas  Co.,  40  Atl.  Rep.  542  (Me., 
1898).  The  court  evidently  overlooked 
tlie  fact  that  originally  a  corporation 
signed  a  deed  or  contract  by  affixing 
its  seal  without  any  written  signa- 
ture whatsoever,  and  that  conse- 
quently, upon  proof  that  such  seal 
was  the  corporate  seal,  the  presump- 
tion arose  that  it  was  properly  affixed, 
just  as  proof  of  the  signature  of  the 
maker  of  a  promissory  note  raises  a 
presumption  that  the  maker  signed 
the  note  and  was  bound  by  it. 

^  Koehler  v.  Black  Riv^er,  etc.  Co.,  2 
Black,  715  (1862);  Parker  v.  Washoe 
Mfg.  Co.,  49  N.  J.  L.  465  (1888),  hold- 
ing also  that  the  testimony  of  a  single 
officer  tliat  he  had  no  knowledge  of 
any  authority  having  been  given  by 
the  corporation  to  execute  the  in- 
strument in  suit  was  not  sufficient  to 
overcome  the  presumption  of  proper 
execution  raised  by  the  fact  that 
the  corixjrate  seal  was  affixed  to  it. 
Union  Gold  Min.  Co.  v.  Bank,  2  Colo. 
226  (1873).  Where  deeds  are  duly 
sealed  \vith  a  corporate  seal,  the  tes- 


2  Wood  V.  Whelen,  93  111.  153  (1879), 
where  a  mortgage  executed  by  cor- 
poration officers  under  its  seal  with- 
out proper  authority  was  held  to  be 
adopted  by  a  simple  resolution  with- 
out again  affixing  the  seal;  Royal 
Bank  v.  Grand  Jimction  R  R,  100 
Mass.  444  (1868);  St.  James's  Parish  v. 
Newbuiyport,etc.  R  R,  141  Mass.  500 
(1886),  in  which  the  facts  that  two 
directors    had    examined   corporate 


notes  under  seal  and  pronounced 
them  genuine,  and  that  the  treasurer 
had  paid  interest  upon  them,  were 
held  to  constitute  a  ratification.  A 
court  of  equity  may  compel  a  corpo- 
ration to  affix  its  seal  Missouri  River, 
etc.  R.  R  V.  Miami  County,  12  Kan. 
483  (1874).  Mandamus  sometimes  lies. 
Rex  V.  Vice-Chancellor,  3  Burr.  1647 
(1765). 


1541 


§  722.] 


HOW   COKPORATE   CONTKAOTS   AliE   MADE.        [cn.  XLIII. 


intent  to  acknowledge.    The  acknowledgment  is  made  by  one 
of  the  officers  who  executed  it.^ 

An  acknowledgment  by  a  corporation  must  show  the  iden- 
tity of  the  party  executing  it,  and  his  acknowledgment  or  ad- 


timony  of  a  director  that  be  knew 
nothing  thereof  does  not  invalidate 
the  sealing.  Parker  v.  Washoe  Mfg. 
Co.,  49  N.  J.  L.  465  (1887).  The  execu- 
tion of  a  corporate  deed,  apparently 
perfect  on  its  face,  may  be  over- 
thrown by  proof  that  the  board  of 
directors  never  autliorized  it;  that 
the  president  signed  it  before  the  de- 
scription was  filled  in;  and  that  the 
description  was  to  be  other  than  that 
which  was  %vritten  in.  Vica,  etc.  R. 
R.  V.  Mansfield,  84  CaL  500  (1890). 
Where  the  seal  of  the  company  lias 
been  duly  affixed  to  a  mortgage  by 
the  secretary,  the  mortgagee  need 
not  inquire  whether  tlie  secretary 
was  duly  authorized  to  affix  it,  or 
whether  a  quormn  of  the  directors 
was  present  at  the  meeting  and  au- 
thorized the  mortgage,  the  court  up- 
holding the  mortgage,  although  a 
quorum  was  not  i^resent  when  it  was 
authorized.  Covmty,  etc.  Bank  v. 
Rudry  Merthyr,  etc.  Co.,  [1895]  1  Ch. 
629.  Where  there  is  no  statute  or 
by-law  requiring  a  private  corpora- 
tion to  keep  a  minute-book,  it  seems 
that  the  certificate  of  the  secretary 
under  the  corporate  seal  that  a  reso- 
lution was  passed  cannot  be  ques- 
tioned by  any  one  claiming  under  or 
through  the  corporation.  Prentiss, 
etc.  Co.  V.  Godchaux,  66  Fed.  Rep.  224 
(1894).  Where  it  is  proven  that  the 
proper  agents  of  a  corporation  signed 
a  deed,  and  the  seal  attached  to  the 
deed  is  presumed  to  be  the  corporate 
seal,  such  presumption  is  not  over- 
come by  proof  that  no  vote  of  the 
directors  was  had  authorizing  the 
execution  of  the  deed.  Ruffner  v. 
Welton,  etc.  Co.,  36  W.  Va.  244  (1892). 
Although  the  proper  signatures  and 
seal  attached  to  corporate  contracts. 


deeds,  and  mortgages  raises  a  pre- 
sumption of  authority  on  the  part  of 
the  officers  to  sign,  yet  tlie  want  of 
authority  may  be  shown.  Leggett  v. 
New  Jersey,  etc.  Co.,  1  N.  J.  Eq.  541 
(1832). 

1  The  officer  or  agent  who,  in  behalf 
of  the  corporation,  affixes  the  com- 
mon seal  to  an  instrument  is,  in  the 
absence  of  any  statutory  provision, 
deemed  the  agent  executing  it  He 
also  stands  in  the  relation  of  a  sub- 
scribing witness  to  the  execution  of 
the  deed  bj^  the  corporation,  and  is 
the  proper  pai-ty  to  be  examined  or 
to  make  afiidavit  to  prove  that  the 
seal  affixed  by  him  was  the  corpo- 
rate seal,  and  that  it  was  affixed  by 
authority  of  the  board  of  directors. 
Bowers  v.  Hechtman,  45  Minn.  238 
(1891).  The  deed  of  a  corporation  is 
capable  of  being  acknowledged. 
Proving  the  execution  is  not  the 
only  way  of  preparing  it  for  record. 
Hopper  V.  Lovejoy,  47  N.  J.  Eq.  573 
(1891).  Authority  to  execute  gives 
authority  to  acknowledge  the  instru- 
ment. Wright  V.  Lee,\2  S.  D.  596 
(1892).  The  deed  is  good  though  there 
is  no  attestation  as  to  the  seal.  Smith 
V.  Smith,  62  III  492  (1872).  If  the  presi- 
dent signs  the  deed  he  is  the  proper 
person  to  acknowledge  it.  Lovett  v. 
Steam,  etc.  Assoc,  6  Paige,  54  (1830). 
The  acknowledgment  may  be  taken 
out  of  the  state.  Hodder  v.  Ken- 
tucky, etc.  R'y,  7  Fed.  Rep.  793  (1881). 
Where  a  deed  of  the  corporation  is 
acknowledged  by  individuals,  instead 
of  being  proved  by  the  officers,  the 
I'ecording  of  such  deed  is  of  no  effect. 
Bernhardt  v.  Brown,  29  S.  E.  Rep.  884 
(N.  C,  1898).  An  acknowledgment 
similar  in  form  to  that  of  an  indi- 
vidual suffices.    Hoopes  v.  Auburn, 


1542 


CH.  XLIII.]        HOW    COEPOKATE    CONTKACTS   AKE   MADE. 


[§  T23. 


mission  that  he  executed  it,  and  that  the  person  executing  it 
Avas  authorized  to  execute  it.  If  the  seal  is  attached,  this  raises 
the  presumption  that  the  party  executing  it  was  authorized  so 
to  do,  and  to  that  extent  it  need  not  be  acknowledged.^  At 
common  law  there  is  no  particular  form  for  the  acknowledg- 
ment of  an  instrument  by  a  corporation.^  A  mortgage  should 
not  be  acknowledged  before  a  notary  public  who  is  a  stock- 
holder in  and  officer  of  the  mortijag-ee.^ 

§  723.  Corporate  instruments  made  out  in  the  name  of  an 
officer  or  agent  instead  of  in  the  name  of  the  corporation  may 
he  enforced  hj  or  against  the  corporation. —  This  is  now  the 
well-established  rule.*    Thus,  where  a  contract  is  made  by  the 

1  Bennett  v.  Knowles,  68  N,  W.  Rep. 
Ill  (Minn.,  1896).  See  also  note  1, 
p.  1540. 

2  Pniyne  v.  Adams,  etc.  Co.,  93  Hun, 
214  (1895),  upholding  an  acknowledg- 
ment by  the  secretary. 

3  Kothe  V.  Krag,  etc.  Co.,  50  N.  K 
Rep.  594  (Ind.,  1898).  The  fact  that 
the  acknowledgment  is  taken  before 
a  notary  who  was  also  the  vice-presi- 
dent of  the  company  does  not  neces- 
sarily invalidate  the  acknowledg- 
ment. Florida,  etc.  Exchange  v. 
Rivers,  36  Fla.  575  (1896). 

*  See  p.  1536,  snipra,  and  notes;  also 
§  810,  infra.  Where  the  president 
loans  corporate  funds  and  takes  notes 
in  his  own  name,  the  corporation  is 
considered  to  be  the  payea  New 
England,  etc.  Co.  v.  Gay,  33  Fed.  Rep. 
636  (1888);  ElweU  v.  Dodge,  33  Barb. 
336  (1861).  A  bond  running  to  the 
treasurer  may  be  sued  on  by  the  com- 
pany. New  York,  etc.  Soc.  v.  Varick, 
13  Johns.  38  (1816).  So  also  as  to  a 
note  running  to  a  cashier.  Baldwin 
V.  Bank,  etc.,  1  Wall.  234  (1863);  Com- 
mercial Bank  v.  French,  38  Mass.  486 
(1839).  Or  to  a  manager.  Societe, 
etc.  V.  Mackintosh,  5  Utah,  568  (1888). 
The  company  is  liable  on  an  order 
for  goods  though  the  order  is  signed 
by  an  oflRcer  as  such  officer.  Rogers, 
etc.  Co.  V.  Union,  etc.  Co.,  134  Mass. 
31  (1883).  The  case  of  Farmers',  etc. 
Bank  v.  Haight,  3  Hill,  493  (1842), 


etc.  Co.,  37  Hun,  568  (1885).  Cf.  Howe, 
etc.  Co.  V.  Avery,  16  Hun,  555  (1879). 
See  also  Kelly  v.  Calhoun,  95  U.  S. 
710  (1877);  Frostburg,  etc.  Assoc,  v. 
Bruce,  51  Ind.  508  (1879);  Muller  v. 
Boone,  63  Tex.  91  (1885);  Eppright 
f.  Nickerson,  78  Mo.  482  (1883);  City 
of  Kansas  v.  Hannibal,  etc.  R  R.,  77 
Mo.  180  (1882);  Tenneyr.  LumberCo., 
43  N.  H.  350  (1861).  A  deed  may  con- 
clude with  the  words:  "  In  testimony 
whereof  the  common  seal  of  said 
company  is  hereunto  affixed."  Bason 
V.  King's  Movmtain  Min.  Co.,  90  N.  C. 
417  (1884). 
An  approved  form  of  attestation  is: 

"  In  witness  whereof  the  said  party  of  the 
first  part  has  caused  its  corporate  seal  to  be 
aflixed  hereunto  by  its  secretary,  and  its 
name  to  be  subscribed  hereto  by  its  presi- 
dent" [or  other  corporate  officers,  as  the 
case  may  be],  the  day  and  year  aforesaid. 

[Seal.]  [Signatures.] 

The  New  York  form  of  proof  of  the 
deed  of  a  corporation  by  the  presi- 
dent L'  as  follows: 

"  On  this day  of ,  in  the  year  18—, 

before  me  personally  came  A.  B..  the  presi- 
dent of  the company,  with  whom  I  am 

personally  acquainted,  who,  being  by  me 
duly  sworn,  said  that  he  resided  in  the  city 

of  ;  that  he  was  the  president  of  the 

company;  that  he  knew  the  corporate 

seal  of  said  company;  that  the  seal  affixed 
to  the  above  instrument  was  such  corporate 
seal;  that  it  was  affixed  by  order  of  the  board 
of  directors  of  said  company;  and  that  he 
eigned  the  corporate  name  thereto  by  the  like 
order  as  president  of  said  company." 


1543 


§  723.] 


now    CORPOKATE    CONTKACTS    ARE    MADE. 


[cii. 


XLIII. 


president  in  his  individual  name,  but  for  the  corporation,  and 
the  corporation  knows  of  the  contract,  and  acts  upon  it,  and 


holds  a  corporation  not  liable  on  a 
note  informally  made  out.  See  also 
Steele  v.  Oswego,  etc.  Co.,  15  Wend. 
26G  (1836).  Suit  lies  against  a  bank 
on  its  check  signed  by  its  cashier  in 
his  own  name.  Mechanics'  Bank  v. 
Bank  of  Columbia,  5  Wheat.  326 
(1820).  See  also  Edwards  v.  Cam- 
eron's, etc.  Co.,  11  Eng.  L.  &  Eq.  565 
(1852),  where  directors  signed  a  note; 
Olcott  V.  Tioga  R.  R.,  27  N.  Y.  546 
(1863);  Bank  of  Brit.  N.  A.  v.  Hooper, 
ri  Mass.  567  (1856);  Morrill  v.  Segar 
Co.,  32  Hun,  543  (1884),  where  the 
secretary  signed  a  contract;  Van 
Leuven  v.  First  Nat.  Bank,  54  N.  Y. 
671  (1873),  where  the  president  signed ; 
Bank  of  Genesee  v.  Patchin  Bank,  19 
N.  Y.  312  (1859);  S.  C,  13  N.  Y.  308 
(1855);  Many  u  Beekman,  etc.  Co.,  9 
Paige,  188  (1841).  But  see  De  Witt 
V.  Walton,  9  N.  Y.  570  (1854).  A 
cashier  may  transfer  a  note  by  sign- 
ing his  own  name  as  cashier.  Mc- 
Intyre  v.  Preston,  10  III  48  (1848). 
See  also  §  724,  notes,  infra.  A  note 
payable  to  and  indorsed  by  "E.  S. 
Hubbell,  agent  for  Buffalo  Colliery 
Company,"  is  collectible  against  the 
company  where  it  is  showyi  tliat  he 
was  authorized  by  the  company  by 
its  mode  of  doing  business.  Lake 
Shore  Nat.  Bank  v.  Butler  Colliery 
Co.,  51  Hun,  63  (1889).  A  due-bill 
signed  by  an  individual  may  be  shown 
to  have  been  intended  as  a  due-bill 
of  the  company,  he  being  the  presi- 
dent. Richmond,  etc.  R.  R.  v.  Snead, 
19  Gratt.  (Va.)  354  (1869).  An  instru- 
ment for  the  payment  of  money  run- 
ning from  a  person  "  as  manager  and 
president "  is  enforceable  against  the 
corporation,  although  signed  by  tlie 
person  as  an  individual.  Jones  v. 
Woolley,  2  Idaho,  790  (1891).  A  check 
signed  by  an  individual  with  the  cor- 
porate seal  and  the  name  of  the  sec- 
retary attached  is    not  enforceable 


against  the  company,  it  having  no 
benefit  thereof.  Serrell  v.  Derby- 
shire, etc.  R'y,  9  C.  B.  811  (1850).  The 
signature  to  a  corporate  mortgage 
omitting  one  word  of  the  name  is 
nevertheless  good,  and  altliough 
signed  "Chas.  P.  Law,  president  of 
the  Santa,"  etc.,  is  sufficient  where 
tlie  corporate  seal  is  affixed.  Under- 
bill V.  Santa  Barbara,  etc.  Co.,  93  OnL 
300  (1892).  Wliere  notes  are  made 
by  an  individual  the  payee  cannot 
introduce  evidence  that  they  were 
in  behalf  of  the  corporation,  the  suit 
being  on  the  notes.  Sparks  v.  Dis- 
patch Transfer  Co.,  104  Mo.  531  (1891). 
An  accommodation  note  running  to 
"F.  Medliurst,  commercial  director," 
given  to  him  by  a  friend,  cannot  be 
enforced  by  the  corporation,  Med- 
hurst  having  defaidted  and  de- 
frauded the  company.  Societe,  etc. 
V.  Mackintosh,  7  Utah,  35  (1890).  The 
corporation  is  not  liable  on  a  note  as 
follows :  "  For  value  received,  we,  the 
subscribers,  jointly  and  severally, 
promise  to  pay  the  plaintiffs  or  order, 
for  the  Boston  Glass  Manufactory, 
$3,500,  on  demand,"  and  signed  by 
individuals  as  individuals.  Bradlee 
V.  Boston,  etc.  Mfy.,  33  Mass.  347 
(1835).  A  grant  to  "the  governors, 
president,  and  fellows  of  King's  Col- 
lege, at  Windsor,  in  the  province  of 
Nova  Scotia,"  is  prima  facie  a  grant 
to  the  corporation.  King's  College 
V.  McDonald,  2  Tham.  106  (Can.,  1843). 
A  company  may  be  bound  by  a  con- 
tract, although  the  contract  is  signed 
in  the  name  of  an  individuaL  Jones 
V.  Williams,  39  S.  W.  Rep.  486  (Mo., 
1897).  A  contract  drawn  and  signed 
by  '•  S.,  general  agent,"  may  be  shown 
by  parol  to  be  a  corporate  contract. 
Lewis  V.  Mutual  L.  Ins.  Co.,  8  Colo. 
App.  368  (1896).  The  agreement  of 
J.  Gould,  as  trustee  for  the  Missouri 
Pacific  Railroad,  that  the  latter  will 


1544 


CH.  XLIII.]        HOW    COEPOKATE   CONTRACTS   ARE   MADE. 


[§  T2i. 


partially  performs  it,  the  corporation  is  bound.^  Although  a 
contract  under  seal  is  executed  by  the  corporate  officers  in 
their  individual  names,  it  may  be  proved  by  parol  that  it  was 
a  corporation  contract,  and  that  the  corporation,  having  adopted 
and  ratified  it  and  attempted  to  carry  it  out,  is  liable  on  it.^ 

§  T24.  Liahilitij  of  officers  and  agents  on  corporate  securities 
which  are  not  i)roi)crlij  drawn,  signed,  or  sealed  in  the  coriwrate 
name. —  The  rule  that  an  officer  or  agent,  to  bind  the  corpora- 
tion, must  have  an  instrument  made  out  in  the  corporate  name, 
applies  only  to  deeds  and  not  to  simple  contracts.^  It  fre- 
quently happens,  however,  that  the  person  with  whom  the  con- 
tract is  made  attempts  to  hold  liable  the  officer  or  agent  of  the 
corporation  on  the  ground  that  such  officer  or  agent  used  his 
own  name  in  the  body  of  the  contract,  or  signed  it  as  principal 


do  a  certain  thing  upon  an  extension 
being  made,  does  not  bind  the  lat- 
ter. Hill  I'.  Gould,  129  IMo.  106  (1895). 
Where  a  note  is  signed  by  the  offi- 
cers indi\-idually,  but  is  really  a  cor- 
porate note,  the  officers  who  pay  and 
take  up  the  note  may  enforce  it 
against  the  corporation.  Re  Pendle- 
ton Hardware,  etc.  Co.,  24  Oreg. 
330  (1893).  A  note  signed  "National 
Forge  and  Iron  Co.,  Mark  Swarts, 
President,"  may  be  shown  to  be  the 
joint  note  of  the  company  and  presi- 
dent. Swarts  V.  Cohen,  11  Ind.  App. 
20  (1894),  classifying  many  author- 
ities. 

1  Cotting  V.  Grant  Street  Elec  Ry, 
65  Fed.  Rep.  545  (1895). 

2  Williams  v.  Uncompahgre  Canal 
Co.,  13  Colo.  4G9  (1889).  The  corpora- 
tion is  bovmd  where  the  president 
signs  his  name  followed  by  the  word 
"  president,"  and  the  secretary  signs 
his  name  followed  by  the  word  "  secre- 
tary," the  corporate  seal  having  been 
also  impressed  upon  the  document  in 
the  body  thereof.  Union,  etc.  Co.  v. 
Robinson,  79  Fed.  Rep.  420  (1897). 
Where  the  lease  in  its  body  is  to  a  cor- 
poration, the  corporation  is  bound, 
even  though  it  is  signed  "  E.  J.  Cran- 
dall  [Seal],  President."  Consolidated 
Coal  Co.  etc.  v.  Peers,  150  IlL  344  (1894). 

1545 


A  sealed  contract  to  sell  land  run- 
ning to  the  president  cannot  be  en- 
forced by  the  corporation.  Buffalo, 
etc.  Inst.  V.  Bitter,  87  N.  Y.250  (1881). 
It  is  not  liable  on  a  deed  to  the  man- 
ager.    Pickering's  Claim,  L.  R.  6  Ch. 


525  (1871).  An  assignment  of  a  lease 
running  in  its  body  from  "  George  F. 
Baker,  treasurer,"  etc.,  of  the  com- 
pany, and  signed  in  the  same  way,  is 
not  a  corporate  assignment.  Norris 
V.  Davis,  53  Ohio  St.  215  (1894).  A 
mortgage  is  not  enforceable  against 
a  corporation  where  it  is  drawn  as  a 
personal  obligation  and  signed  by  an 
individual  "as  president."  Clark  u 
Hodge,  116  N.  C.  761  (1895).  An  as- 
signment of  a  mortgage  and  note 
belonging  to  a  corporation  by  its 
president  and  secretary,  as  follows: 
"  We,  the  undersigned,  D.  R.  T.,  pres- 
ident, and  C.  S.  B.,  secretary,  have 
transferred  .  .  .  and  on  the  part  of 
said  company  have  hereunto  attached 
our  names  and  affixed  our  seals," 
signing  their  names  and  affixing 
their  private  seals,  is  presumptively 
a  coi-porate  transfer.  Lay  v.  Austin, 
25  Fla.  933  (1890). 

3  See  New  England,  etc.  Co.  v.  De 
Wolf,  25  Mass.  56  (1829),  and  cases  in 
preceding  section. 


§  72^.] 


HOW    COEPOEATE    CONTRACTS    ARE   MADE.        [CH.  SLIII. 


instead  of  using  the  corporate  name.  But  the  courts  have  quite 
uniformly  defeated  such  attempts  to  hold  the  officer  or  agent 
liable.  If  the  instrument  or  contract  indicates  that  the  officer 
or  agent  is  acting  only  as  agent,  and  if  the  name  of  the  corpo- 
ration appears  on  the  instrument,  the  officer  or  agent  is  not 
liable  thereon.^    There  are  cases,  however,  upholding  a  con- 


1 A  note  stamped  with  the  corpo- 
rate seal,  followed  by  the  words 
"  John  Roach,  Treasurer,"  is  the  com- 
pany's note  alone.  Miller  v.  Roach, 
150  Mass.  140  (1889).  A  note,  "We 
promise  to  pay,"  and  signed  "San 
Pedro  Mining  and  Milling  Company, 
T.  Kraus,  President,"  cannot  be  en- 
forced against  Ki-aus  personally. 
Liebscher  v.  Kraus,  74  Wis.  387  (1889). 
A  note  reading  "We  promise."  etc. 
and  signed  "Warrick  Glass  Works, 
J.  Price  Warrick,  President,"  is  con- 
clusively held  to  be  the  note  of  the 
corporation  alone.  Reeve  v.  First 
Nat.  Bank,  54  N.  J.  L.  208  (1892).  It 
is  a  question  of  fact  whether  a  note 
is  that  of  the  corporation  or  of  an  in- 
dividual where  in  the  body  it  is  made 
by  the  corporation,  but  the  signature 
is  that  of  a  person  as  "  Gen.  Supt." 
Frankland  v.  Johnson,  147  III  520 
(1893).  Where  the  unissued  stock  of 
a  corporation  (upon  its  reorganiza- 
tion on  tlie  expiration  of  its  charter) 
is  issued  to  the  president  as  trustee 
to  sell  from  time  to  time,  and  to  turn 
over  the  proceeds  of  the  sales  to  the 
company,  the  fact  that  he  gives  the 
company  a  note  for  the  same  signed 
by  him  as  "  Trustee  for  Bank  "  does 
not  render  him  liable  on  such  note 
vipon  the  bank  becoming  insolvent. 
Neptune  v.  Paxton,  15  Ind.  App.  284 
(1896).  Where  the  directors  sign  a 
corporate  note  on  the  back  with  the 
words  added  "  board  of  directors,"  it 
may  be  shown  by  parol  evidence  that 
they  signed  it  as  directors,  and  are 
not  liable  personally.  Kline  v.  Bank 
of  Tescott,  50  Kan.  91  (1892).  A  note 
signed  "  G.  A.  Colby,  President  Pac. 
Peat  Coal  Co.,  D.  K  Tripp,  Sec.  pro 


tern."  is  on  its  face  a  corporate  note. 
Farmers',  etc.  Bank  v.  Colby,  G4  Cal. 
352  (1883);  Nott  v.  Hicks,  1  Cow.  513 
(1823);  Billinger  v.  Bentley,  1  Ilun, 
5G2  (1874);  Hascall  v.  Life  Assoc,  5 
Hun,  151  (1875);  afl'd,  66  N.  Y.  610; 
Morrill  v.  Segar  Co.,  33  Hun,  543 
(1884),  the  court  saying:  "The  rule 
now  is  that,  where  the  instrument 
raises  on  its  face  a  question  as  to  the 
personal  liability  of  the  party  sign- 
ing it,  parol  evidence  is  admissible  to 
show  the  intention  of  the  parties;" 
Babcock  v.  Beman,  11  N.  Y.  200 
(1854);  Whitney  v.  Wyman,  101  U.S. 
392  (1879);  Whitford  v.  Laidler,  94 
N.  Y.  145  (1883),  where  even  a  lease 
made  out  to  an  officer  as  such  was 
held  not  enforceable  against  him; 
Holt  V.  Winfield,  25  Fed.  Rep.  813 
(1885),  where  an  attempt  was  made  to 
hold  a  president  liable  on  an  ultra 
mVcs  subscription;  Haight  u  Sahler, 
30  Barb.  218  (1859),  where  also  the 
contract  was  sealed;  Pitman  v.  Kint- 
ner,  5  Blackf.  (Ind.)  250  (1839);  Stan- 
ton V.  Camp,  4  Barb.  274  (1848); 
Draper  v.  Moss,  etc.  Co.,  87  Mass.  838 
(1862);  Sharpe  v.  Belles,  61  Pa,  St.  69 
(1869);  Hopkins  v.  Mehaffy,  11  Serg. 

6  R.  (Pa.)  126  (1824),  where  also  a  seal 
was  used,  the  body  of  the  instrument 
being  in  the  company's  name.  To 
same  effect,  Abbey  v.  Chase,  60  Mass. 
54  (1850),  and  Ellis  v.  Pulsifer,  86 
Mass.  165(1862);  McHenryn  Duffield, 

7  Blackf.  (Ind.)  41  (1843),  where  a  due- 
bill  was  signed  by  a  committee;  Pass- 
more  V.  Mott,  2  Binn.  (Pa.)  201  (1809), 
where  a  secretary  signed  a  ticket; 
Hovey  v.  Magill,  3  Conn.  680  (1818); 
McWhorter  v.  Lewis,  4  Ala.  198 
(1842);  Means  v.  Swormstedt,  33  IndL 


1546 


€H.  XLIII.]        HOW   COEPOKATE   CONTKACTS    ARE   MADE. 


[§  «2i- 


trary  rule.^  Thus,  where  a  note  is  signed  by  two  persons  with 
the  words  "president"  and  "treasurer"  following  their  names, 
they  are  liable  individually,  unless  the  plaintiff  had  notice  that 
the  note  was  a  corporate  note.     The  fact  that  the  plaintiff  had 


87  (1869);  Mann  v.  Chandler.  9  Mass. 
385  (1812);  Carpenter  u.  Farnsworth, 
106  Mass.  561  (1871).  An  officer  is 
not  liable  personally  on  a  note  pay- 
able to  him  as  "  Sec.  and  Treas.,"  and 
indorsed  by  him  likewise.  Falk  v. 
:Moebs,  127  U.  S.  597  (1888).  A  note 
signed  in  the  company's  name,  fol- 
lowed by  the  words  "  B.  L.  Brownell, 
Pres.,"  binds  him  personally.  Heff- 
ner  v.  Brownell,  70  Iowa,  591  (1887). 
So  also  of  a  note  signed  "  C.  F.  Clark, 
Trustee  Omega  Lodge."  Coburn  v. 
Omega  Lodge,  71  Iowa,  581  (1887).  A 
promissory  note:  "We  promise  to 
pay,"  etc.,  signed  ''Houston  Flour- 
mills  Co.,  D.  P.  Shepherd,  President," 
is  enforceable  against  the  company 
only.  Latham  v.  Houston  Flour 
Mills,  68  Tex.  127  (1887);  Jefts  v. 
York,  58  Mass.  371  (1849);  S.  C,  64 
3Iass.  392  (1852);  Okell  v.  Charles,  34 
L.  T.  Rep.  822  (1876).  It  may  be  a 
question  of  fact  as  to  whether  a 
treasurer,  in  buying,  bought  stock  for 
himself  or  the  company.  Haynes  v. 
Hunnewell,  42  Me.  276  (1856).  See 
also  Eandall  v.  Van  Vechten,  19 
Johns.  60  (1821),  holding  a  committee 
not  liable  on  a  sealed  instrument; 
Stearns  v.  Allen,  25  Hun,  558  (1881). 
Cf.  DeWitt  V.  Walton,  9  N.  Y.  571 
(1853).  In  support  of  the  text  see 
also  Dubois  v.  Delaware,  etc.  Co.,  4 
Wend.  285  (1830) ;  Olcott  v.  Tioga,  etc. 
R.  R.,  27  N.  Y.  546  (1863).  See  also 
Lindley,  Companies  (5th  ed.),  p.  231, 
etc.;  Green's  Brice,  Ultra  Vires, 
p.  754  The  denial  of  the  directors' 
liability  on  a  note  signed  by  them  as 
directors  is  raised  by  answer,  not  by 
demurrer.      McKensey  v.  Edwards, 

88  Ky.  272  (1889).  A  note  drawn  by 
the  directors  as  directors  of  the  com- 
pany, and  sealed  with  the  seal  of  the 


company,  is  not  enforceable  against 
the  directors  individually.  Aggs  v, 
Nicholson,  1  H.  &  N.  165  (1856).  Tlie 
president  is  not  liable  on  bonds 
which  he  signed  as  president  and 
which  the  corporation  had  power  to 
issue.  Mc^Masters  v.  Reed,  1  Grant, 
Cas.  (Pa.)  36  (1854);  46  S.  W.  Rep.  1056. 
1  Where  a  note  reads,  "We  promise 
to  pay,"  etc.,  and  is  signed  "  D.  M.  Co. 
J.  K.,  President,"  the  president  alone 
is  liable.  Mathews  v.  Dubuque  Mat- 
tress Co.,  87  Iowa,  246  (1893).  Where 
a  note  is  signed  by  the  president  and 
secretary  in  their  individual  names, 
except  that  they  add  the  words  "  Pres- 
ident" and  "Secretary"  respectively, 
there  being  nothing  on  the  face  of 
the  note  to  show  that  it  is  a  company 
note,  they  are  liable  personally  on 
the  note.  They  will  not  be  allowed 
to  show  that  it  was  the  intention  of 
all  parties  to  bind  the  company  only, 
or  that  the  money  went  to  the  com- 
pany only,  or  that  the  company  au- 
thorized the  note;  nor  can  they  file 
a  cross-bill  to  relieve  themselves  irora 
the  note.  San  Bernardino,  etc.  Bank  v. 
Andreson,  32  Pac.  Rep.  168  (Cal.,  1893). 
In  the  case  of  Hackemack  v.  Wie- 
brock,  49  N.  E.  Rep.  984  (IlL,  1898), 
the  court  held  that  the  signers  were 
individually  liable  on  a  note  which 
recited,  "We  promise  to  pay,"  and  was 
signed  "Henry  Hackemack,  Pres., 
Raythe  Nagel,  Secy.,"  to  a  person 
who  took  the  note  supposing  that 
they  were  personally  liable.  A  note, 
"We  promise  to  pay,"  etc.,  signed 
«E.  H.  Close,  Treas.,  John  Clark, 
Pres't,"  without  referring  to  the  cox*- 
poration,  may  be  enforced  against 
Close  and  Clark  personally,  although 
in  the  border  of  the  note  the  com- 
pany's name   appears.      Llerchants' 


1547 


r24.] 


HOW    COEPOEATE    COXTKACTS    ARE    MADE.        [cil.  .XI.III. 


brought  another  suit  on  another  similar  note  against  the  corpora- 
tion after  the  note  in  this  case  had  been  issued  docs  not  ])rovo 
such  notice.'    A  honafide  purchaser  of  a  promissory  note  which 


Nat.  Bank  v.  Clark,  64  Hun,  175  (1892) ; 
affirmed  in  139  N.  Y.  307  (1893).  A 
treasurer  is  liable  personally  on  a 
note  signed  personally  by  him,  al- 
though the  signature  is  followed  by 
the  word  "  Treasurer."  ]\Ied berry  v. 
Siiort,  15  N.  Y.  Week.  Dig.  227  (1882); 
Tippets  V.  Walker,  4  Mass.  595  (1808). 
A  note  in  the  form  "I  promise  to 
pay,"  and  signed  by  "  E.,  Pres.  & 
Treas.  C.  Co.,"  has  been  held  to  be 
the  note  of  E.  and  not  of  the  corpo- 
ration. Davis  V.  England,  141  Mass. 
587  (1886);  Stinchfield  v.  Little,  1  Me. 
231  (1821),  where  a  deed  was  to  the 
agent;  Bruce  v.  Lord,  1  Hilt.  247 
(1856),  holding  the  agent  prima /ac?e 
liable  on  a  draft;  Mare  v.  Charles,  5 
El.  &  B.  978  (1850);  Dayton  r.  Warne, 
43  N.  J.  L.  659  (1881),  involving  a 
bond;  Sawyer  v.  Winnegance  Mill 
Co.,  26  Me.  122  (1846),  holding  the 
company  not  bound  by  an  agreement 
to  arbitrate;  Seaver  v.  Cobui-n,  64 
Mass.  324  (1852),  involving  a  lease; 
Drake  v.  Flewellen,  33  Ala.  106  (1858). 
holding  the  secretary  prima  facie 
liable;  Button  v.  Marsh,  L.  R.  6  Q.  B. 
361  (1871),  where  the  note  was,  "We, 
the  directors  of  tlie  Isle  of  3Ian  Slate 
&  Flag  Co.,  Limited,  do  promise  to 
pay  J.  D.  £1,600."  The  company's 
seal  was  affixed;  Tucker,  etc.  Co.  v. 
Fairbanks,  98  Mass.  101  (1867);  Bar- 
ker V.  Mechanics',  etc.  Co.,  3  Wend. 
94  (1829);  Taft  v.  Brewster,  9  Johns. 
.334  (1812),  involving  a  bond;  Brock- 
way  V.  Allen,  17  Wend.  40  (1837). 
Where  a  draft  was  drawn  on  an  in- 
dividual name,  followed  by  the  words 
"  President  Rosendale  M'ng  Co.,  New 
York,"  and  accepted  by  him  by  the 
same  signature,  he  is  liable  person- 
ally on  it.  Moss  V.  Livingston,  4  N.  Y. 
208  (1850);  Hills  v.  Bannister,  8  Cow. 
31  (1827).  Persons  signing  and  seal- 
ing a  bond  in  their  own  names  and 


under  their  own  seals  are  individ- 
ually bound,  even  tliough  tliey  in- 
tended to  bind  the  corporation,  and 
in  the  body  of  the  instruments  they 
are  described  as  trustees.  Cullen  v. 
Nickerson,  10  Up.  Can.  C.  P.  Rep.  541> 
(1801).  Prima  facie  a  person  is  liable 
personally  who  signs  a  note  as  fol- 
lows: "J.  W.  Parrott,  President  of 
Long  Branch  Hotel  and  Cottage  Co." 
Terhune  v.  Parrott,  59  N.  J.  L.  16 
(1896).  A  corporate  agent  who  signs 
the  coi-porate  name  to  a  note  without 
authority  is  liable  personally  thereon. 
Frankland  v.  Jolmson,  147  IlL  520 
(1893).  An  officer  making  a  corpora- 
tion note  without  authority  is  per- 
sonally liable  thereon.  Miller  v.  Rey- 
nolds, 92  Hiin,  400  (1895).  A  note  in 
its  body  saying  "  we  "  and  signed  by 
two  persons,  the  words  "  Prest."  and 
"Treas."  following  their  names,  is 
their  note,  and  they  are  personally 
liable.  First  Nat.  Bank  v.  Wallis, 
84  Hun,  376  (1805);  affirmed  in  150 
N.  Y.  455.  See  also  Keokuk  FalU 
Imp.  Co.  V.  Kingsland,  etc.  Co.,  5 
Okla.  32  (1896).  Where  a  note  reads, 
"We  promise  to  pay,"  etc.,  and  is 
signed  "William  T.  Wallis,  President, 
Geo.  T.  Smith,  Treasurer,"  they  are 
liable  personally  to  a  honafide  holder. 
First  Nat.  Bank  v.  Stuetzer,  80  Hun, 
435  (1894).  The  president  executing 
an  ordinary  guaranty  in  the  nam© 
of  the  corporation  without  authority 
is  personally  liable  thereon.  Nelligan 
V.  Campbell,  20  N.  Y.  Supp.  234  (1892). 
On  this  subject  of  liability  see  also 
§  245,  supra,  on  the  Liability  of  trust- 
ees; §  705,  supra,  on  the  liability  of 
promoters;  §  508,  supra,  on  the  lia- 
bility of  officers  of  unincorpoi-ated 
associations;  and  i^  888,  infra,  on  the 
liability  of  committeemen. 

1  First  Nat.  Bank  v.  Wallis,  150  N. 
Y.  455  (1896). 


1543 


CH.  2LIII.]        HOTV    COEPOEATE    COXTEACTS   AEE   MADE. 


[§  T25. 


does  not  disclose  any  corporate  obligation,  and  is  signed  by  the 
officers  with  their  title  attached,  may  enforce  such  note  against 
the  officers  as  individuals,  if  the  holder  has  no  notice  of  the 
fact  that  it  was  a  corporate  obligation.  The  fact  that  the  'name 
of  the  corporation  is  on  the  margin  does  not  constitute  notice.^ 
§  725.  Beqiiircments  hy  cliarter  or  hij-laws  that  contracts  shall 
he  made  hy  certain  officers  or  with  certain  formalities. —  It  has 
been  held  that,  where  the  charter  prescribes  that  corporate 
contracts  shall  be  signed  by  certain  officers,  a  contract  that  is 
signed  by  only  a  part  of  them  is  not  enforceable,  even  in  bona 
fide  hands.^  But  the  harshness  and  the  inconvenience  of  this 
rule  have  caused  it  to  be  widely  departed  from  and  practically 
abandoned.' 


1  Casco  Nat.  Bank  v.  Clark,  139  N. 
Y.  307  (1893);  Merchants'  Nat  Bank 
r.  Clark,  139  N.  Y.  814  (1893). 

2Safiford  v.  Wyckoff,  4  Hill,  442 
(1842);  Head  v.  Providence  Ins.  Co., 
2  Cranch,  127  (1801);  Badger  v.  Amer- 
ican Ins.  Co.,  103  Mass.  244  (18G9); 
Dawes  v.  North  River  Ins.  Co.,  7  Cow. 
462  (1827);  Hill  v.  Manchester,  etc. 
\yater-works  Co.,  2  Nev.  &  M.  573 
(1833);  S.  C.  5  B.  &  Ad.  8G6;  Corn 
Exchange  Bank  v.  Cumberland  Coal 
Co.,  1  Bosw.  436  (IS.jT).  A  corpo- 
rate deed  not  countersigned  by  the 
secretaiy  as  retiuired  by  statute  is 
void  as  against  a  subsequent  levy 
of  execution.  Galloway  v.  Hamil- 
ton, 68  Wis.  651  (1887).  Where  the 
articles  prohibit  a  purchase  on  credit, 
a  vendor  who  knew  it  cannot  re- 
cover. Hotchin  v.  Kent,  8  Mich.  526 
(1860).  Where  the  charter  prescribes 
who  may  be  the  corporate  agents  for 
particular  purjioses,  the  provision  is  ^ 
limitation  upon  the  power  of  the  cor- 
poration, and  it  cannot  appoint  other 
agents  for  such  purposes.  Washing- 
ton Turnpike  v.  CuUen,  8  Serg.  &  R. 
(Pa.)  517,  521  (1822).  And  see  U.  S. 
Bank  v.  Dandridge,  12  Wheat.  64, 113 
(1827);  Royalton  v.  Royalton  Tump. 
Co.,  14  Vt.  311  (1842);  Union  Turn- 
pike V.  Jenkins,  1  CaL  381,  391  (1803); 
Beatty  v.  Marine  Ins.  Co.,  2  Johns.  109 


(1807);  Commonwealth  v.  St.  Mary's 
Church,  6  Serg.  &  R.  (Pa.)  508  (1821); 
Como  V.  Port  Henry  Iron  Co.,  12 
Barb.  27  (1851);  Re  General,  etc.  Co., 
38  L.  J.  (Ch.)  320  (1869),  where  the 
general  manager  signed  instead  of 
two  directors  and  the  secretary. 
Time  notes  are  void  where  the  cliar- 
ter forbids  all  except  demand  notes. 
Root  V.  Godard,  3  McLean,  102  (1842); 
S.  C,  20  Fed.  Cas.  1159;  Root  v.  Wal- 
lace, 4  McLean,  8  (1845);  S.  C,  20 
Fed.  Cas.  1167.  The  president  cannot 
discount  paper  where  the  charter  re- 
quires the  board  to  pass  on  it.  Mau- 
derson  v.  Commercial  Bank,  28  Pa. 
St.  379  (1857).  See  also  British  Assur. 
Co.  V.  Brown,  12  C.  B.  723  (1852);  but 
here  the  contract,  being  unilateral, 
Avas  held  not  to  be  witliin  the  stat- 
ute; Edwards  v.  Cameron's,  etc.  Co., 
11  Eng.  L.  &  Eq.  565  (1852)  — an  ac- 
ceptance of  a  bill;  Ilalford  v.  Cam- 
eron's, etc.  R'y,  16  Q.  B.  442  (1851); 
Andrews,  etc.  Co.  v.  Youngstown,  etc. 
Co.,  39  Fed.  Rep.  353  (1889). 

3  The  ciLstom  of  the  corporation 
may  have  that  effect.  Barnes  v.  On- 
tario Bank,  19  N.  Y.  152  (1859);  Bulk- 
ley  V.  Derby  Fishing  Co.,  2  Conn.  253 
(1817);  Kilgore  v.  Bulkley,  14  Conn. 
362  (1841);  Kenner  v.  Lexington,  etc. 
JIfg.  Co.,  91  N.  C.  421  (1884),  hold- 
ing also  that  the  provision  must  be 


1549 


§  725.] 


HOW    COKPOKATE    CONTRACTS   AEE    MADE.        [CH.  XLIII. 


A  constitutional  and  statutory  provision  that  debts  shall  be 
incurred  only  upon  a  vote  of  the  stockholders  does  not  apply 

V.  Carmichael,  83  Tex.  355  (1893).  Al- 
thougli  the  statutes  require  contracts 
of  corporations  involving  a  liability 
of  over  $100  to  be  in  writing,  ami 
under  the  corporate  seal,  or  signed 
by  a  corporate  officer,  yet  a  i)ersou 
performing  work  for  the  company 
may  sue  on  a  quantum  meruit.  Rol> 
arts  V.  Deming,  etc.  Co.,  Ill  N.  C.  4;J3 
(1893).  A  charter  provision  as  to  cer- 
tain officers  signing  documents  may 
be  disregarded.  Re  Norwich,  etc. 
Co.,  23  Beav.  143  (1856),  where  tliree 
directors  did  not  sign  as  required. 
The  provision  in  Pennsylvania  that 
certain  corporations  shall  not  make 
certain  contracts  except  in  writing 
signed  by  two  directors  does  not 
apply  to  contracts  made  out  of  the 
state,  and  is  waived  if  the  corpora- 
tion sues  on  the  contract;  and  it  does 
not  apply  to  a  contract  executed  on 
one  side.  Park,  etc.  Co.  v.  Kelly  Axe 
Mfg.  Co.,  49  Fed.  Rep.  618  (1892). 
Where  the  charter  provides  that 
property  shall  be  purchased  by  five 
trustees,  a  purchase-money  mortgage 
executed  by  the  president  and  sec- 
retary, not  sealed  with  the  corporate 
seal  and  not  authorized  by  the  corpo- 
ration, is  void.  ]\IcElroy  v.  Nucleus 
Assoc,  131  Pa.  St.  393  (1890).  A  cor- 
porate lease  not  mala  prohibita  nor 
mala  in  se,  but  informal  in  that  all 
the  statutory  formalities  were  not 
complied  with,  supports  an  action  for 
past-due  rent.  Mayor,  etc.  v.  Wylie, 
43  Hun,  547  (1887).  But  where  a  stat- 
ute prohibited  transfers  of  securities 
over  $1,000  in  value  by  the  cashier, 
unless  the  directors  had  previously 
authorized,  a  director  taking  such 
securities  without  there  being  a  pre- 
vious authorization  takes  nothing  by 
the  transfer  and  cannot  recover  back 
what  he  paid  therefor,  the  corpora- 
tion being  in  a  receiver's  hands.  Gil- 
lett  V.  Phillips,  13  N.  Y   114  (1855). 


pleaded;  Witte  v.  Derby  Fishing  Co., 
2  Conn.  260  (1817).  If  the  corporation 
ratifies  or  receives  the  benefits  of  the 
contract,  the  contract  is  valid.  Whit- 
ney V.  Union  Trust  Co.,  05  N.  Y.  576 
(1875);  Curtis  v.  Leavitt,  15  N.  Y.  1 
(1857);  Merchants'  Bank  v.  Central 
Bank,  1  Ga.  418  (1846;.  Where  the 
statute  requires  corporate  contracts 
to  be  executed  in  a  certain  way,  a 
contract  not  so  executed  cannot  be 
enforced,  although  probably  a  quan- 
tum meruit  would  lie.  Curtis  v. 
Piedmont,  etc.  Co.,  109  N.  C.  401  (1891). 
A  bona  fide  purchaser  of  bonds  is 
protected  against  the  defense  that 
they  were  issued  illegally  and  in  vio- 
lation of  statutory  provisions,  the 
issue  itself  having  been  authorized. 
Webb  V.  Heme  Bay,  L.  R.  5  Q.  B. 
642  (1870).  A  substantial  compliance 
with  a  statutory  provision  that  bills 
of  exchange  must  be  accepted  by  the 
corporation  in  a  certain  way  is  suffi- 
cient. Halford  v.  Cameron's,  etc. 
R'y,  16  Q.  B.  442  (1851).  In  regard  to 
the  method  in  which  New  York  re- 
ligious corporations  contract  for  the 
services  of  the  minister,  see  Landers 
V.  Frank,  etc.  Church,  97  N.  Y.  119 
(1884).  A  statute  requiring  that  no 
contract  shall  be  binding  upon  a  cor- 
poration unless  made  in  writing  is 
held  to  refer  wholly  to  contracts 
executory.  Foulke  v.  San  Diego,  etc. 
R'y,  51  Cal.  865  (1876);  Renter  v.  Elec- 
tric Tel.  Co.,  6  El.  &  B.  341  (1856).  In 
this  case  an  agreement  of  the  chair- 
man was  held  to  have  been  ratified 
by  the  corporation,  though  the  deed 
of  settlement  required  the  signatures 
of  three  directors  to  contracts  of  the 
kind  in  controversy.  Bargate  v.  Short- 
ridge,  5  H.  L.  Cas.  297  (1855).  Al- 
though the  statute  says  that  deeds 
of  a  corporation  shall  be  signed  by 
the  president,  yet  signature  by  the 
vice-president  is  sufficient.    Ballard 


1550 


CH.  XLIII,]        HOW    COKPOKATE    CONTEACTS   AKE    MADE. 


[§  T25. 


to  ordinary  business  debts.^  "Acts  done  by  a  corporation, 
which  presuppose  the  existence  of  other  acts  to  make  them  le- 
gally operative,  are  presumptive'*proofs  of  the  latter."  ^  Pro- 
visions as  to  the  mode  in  Avhich  a  contract  shall  be  made,  such 
as  that  certain  notice  shall  be  given,  may,  if  not  followed,  ren- 
der the  contract  voidable,  but  not  void.'    Where  the  charter 

an  agent  appointed  for  tlie  purpose 
does  not  exclude  other  means  of  con- 
veyance, as  by  its  officers.     Morris  v. 
Keil,  20  Minn.  531  (1874),  where  the 
deed  was  by  a  foreign  corporation. 
And  in  general  the  ordinary  con- 
tracts of  the  company  may  be  made 
without  observing  this  statutory  pro- 
vision as  to  what  officers  shall  con- 
tract.   Mechanics'  Bank  v.  Bank  of 
Columbia,  5  Wheat.  326  (1820);  Prince 
of  Wales  Ass.  Co.  v.  Harding,  El., 
Bl.  &  E.  183  (1857);  Rockwell  v.  Elk- 
horn  Bank,  13  Wis.  653  (1861);  Mer- 
rick V.  Burlington    Plank-Road,  11 
Iowa,  74  (1800);  Dana  v.  Bank  of  St. 
Paul,  4  Minn.  385  (1860);  De  Groflf  v. 
American  Linen  T.  Co.,  21  N.  Y.  134 
(1860);  Creswell  v.  Lanahan,  101 U.  S. 
347  (1879);  Kelley  v.  Mayor  of  Brook- 
lyn, 4  Hill,  203  (1843);  Moreland  v. 
State  Bank,  1  111.  203  (1828);  South 
Carolina  Bank  v.  Hammond,  1  Rich. 
L.  (S.  C.)  281  (1845);    Boisgerard  v. 
N.  Y.  etc.  Co.,  3  Sandf.  Ch.  23  (1844). 
See  also  Merritt  v.  Lambert,  Hoffm. 
Ch,  166  (1840),  where  title  to  land 
was  taken  in  the  president's  name 
instead  of  the  company's.     Cf.  Farm- 
ers' Loan,  etc.  Co.  v.  Carroll,  5  Barb. 
613  (1849).    See  also  Fountaine  v.  Car- 
marthen R'y,  L.  R,  5  Eq.  316  (1868), 
where  no  previous  authorization  by 
the  stockholders  was  obtained ;  Agar 
V.  Athenaeum,  etc.  Soc,  3  C.  B.  (N.  S.) 
735  (1858),  where  a  seal  was  required 
but  was  omitted;   Lindley,  Compa- 
nies, p.  ICO. 

1  Manhattan  Hardware  Co.  v.  Pha- 
len,  128  Pa,  St.  110  (1889). 

^Demings  v.  Supreme  Lodge,  131 
N.  Y.  523  (1892). 

3  Campbell  v.  Argenta,  etc.  Co.,  51 
1 


Cf.  Atkinson  v.  Rochester,  etc.  Co., 
114  N.  Y.  168  (1889).     A  statute  pro- 
viding that  the  president  and  two 
other  members  of  a  corporation  shall 
sign  deeds  does  not  exclude  the  com- 
mon-law method.     Bason  v.  King's 
Mountain  Min.  Co.,  90  N.  C.  417  (1884). 
A  statute  requiring  corporate  con- 
tracts for  over  $100  to  be  in  writing 
does  not  apply  to  executed  contracts. 
Clowe  V.  Imperial,  etc.  Co.,  114  N.  C. 
304  (1894).     Where  the  charter  pro- 
hibits the  directors  making  a  con- 
tract for  over  $250,  unless  a  stock- 
holders" meeting  authorizes  the  same, 
a  contract  for  $2,000  without  such 
authorization  is  void.     Georgetown, 
etc.  Co.  V.  Central,  etc.  Co.,  34  S.  W. 
Rep.  435  (Kj'.,  1890).    A  provision  in 
the  charter  that  contracts  beyond  a 
certain  amount  must  be  executed  in 
a  certain  way,  or  else  ratified  by  the 
board  of  directors,  is  satisfied  if  all 
of  the  directors  assent  to  the  con- 
tract.   New  York,  etc.  Co.  v.  Metro- 
politan Inv.  Co.,  10  N.  Y.  App.  Div. 
343  (1896).  Although  a  corporate  debt 
is  not  incurred  with  the  formalities 
required  by  statute,  yet  acquiescence 
therein  by  a  stockholder  bars  any 
complaint  by  him.    Manhattan  Hard- 
ware Co.  V.  Phalen,  128  Pa,  St.  110 
(1889),      A  deed   of  corporate  land 
made  by  the  president  under  his  own 
name  and  seal  is  good  when  the  stat- 
ute said  "  the  deed  of  the  president." 
Warner  v.  Mower,  11  Vt.  385  (1839), 
But  see  Isham  v.  Bennington,  19  Vt, 
230  (1847),  where  the  deed  was  signed 
by  the  president  and  failed  to  recite 
a  resolution  authorizing  it,  and  was 
held  void,     A  statute  authorizing  a 
corporation  to  convey  real  estate  by 

155 


§  725.] 


HOW   CORPOKATE   CONTRACTS   ARE    MADE.        [cil.  XI.III. 


provides  that  certain  contracts  may  be  made  only  after  an  act 
has  been  performed  by  the  company,  a  third  person  may  rely 
on  the  company's  representation  that  the  act  has  been  done.^ 
A  by-law  requiring  that  contracts  be  made  only  by  certain  of- 
ficers, or  that  certain  formalities  shall  be  observed,  is  usually 
of  little  avail  as  against  outside  parties.  Persons  contracting 
with  the  corporation  are  not  bound  to  know  of  the  by-law,  and 
the  courts  are  reluctant  to  invalidate  a  contract  by  reason  of  it.* 


Fed.  Rep.  1  (1893).  A  bona  fide  pur- 
chaser of  a  negotiable  corporation 
bond  is  protected  in  assuming  tliat 
the  acts  of  the  corporation  and  relat- 
ing to  its  management  in  the  issue 
of  the  bonds  have  been  complied 
with.  Hackensack  Water  Co.  v.  De 
Kay,  36  N.  J.  Eq.  548  (1883);  Con- 
necticut, etc.  Ins.  Co.  v.  Cleveland, 
etc.  R.  R.,  41  Barb.  9  (18G3),  where  the 
defense  was  set  up  that  the  stock- 
holders had  not  voted  on  the  matter, 
as  required  by  statute.  The  court 
held  that  the  regvilar  execution  of  the 
corporate  powers  was  conclusively 
presumed  in  favor  of  bona  fide  hold- 
ers. Purchasers  are  not  affected  by 
informalities  in  the  notice  of  and  the 
conducting  of  meetings.  Fountaine 
V.  Carmarthen  R'y,  L.  R.  5  Eq.  316 
(1868).  It  has  been  held  that  a  pur- 
chaser of  corporate  securities  may 
safely  assume  that  all  charter  re- 
quirements in  regard  to  notes  rela- 
tive to  the  securities  have  been  com- 
plied with.  Royal  British  Bank  v. 
Turquand,  6  El.  &  B.  327  (1856);  Colo- 
nial Bank  v.  WiUan,  L.  R.  5  P.  C.  417 
<1874);  London,  etc.  R'y  u  M'3Iichael, 
5  Exch.  855  (1850),  where  the  com- 
pany sued  for  subscriptions ;  Zabriskie 
V.  Cleveland,  etc.  R.  R.,  23  How.  381 
(1859),  where  the  stockholders  ac- 
quiesced. See  also  Bank  of  U.  S.  v. 
Dandridge,  12  Wheat.  64  (1827).  But 
compare  the  cases  under  the  New 
York  statute  requiring  the  written 
consent  of  stockholders  before  a 
mortgage  -can  be  made  by  certain 
corporations.    §  779,  infra.    See  also 


§  808,  infra.  Where  directors  have 
power  to  bind  the  company,  "  but 
certain  preliminaries  are  required  to 
be  gone  through  on  the  part  of  the 
company  before  that  jwwer  can  be 
duly  exercised,  then  the  person  con- 
tracting with  the  directore  is  not 
bound  to  see  that  all  these  prelimi- 
naries have  been  observed."  Re  Land 
Credit  Co.,  L.  R.  4  Ch.  460  (1869), 
where  bills  of  exchange  had  been  is- 
sued and  the  directors  knew  it  and 
acquiesced.  Where  tlie  statute  re- 
quires the  consent  of  the  court  to  a 
moi'tgage,  tlie  mortgage  cannot  be 
foreclosed  if  such  consent  was  not 
obtained.  Dudley  v.  Congregation  of 
9#.  Francis,  N.  Y.  L.  J.,  Sept.  2,  1891. 

1  Hackensack  Water  Co.  v.  De  Kay, 
36  N.  J.  Eq.  548  (1883),  where  bonds 
were  to  be  issued  only  after  a  certain 
amount  of  the  capital  stock  had  been 
paid  in;  Royal  British  Bank  v.  Tur- 
quand, 5  EL  &  B.  248  (1855),  where  a 
resolution  was  to  precede  all  con- 
tracts. See  also  Ex  parte  American, 
etc.  Co.,  3  De  G.,  J.  &  S.  147  (1865), 
and  Prince  of  Wales  Ass.  Co.  v.  Hard- 
ing, El.,  BL  &  E.  183  (1857).  See  also 
Akin  V.  Blanchard,  32  Barb.  527  (1860) ; 
Kingsley  v.  New  England,  etc.  Ins. 
Co.,  63  Mass.  393  (1851);  Union,  etc. 
Ins.  Co.  V.  White,  106  III  67  (1883); 
Irvine  v.  Union  Bank  of  Australia, 
L.  R.  2  App.  Cas.  366  (1877). 

2  Fay  V.  Noble,  66  Mass.  1  (1853); 
Ten  Broeck  v.  Winn,  etc.  Co.,  20  Mo. 
App.  19  (1885);  Walker  v.  Wilming- 
ton, etc.  R.  R.,  26  S.  C.  80  (1887);  Bank 
n  Cresson,  12  Serg.  &  R.  (Pa.)  306 


1553 


CH.  XLIII.]        HOW    COKPOEATE    CONTEACTS    AKE    MADE. 


[§  T25. 


A  limitation  by  by-laTV  that  no  corporate  liability  sball  be 
incurred  unless  expressly  authorized  by  the  directors  does  not 


(1825);  Manville  v.  Belden,  etc.  Co.,  17 
Fed.  Rep.  425  (1883);  MorrHl  v.  Segar, 
etc.  Co.,  32  Hun,  543  (1884);  Samuel  v. 
HoUaday,  1  Woolw.  400  (1869);  S.  C, 
21  Fed.  Cas.  306;  Mechanics'  Bank  v. 
Smith,  19  Johns.  115  (1821).  A  com- 
pany is  bound  by  the  customary  con- 
tracts of  its  general  freight  agent, 
though  he  does  not  obtain  the  ap- 
proval of  the  president  as  required  by 
the  by-laws.  Medbury  v.  New  York, 
etc.  R.  R.,  26  Barb.  504  (1858).  Contra, 
Susquehanna  Ins.  Co.  v.  Perrin,  7 
Watts  &  S.  (Pa.)  348  (1844).  A  by- 
law that  contracts  for  over  a  year 
can  be  made  by  the  directors  only 
does  not  bind  a  person  who,  without 
knowledge  thereof,  makes  a  longer 
contract  with  the  general  manager. 
Moyer  v.  East  Shore  Term.  Co.,  41 
S.  C.  300  (1894).  The  treasurer  can- 
not make  a  corporate  note  good  by 
his  sole  signature  where  the  by-laws 
require  the  signature  of  the  president 
also.  Re  Millward-ClifT  Cracker  Co., 
161  Pa.  St.  157  (1894).  A  by-law  re- 
quiring contracts  to  be  signed  by  a 
certain  officer  does  not  invalidate  a 
contract  signed  by  another  officer  if 
the  party  contracting  hstd  no  knowl- 
edge of  the  by-law.  Smith  v.  Martin, 
etc.  Co.,  19  N.  Y.  Supp.  285  (1892).  If 
the  company  receives  the  money  on 
a  note  with  knowledge,  it  cannot  set 
up  that  the  note  was  not  signed  by 
the  treasurer  as  required  by  the  by- 
laws. Grant  v.  TreadweU  Co.,  1  N.  Y. 
App.  Div.  367  (1896).  The  failure  of 
the  treasurer  to  sign  a  note  as  re- 
quired by  the  by-laws  does  not  avoid 
the  note  in  bona  fide  hands.  National 
Spraker  Bank  v.  TreadweU  Co.,  80 
Hun,  363  (1894).  The  general  man- 
ager may  sell  a  part  of  the  product, 
even  though  a  by-law  requires  the 
consent  of  the  president.  Cone  v. 
Empire  Plaid  Mills,  12  N.  Y.  App. 
Div.  314  (1896).     Although  the  by- 


laws require  the  secretary  to  sign 
notes,  yet,  if  the  treasurer  is  accus- 
tomed to  sign  them,  notes  signed  by 
him  are  good.  Milbank  v.  De  Ries- 
thal,  82  Hun,  537  (1894).  So  also  as 
to  notes  signed  by  the  president  only 
when  the  by-laws  require  the  treas- 
urer to  sign  also.  Grant  v.  Tread- 
weU Co.,  82  Him,  591  (1894).  A  per- 
son contracting  with  a  corporation 
is  not  bound  to  know  that  a  by-law 
prohibits  the  officers  from  borrowing 
money  except  by  order  of  the  board 
of  directors.  Arapahoe,  etc.  Co.  v. 
Stevens,  13  Colo.  534  (1889).  A  by- 
law that  all  notes  shall  be  made  to 
the  order  of  the  company  may  be  dis- 
regarded. Stewart  v.  St.  Louis,  etc. 
R  R.,  41  Fed.  Rep.  736  (1887).  Secret 
instructions  limiting  the  apparent 
power  of  a  general  manager  to  con- 
tract do  not  affect  strangers.  Benesch 
V.  John  Hancock,  etc.  Co.,  11  N.  Y. 
Supp.  348  (1890).  Officers  entrusted 
with  the  management  of  the  coipo- 
rate  business  are  general  agents,  and 
private  restrictions  imposed  by  the 
coi-poration  are  immaterial  against 
third  persons  acting  on  the  faith  of 
the  agency.  Grafius  v.  Land  Co.,  3 
Phila.  447  (1859).  Where  the  by-laws 
provided  that  no  contract  of  the  cor- 
poration involving  a  liability  of  over 
$500  shall  be  voted  unless  signed 
by  the  president  and  treasurer  and 
sealed  with  the  corporate  seal,  a  lease 
to  the  corporation  on  a  rental  of  over 
$500,  and  signed  by  the  president 
alone,  was  held  to  be  void.  In  this 
case  it  seems  that  no  pi'oof  of  even 
an  apparent  authority  of  the  presi- 
dent was  given.  Bohm  v.  Loewer's, 
etc.  Co.,  9  N.  Y.  Supp.  514' (1890); 
Johnston  v.  Milwaukee,  etc.  Co.,  46 
Neb.  480  (1895).  A  by-law  limiting 
the  debts  of  the  company  is  waived 
where  such  excess  of  debt  is  reported 
to  the  stockholders  and  acquiesced 


98 


1553 


§  726.]  now   COEPOEATE   CONTEACTS   AEE   MADE.        [CH.  XLIIT. 

invalidate  corporate  contracts  made  by  agents  acting  "  within 
tlie  apparent  scope  of  the  agency."  * 

A  by-law  requiring  the  signature  of  the  secretary  to  notes 
issued  by  the  corporation  does  not  bind  a  person  taking  a  note 
without  actual  knowledge  of  the  by-law,  especially  where  it 
has  been  long  in  disuse.'^  A  party  contracting  with  a  corpora- 
tion is  not  bound  to  know  of  restrictions  in  the  by-laws  as  to 
the  method  of  authorizing  and  executing  contracts,  nor  is  ho 
bound  to  take  notice  that  a  quorum  of  the  directors  was  not 
present  when  the  act  was  autliorized.' 

O.    ADMISSIONS  OF  AND  NOTICE  TO  THE  VAEIOUS  OFFICERS  AND  AGENTS 
OF  A  CORPORATION. 

§  726.  Admissions  and  declarations  of  a  director,  j^residentj 
cashier,  general  manager,  treasurer,  agent,  or  stoclholdcr  as 
Regards  the  corporation. —  This  subject  is  closely  identified  with 
the  questions  discussed  in  preceding  sections.  If  a  particular 
officer  or  agent  has  power  to  represent  or  contract  for  a  corpo- 
ration, he  may  in  most  cases  bind  the  company  by  his  admis- 
sions or  declarations  in  regard  thereto.  But  his  power  to  do 
so  must  be  shown. 

The  law  is  clear  that  the  admissions  of  a  stockholder  do  not 
bind  the  corporation.'*     The  board  of  directors  acting  as  a 

in  by  them.    The  by-law  does  not  i  Rathbun  v.  Snow,  123  N.  Y.  343 

bind  strangers  who  do  not  know  of  (1890). 

it.    Underbill  u  Santa  Barbara,  etc.  2  Martin  v.  Niagara,  etc.   Co.,  122 

Co.,  93  CaL  300  (1892).    The  question  N.  Y.  165  (1890). 

of  the  regularity  of  the  action  of  cor-  »  Covmty,  etc.  Bank  v.  Rudry  Mer- 

porate  agents  and  officers  in  making  thyr,  etc.  Co.,  [1895]  1  Ch.  629. 

contracts,  and   more   especially  of  <  Polleys  u  Ocean  Ins.  Co.,  14  Me. 

waiving  provisions  in  contracts  in  141  (1837);  Mitchell  v.  Rome  R  R,  17 

violation  of  the  rules,  has  frequently  Ga.  574,  586  (1855);  Fairfield,  etc.  Co. 

arisen  in  insurance   policies  where  v.  Thorp,  13  Conn.  173  (1839);  iJeKip, 

provisions  have  been  waived  orally  1  Paige,  601  (1829;;  Sopern  Buffalo, 

or  without  the  consent  of  specified  etc.  R  R,  19  Barb.  310  (1855);  Hart^ 

officers.  Carrugi  v.  Atlantic,  etc.  Co.,  ford  Bank  v.  Hart,  3  Day  (Conn.),  491, 

40  Ga.  135  (1869).  An  insurance  policy  495  (1807) ;  Morrell  v.  Dixfield,  30  Me. 

is  good  although  not  sealed  and  with-  157  (1849);  City  Bank  v.  Bateman,  7 

out  a  clause  exempting  the  stock-  Har.  &  J.  (Md.)  104  (1826);  Magill  u 

holders  from  liability  as  required  by  Kauffman,  4  Serg.  &  R  (Pa.)  317,  321 

the    by-laws.    Re   Athenjeum,    etc.  (1818) ;  Stewart  u  Huntington  Bank, 

Soc,  4  K  &  J.  549  (1858).    The  same  11  Serg.  &  R  (Pa.)  267,  269  (1824); 

question  has  also  arisen  in  regard  to  Hosack  v.  CoUege  of  Physicians,  5 

the  contracts  of  municipal  corpora-  Wend.  547  (1830);   N.   Y.  Code  Civ. 

^^^"^  Pro.,  §  839 ;  AngeU  &  A.  Corp.,  §§  309^ 

1554 


en.  XLIII.]        HOW   COEPOKATE   C02ITRACTS   AEE   MADE. 


[§  T26. 


board  may  bind  the  company  by  admissions  and  declarations, 
but  a  single  director  cannot  do  so  except  as  a  special  agent  of 
the  company.^  ISTeither  do  the  admissions  or  declarations  of 
the  president  bind  the  company  unless  he  has  extra  powers 
given  to  him ;  -  nor  ordinarily  those  of  the  secretary  and  treas- 


657-GGO;  1  PhilL  Ev.  487,  note  134, 
saying,  "the  admissions  of  corpo- 
rators or  quasi-corporators  in  the 
United  States  are  received  or  re- 
jected upon  much  the  same  principle 
as  governs  in  respect  to  admissions 
of  agents."  The  frequently  cited  case 
of  Hartford  Bank  v.  Hart,  3  Day 
{Conn.),  491,  495  (1807),  where  it  was 
offered  to  prove  that  the  president 
and  directors  of  a  bank  knew,  when 
they  discounted  a  note,  that  the  in- 
dorsement was  forged,  and  to  prove 
this  by  tlie  confessions  of  said  presi- 
dent and  directors,  held,  that  the  evi- 
dence was  inadmissible. 

•  Magill  V.  Kaullman,  4  Serg.  &  R 
(Pa.)  317  (1818),  holding  that  while 
acts  and  declaration  of  trustees  and 
agents  of  the  congregation,  in  their 
oflScial  capacities,  are  evidence 
against  those  whom  they  represent, 
yet  their  statements  made  not  in  the 
transaction  of  the  business  of  their 
principal  are  not  evidence.  "A  fact 
once  admitted  by  a  corporation 
through  its  officer,  duly  and  properly 
acting  within  the  scope  of  his  author- 
ity, is  evidence  against  it,  and  cannot 
be  withdrawn  to  the  prejudice  of 
any  one  who,  in  reliance  upon  it,  has 
changed  his  situation  in  respect  to 
the  matter  affected  thereby.  In  such 
a  case  the  doctrine  of  estoppel  applies 
to  a  corporation  as  well  as  to  an  in- 
dividual" O'Leary  v.  Board  of  Edu- 
cation, 93  N.  Y.  1  (1883).  Admissions 
of  a  director  who  is  also  a  member 
of  the  discount  board  of  a  bank  do 
not  bind  the  corporation  unless  he 
was  a  duly  authorized  agent.  East 
River  Bank  v.  Hoyt,  41  Barb.  441 
(1864).    Declaration  of  a  director  that 


a  certain  person  is  a  corporate  agent 
does  not  bind  the  company.  Florida, 
etc.  R.  R.  v.  Varnedoe,  81  Ga.  175 
(1888) ;  Stewart  v.  Huntington  Bank, 
11  Serg.  &  R.  (Pa.)  2G7  (1824),  where 
certain  declarations  of  bank  officers 
as  to  the  disposition  to  be  made  of 
certain  collaterals  were  held  not  evi- 
dence against  the  bank.  Reports  to 
stockholders  and  directors  do  not 
bind  the  company  by  reason  of  that 
fact.  Hall  V.  Mobile,  etc.  R.  R,  58 
Ala.  10  (1877).  The  company  is  not 
bound  by  a  director's  declaration 
that  an  attorney  would  be  paid. 
Hillyer  v.  Overman,  etc.  Co.,  6  Nev. 
51  (1870).  Nor  as  to  the  purpose  of  a 
fund.  Grayville,  etc.  R.  R.  v.  Burnes, 
93  111.  303  (1879).  See  also,  in  gen- 
eral, Peck  V.  Detroit,  etc.  Works,  29 
Mich.  313  (1874);  and  §  713,  supra. 

2  The  admissions  of  the  president 
of  the  construction  company  which 
is  operating  the  road  are  not  admis- 
sible against  the  railroad  company 
which  is  sued  for  an  accident.  Cliat- 
tanooga,  etc.  R  R  u  Liddell,  85  Ga. 
483  (1890).  His  admissions  cannot 
create  a  liability.  Spyker  v.  Spence, 
8  Ala,  333  (1845);  Henry,  etc.  Co.  v. 
Northern  Bank,  63  Ala.  527  (1879). 
Admissions  of  the  president  of  a 
bank  that  it  did  not  own  a  note 
which  was  assigned  to  it  are  not  ad- 
missibla  Tuthill,  etc.  Co.  v.  Shaver, 
etc.  Co.,  35  Fed.  Rep.  644  (1888).  See 
also  City  Bank  v.  Bateman,  7  Har.  & 
J.  (Md.)  104  (1826),  where  a  declara- 
tion by  the  president  of  a  bank  to 
an  inferior  officer,  that  certain  money 
whicli  had  been  brought  into  the 
bank  by  one  of  the  directors  was  the 
money  of  the  plaintiff,  was  held  not 


1555 


§  T26.] 


HOW   COEPOKATE    COXTEACTS   AEE    MADE.        [cn.  XLIII. 


urer;  ^  nor  those  of  a  casMer,  except  as  to  matters  in  the  ordi- 
nary course  of  his  duties.^ 

The  power  of  a  superintendent  to  bind  the  company  by  his 
admissions  and  declarations  depends  on  whether  they  pertain 
to  his  work  and  duties.'    The  president  and  managing  agent  of 


admissible.  But  his  admissions  may 
prove  its  actual  indebtedness.  Hoag 
V.  Lamont,  60  N.  Y.  96  (1875).  And 
as  an  active  agent  his  admissions 
may  bind  the  company.  Nortbrup 
V.  Mississippi  VaL  Ins.  Co.,  47  IMo. 
435  (1871);  Spalding  v.  Susquehanna 
County  Bank,  9  Pa.  St.  28  (1848).  So 
also,  where  the  company  itself  fii-st 
uses  his  admissions  as  evidence. 
Western  Union  TeL  Co.  v.  Baltimore, 
etc.  Tel.  Co.,  26  Fed.  Rep.  55  (1885), 
the  court  saying,  "  a  corporation  can 
only  speak  through  its  officers  and 
agents;  and  their  declarations  made 
in  the  course  of  their  employment, 
and  relating  to  the  immediate  trans- 
action in  wliich  they  are  engaged, 
are  always  competent  against  the 
corporation. "  The  president's  admis- 
sions of  what  is  due  a  laborer  are  not 
good  in  enforcing  a  stockholder's 
statutory  liability,  unless  he  was  act- 
ing as  agent  of  the  company.  Trues- 
deU  V.  Chumar,  75  Hun,  416  (1894). 
The  statement  of  the  president  as  to 
an  accident,  he  not  being  present,  is 
not  admissibla  Lombard,  etc.  R'y 
V.  Christian,  124  Pa.  St.  114  (1889); 
Ricketts  v.  Birmingham  St.  R'y,  85 
Ala.  600  (1889).  Under  the  Alabama 
statute,  evidence  of  a  person  inter- 
ested in  the  suit  as  to  a  conversation 
between  him  and  the  deceased  presi- 
dent of  a  corporation  is  inadmissible. 
Tabler  v.  Sheffield,  etc.  Co.,  87  Ala. 
305  (1889).    See  also  §  716,  suprcu 

1  Alexander  v.  Cauldwell,  83  N.  Y. 
480  (1881);  Tripp  v.  New,  etc.  Co.,  137 
Mass.  499  (1884),  where  the  treasurer 
said  that  a  condition  had  been  per- 
formed; Kalamazoo,  etc.  Co.  v.  IMc- 
Alister,  36  Mich.  327  (1877),  where  he 
stated  a  matter  relative  to  a  salary. 


1556 


Admissions  or  declarations  of  a  sec- 
retary as  to  the  amovmt  due  the  cor- 
poration on  a  mortgage  are  not  ad- 
missible unless  it  is  shown  that  he 
was  specially  authorized  to  make 
them-  Johnston  v.  Elizabeth,  etc. 
Assoc,  104  Pa.  St.  394  (1883).  The  sec- 
retary and  assistant  treasurer  of  a 
corporation  has  no  authority  to  bind 
tlie  coi'poration  by  an  account  ren- 
dered by  him  to  a  creditor  of  the  cor- 
poration. Harvey  v.  "West  Side,  etc. 
Co.,  13  Hun,  392  (1878).  The  assignee 
of  a  contractor's  claim  against  a  com- 
pany cannot  enforce  it  on  the  ground 
that  at  the  time  of  assignment  the 
secretary  of  the  company  represented 
that  it  would  be  paid.  Barnett  v. 
South  London,  etc.  R'y,  L.  R.  18  Q.  B. 
D.  815  (1887).  In  a  suit  of  ejectment 
against  a  corporation,  evidence  tliat 
a  corporate  officer  had  tried  to  buy  it 
of  plaintiff  is  not  admissible  as  an  ad- 
mission by  the  corporation.  Mobile, 
etc.  R  R  u  Cogsbill,  85  Ala.  456 
(1888).    See  also  g  717,  supra, 

-  He  cannot  admit  that  the  signa- 
ture of  the  person  to  whom  a  certifi- 
cate of  deposit  is  issued  is  genuine, 
jMerchants'  Bank  v.  Marine  Bank,  3 
Gill  (Md.),  96  (1845);  nor  that  a  new 
company  is  liable  for  the  debts  of  an 
old  one,  Wyman  v.  Hallowell,  etc. 
Bank,  14  Mass.  58  (1817);  nor  make 
representations  as  to  an  indorser's 
responsibility,  Mapes  v.  Second  Nat. 
Bank,  80  Pa.  St.  163  (1875).  But  he 
may  admit  to  a  surety  that  a  note 
has  been  paid.  Cochecho  Nat.  Bank 
V.  HaskeU,  51  N.  H.  116  (1871). 

3  The  admissions  of  a  superintend- 
ent that  a  reward  offered  by  his  com- 
pany is  to  go  to  a  certain  person  is 
not  binding,  Blain  v.  Pacific  Exp.  Co., 


CH.  XLIII.]        HOW    CORPOKATE    COISTEACTS   AUE   MADE. 


[§  T26. 


a  corporation  have  authority  to  make  admissions  in  regard  to 
the  fulfillment  of  contracts.^  Such  also  is  the  rule  in  regard 
to  other  agents  of  the  corporation.^  "  The  declarations  of  an 
agent  or  officer  of  a  corporation  are  not  admissible,  except  when 
made  as  a  part  of  the  res  gestcB,  or  in  the  performance  of  his 
duties  as  agent  or  officer." ' 

The  admissions  and  representations  made  by  an  agent  of  a 
corporation,  acting  within  the  scope  of  his  authority  and  con- 
cerning matters  entrusted  to  him,  are  binding  upon  the  corpo- 
ration.*   There  are  a  large  number  of  cases  on  this  subject,  and 


69  Tex.  74  (1887);  nor  his  representa- 
tions as  to  the  cost  of  mining.  Han- 
over, etc.  Co.  V.  Ashland,  etc.  Co.,  84 
Pa.  St.  279  (1877).  But  he  may  admit 
the  amount  of  damage  caused  by 
a  nuisance.  ]\IcGinness  v.  Adriatic 
MiUs,  116  Mass.  177  (1874).  May  make 
admissions  as  to  an  assault  made  by 
an  employee.  [Malecek  v.  Tower,  etc. 
R'y,  57  :Mo.  17  (1874). 

1  Bullock  V.  Consumers*  Lumber 
Co.,  31  Pac.  Rep.  367  (Cal.,  1892). 

2  Their  admissions  in  regard  to  who 
paid  for  water  in  a  ditch  are  evidence 
as  to  ownership  thereof.  Imboden  v. 
Etowah,  etc.  Co.,  70  Ga  86  (1883).  So, 
also,  of  a  conductor  as  to  a  trunk, 
Morse  v.  Connecticut,  etc.  R  R.,  72 
Iowa,  450  (1856);  of  a  freight  agent 
relative  to  the  delivery  of  freight, 
Lane  v.  Boston,  etc.  R.  R.,  112  Mass. 
455  (1873) ;  and  of  a  bridge-tender  as 
to  the  proper  way  to  pass  through, 
Toll,  etc.  Co.  V.  Betsworth,  30  Conn. 
380  (1862);  but  not  of  a  road-master 
as  to  trees  that  were  cut  down,  Coyle 
V.  Ball,  etc.  R.  R.,  11  W.  Va.  94  (1877); 
nor  as  to  an  accident  after  it  had  ha]> 
pened,  McDermott  v.  Hannibal,  etc. 
R  R,  73  Mo.  516  (1881);  nor  of  train- 
men, Adams  v.  Hannibal,  etc.  R.  R, 
74  !Mo.  553  (1881);  nor  of  an  engineer 
that  a  brakeman  would  be  paid.  Stiles 
V.  Western  R  R,  49  Mass.  44  (1844); 
nor  of  a  telegraph  operator,  Sweat- 
land  V.  Illinois,  etc.  Tel.  Co.,  27  Iowa, 


433  (1869);  nor  of  an  engineer  as  to 
an  accident,  Robinson  v.  Fitchburg, 
etc.  R  R,  73  Mass.  92  (1856).  The  ad- 
missions of  a  contractor  may  bind 
the  company.  Morris,  etc.  R  R.  v. 
Green,  15  N.  J.  Eq.  469  (1862).  Dec- 
larations of  agents  made  and  known 
by  the  officers  bind  the  corporation. 
Toll-bridge  Co.  v.  Betsworth,  30  Conn. 
380  (1862). 

3  Cosgray  v.  Xew  England  P.  Co.,  22 
N.  Y.  App.  Div.  455  (1897). 

•»  Fairfield,  etc.  Co.  v.  Thorp,  13 
Conn.  173  (1839);  Stewart  v.  Hunt- 
ington Bank,  11  Serg.  &  R  (Pa.)  267 
(1824);  Hay  ward  v.  Pilgrim  Soc,  38 
Mass.  270  (1838);  Sterling  v.  Marietta 
Co.,  11  Serg.  &  R  (Pa.)  179  (1824); 
"Westmoreland  Bank  v.  Elinesmith, 
7  Watts  (Pa),  523  (1838);  Harrisburg 
Bank  v.  Tyler,  3  Watts  &  S.  (Pa.)  377 
(1842);  Farmers'  Bank  v.  McKce,  2 
Pa  St.  321  (1845);  Hackney  u  Alle- 
gheny Ins.  Co.,  4  Pa.  St.  185  (1846); 
Spalding  v.  Susquehanna  Comity 
Bank,  9  Pa  St.  28  (1848);  Crump  v. 
U.  S.  Min.  Co.,  7  Gratt.  (Va.)  352  (1851) ; 
Baptist  Church  v.  Brooklyn  Ins.  Co., 
18  Barb.  69  (1854);  Devendorf  v. 
Beardsley,  23  Barb.  656  (1857);  Troy 
Ins.  Co.  V.  Carpenter,  4  Wis.  20  (1855); 
[Metropolis  Bank  v.  Jones,  8  Pet.  12 
(1834);  Merchants'  Bank  v.  Marine 
Bank,  3  Gill  (Md.),  96  (1845);  Hart- 
ford Bank  v.  Hart,  3  Day  (Conn.),  491 
(1807);   Osgood  v.  Manhattan  Co.,  3 


1557 


§  T27.] 


HOW    COKPOEATE   CONTKAOTS   AKE   MADE.        [CH.  XUII. 


the  question  of  how  far  the  corporation  is  bound  by  the  declar 
rations  of  subordinate  agents  frequently  arises  in  the  courts. 
The  general  rule  is  very  much  the  same  as  prevails  in  regard 
to  admissions  made  by  agents  of  a  large  business  copartner- 
ship. If  the  admission  pertained  to  matters  within  the  scope  of 
that  particular  agent's  powers,  or  apparent  powers,  the  prin- 
cipal is  bound,  otherwise  it  is  not.  Thus  an  inquiry,  by  a 
purchaser  of  stock,  of  corporate  oiRcers,  as  to  whether  it  was 
full-paid  stock,  must  be  made  of  officers  having  authority  to 
speak  for  the  corporation.^ 

§  727.  Notice  to  an  incoriwrator,  stocliliolder^  agent,  super- 
intendent,  treasurer,  secretary,  cashier,  lyresident,  or  director  — 
When  does  their  Icnowlcdge  of  facts  constitute  a  notice  of  those 
facts  to  tlie  corporation — When  notice  is  chargeahle  to  direct- 
ors and  stoclholdcrs  —  Notice  of  fraud  perpetrated  on  the  cor- 
poration.—  It  is  well  settled  that  a  corporation  is  not  charge- 
able with  knowledge  of  facts  merely  because  those  facts  were 
known  to  its  incorporators^  or  stockholders'  or  clerk.*    But  the 


Cow.  632  (1824);  Polleys  v.  Ocean  Ins. 
Co.,  14  Me.  141  (1837);  Ruby  v.  Abys- 
sinian Soc,  15  Ma  306  (1838);  Old- 
town  Bank  v.  Houlton,  21  Ma  507 
(1842);  Holman  v.  Norfolk  Bank,  13 
Ala.  369  (1847);  Soper  v.  Biiffalo,  etc. 
R  R,  19  Barb.  310  (1855);  Mitchell  v. 
Rome  R  R,  17  Ga.  574  (1855);  Toll- 
bridge Co.  V.  Betsworth,  30  Conn.  380 
(1862);  Morse  v.  Connecticut  River 
R  R,  72  Mass.  450  (1856);  McGinness 
V.  Adriatic  Mills,  116  Mass.  177  (1874). 
See  also  Green's  Brice,  Ultra  Vires, 
pp.  500-504;  Wood,  Railw.  Law, 
pp.  457-465. 

1  Browning  v.  Hinkle,  48  Minn.  544 
(1892). 

2  Where  an  owner  of  a  patent  makes 
a  contract  to  assign  it,  but  after- 
wards, instead  of  doing  so,  forms  a 
corporation  and  transfers  the  patent 
to  it,  the  corporation  is  protected  in 
its  title,  although  the  patentee  was 


one  of  the  incorporators  and  also  a 
director  of  the  corporation.  Davis, 
etc.  Co.  V.  Davis,  etc.  Co.,  20  Fed.  Rep. 
699  (1884).  Upon  the  reorganization 
of  a  corporation  after  bankruptcy  the 
new  company  is  not  bound  by  the 
knowledge  of  its  corporators  as  to 
the  existence  of  incumbrances  on 
property  purchased  from  the  old 
company.  Burt  v.  Batavia  Paper 
Mfg.  Co.,  86  IlL  66  (1877).  « If  false 
and  fraudulent  representations  are 
made  to  persons  who  afterwards  be- 
come officers  or  agents  of  a  corpora- 
tion, and  the  corporation  acts  on  the 
faith  of  such  representations  and  is 
thereby  defrauded,  an  action  wUl  lie 
in  favor  of  the  corporation  for  the 
damages  thus  sustained."  Iowa,  etc. 
Co.  V.  American,  etc.  Co.,  82  Fed.  Kep. 
735  (1887). 

3  A  company  formed  to  purchase  a 
patent-right  is  protected  in  its  title. 


*  Knowledge  of  a  bank  clerk  of  the    bank.  Goodloe  v.  Godley,  21  Miss.  233 
place  of  residence  of  a  party  charge-    (1849). 
able  as  indorser  is  not  notice  to  the 

1558 


CH.  XLIII.]        HOW    COEPOEATE    CONTEACTS   AEE   MADE. 


[§  T27. 


corporation  has  notice  of  facts  wliich  come  to  the  knowledge 
of  its  officers  or  agents  while  engaged  in  the  business  of  the  cor- 
poration, provided  those  facts  pertain  to  that  branch  of  the  cor- 
porate business  over  which  the  particular  officer  or  agent  has 
some  control.  Thus,  a  corporation  has  been  charged  with  notice 
of  facts  which  were  known  at  the  time  to  its  agent,^  local  agent,'' 


although  some  of  its  promoters  and 
stockholders  knew  of  an  infirmity  in 
the  title.  Racine,  etc.  Co.  v.  Joliet,  etc. 
Co.,  27  Fed.  Eep.  367,  375  (1886);  Hou- 
satonic  Bank  v.  IMartin,  42  Mass.  294, 
308  (1840),  where  it  was  unsuccess- 
fully sought  by  a  mortgagor  to  de- 
feat his  deed  by  a  subsequent  assigu.- 
ment,  on  the  ground  that  members 
of  the  corporation  mortgagee  had 
knowledge  of  the  assignment;  Union 
Canal  Co.  v.  Loyd,  4  Watts  &  S.  (Pa.) 
393  (1842).  wliere,  in  a  contest  over 
title  to  land,  evidence  was  held  prop- 
erly excluded  which  depended  on  the 
fact  that  a  party  was  a  stockholder 
in  a  company,  and  constructive  no- 
tice of  adverse  claims  was  thereby 
sought  to  be  established  against  the 
company.  See  Fairfield  Sav.  Bank  v. 
Chase,  72  Me.  226  (1881). 

1 "  Notice  to  one  agent  of  a  corpo- 
ration, with  respect  to  a  matter  cov- 
ered by  his  agency,  must  be  as  effi- 
cacious as  to  its  directors  or  to  its 
president,  since  these  also  are  only 
agents,  with  larger  powers  and  du- 
ties, it  is  true,  but  not  more  fully 
charged  with  respect  to  the  particu- 
lar thing  than  he  whose  authority  is 
confined  to  that  one  thing."  Saint  v. 
Wheeler,  etc.  Co.,  95  Ala.  362  (1892). 
Notice  to  an  agent,  but  not  in  the 
course  of  his  business,  is  not  notice 
to  the  corporation.  Willard  v.  Denise, 
50  N.  J.  Eq.  482  (1892).  Where  two 
corporations  deal  with  each  other 
through  a  common  agent,  the  ques- 
tion of  notice  depends  upon  the  cir- 
cumstances of  each  case.  Lyndon, 
etc.  Co.  V.  Lyndon,  etc.  Inst.,  22  AtL 
Rep.  575  (Ma,  1891).  The  corporation 


is  given  notice  of  a  breach  of  trust 
by  an  attorney  in  fact  for  the  trans- 
fer of  stock,  the  attorney  being  one 
of  its  directors.  Tafft  v.  Presidio,  etc. 
Co.,  84  Cal.  131  (1890),  rev'g  22  Pac. 
Rep.  485  (1889).  "  In  case  of  a  corpo- 
ration created  for,  and  engaged  in, 
trade  or  business,  service  of  a  notice 
on  any  officer  or  agent  of  the  com- 
pany whose  duty  it  is,  either  in  his 
official  capacity  or  by  virtue  of  hia 
employment,  to  communicate  the 
fact  of  such  service  to  the  governing 
body  of  the  corporation,  is  tanta- 
mount to  personal  service  in  case  of 
a  natural  person."  State  v.  Felton, 
52  N.  J.  L.  161  (1889).  The  knowledge 
of  an  agent,  whose  powers  are  no 
greater  than  those  of  the  master  of 
a  ship,  is  not  notice  to  a  corporation. 
Craig  V.  Continental  Ins.  Co.,  141  U.  S. 
638  (1891).  In  Consolidated,  etc.  Co. 
V.  Kansas,  etc.  Co.,  45  Fed.  Rep.  7 
(1891),  the  court  said :  "  Facts  coming 
to  the  knowledge  of  an  agent  or  at- 
torney while  engaged  about  the  busi- 
ness of  his  agency  are,  in  law,  pre- 
sumed to  be  known  to  the  principal 
or  client."  As  to  when  a  client  is 
chargeable  with  knowledge  of  facts 
known  to  the  attorney,  see  Slattery 
V.  Schwannecke,  44  Hun,  75  (1887); 
aff 'd,  118  N.  Y.  543.  A  corporation  tak- 
ing an  assignment  of  a  patent  with- 
.out  notice  that  another  party  was 
entitled  to  it  is  protected.  Averill  v. 
Barber,  6  N.  Y.  Supp.  255  (1889). 

2  Knowledge  of  a  local  insurance 
agent  that  the  insured  is  insuring 
for  his  firm  is  notice  to  the  com- 
pany. Keith  V.  Globe  Ins.  Co.,  52 
111.  518  (1869).    Knowledge  of  a  local 


1559 


§  72 v.]  HOW   CORPORATE   CONTEACt'S    ARE    MADE.        [CU.  XLIIT. 

or  superintendent.'     So  also  as  regards  tlie  higher  officers  of 
the  company.     Thus,  the  company  has  been  charged  with  no- 


agent  that  the  insured  had  gone  be- 
yond the  limits,  and  receipt  of  pre- 
miums thereafter,  bind  the  company. 
Wing  V.  Harvey,  5  De  G.,  JL  &  G.  2G5 
(1854).  Notice  to  insurance  company 
of  a  subsequent  insurance.  Schenck 
V.  Mercer,  etc.  Ins.  Co.,  24  N.  J.  L.  447 
(1854).  See  also,  in  general,  as  to  in- 
surance, Troy,  etc.  Ins.  Co.  v.  Car- 
penter, 4  Wis.  20  (1855);  Bennett  v. 
Maryland,  etc.  Co.,  14  Blatchf.  423 
(1878);  S.  C,  3  Fed.  Cas.  229;  McEwen 
V,  Montgomery,  etc.  Co.,  5  Hill,  101 
(1843).  And  see  text-books  on  insur- 
ance law.  "  Notice  to  an  agent  of  a 
bank,  or  other  corporation  entrusted 
with  the  management  of  its  busi- 
ness, or  of  a  particular  branch  of  its 
business,  is  notice  to  the  corporation 
in  transactions  conducted  by  such 
agent,  acting  for  the  corporation, 
within  the  scope  of  his  authority, 
whether  the  knowledge  of  such  agent 
was  acquired  in  the  course  of  the 
particular  dealing  or  on  some  prior 
occasion."  Cragie  v.  Hadley,  99  N. 
Y.  131  (1885);  Wood,  Railw.  Law, 
pp.  457-465;  Smith  v.  Board,  etc.  Co., 
38  Conn.  208  (1871).  To  this  rule 
there  are  certain  limitations  more  or 
less  depending  on  the  time  of  notice 
and  the  occasion  of  such  notice;  for 
example,  while  acting  in  the  ordi- 
nary course  of  his  employment  as 
agent,  notice  to  such  agent  of  a  cor- 
poration is  notice  to  the  corporation 
itself.  But  if  such  notice  is  given 
at  an  inopportune  time,  or  upon  an 
inappropriate  occasion,  constructive 
notice  to  the  corporation  may  ipso 
facto  be  easily  rebutted.  Seneca 
County  Bank  v.  Neass,  5  Denio,  329 
(1848);  Holden  v.  New  York,  etc. 
Bank,  72  N.  Y.  294  (1878).  It  is  well 
known  that  presumptive  notice  to  a 
principal  by  reason  of  knowledge  of 


an  agent  or  trustee  interested  in  con- 
cealing the  fact  from  Jiis  principal 
cannot  be  imputed  to  the  principaL 
Cmtis  V.  Leavitt,  15  N.  Y.  194,  195 
(1857);  Commissioners  v.  Thayer.  94 
U.  S.  G31  (1876).  This  is  equally  true 
in  the  case  of  corporate  agents.  Sen- 
eca County  Bank  v.  Neass,  5  Denio, 
329  (1848).  When  the  agent  himself 
is  the  person  charged  with  tlie  fraud, 
notice  to  the  principal  through  such 
an  agent  cannot  be  presumed,  for  it 
is  the  interest  of  the  agent  to  conceal 
the  facts  from  his  principaL  Cave 
V.  Cave,  L.  R.  15  Ch.  D.  639  (1880). 
Knowledge  obtained  by  the  corpo- 
rate attorney  and  agent  in  another 
transaction  does  not  bind  the  coi^po- 
ration.  Constant  v.  Rochester  Uni- 
versity, 111  N.  Y.  604  (1888);  Fairfield 
Sav.  Bank  v.  Chase,  72  Me.  226  1 1881). 
Notice  to  a  bank  clerk  of  matters 
not  under  his  charge  is  not  notice 
to  the  bank.  Goodloe  v.  Godley,  21 
Miss.  233  (1849). 

1  Knowledge  of  the  general  officers 
that  an  employee  is  incompetent  is 
notice  to  the  corporation,  and  it  is 
liable  for  his  negligence  in  running 
a  train.  Pittsburgh,  etc.  R'y  v.  Ruby, 
38  Ind.  294,  313  (1871).  Knowledge 
of  the  company's  supervising  engi- 
neer that  the  contractors  in  the  con- 
struction of  the  bridge  are  innocently 
omitting  certain  things  is  notice  to 
the  company.  Danville  Bridge  Co. 
V.  Pomroy,  15  Pa.  St.  151  (1850). 
Knowledge  of  a  superintendent  'of 
an  unrecorded  lien  is  not  notice  to 
his  company  to  which  he  conveys  the 
property  so  subject.  Wickersham  v. 
Chicago,  etc.  Co.,  18  Kan.  481  (1877). 
Knowledge  by  the  superintendent  of 
a  coal  mine  of  a  dangerous  roof  is 
notice  to  the  company.  Quincy,  eto. 
Co.  V.  Hood,  77  IlL  68  (1875). 


1560 


CH.  XLIII.]        HOW    COEPOEATE    CONTKACTS    AEE    JIADE. 


[§  T2T. 


tice  of  facts  known  to  the  treasurer,*  secretary,^  casliier,'  and 
manager/    !N'otice  to  the  president  of  a  bank  is  notice  to  the 


1  Hotchkiss,  etc.  Co.  v.  Union  Nat 
Bank,  68  Fed.  Rep.  76  (1895).  Where 
the  treasurer  of  two  corporations 
takes  the  funds  of  one  and  places 
them  with  the  other  to  make  good  a 
defalcation  from  the  latter,  the  lat- 
ter corporation  is  liable,  since  it  is 
chargeable  with  the  knowledge  of  its 
treasurer.  Atlantic  Cotton  Mills  v. 
Indian  Orchard  ]\Iills,  147  Mass.  268 
(1888).  Payment  to  the  treasurer, 
who  enters  the  same  on  the  books,  is 
notice  to  the  company,  since  the  di- 
rectors, if  they  did  their  duty,  would 
know  of  such  entry.  New  England, 
etc.  Co.  V.  Union,  etc  Co.,  4  Blatchf. 
1  (1857). 

2  Knowledge  of  the  secretary  that 
a  vessel  is  being  run,  not  by  the  own- 
ers, but  by  a  third  person,  is  notice 
to  the  corporation,  and  it  cannot  sue 
the  owners  for  work  done.  Pontchar- 
train  R.  R  r.  Heirne,  2  La.  Ann.  129 
(1847).  Knowledge  of  the  secretary 
that  his  wife,  the  owner  of  stock, 
had  pledged  that  stock,  is  not  notice 
to  the  corporation.  Piatt  v.  Birming- 
ham, etc.  Co.,  41  Conn.  255  (1874). 
Notice  to  one  acting  for  the  secre- 
tary in  his  absence,  and  at  his  place 
of  business,  is  as  effectual  as  though 
given  to  the  secretary  himself.  Mc- 
Kenney  v.  Diamond,  etc.  Assoc,  8 
Houst.  (Del)  557  (1889).  Notice  to  the 
secretary,  who  is  also  a  director,  that 
a  note  given  by  the  corporation  had 
been  assigned  by  the  payee  to  another, 
is  sufficient  notice  Love  v.  Anchor, 
etc.  Co.,  45  Pac.  Rep.  1044  (CaL,  1896). 

3  Kiiovvledge  of  the  cashier  and 
manager  of  a  bank,  acquired  in  the 
bank  business,  that  an  unrecorded 
deed  has  been  made,  defeats  the 
bank's  deed.  Johnson  v.  Shortridge, 
93  Ma  227  (1887).  A  bank  may  be  a 
bona  fide  purchaser  of  a  draft  from 
its  cashier  who  has  notice  of  de- 
fenses.    Hummell  v.  Bank  of  Mon- 


roe, 75  Iowa,  689  (1888).  Knowledge 
of  the  cashier  of  a  bank  that  stock 
received  in  pledge  is  trust  stock  is 
notice  to  the  bank.  Loring  v.  Brodie, 
134  Mass.  453  (1883).  See  also  Second 
Nat  Bank  v.  Howe,  40  Minn.  390  (1889). 
The  cashier's  knowledge  of  fraud 
in  a  note  is  notice  to  the  company. 
Fall,  etc.  Bank  v.  Sturtevant,  66  Mass. 
372  (1853).  Notice  to  the  cashier  of 
acceptance  of  the  bank  to  receive 
payment  in  bonds  is  good  notice. 
Branch  Bank  v.  Steele,  10  Ala.  915 
(1846).  Notice  to  a  cashier  that  bank 
funds  have  been  loaned  is  notice  to 
the  bank.  New  Hope,  etc.  Co.  v. 
Phenix  Bank,  3  N.  Y.  156  (1849). 
Where  the  directors  acquiesce  in  the 
cashier's  assumption  of  exclusive 
management  of  the  bank's  business, 
they  will  be  held  chargeable  witli 
knowledge  of  such  things  as  by 
proper  diligence  they  might  and 
should  have  known  as  to  the  condi- 
tion of  business.  Martin  v.  Webb, 
110  U.  S.  7  (1884).  Knowledge  of  the 
cashier  that  a  person  turning  in  prop- 
erty to  the  bank  is  insolvent  is  notice 
to  the  bank.  Witters  v.  Sowles,  32 
Fed.  Rep.  762  (1887).  Notice  to  the 
cashier  is  notice  to  the  bank.  Bank 
of  St.  ]\rary"s  v.  :\Iumford,  6  Ga.  44 
(1849);  Trenton,  etc  Co.  v.  Woodruff, 
2  N.  J.  Eq.  117  (1838).  But  knowledge 
obtained  by  the  cashier  outside  of  liis 
duties  is  not  notice  to  the  bank 
(dictimi).  Seneca  Co.  Bank  v.  Neass, 
5  Denio,  329,  337  (1848). 

*  Where  the  general  manager  and 
secretary  does  the  corix)rate  business 
entirely  as  he  sees  fit,  his  knowledge 
of  facts  is  notice  to  the  corporation. 
Anderson  v.  Kinley,  90  Iowa,  554 
(1894).  A  pledgee  is  entitled  "to  col- 
lect the  dividends,  and  in  some  in- 
stances may  do  so,  even  though  the 
stock  is  not  transferred  to  him  on 
the  books,  it  being  shown  tliat  the 


1561 


§  T2T.] 


HOW    COEPOEATE    CONTEACTS   AEB   MADE.        [CH.  XLIIL 


company  unless  he  is  interested  on  the  other  side  of  the  trans- 
action.* 

There  are  many  conflicting  decisions,  however,  on  this  sub- 
ject of  whether  notice  to  the  president  is  notice  to  the  corpo- 
ration, and  in  general  the  question  may  be  said  to  be  one  of 
fact.^    "Where  a  corporation  takes  title  to  land  through  its 


officers  knew  of  the  pledga  Guaran- 
tee Co.  V.  East  Rome  Town  Co.,  96 
Ga.  511  (1895).  It  may  be  a  question 
of  fact  whether  a  sale  of  property  to 
the  corporation  for  stock  was  made, 
even  though  a  certificate  of  stock 
was  issued-  The  delivery  of  all  the 
papers  may  have  been  in  escrow. 
The  knowledge  of  a  promoter  who 
then  becomes  general  manager  may 
be  notice  to  the  corporation.  Huron, 
etc.  Co.  V.  Kittleson,  4  S.  D.  520  (1894). 
Notice  prior  to  incorporation  to  a 
person  who  becomes  an  officer  upon 
incorporation  is  not  notice  to  the 
corporation,  even  though  he  trans- 
acts the  business.  Taj'lor  v.  Calla- 
way, 7  Tex  Civ.  App.  461  (1894).  Al- 
though a  managing  director  of  one 
company  is  secretary  of  another 
company,  yet  knowledge  that  he  has 
as  to  the  latter  company  is  not  no- 
tice to  the  former  company.  Re 
Hampshire  Land  Co.,  [1896]  2  Ch. 
743.  Notice  to  a  managing  director 
while  acting  as  such,  and  affecting 
business  under  his  charge,  is  notice 
to  the  company.  Dr.  Jaeger's,  etc. 
Ltd.  V.  Walker  &  Sons,  77  L.  T.  Rep. 
180  (1897).  Knowledge  which  a  man- 
aging director  had  in  regard  to  real 
estate  three  years  prior  to  the  or- 
ganization of  the  corporation  is  not 
in  itself  notice  to  the  corporation. 
Red  River,  etc.  Co.  v.  Smith,  74  N. 
W.  Rep.  194  (N.  D.,  1898). 

1  Louisville  T.  Co.  v.  Louisville,  etc. 
R'y,  75  Fed.  Rep.  433  (1896);  50  N.  E. 
Rep.  1079. 

2  The  case  of  Kissam  v.  Anderson, 
145  U.  S.  485  (1892),  reversed  the  de- 
cision below  on  the  ground  that  it 
was  for  the  jury  to  say  whether  the 


bank,  whose  funds  were  used  by  the 
president  to  pay  the  broker,  had  no- 
tice of  payments  by  the  broker  to  the 
president.  A  corporation  to  which 
the  principal  stockholder,  incorpo- 
rator, and  president  conveys  land  is  a 
purchaser  with  notice  unless  it  proves 
tlie  contrary.  Billings  v.  Aspen,  etc. 
Co.,  51  Fed.'  Rep.  338,  349  (1892).  A 
bank  is  not  given  notice  as  to  de- 
fenses to  notes  of  a  cattle  company 
presented  to  the  bank  by  its  presi- 
dent, but  in  behalf  of  the  cattle 
company.  Corcoran  v.  Snow  Cattle 
Co.,  151  Mass.  74  (1890).  ICnowledge 
which  a  trustee  of  a  railroad  mort- 
gage receives  as  trustee  binds  an- 
other company  in  which  he  is  presi- 
dent and  superintendent.  New  York, 
etc  R.  R  V.  New  York,  etc.  R  R.,  52 
Conn.  274,  280  (1884).  Notice  to  the 
president  that  stock  is  held  in  trust 
is  notice  to  the  company.  Porter  v. 
Bank  of  Rutland,  19  Vt.  410  (1847). 
Notice  to  the  president  of  a  bank  that 
the  village  is  being  sued  for  damage 
due  to  the  bank's  sidewalk  is  notice 
to  the  bank.  Port  Jervis  v.  First  Nat. 
Bank,  96  N.  Y.  550  (1884).  See  also 
Gold  Min.  Co.  v.  National  Bank,  96 
U.  S.  640  (1877).  Knowledge  of  the 
president  that  a  person  who  is  turn- 
ing property  in  to  the  bank  is  in- 
solvent is  notice  to  the  bank.  Gilman 
V.  Second  Nat.  Bank,  23  Him,  498 
(1881).  See  also  Central,  etc.  Bank  v. 
Levin,  6  Mo.  App.  543  (1879);  First 
Nat.  Bank  v.  Fricke,  75  Mo.  178  (1881). 
Cf.  First  Nat.  Bank  v.  Sherburne,  14 
Bradw.  (IlL)  566  (1884).  Notice  to  the 
president  and  certain  stockholders 
who  are  sent  to  investigate  for  tlie 
corporation  is  notice  to  the  corpora- 


1562 


CH.  XLIII.]        HOW    COKPOKATE    CONTEACTS   AKE    MADE. 


[§  T27. 


incorporators,  and  all  of  them  as  well  as  the  president  had  con- 
structive or  actual  knowledge  of  a  flaw  in  the  title,  the  corpo- 


tion.  U.  S.  V.  San  Pedro,  etc.  Co.,  4 
X.  M.  225  (1888).  Knowledge  of  a 
president  in  regard  to  property  which 
he  sells  to  the  company  is  not  notice 
to  the  company.  Barnes  v.  Trenton, 
etc.  Co.,  27  N.  J.  Eq.  33  (1876).  Where 
it  was  attempted  to  impute  to  a  cor- 
poration the  knowledge  of  its  presi- 
dent of  a  prior  unrecorded  convey- 
ance, it  was  held  this  could  not  be 
done  where  the  knowledge  was  gen- 
eral and  not  specific  or  official  U.  S. 
Ins.  Co.  V.  Sliriver,  3  Md.  Cli.  381 
(1851);  S.  C.  on  appeal,  sub  noin. 
General  Ins.  Co.  v.  U.  S.  Ins.  Co.,  10 
Md.  517  (1857).  Knowledge  by  the 
president  of  outstanding  equities  to 
land  mortgaged  by  him  to  the  cor- 
poration is  not  notice  thereof  to  the 
company.  Winchesters.  Baltimore, 
etc.  R,  R.,  4  I\Id.  231,  239  (1853).  No- 
tice to  a  stockholder  who  is  also 
president  of  another  company  is  not 
notice  to  the  latter.  First  Nat.  Bank 
V.  Anderson,  28  S.  C.  143  (1888).  The 
company  is  bound  to  take  notice  of 
the  extent  of  a  power  of  attorney 
given  by  a  third  person  to  its  presi- 
dent. [Mechanics'  Bank  v.  Schaum- 
berg,  38  Mo.  228  (1866).  The  k-nowl- 
edge  of  the  vendor  of  personalty  to 
a  corporation  that  a  chattel  mort- 
gage exists  is  not  necessarily  notice 
to  the  corporation,  although  he  be- 
comes its  president  and  general 
manager.  It  is  for  the  jury  to  decide 
whether  there  are  not  bona  fide  stock- 
holders who  would  be  injured  by  such 
a  result.  International,  etc.  Co.  v.  Mo- 
Morran,  73  Mich.  467  (1889).  Knowl- 
edge of  one  who  is  president  of  a 
railroad  and  also  of  a  bank,  where  the 
bank  discounts  paper  for  the  rail- 
road, is  notice  to  the  bank  if  he  took 
part  in  its  action.  Waynesville  Nat. 
Bank  v.  Irons,  8  Fed.  Rep.  1  (1881); 
and  see  the  nota  Notice  to  a  member 
of  a  copartnership  is  not  notice  to  a 


corporation  of  which  that  member  is 
president.  Miller  u  Illinois,  etc.  R.  R, 
24  Barb.  312  (1857).  The  president  and 
treasurer  who  stand  by  and  allow 
another  to  purchase  property  witli- 
out  saying  that  the  company  has  a 
claim  thereon  bind  the  company 
thereby.  ]\Iihills  Mfg.  Co.  v.  Camp,  49 
Wis.  130  (1880).  Knowledge  of  a 
president  and  director  of  a  transfer 
of  stock  is  notice  to  the  company. 
Factors',  etc.  Co.  v.  Marine,  etc.  Co., 
31  La.  Ann.  149  (1879).  Knowledge 
of  a  vice-president  is  not  notice  to 
the  company.  Fisher  v.  Murdock,  13 
Hun,  485  (1878).  Although  the  presi- 
dent and  cashier  are  the  discount 
committee  and  discovmt  a  note  which 
is  indorsed  by  the  president,  the 
bank  is  not  chai'ged  with  notice  that 
the  ^ote  was  given  for  an  illegal 
purpose.  Graham  v.  Orange  County 
Nat.  Bank,  59  N.  J.  L.  225  (1896).  The 
fact  that  the  maker  of  a  note  tells 
the  president  of  a  bank,  at  the  office 
of  another  company  in  which  they 
are  both  directors,  that  a  certain 
note  was  fraudulent,  is  not  notice  to 
the  bank,  although  it  afterwards 
discounts  the  note.  Washington  Nat. 
Bank  v.  Pierce,  6  Wash.  491  (1893). 
Where  the  president  of  a  bank  pur- 
chases for  the  bank  a  note  from  a 
corporation  in  which  he  is  a  director, 
the  bank  is  chargeable  with  notice  of 
defenses  to  the  note  known  to  the 
vendor  of  the  note.  Traders'  Nat. 
Bank  v.  Smith,  22  S.  W.  Rep.  1056 
(Tex.,  1893).  Knowledge  acquired  by 
an^ttorney,  as  attorney,  of  the  execu- 
tion of  a  mortgage,  is  chargeable  to 
a  corporation  which  takes  a  subse- 
quent mortgage,  where  the  attorney 
is  the  president  of  the  corporation. 
Willard  v.  Denise,  50  N.  J.  Eq.  483 
(1893).  A  bank  is  not  chargeable 
with  knowledge  of  the  fact  that  its 
president,  in  depositing  money  to  his 


1563 


§  T2Y.] 


HOW   COKPOKATE    CONTKACTS   AHE   MADE.        [CH.  XLIII. 


ration  thereby  had  similar  notice.^  Where  a  patentee  is  under 
obligation  to  assign  his  patent,  a  corporation  wholly  owned 
by  him  is  not  protected  as  a  lonajide  purchaser  of  the  patent 
from  him.2  "Where  an  attornej^  in  fact  for  the  sale  of  a  patent 
causes  his  friends  to  organize  a  corporation,  and  then  sells  the 
patent  to  the  corporation  on  terms  entirely  beyond  his  autlior- 
ity,  his  principal  may  repudiate  the  sale,  and  the  company  is  not 
a  dona  fide  purchaser,  inasmuch  as  its  projector  and  organizer 
was  the  attorney.  Another  company  to  which  the  principal 
again  assigns  his  patent  may  sue  the  former  company  for  in- 
fringement.^ In  general  the  test  turns  on  whether  the  corpo- 
rate agent  received  the  knowledge  in  the  regular  course  of 
business.  Knowledge  by  an  officer,  derived  as  an  individual 
and  not  while  acting  officially  for  the  corporation,  cannot  oper- 
ate to  its  prejudice,  and  will  not  be  imputed  to  it.'' 

The  corporation  is  sometimes  chargeable  with  knowledge  of 
facts  which  are  kno\vn  to  one  of  its  directors ;  *  but  there  are 


individual  credit,  was  depositing 
trust  funds.  He  Plankinton  Bank, 
87  Wis.  378  (1894).  Where  the  presi- 
dent of  a  corporation  sells  property 
to  it,  the  corporation  is  not  charge- 
able with  notice  of  defects  in  the 
title  known  to  him.  Higgins  v.  Lan- 
singh,  154  IlL  301  (1895).  Where  the 
treasurer  of  a  corporation  is  also 
vice-president  of  a  bank  and  draws 
out  the  funds  of  the  former,  taking 
in  payment  a  draft  running  to  him- 
self individually,  the  bank  is  not 
chargeable  with  notice  of  a  diversion 
of  the  corporate  funds  to  his  own 
use.  Gunster  v.  Scranton  Illuminat- 
ing, etc.  Co.,  181  Pa.  St.  327  (1897). 

1  Simmons,  etc.  Co.  v.  Doran,  142 
U.  S.  417,  436  (1892). 

2  National  Conduit  Mfg.  Co.  v. 
Connecticut  Pipe  Mfg.  Co.,  73  Fed. 
Rep.  491  (1896). 

3  Young  Reversible,  etc.  Co.  v. 
Young  Lock-Nut  Co.,  72  Fed.  Rep.  62 
(1896). 

4  CascoNat.  Bank  v.  Clark,  139  N.  Y. 
307  (1893);  Merchants'  Nat  Bank  v. 
Clark,  139  N.  Y.  314  (1893).    Concern- 


ing notice  to  an  officer  wlio  is  acting 
as  a  third  party,  and  not  for  a  com- 
pany, see  also  First  Nat.  Bank  v. 
Tompkins,  57  Fed.  Rep.  20  (1893). 
AVhere  the  same  persons  are  officers 
of  a  corporation  and  trustees  for  the 
benefit  of  its  creditors,  notice  to  them 
as  such  officers  is  not  notice  to  them 
as  trustees.  New  York  Security,  etc. 
Co.  V.  Lombard  Inv.  Co.,  65  Fed.  Rep. 
271  (1895).  Notice  to  an  officer  who 
is  personally  interested  is  not  notice 
to  the  coi-jDoration.  Victor,  etc.  Co.  v. 
National  Bank,  49  Paa  Rep.  826  (Utah, 
1897  j.  A  corporation  is  not  charge- 
able with  notice  of  the  fact  that  the 
parties  conveying  property  to  it  for 
stock  are  doing  so  in  breach  of  trust, 
even  though  such  parties  are  direct- 
ors in  the  corporation-  This  rule 
wHl  be  applied,  especially  where  the 
beneficiary  has  been  guilty  of  laches. 
Whittle  V.  Vanderbilt,  etc.  Co.,  83 
Fed.  Rep.  48  (1897). 

s  A  corporation  is  chargeable  with 
notice  of  facts  known  to  its  directors 
whereby  the  corporation  acqmred 
title  to  a  large  property  from  the 


1564 


CH,  XLni.]        HOW    COEPOEATE    CONTEACTS   AEE   MADE. 


[§  T27. 


so  many  exceptions  to  this  rule  that  the  only  safety  lies  in  a 
study  of  the  cases  themselves.^ 


bondholders  of  a  foreclosed  company. 
Rogers  v.  New  York,  etc.  Land  Co., 
134  N.  Y.  197  (1892).  Notice  to  a  di- 
rector is  not  notice  to  the  company 
except  "  in  the  business  to  which  the 
knowledge  is  material  through  the 
agency  of  such  director  acting  either 
alone  or  as  one  of  the  board."  But- 
trick  V.  Nashua,  etc.  R  R.,  62  N.  H. 
413  (1882).  The  knowledge  of  a  pat- 
entee that  a  label  claims  more  than 
is  correct  is  not  notice  to  a  corpora- 
tion wMch  purchased,  owns,  and  oper- 
ates the  patent,  although  he  is  a  di- 
rector. Lawrence  v.  Holmes,  etc.,  45 
Fed.  Rep.  357  (1891).  The  fact  that  a 
director  in  a  bank  negotiates  the  sale 
of  commercial  paper  to  it  does  not 
charge  the  bank  with  notice  of  de- 
fenses to  the  paper.  Koehler  v.  Dodge, 
31  Neb.  328  (1891).  If  a  director  act 
in  behalf  of  a  bank  in  a  transaction 
of  which  the  bank  takes  the  benefit, 
the  bank  is  chargeable  with  a  knowl- 
edge of  all  the  director's  acts  in  such 
transaction.  Smith  v.  South  Royal- 
ton  Bank,  32  Vt.  341  (1859).  Notice  to 
a  director  who  is  acting  as  a  special 
agent  is  notice  to  a  bank.  Fulton 
Bank  v.  Benedict,  1  Hall  (N.  Y),  480, 
557  (1829);  Farmers'  Bank  v.  McKee, 
3  Pa.  St.  318  (1845).  Notice  to  three 
trustees  and  superintendent  of  re- 
pairs for  a  corporation  that  the  water 
from  the  bank  building  was  not  prop- 
erly conducted  away  is  notice  to  the 
corporation.  Tlie  "  j  ury  may  presume 
tJiat  the  trustee  did  his  duty  by  com- 
municating to  the  corporation  the 
knowledge  he  had  obtained,  and 
wluch  it  was  material  that  the  cor- 
poration should  know."  "Winne  v. 
Ulster,  etc.  Inst,  37  Hun,  349  (1885). 
Knowledge  of  a  firm  dissolution  im- 
parted to  the  board  by  a  director  at 
a  regular  meeting  is  notice  to  the 
bank.  Bank  of  Pittsburgh  r.  "N,\Tiit6- 
head,  10  "Watts  (Pa,),  397  (1840).     In 


Re  Carew's  Estate  Act,  31  Beav.  39 
(1862),  where  a  director  and  local 
manager  of  a  bank  obtained  posses- 
sion of  certain  acceptances  without 
consideration,  had  them  discoimted 
by  the  bank,  and  carried  to  his  ac- 
count, which  was  largely  overdrawn, 
the  bank  was  held  to  have  notice  suf- 
ficient to  prevent  its  being  a  bona  fide 
owner.  Notice  once  given  to  a  board 
of  directors  is  notice  to  its  successor, 
although  the  individuals  constitut- 
ing it  are  all  different.  Mechanics' 
Bank  v.  Baton,  1  Pet.  299,  309  (1828). 
A  director  who,  as  attorney  for  the 
company,  takes  an  acknowledgment 
of  a  mortgage  to  it  binds  the  com- 
pany with  notice  when  he  had  previ- 
ously taken  an  acknowledgment  of 
an  iinrecorded  deed.  Fairfield  Sav. 
Bank  v.  Chase,  72  Me.  226  (1881).  Con- 
tra, Houseman  v.  Girard,  eta  Assoc, 
81  Pa.  St.  256  (1876). 

1  Although  three  of  a  body  of  city 
commissioners  who  have  defrauded 
the  city  by  a  conspiracy  in  expend- 
ing money  are  directors  in  a  bank 
which  advanced  the  money  to  the 
city,  yet  the  bank  may  coUect,  it 
being  proved  that  these  three  did  not 
attend  directors'  meetings  in  refer- 
ence to  the  matter,  and  did  not  act 
for  the  bank  in  any  way  in  i-egard  to 
it  Mayor,  etc.  v.  Tenth  Nat.  Bank, 
111  N.  Y.  446  (1888).  See  also  National 
Park  Bank  v.  German,  etc.  Co.,  53 
N.Y.  Super.  Ct  367  (1886).  Knowledge 
of  a  majority  of  the  directors  that 
an  unauthorized  note  has  been  given 
is  .not  notice  to  the  company.  Ed- 
wards V.  Carson  Water  Co.,  21  Nev. 
469  (1893).  Knowledge  of  a  director 
who  sells  a  note  to  his  bank  that 
there  is  a  defense  to  the  note  is  not 
notice  to  the  bank.  Buffalo  Coimty 
Nat.  Bank  v.  Sharpe,  40  Neb.  123  (1894). 
Where  two  of  fifteen  directors  sell 
land  to  the  corporation,  their  knowl- 


15G5 


§  T27.] 


HOW   COEPOEATE    CONTEACTS   AliE   MADE.        [CH.  XLIII. 


A  corporation  has  notice  of  facts  which  are  known  to  all  its 
officers  and  stockholders,  and  especially  to  a  contracting  firm 


edge  of  a  prior  vendor's  lien  is  not 
notice  to  tlie  corporation.  Bank  v. 
Brett,  62  Minn.  4  (1895).  Knowledge 
of  a  director  that  a  note  is  tainted 
with  illegal  gambling  is  not  notice  to 
the  bank,  altiiough  he  recommended 
it  for  discount.  Shaw  v.  Clark,  49 
Mich.  384  (1883).  The  fact  tliat  a 
cashier  who  discounts  a  note  for  a 
corporation  payee  is  also  a  director 
in  the  latter  is  not  notice  to  the  bank 
of  facts  kno^vn  to  the  corporation 
payee.  First  Nat.  Bank  v.  Loyhed,  28 
Minn.  396  (1881).  Knowledge  of  a 
director  that  a  member  of  a  firm  in 
which  the  director  is  also  a  member 
has  withdrawn  therefrom  is  not  no- 
tice to  the  corporation.  But  it  was 
proved  that  the  director  had  no  man- 
agement or  interference  in  the  cor- 
porate affairs.  Powles  v.  Page,  3  C.  B. 
16,  24,  81  (1846).  Where  a  director 
causes  his  bank  to  discount  a  note 
which  he  holds  as  an  indorsee,  the 
bank  is  not  chargeable  with  knowl- 
edge of  facts  which  he  knows  and 
which  would  defeat  payment.  Loomis 
V.  Eagle  Bank,  1  Disney  (Ohio),  285 
(1859);  Louisiana  State  Bank  v.  Sene- 
cal,  13  La.  525  (1839).  Where  a  board 
of  bank  directors  discounted  a  note 
for  one  of  their  number,  who  had 
knowledge  of  fraud  in  its  inception, 
the  maker  was  held  liable  on  the 
ground  that  the  knowledge  of  the  di- 
rector which  was  not  communicated 
to  any  other  director  could  not  be 
considered  notice  to  the  bank.  TerreU 
V.  Branch  Bank  at  Mobile,  12  Ala.  502 
(1847).  And  see  Lucas  v.  Bank  of 
Darien,  3  Ala.  (O.  S.)  280,  321  (1830); 
Washington  Bank  v.  Lewis,  39  Mass. 
24  (1839);  Commercial  Bank  v.  Cim- 
ningham,  41  Mass.  270,  276  (1841); 
First  Nat.  Bank  v.  Christopher,  40 
N.  J.  L.  435  (1878).  Where  a  director 
had  knowledge   that   certain    bills 


which  were  discounted  at  the  bank 
had  been  given  originally  as  accom- 
modation paper,  but  was  not  present 
when  the  board  discounted  them,  and 
did  not  communicate  his  knowledge 
to  any  one,  the  bank  was  not  re- 
garded as  having  notica  Farmers', 
etc.  Bank  v.  Payne,  25  Conn.  444 
(1857);  Westfield  Bank  v.  Cornen,  37 
N.  Y.  320  (1807).  But  if  the  director 
who  laas  such  knowledge  acts  for  the 
bank  in  discounting  the  note,  his  act 
is  the  act  of  the  bank,  and  the  latter 
is  affected  with  his  knowledge.  Na- 
tional Security  Bank  v.  Cushman,  121 
Mass.  490  (1877);  Bank  of  U.  S.  v. 
Davis,  2  Hill,  451, 464  (1842).  Cf.  North 
River  Bank  v.  Aymar,  3  Hill,  202,  274 
(1842). 

Notice  to  an  individual  director, 
who  has  no  duty  to  perform  in  rela- 
tion to  such  notice,  cannot  be  con- 
sidered a  notice  to  the  corporation. 
And  even  knowledge  of  the  president 
that  certain  deposits  were  only  to  be 
drawn  in  a  certain  manner  was  held 
not  to  be  knowledge  of  the  bank  so 
as  to  render  it  liable  when  sucli 
money  had,  unknown  to  the  presi- 
dent, been  wrongfully  withdrawn. 
Fulton  Bank  v.  New  York,  etc.  Canal, 
4  Paige,  127,  136  (1833).  Knowledge 
of  directors  in  a  matter  of  their  own 
in  which  they  are  not  acting  for  the 
corporation  is  not  notice  to  the  latter. 
So  held  in  a  patent  case  where  this 
defect  of  actual  or  constructive  notice 
enabled  the  legal  title  to  prevail  over 
the  equitable.  Davis,  etc.  Wheel  Co. 
V.  Davis,  etc.  Wagon  Co.,  20  Fed.  Rep. 
699  (1884).  An  insurance  company 
taking  mortgages  subsequent  in  date 
to  an  unrecorded  deed  of  the  same 
premises  will  not  be  charged  with 
constructive  notice  of  such  deed  by 
the  fact  that  the  grantor  and  mort- 
gagor was,  at  the  date  of  the  deed 


1566 


CH.  XUII.]        HOW    COEPOEATE   CONTEACTS   ARE    MADE. 


[§  T27. 


that  owns  the  corporation  and  uses  it  to  carry  on  the  firm's 
business.^ 

Where  raiLroacl  property  purchased  at  foreclosure  sale  is 
transferred  by  the  purchaser  to  a  corporation  for  the  bonds 
and  stock  of  the  latter,  the  New  York  court  of  appeals  holds 
that  such  corporation  "  paid  no  value,  and  held  the  property 


and  execution  of  the  mortgages,  a    same  property  is  first  recorded.  Arm- 


director  in  the  insurance  company. 
La  Farge  Fire  Ina  Co.  v.  Bell,  22  Barb, 
54, 61  (1856).  Knowledge  of  a  director, 
acqviired  by  reading  a  notice  thereof 
in  a  newspaper,  that  a  firm  has  dis- 
solved and  that  certain  partners  are 
no  longer  liable,  is  not  notice  to  the 
corporation;  he  did  not  acquire  the 
knowledge  nor  was  it  given  to  him 
for  the  corporation.  National  Bank 
V.  Norton,  1  Hill,  572  (1841).  On  a 
question  as  to  the  ratification  by  a 
company  of  the  imauthorized  act  of 
its  president,  where  it  is  necessary  to 
show  knowledge  on  the  part  of  the 
company,  it  is  not  enough  to  show 
an  individual  knowledge  on  the  part 
of  the  minority  of  the  board  of  trust- 
ees, even  if  a  knowledge  by  all  of 
them  in  their  individual  capacity, 
and  not  acting  as  a  board,  would 
be  sufficient.  Yellow  Jacket,  etc 
Co.  V.  Stevenson,  5  Nev.  224  (1869). 
A  cori^oration  is  not  chargeable  with 
any  knowledge  of  a  deed  which  a  di- 
rector discovers  on  examining  the 
record  unofficially.  Farrell  Foundry 
V.  Dart,  26  Conn.  376  (1857).  Notice 
to  a  director,  not  constituted  an 
organ  of  communication  between 
the  parties,  that  a  promissory  note 
was  made  to  be  discounted  for  a  spe- 
cial purpose,  is  not  notice  to  the  bank, 
although  the  director  was  present 
when  the  note  was  discounted.  Cus- 
ter V.  Tompkins  County  Bank,  9  Pa. 
St  27  (1848).  Knowledge  by  a  di- 
rector of  a  deed  drawn  by  him  pro- 
fessionally is  not  notice  to  the  corpo- 
ration whose  subsequent  deed  of  the 


strong  V.  Abbott,  11  Colo.  220  (1888). 
Notice  of  an  omrecorded  lien  does 
not  come  to  the  corporation  by  the 
fact  that  a  stockholder  had  notice 
and  that  he  afterwards  became  an 
officer.  The  Admiral,  1  Fed.  Cas. 
178  (1856).  Knowledge  of  a  director 
that  a  bill  purchased  by  the  com- 
pany is  accommodation  on  the  part 
of  the  drawee  is  not  knowledge  of 
the  company  if  the  director  took  no 
part  in  the  purchase.  Re  Peruvian 
R'y,  L.  R.  2  Ch.  617  (1867).  Knowl- 
edge acquired  by  a  director  while 
acting  as  a  member  of  the  firm  which 
sells  a  note  to  the  company  is  not  no- 
tice to  the  company.  Atlantic,  etc. 
Bank  v.  Savery,  82  N.  Y.  291  (1880). 
Corporations  having  common  direct- 
ors or  officers  are  not  chargeable 
with  knowledge  of  each  other's  trans- 
actions an  d  condition.  Re  Marseilles 
Extension  R'y.  L.  R.  7  Ch.  App.  161 
(1871).  See  also,  in  general.  Third 
Nat  Bank  v.  Harrison,  10  Fed.  Rep. 
243  (1882);  West  Boston  Sav,  Bank 
V.  Thompson,  124  Mass.  506  (1878). 
Where  the  president  of  a  corpora- 
tion is  vice-president  and  manager 
of  a  bank,  and  obtains  money  from 
the  latter  in  the  name  of  the  former, 
but  for  his  own  use,  the  bank  cannot 
recover  from  the  corporation,  the 
officers  of  the  bank  being  cognizant 
of  the  transaction.  Trapp  v.  Fidelity 
Nat.  Bank,  41  S.  W,  Rep.  577  (Ky., 
1897). 

1  Holly  Mfg.  Co.  V.  New  Chester, 
etc.  Co.,  48  Fed.  Rep.  879  (1891).  See 
also  §  663,  supra. 


1567 


§  727.] 


HOW    COKPOEATE    CONTKACTS   ARE    MADE.        [CH.  XLIII, 


subject  to  any  equitable  lien  to  which  it  was  subject  in  the 
hands  of  its  grantors."  ^ 

A  director  cannot  claim  to  be  a  'bona  fide  purchaser  of  bonds 
upon  their  issue  by  the  corporation.  He  is  bound  to  know 
what  transpires  in  the  meetings  of  the  board  of  directors.- 
Where  a  company  sells  land  to  its  president  and  secretary,  they 
are  charged  with  knowledge  of  facts  known  to  the  company, 
the  latter  having  been  present  at  the  meetings.'  The  question 
sometimes  arises  whether  a  director  or  officer  of  a  corporation 
is  chargeable  with  notice  of  all  facts  contained  in  the  corpo- 
rate books.  The  general  rule  is  that  he  is  not  chargeable  with 
actual  knowledge  of  such  entries,*  but  such  entries  are  admis- 


1  Vilas  V.  Page,  106  N.  Y.  439,  465 
(1887).  See  also  ch.  XL,  sitpra.  Where 
the  oflQcers  of  a  bank  use  its  funds  to 
buy  property  which  they  then  turn 
in  to  a  corporation  in  payment  for 
stock,  the  propeity  is  impressed  with 
a  trust  and  may  be  followed.  The 
fact  that  they  were  officers  of  the 
corporation  also  is  sufficient  to  give 
it  notice.  The  bank  may  follow  the 
stock  or  the  proiDerty  at  their  option. 
Farmers',  etc.  Bank  v.  Kimball  Llill- 
ing  Co.,  1  S.  D.  388  (1890).  A  consol- 
idated company  takes  with  notice 
of  facts  known  to  one  of  the  com- 
panies consolidated.  Joy  v.  St.  Louis, 
138  U.  S.  1  (1891).  A  tripartite  agree- 
ment relative  to  a  right  of  way 
through  a  park  binds  the  successors 
of  one  of  the  companies.  Joy  v.  St. 
Louis,  138  U.  S.  1  (1891). 

2  Greenville  Gas  Co.  v.  Reis,  54 
Ohio  St.  549  (1896). 

3  Rapley  v.  Klugh,  40  S.  C.  134  (1893). 
A  discussion  of  what  constitutes  in- 
solvency of  a  corporation,  and  stat- 
ing that  the  directors  are  bound  to 
know  the  condition  of  business,  is 
given  in  Consolidated  Tank  Line  Co. 
V.  Kansas  City  Varnish  Co.,  45  Fed. 
Rep.  7  (1891).  Where  the  president  dis- 
counts a  note  for  the  company  and 
pays  in  the  money  therefor,  he  is  a 
"bona  fide  holder  of  it.  Hitchings  v. 
St.  Louis,  etc.  Co.,  68  Hun,  33  (1893). 


* "  There  is  no  rule  of  law  which 
charges  a  director  or  stockholder  of 
a  corporation  with  actual  knowledge 
of  its  business  transactions  merely 
because  he  is  such  director  or  stock- 
holder." Hence,  in  an  action  by  the 
corporation  for  an  accounting,  the 
books  of  the  company  are  not  com- 
petent evidence  to  establish  the  ac- 
count and  hold  him  liable,  Rudd  v. 
Robinson,  126  N.  Y.  113  (1891).  A  di- 
rector sued  by  a  stockholder  for  neg- 
ligence in  not  attending  to  his  duties 
is  not  presumed  to  have  knowledge 
of  all  that  is  shown  by  the  books  of 
the  company.  This  rule  applies  only 
to  suits  between  the  company  and  a 
stranger.  Wallace  v.  Lincoln  Sav. 
Bank,  89  Tenn.  630  (1891).  A  director 
is  bound  to  take  notice  of  calls,  and 
cannot  set  up  that  he  had  no  actual 
notice.  Spellier,  etc.  Co.  v,  Geiger, 
147  Pa,  St,  399  (1892).  Knowledge 
imparted  to  the  corporation  is  not 
notice  to  its  president,  who  buys  a 
note  from  it,  Peckham  v.  Hendren, 
76  Ind.  47  (1881).  The  rule  that  a 
bank  is  estopped  by  the  statement  of 
its  cashier  to  a  surety  that  his  prin- 
cipal had  paid  the  note  is  not  appli- 
cable where  the  surety  is  a  director 
of  the  bank,  for  he  will  be  conclu- 
sively presumed  to  know  whether 
payment  was  made.  His  knowledge 
will  also  be  imputed  to  a  firm  which 


1568 


CH.  XLIII.]        HOW    COEPOEATE    COKTEACTS    AEE   MADE. 


[§  T27. 


sible  in  evidence  against  liim.^  They  are  not  admissible  as 
evidence,  however,  as  against  strangers.- 

A  stockholder  is  chargeable  with  notice  of  entries  on  the 
corporate  books  if  made  in  his  presence  and  he  personally  as- 
sented thereto.' 

But  "  a  shareholder  in  a  corporation  is  not  chargeable  mth 
constructive  notice  of  resolutions  adopted  by  the  board  of  di- 
rectors, or  of  provisions  in  the  by-laws  regulating  the  mode  in 
which  its  business  shall  be  transacted  with  its  customers."  * 


was  tlie  security  and  of  which  he  was 
a  member.  Merchants'  Bank  v.  Ru- 
dolf, 5  Neb.  528  (1877).  See  also  §  714, 
supra.  The  directors'  minute-book  is 
evidence  against  a  director.  Allison 
V.  Coal  Creek,  etc.  Co.,  87  Tenn.  60 
(1888);  First  Nat.  Bank  v.  Tisdale,  84 
N.  Y.  G55  (1881).  A  director  cannot 
hold  the  president  liable  on  a  loan  by 
the  former  to  the  corporation  made 
on  representations  of  the  condition  of 
the  corporation.  Hubbard  v.  Weare, 
79  Iowa,  078  (1890). 

1  The  books  of  a  company  are  "  com- 
petent as  evidence  so  far  as  related 
to  any  entries  legitimately  contained 
in  them,  and  so  far  as  they  were  rel- 
evant to  the  issues  on  trial "'  in  an 
action  by  creditors  to  hold  a  director 
liable,  under  the  New  York  statute, 
for  making  a  false  report.  Hunting- 
ton V.  Attrill,  1 18  N.  Y.  365  (1890).  Cor- 
porate books  are  admissible  in  evi- 
dence to  show  money  received  as 
against  a  corporate  officer  on  trial  for 
embezzlement,  even  though  the  en- 
tries were  not  made  by  him.  Hmn- 
phrey  v.  People,  18  Hxm,  393  (1879). 
The  minutes  of  a  directors'  meeting 
are  evidence  of  who  were  present 
and  what  was  done,  so  far  as  a  suit 
between  the  corporation  and  one  of 
those  who  were  present  is  concerned. 
Olney  v.  Chadsey,  7  R.  I.  224  (1862).  A 
director  and  vice-president  is  charge- 
able with  knowledge  of  what  is  on 
the    corporate    records.    First   Nat. 


99 


Bank  v.  Tisdale,  84  N.  Y.  655  (1881). 
Qucere,  as  to  entries  in  miscellaneous 
corporate  books.  Billings  v.  Trask, 
30  Hun,  314  (1883).  The  entries  in 
the  books  of  a  business  corporation 
during  the  period  of  his  directorship 
are  admissible  in  evidence  against 
one  who  has  been  a  director  in  the 
corporation,  and  as  such  took  part  in 
its  affairs.  Bedford  v.  Sherman,  68 
Hun,  317  (1893).  The  books  of  the 
company  are  not,  per  se,  evidence 
against  a  director.  Powell  v.  Con- 
over,  75  Hun,  11  (1894). 

2  A  person  contracting  with  a  cor- 
poration is  not  bound  to  know  what 
is  contained  in  the  corporate  records. 
Blair  v.  St.  Louis,  etc.  R.  R.,  25  Fed. 
Rep.  684  (1885).  Entries  in  the  cor- 
poration books  of  matters  relating  to 
any  property  or  right  claimed  by 
them  can  never  be  evidence  for  them 
unless  made  so  by  act  of  the  legisla- 
ture. They  are  not  admissible  in 
favor  of  the  corporation  as  against 
strangers.  Graville  v.  New  York,  etc. 
R.  R.,  34  Hun,  224  (1884).  See  also 
15  Wend.  256,  note;  Wait,  Insolv. 
Corp.,  §  528.  As  between  claimants 
to  the  property  of  a  coi-poration,  the 
corporate  records  are  not  admissible 
as  evidence  to  show  the  title  of  the 
corporation.  Dolan  v.  Wilkerson,  48 
Pac.  Rep.  23  (Kan.,  1897). 

3  See  Abbott's  Tr.  Ev.,  p.  58. 

*  So  held  where  a  stockholder  in  a 
telegraph  company  sued  it  for  negli- 


1569 


§  T27.] 


HOW   COEPOEATE    CONTEACTS   AEE   MADE.        [cU.  XLIII. 


The  question  of  serving  notice  or  papers  upon  corporations 
in  judicial  proceedings  is  discussed  elsewhere.'  The  publica- 
tion of  a  notice  in  a  newspaper  is  not  notice,  unless  the  party 
notified  is  proved  to  have  read  the  notice.'' 


gence  in  sending  a  message.  Pearsall 
V.  Western  Union  Tel.  Co.,  124  N.  Y. 
256  (1890),  afif'g  44  Hun,  533.    A  stock- 
holder is  not  chargeable  with  knowl- 
edge of  corporate  contracts  of  which 
as  a  fact  he  knows  nothing.    Tarbox 
V.  Gorman,  31  Minn.  G2  (1883).    But 
one  who  is  a  stockholder,  director, 
and  vice-president  is  chargeable  with 
knowledge  of  entries  on  the  corpo- 
rate books.     First  Nat.  Bank  v.  Tis- 
dale,  18  Hun,  151  (1879);  aff'd,  84  N.  Y. 
655.    See  also  ch.  XXX,  supra.    One 
who  is  a  stockholder  and  also  director 
is  as  fully  bound  by  entries  in  them 
as  a  partner  is  by  entries  in  the  part- 
nership books.     Montgomery  v.  Ex- 
change Bank,  6  AtL  Rep.  133  (Pa„ 
1886).    Minutes  of  the  directors  have 
been  held  to  be  evidence  against  a 
subscriber  to  disprove   certain   de- 
fenses set  up  by  him  to  his  subscrip- 
tion.    Bedford  R.   R.  v.  Bowser,  48 
Pa.  St.  39  (1864).    The  cases  of  Union 
Canal  Co.  v.  Loyd,  4  Watts  &  S.  (Pa.) 
393,  398  (1843);    and   Graff  v.  Pitts- 
burgh, etc,  R  R.,  31  Pa.  St.  489,  495 
(1858),  hold  that  a  stockholder  pres- 
ent and  assenting  to  an  entry  on  the 
corporate  books  is  bound  by  it    But 
Hill  V.  Manchester,  etc.  Co.,  5  B.  & 
Ad.  866  (1833),  per  Parke,  B.,  holds 
that  corporate  minutes  are  not  ad- 
missible on  behalf  of  the  company 
in  a  suit  against  it  by  one  of  its  stock- 
holders.     Corporate  books   are  not 
only  evidence  of  corporate  acts  when 
they  are  to  be  proved,  but  are  to  the 
same  extent  evidence  against  stock- 
holders who   are    chargeable    with 
knowledge  of  their  contents.     Blake 
V.  Griswold,  103  N.  Y.  439  (1886) ;  Bil- 
lings V.  Trask,  30  Hun,  314  (1883).    As 
between  stockholders,  the  books  of  a 
corporation  and  sworn  copies  thereof 

1571 


are  competent  evidence  to  show  the 
acts  of  a  corporation.  Hubboll  v. 
Meigs,  50  N.  Y.  480  (1873).  See  also 
Lindley,  Companies,  p.  312;  Black  v. 
Shreve,  13  N.  J.  Eq.  455  (1860) ;  Haynos 
V.  Brown,  36  N.  H.  545  (1858);  Pitts- 
burg Coal  Co.  V.  Foster,  59  Pa,  St  365 
(1808).  Where  a  person  is  merely  in 
possession  of  bank  stock  as  collateral 
security,  and  does  not  participate  in 
the  meetings  of  the  stockholders,  and 
is  not  recognized  by  the  stockholders 
as  a  member,  he  is  not  such  a  part 
of  the  corporation  as  to  be  bound  to 
have  knowledge  of  the  facts  in  pos- 
session of  the  corporation  or  its  ofli- 
cera  Baker  v.  Woolston,  27  Kan. 
185,  189  (1882).  A  pledgee  of  storlc 
who  takes  no  part  in  the  stockhoM- 
ers'  meetings  is  not  chargeable  witli 
notice  of  a  lien  which  the  corpora- 
tion has  on  property  which  he  pur- 
chases. Baker  v.  Woolston,  27  Kan. 
185  (1883). 
'  See  §  752,  infra. 

2  See  §  119,  supra.  Though  the 
company  takes  a  newspaper,  the  an- 
novmcement  therein  of  a  dissolution 
of  partnership  is  not  notice  to  it. 
Vernon  v.  Manhattan  Co.,  23  Wend. 
183  (1839),  aff'g  17  Wend.  524  Cf. 
1  Hill,  578,  n.  Contra,  Bank  of  South 
Carolina  v.  Humplireys,  1  McCord 
(S.  C),  388  (1821);  Martin  v.  Walton, 
1  McCord  (S.  C),  16  (1821).  Notice  in 
a  newspaper  taken  by  an  individual 
is  not  notice.  Rawley  v.  Home,  3 
Bing.  3  (1825).  But  if  contained  in 
a  newspaper  taken  by  a  marine  in- 
surance company,  and  is  marine  news, 
and  the  president  knew  the  fact 
involved,  the  company  has  notice. 
Green  v.  Merchants'  Ins.  Ca,  27  Mass. 
402  (1830). 


CH.  XLIII.]        HOW    COKrOEATE    COXTEACTS    AKE    MADE.  [§  ^27. 

"Where  a  party  ovms  all  tlie  stock  of  another  corporation,  it 
has  been  held  that  he  is  chargeable  with  notice  of  entries  upon 
its  boolis.^  The  important  principle  of  law  that  a  person  tak- 
ing from  a  corporate  officer  corporate  obligations  in  payment 
of  a  personal  debt  of  such  officer  is  not  a  lona  fide  holder  of 
the  same  is  considered  elsewhere.* 

1  Hamilton     Buggy    Co.    v.    Iowa       2  gee  §  293,  ini;pTam 
Buggy  Co.,  88  Iowa,  364  (1893). 

1571 


CHAPTEE  XLIY. 


RATIFICATION,    ACQUIESCENCE,  OR    LACHES  AS  A  BAR   TO  A 
STOCKHOLDER'S  ACTION  HEREIN. 


§  728.  Introductory. 

729.  Laches,  acquiescence,  or  ratifi- 

cation as  a  defense  to  a  stock- 
holder's action  to  remedy- 
illegal  corporate  acts  which 
are  prohibited  by  statute  or 
contrary  to  public  policy. 

730.  Express  ratification  herein  — 

Transferee  of  stock  that  has 
been  voted  in  favor  of  the 
act  cannot  complain. 


§731 


Stockholder  chargeable  with 
laches  only  after  lie  has  a 
full  knowledge  of  the  facts. 

"What  length  of  time  consti- 
tutes laches  herein — Statute 
of  limitations. 
733.  Miscellaneous  applications  of 
the  doctrine  of  laches  herein. 


732. 


§  728.  Introductory. — "WTien  a  stockholder  brings  an  action 
to  remedy  tlie  frauds,  ult/ra  vi7'es  acts,  or  negligence  of  a  director 
or  third  person,  the  most  common  and  dangerous  defense  that 
he  has  to  encounter  is  the  defense  that  he  has  been  guilty  of 
laches  in  bringing  his  action.  Like  the  defense  of  contributory 
negligence  —  a  modern  principle  of  law  that  defeats  many  ac- 
tions for  negligence  —  so  the  defense  of  laches,  acquiescence,  or 
ratification  has  sprung  up  to  defeat  stockholders'  actions  herein. 
The  principles  which  govern,  define,  and  explain  this  defense 
have  become  well  settled.  They  form  the  subject  of  this  chapter. 

§  729.  Laches,  acquiescence,  or  ratification  as  a  defense  to  a 
stocMolder's  action  to  remedy  illegal  corporate  acts  u'hich  are 
proMMted  hy  statute  or  contrary  to  puMic  policy. —  It  has  al- 
ready been  shown  that  a  stockholder  may  bring  an  action  to 
remedy  frauds,  negligence,  or  ultra  vires  acts.  As  regards  the 
frauds  and  negligence  of  corporate  officers,  it  is  well  settled 
that  laches  is  a  good  defense  to  a  stockholder's  action  herein. 
In  reference  to  ultra  vires  acts,  however,  which  are  malapro- 
hihita  or  mala  in  se,  there  is  more  difficulty.  It  is  very  clear 
that  no  assent  or  acquiescence  of  the  stockholders  can  validate 
such  acts.^ 

1  See  Kent  v.  Quicksilver  Min.  Co.,  harm,  inasmuch  as  they  are  per  se 
78  N.  Y.  159,  186  (1879),  where  the  illegal  or  are  malum  prohibitum. 
court  said :  "  A  corporation  may  do  Then  no  assent  of  stockholders  can 
acts  which  affect  the  public  to  its    validate  them."  A  contract  in  which 

1573 


€H.  XLIV,]       DELAY  AS  A  BAE    TO    STOCKHOLDEk's  ACTIONS.       [§  729. 


But  it  is  a  different  question  to  determine  whether,  after  long 
acquiescence,  the  stockholder  may  take  advantage  of  the  in- 
validity of  such  acts.  As  regards  acts  mala  jproliibita  —  that  is, 
acts  expressl}''  prohibited  by  statute  —  the  stockholder  may  be 
barred  by  laches  from  complaining  thereof,  since  the  state, 
through  its  attorney-general,  may  protect  the  interests  of  the 
public'  The  stockholder,  however,  may  sue  on  the  ground 
that  unless  the  evil  is  corrected  the  state  may  forfeit  the  cor- 
porate franchises.^  As  regards  acts  mala  in  se,  probably  the 
rule  will  depend  on  the  circumstances  of  the  case.  If  the  stock- 
holder has  participated  in  the  act  or  knowingly  accepted  the 
benefit  thereof,  the  court  will  not  aid  him,  since  he  who  comes 
into  equity  must  do  so  mth  clean  hands.'  Thus,  where  a  lease 
of  a  railroad  is  ultra  vires,  a  bill  in  equity  filed  by  one  of  the 
parties  to  the  contract  will  not  lie  to  set  it  aside.  The  court 
will  aid  neither  party,  they  being  i/njpa/ri  delicto .^  When,  how- 
ever, a  stockholder  has  not  participated  or  knowingly  accepted 
the  benefit  of  corporate  contracts  which  are  mala  in  se,  there 


the  directors  are  interested,  where  it 
is  void  by  statute,  cannot  be  enforced 
on  the  ground  of  waiver  by  the  cor- 
poration. Barton  v. '  Port  Jackson, 
etc.  Co.,  17  Barb.  397  (1854).  "Void" 
cannot  be  construed  as  "  voidable  " 
in  a  statute  which  is  enacted  from 
public  policy,  and  not  for  the  benefit 
of  parties  only.  Rex  v.  Hipswell,  8  B. 
&  C.  466  (1828),  concerning  a  statute 
against  binding  out  children.  For  a 
collection  of  the  cases  on  ultra  vires 
acts  as  mala  prohibita  and  mala  in 
se,  see  an  article  in  The  Counsellor, 
voL  4,  p.  151. 

1  See  Stewart  v.  Erie,  etc.  Transp. 
Co.,  17  Minn.  372  (1871);  and  Gray  v. 
Chaplin,  2  Russ.  Ch.  126  (1826),  where 
the  court  held  that  the  stockholder 
cannot  claim  that  the  public  is 
wronged-  If  a  public  right  is  to  be  en- 
forced, it  must  be  at  the  suit  of  those 
to  whom  the  protection  of  public 
rights  belongs.  Cf.  Ashbiiry,  etc.  Co. 
V.  Riche,  L.  R.  7  H.  L.  653  (1875); 
S.  C,  L.  R  9  Exch.  224,  262.  That 
which  is  forbidden  by  statute  cannot 

lOi 


be  ratified.  Nellis  Co.  v.  Nellis,  63 
Hun,  63  (1891);  Taylor  v.  Chichester, 
etc.  R'y,  L.  R.  2  Exch.  356  (1867).  The 
state  may  at  any  time  object.  Alex- 
ander V.  Searcy,  81  Ga.  536  (1889). 

2  Manderson  v.  Commercial  Bank, 
28  Pa.  St.  379  (1857),  where  discounts 
were  being  improperly  mada 

3  See  §  39,  supra.  A  stockholder  in 
a  corporation  cannot  sustain  a  bill  to 
have  the  charter  forfeited  and  the 
corporation  wound  ujj  on  the  ground 
that  it  was  formed  to  purchase  and 
combine  various  competing  linseed- 
oil  mills  for  the  purpose  of  forming 
a  monopoly.  The  state  alone  can 
ask  for  such  a  forfeiture.  Moreover, 
the  stockholder  by  being  a  stock- 
holder is  estopped  from  complaining, 
and  is  presumed  to  have  had  knowl- 
edge of  the  facts  from  the  time  when 
he  became  a  stockholder.  Coquard 
V.  National  L.  S.  Co.,  49  N.  E.  Rep.  563 
(EL,  1898). 

*  St.  Louis,  etc.  R.  R.  u  Terre  Haute, 
etc.  R.  R.,  145  U.  S.  393  (1892). 


§  730,]       DELAY  AS  A  BAH   TO    STOCKHOLDER'S  ACTIONS.       [CH.  XLIV. 

would  seem  to  be  no  reason  why  mere  delay  on  liis  part  in  bring- 
ins:  suit  to  set  aside  such  acts  should  be  fatal  to  his  bill.  As  to 
the  corporation  itself,  the  fact  of  its  participating  in  an  act 
which  is  merely  beyond  the  powers  of  a  corporation,  but  is  not 
prohibited  by  statute  or  pernicious  in  itself,  may  not  be  a  bar 
to  recovery  upon  the  contract.* 

§  Y30.  JExi)ress  ratification  herein —  Transferee  ofstoch  that 
has  heen  voted  in  favor  of  the  act  cannot  complain. —  There  are 
in  general  two  ways  in  which  a  stockholder  may  be  said  to 
have  ratified  an  act  of  the  directors  which  he  is  attempting 
to  enjoin  or  set  aside.  The  ratification  may  be  by  an  express 
agreement  or  statement  to  that  effect,  or  it  may  be  by  such 
laches  or  acquiescence  as  will  amount  to  an  implied  ratifica- 
tion.'^ Cases  involving  the  defense  of  an  express  ratification 
rarely  arise,  since  this  defense  is  easy  to  prove.'  If  the  com- 
plaining stockholder  participated  in  the  act  complained  of,  he 
of  course  is  barred  of  his  remedy.* 


» Bath  Gas  Light  Co.  v.  Claffy,  151 
N.  Y.  24  (1896). 

2  Thus,  in  Evans  v.  Smallcombe, 
L.  R.  3  H.  L.  249  (18G8),  aff'g  L.  R.  3 
Eq.  7G9,  the  court  said:  "Consent 
might  be  either  express  or  might  be 
inferred  from  the  acquiescence  of 
the  shareholders  after  full  knowl- 
edge of  the  transaction  which  was  in 
excess  of  the  powers  of  the  direct- 
ors." See  also  Kent  v.  Quicksilver 
]yiin.  Co.,  78  N.  Y.  159, 187  (1879). 
.  '  As  an  instance  of  express  ratifica- 
tion, see  Allen  v.  Wilson,  28  Fed.  Rep. 
^77  (1886);  Butterfield  v.  Cowing,  112 
N.  Y.  486  (1889).  Cf.  §§  652,  662,  681, 
supra. 

^  See  §§  39,  40,  supra,  and  §  735,  in- 
fra. Acquiescence  and  ratification 
of  the  guaranty  by  one  railroad  of 
stock  and  bonds  of  another  railroad, 
the  stock  and  bonds  being  owned  by 
directors  of  the  former  company,  is 
a  bar  to  an  action  to  set  the  same 
aside.  Barr  v.  New  York,  etc.  R.  R., 
125  N.  Y.  263  (1891).  Stockholders 
who  have  participated  in  a  contract 
between  the  corporation  and  its  ofl9- 


cers  cannot  complain  thereof.  Clark 
V.  Pittsburgh,  etc.  Co.,  39  AtL  Rep.  86 
(Pa.,  1898).  A  stockholder  who  votes 
for  an  act  cannot  afterward  com- 
plain of  it.  McGeorge  v.  Big  Stone 
Gap  Imp.  Co.,  57  Fed.  Rep.  262  (1893). 
Stockholders  who  participate  in  an 
alleged  fraudulent  reorganization 
cannot  complain.  Symmes  v.  Union 
Trust  Co.,  60  Fed.  Rep.  830  (1894).  A 
stockholder  who  votes  for  the  pur- 
chase of  property  from  a  director 
cannot  afterwards  complain.  Barr 
V.  Pittsburgh  Plate  Glass  Co.,  51  Fed. 
Rep.  33  (1892).  See  also  ch.  XXXIX, 
supra.  A  director  who  has  voted  for 
a  sale  cannot  as  a  stockholder  object. 
Holton  V.  Wallace,  66  Fed.  Rep.  409 
(1895).  A  stockholder  who,  as  secre- 
tary, signed  certificates  of  stock,  can- 
not claim  that  they  were  watered 
stock,  and  hence  that  they  cannot  be 
voted  at  a  meeting  called  to  ratify  a 
sale  of  property  to  a  director.  Wis- 
ner  v.  Delhi,  etc.  Co.,  46  La.  Ann.  122a 
(1894).  Although  a  stockholder  voted 
in  favor  of  an  ultra  vires  lease,  yet,^ 
if  the    corporation   has    repudiated 


1574 


en.  XLIY.]       DELAY  AS  A  BAB   TO    STOCKHOLDEe's  ACTIONS.       [§  730. 


Moreover,  a  stockliolder  who  holds  stock  which  has  been 
voted  in  favor  of  the  act  complained  of  cannot  bring  suit  as 
the  holder  of  that  stock.^     In  like  manner,  where  the  stock- 


the  lease,  the  estoppel  is  destroyed 
and  the  stockholder's  suit  may  con- 
tinue. Memphis,  etc.  R  R.  v.  Gray- 
son, 88  Ala.  573  (1890).  See  also 
oh-  XL,  supra.  A  stockholder  in  a 
corporation  which  is  acting  practi- 
cally for  the  profit  of  another  corpo- 
ration cannot,  after  ^le  expressly  as- 
sents to  such  an  arrangement,  object 
thereto.  Hart  v.  Mt.  Pleasant,  etc. 
Co.,  97  Iowa,  353  (1896).  A  stock- 
holder who  has  participated  in  a  con- 
solidation cannot  object  thereto  as 
being  irregular.  Bradford  v.  Frank- 
fort, etc.  R.  R.,  142  Ind.  383  (1895). 
Parties  taking  part  in  an  extension 
of  the  road  cannot  object  that  the 
charter  amendment  authorizing  it 
was  unconstitutional.  Jones  v.  Con- 
cord, etc.  R.  R.,  30  AtL  Rep.  G14  (N.  U., 
1892).  See  also,  in  general,  Steger 
V.  Davis,  8  Tex.  Civ.  App.  23  (1894). 
Although  creditors  may  complain  of 
a  mortgage  given  to  directors  by  the 
corporation  when  largely  in  debt,  yet 
the  president,  who  is  also  a  large 
stockholder  and  who  signs  the  mort- 
gage, cannot  do  so.  Perry  v.  Pear- 
son, 135  III  218  (1890).  Where  all  the 
stockholders  unite  in  the  issue  of 
watered  stock  to  the  president  for 
hi?  own  use,  and  assent  to  a  con- 
tract between  him  and  the  company, 
the  corporation  itself  cannot  subse- 
quently complain.  Arkansas,  etc.  Co. 
V.  Farmers',  etc.  Co.,  13  Colo.  587 
(1889).  A  stockholder  who  votes  for 
the  purchase  of  property  from  a  di- 
rector cannot  afterwards  complain. 
Barr  v.  Pittsburgh,  etc.  Co.,  51  Fed. 
Rep.  33  (1892).  Where  an  act  by  the 
directors  amounts  to  a  preference  to 
them,  the  corporation  being  insolv- 
ent, the  act  cannot  be  validated  by 
a  vote  of  the  stockholders,  the  di- 
rectoi-s  themselves  voting  a  majority 
of  the  stock.    Farmers'  L.  &  T.  Co. 

15< 


V.  San  Diego,  etc.  Co.,  45  Fed.  Rep.  518 
(1891).  See  also,  in  general.  Branch 
V.  Jesup,  106  U.  S.  468,  476  (1882); 
U.  S.  V.  Union  Pac.  R.  R.,  98  U.  S. 
569, 612  (1878).  If  aU  of  the  directors 
and  stockholders  know  of  a  sale  of 
property  by  a  director  to  the  corpo- 
ration and  do  not  object,  and  use  the 
property,  the  transaction  cannot  be 
set  aside.  Battelle  v.  Northwestern, 
etc.  Co.,  37  Minn.  89  (1887).  A  bond- 
holder who  is  a  party  to  the  reorgan- 
ization plan,  under  which  and  as 
part  of  which  the  foreclosure  sale 
is  held,  cannot  object  to  the  legality 
of  the  sale.  Crawshay  v.  Soutter,  6 
Wall  739  (1867).  Knowledge  of  stock- 
holders is  not  knowledge  of  the  cor- 
poration. Hence,  after  the  guilty 
directors  are  ousted  by  an  election, 
the  corporation  itself  may  sue.  Pa- 
cific R  R.  V.  Missouri  Pac.  R'y,  111 
U.  S.  505  (1884).  Unless  inequitable, 
or  rights  of  third  persons  have  inter- 
vened. Pacific  R.  R  V.  Missouri  Pac. 
R  R,  111  U.  S.  505  (1884).  "A  re- 
ceipt of  money  as  a  part  of  the  earn- 
ings of  a  corporation  is  no  ratifica- 
tion of  acts  of  business  carried  on 
outside  of  the  corporation  without 
knowledge  of  him  who  is-  sought  to 
be  charged  with  them  that  the  money 
came  from  such  business."  Central, 
etc.  Bank  v.  Walker,  66  N.  Y.  424,  429 
(1876).  A  stockholder  in  an  old  and 
new  company  who  aids  in  the  latter's 
improvement  of  property  purchased 
by  it  from  the  former,  and  is  instru- 
mental in  bringing  about  the  sale 
'and  purchase,  is  estopped  from  object- 
ing to  the  validity  of  the  sale.  St. 
Louis,  etc.  Co.  v.  Sandoval,  etc.  Co., 
116  III  170  (1886). 

1  See  g  40,  supra,  and  §  735,  infra;  Re 
Syracuse,  etc.  R  R,  91  N.  Y.  1  (1883). 
The  purclaaser  of  stock  which  was 
issued  to  directors  cannot  complain 


730.]       DELAY  AS  A  BAR    TO    STOCKnOLDER's  ACTIONS.       [cn.  XLIV. 


holder,  Tvith  full  knowledge,  has  accepted  the  benefit  of  the 
act,  he  cannot  complain  thereafter.^  Eut  the  defense  of  an 
implied  ratification  is  more  difficult  to  establish.     An  implied 


that  the  directors  were  guilty  of 
fravid  in  the  issue.  Barr  v.  New- 
York,  etc.  R.  R.,  125  N.  Y.  2G3  (1891). 
In  Brown  v.  Duluth,  etc.  R'y,  53  Fed. 
Rep.  889  (1893),  the  court  refused  to 
interfere  where  the  transferee  of  the 
stoclv  took  with  notice.  The  court 
said:  ''The  complainant,  as  their 
transferee,  is  in  no  better  situation 
than  they  are.  He  has  no  gi-eater 
rights  than  his  transferrers  as  re- 
gards a  remedy  invalidating  the 
transaction.  The  maxim  in  pari  de- 
licto applies,  and  a  court  of  equity 
will  not  aid  him.  He  cannot  bring 
suit  in  behalf  of  other  stockholders 
against  the  corporation  or  other  par- 
ties participating  in  the  issue,  as  his 
own  title  is  tainted  with  the  same 
fraud."  A  purchaser  of  stock  which 
was  voted  in  favor  of  a  reorganiza- 
tion scheme  cannot  object  to  the 
scheme  as  being  ultra  vires,  there 
being  nothing  illegal  per  se  in  it. 
HoUins  V.  St.  Paul,  etc.  R.  R.,  9  N.  Y. 
Supp.  909  (1889).  A  purchaser  of 
stock  that  has  voted  for  an  issue 
of  "watered"  bonds  and  stock  is 
estopped  from  complaining,  even 
though  the  issue  was  prohibited  by 
the  constitution  of  the  state  —  Penn- 
sylvania. Wood  V.  Corry,  etc.  Co.,  44 
Fed.  Rep.  146  (1890).  Where  three 
persons  own  all  the  stock  of  a  com- 
pany, two  of  them  may  buy  the  stock 


of  the  third  and  give  the  company's 
notes  in  partial  payment  for  the  same. 
The  transaction  is  legal,  inasmuch  as 
no  one  is  injured  and  all  consent. 
Neither  subsequent  piirchasers  of  the 
stock,  nor  those  who  become  stock- 
holders after  the  notes  are  paid,  nor 
stockholders  who  consent  to  the 
arrangement,  can  complain  of  it. 
Schilling,  etc.  Co.  v.  Schneider,  110 
Mo.  83  (1893).  A  stockholder  who 
purchases  his  stock  after  the  acts 
complained  of  took  place  cannot  com- 
pel another  stockholder  to  repay  to 
the  company  dividends  which  he  has 
received,  due  to  contracts  by  which 
the  company  had  sold  coal  to  a  rail- 
way company,  for  which  railway 
company  such  latter  stockholder  was 
purchasing  agent.  Clark  v.  Amer- 
ican Coal  Co.,  86  Iowa,  436  (1892). 
This  same  principle  —  that  stock 
which  has  participated  in  a  fraudu- 
lent act  cannot  afterwards  be  the 
basis  of  a  suit  to  set  aside  that 
fraud  —  has  been  applied  to  bonds, 
so  far  as  enforcing  the  covenants  of 
the  mortgage  is  concerned,  such  cov- 
enants being  waived  by  a  former 
owner  of  the  bonds  which  complain- 
ant now  owns.  Belden  v.  Biu'ke. 
In  regard  to  this  case  and  the  fa- 
mous litigation  in  which  it  was  but 
a  part,  see  g  764,  infra.  In  Alabama 
it  is  held  that,  if  the  stock  passes  into 


1  London  Assur.  Co.'s  Case,  5  De  G., 
M.  &  G.  465,  481  (1854).  See  also 
Weed  V.  Little  Falls,  etc.  Co.,  31  Minn. 
154  (1883).  If  the  stockholders  and 
corporate  creditors  who  are  preju- 
diced thereby  do  not  object,  a  going 
corporation  may  sell  all  its  property 
to  another  corporation,  payment 
being  by  the  issue  of  stock  of  the 
latter  corporation  to  the  stockhold- 
ers of  the  former    corporation,  to- 


gether with  the  right  to  such  stock- 
holders to  subscribe  for  additional 
stock  in  the  purchasing  corporation. 
Dissenting  stockholders,  who  under 
protest  subscribe  for  the  new  stock 
and  then  wait  eighteen  months  be- 
fore commencing  legal  proceedings, 
are  estopped  from  objecting.  Post 
V.  Beacon,  etc  Co.,  84  Fed.  Rep.  371 
(1898). 


1576 


CH.  XLIT.]       DELAY  AS  A  BAR   TO    STOCKHOLDER'S  ACTIONS.       [§  731. 

ratification  is  generally  spoken  of  as  laches.     It  is  the  subject 
of  the  remainder  of  this  chapter.^ 

§  T31.  Stocldiolder  cliargecible  ivitli  laches  only  after-  he  has  a 
full  Iniowledge  of  the  facts. —  Laches  is  a  defense  only  when  the 
stockholder,  with  a  full  knowledge  of  the  facts,  has  delayed  an 
unreasonable  length  of  time  in  bringing  his  action.  These  two 
elements,  knowledge  and  delay,  are  the  essential  elements  of 
the  defense.^  Until  the  stockholder  has  full  and  complete 
knowledge  of  all  the  essential  facts  which  would  be  likely  to 
induce  him  to  institute  the.  action,  the  beginning  of  the  time 
from  which  laches  will  run  cannot  be  said  to  commence.' 
Where,  however,  the  facts  would  be  well  known  to  any  intelli- 
gent man,  and  the  means  of  knowledge  are  open  to  the  stock- 
holder, he  is  chargeable  mth  knowledge  from  the  date  when 
he  should  have  ascertained  the  facts.* 


hona  fide  hands,  the  bona  fide  holder 
may  object  to  the  fraudulent  or  ultra 
vires  act.  even  though  the  stock  itself 
was  tainted  with  the  fraud  by  rea- 
son of  being  held  by  one  of  the  guilty 
parties  at  the  time  of  the  act.  Par- 
sons V.  Joseph,  93  Ala.  403  (1891). 
But  the  weight  of  authority  holds 
that  if  the  stock  purchased  is  tainted 
with  the  fraud  —  that  is  to  say,  if 
the  persons  guilty  of  the  act  com- 
plained of  owned  that  stock  when 
they  did  the  act  —  no  action  will  lie 
by  a  hona  fide  transferee  of  that 
stock.  Ffooks  V.  Southwestern  R'y, 
1  Sm.  &  G.  142  (1853).  A  transferee 
of  stock  that  was  voted  in  favor  of 
the  act  cannot  complain.  Symmes 
V.  Union  Trust  Co.,  60  Fed.  Rep.  830 
(1894).  Where  a  private  corporation, 
with  the  consent  of  all  its  stockhold- 
ers of  record,  agrees  with  its  cred- 
itors that  the  property  shall  be  taken 
charge  of  by  an  individual  and  man- 
aged for  the  purpose  of  paying  the 
debts  and  then  returning  the  prop- 
erty to  the  corporation,  and  one  of 
the  stockholders  at  that  time  secretly 
transfers  some  of  the  certificates  of 
stock  to  his  wife,  and  she  holds  the 

15^ 


stock  for  three  years  and  then  trans- 
fers it  without  consideration  to  a 
party  who  brings  suit  to  set  aside 
the  transaction,  the  court  will  not 
give  such  relief.  Marbury  v.  Stone, 
17  N.  Y.  App.  Div.  352  (1897). 

1  See  First  Nat.  Bank  v.  Drake,  29 
Kan.  311  (1883),  for  a  definition  of 
ratification. 

2  See  the  leading  case  of  Cumber- 
land Coal  Co.  V.  Sherman,  30  Barb. 
553  (1859),  quoting  from  Lewin  on 
Trusts;  and  the  equally  important 
case  of  Hoffman,  etc.  Co.  v.  Cumber- 
land, etc.  Co.,  16  Md.  456  (1860). 

3  Gilman,  etc.  R.  R,  v.  Kelly,  77  EL 
426  (1875).  The  statute  of  limitations 
does  not  begin  to  run  against  a  pro- 
moter who  takes  a  secret  profit  imtil 
the  facts  are  known  to  the  stock- 
holders. Re  Sale,  etc.  Co.,  77  L.  T. 
Rep.  681  (1897).  Where  there  is  not 
a  full  disclosure  at  a  stockholders' 
meeting  the  members  present  are  not 
bound  by  their  assent.  Ives  v.  Smith, 
3  N.  Y.  Supp.  645  (1888). 

*  Laches  must  be  denied  in  tlie  bill, 
and  details  given  of  how  and  when 
knowledge  was  received  of  the  act 
complained  of.  Means  of  knowledge 
7 


§   731.]       DELAY  AS  A  EAR    TO    STOCKHOLDEk's  ACTIONS.       [cH.  XLIY. 


But  it  is  not  incumbent  on  the  stockholder  to  keep  himself 
informed  as  to  the  various  acts  of  the  corporation.  He  is  not 
chargeable  with  knowledge  merely  because  he  might  have  as- 
certained the  facts  by  an  examination  of  the  corporate  books.* 
Moreover,  it  is  the  well-established  rule  that  lapse  of  time  alone 
cannot  support  the  defense  of  laches.  There  must  be  both 
knowledge  and  delay.^  A  stockholder  who  was  not  present  at 
a  stockholders'  meeting  is  not  bound  by  the  ratification  by 
such  meeting  of  the  issue  of  a  large  amount  of  the  original  cap- 


are  equivalent  to  knowledge.  Laches 
need  not  be  pleaded  as  a  defense. 
Credit  Co.  v.  Arkansas  Cent.  R  R.,  15 
Fed.  Rep.  46  (1883>    Thirteen  years' 
delay  in  attacking  a  consolidation  as 
not  being  in  compliance  with  statu- 
tory provisions  is  a  bar.    "  Whatever 
is  suflScient  to  excite  attention,  and 
put  the  party  on  his  guard  and  call 
for  inquiry,  is  notice  of  everything  to 
which  the  inquiry  would  have  led. 
When  a  person  has  sufficient  infor- 
mation to  lead  him  to  a  fact,  he  shall 
be  deemed  conversant  with  it."   It  is 
immaterial  whether  the  court  declare 
the  consolidation  void  or  voidable. 
Leavenworth  County  v.  Cliicago,  etc. 
R.  R.,  18  Fed.  Rep.  209  (1883);  Taylor 
r.  South,  etc.  R.  R.,  4  Woods  (U.  S.), 
575  (1882),  the  court  saying:  "The 
means  of  knowledge  are  the  same 
thing  in  effect  as  knowledge  itself. 
.  .  .  The  circmnstances  of  the  dis- 
covery must   be    fully   stated    and 
proved,  and  the  delay  which  has  oc- 
curred must  be  shown  to  be  consistent 
with  the  requisite  diligence."    See 
also  Kelley  v.  Newburyport,  etc.  R.  R., 
141  Mass.  496  (1886).    In  Phosphate, 
etc.  Co.  V.  Green,  L.  R.  7  C.  P.  43 
(1871),  it  was  held  that  to  show  assent 
and  acquiescence  it  is  not  necessary 
to  prove  the  acquiescence  of  each  in- 
dividual shareholder.    It  is  enough 
to  show    circimastances   which  are 
reasonably  calculated  to  satisfy  the 
court  or  a  jury  that  the  thing  to  be 
ratified  came  to  the  knowledge  of  all 

1578 


who  chose  to  inquire,  all  having  full 
opportunity  and  means  of  inquiry. 

^Re  Agriculturists',  etc.  Co.,  L.  R. 
1  Cli.  App.  161,  511  (1866),  where  the 
court  said:  "It  is  no  part  of  the  duty 
of  a  shareholder  to  look  into  the 
management  of  the  business.  ...  It 
is  not  enough  to  show  that  they  might 
have  become  acquainted  with  the 
mismanagement  of  their  affairs.  It 
must  be  shown  that  they  did  so." 
Ryan  v.  Leavenworth,  etc.  R'y,  21 
Kan.  365  (1879).  Also  Holmes  v.  New- 
castle, etc.  Co.,  L.  R  1  Ch.  D.  683 
(1875),  holding  that  knowledge  of  a 
sale  of  property  is  not  knowledge  of 
an  illegal  dividend  from  the  proceeds. 
See  also  Spackman  v.  Evans,  L.  R  3 
H.  L.  171  (1868);  Houldsworth  v. 
Evans,  L.  R  3  H.  L.  263  (1868). 

2  Evans  V.  Smallcombe,  L.  R.  3  H. 
L.  249  (1868),  aff 'g  L.  R  3  Eq.  769,  the 
court  saying:  "Lapse  of  time  alone 
certainly  would  not  make  valid  that 
which  at  the  beginning  was  invalid. 
.  .  .  Length  of  time  may,  in  many 
cases,  materially  assist  in  establishing 
the  presumption  of  acquiescence  in 
an  act  which  requires  a  confirmation 
to  give  it  validity.  But  then  it  is 
not  time,  but  the  acquiescence,  which 
changes  what  would  otherwise  be  a 
void  act  into  a  valid  one."  Ash- 
hurst's  Appeal,  60  Pa.  St.  290  (1869), 
where,  however,  the  court  says  that 
"  acquiescence  is  presumed  from  de- 
lay." 


CH.  XLIY.]       DELAY  AS  A  BAR   TO    STOCKHOLDEE's  ACTIONS.       [§  732. 


ital  stock  to  the  directors  themselves,  who  were  illegally  elected, 
but  who  thereby  acquire  control  of  the  company.^ 

§  732.  What  length  of  time  constitutes  laches  her-ein  —  Stat- 
ute of  limitations. —  After  a  stockholder  has  knowledge  of  or 
is  chargeable  with  knowledge  of  an  ultra  vires,  fraudulent,  or 
negligent  act  of  the  directors,  he  must  institute  his  suit,  if  at 
all,  within  a  reasonable  time  thereafter.^  As  to  what  will  con- 
stitute a  reasonable  time  depends  on  the  circumstances  of  the 
case.  The  length  of  time  during  which  a  stockholder  may 
delay  in  bringing  his  suit  varies  with  each  case,  according  to 
the  circumstances  of  that  case.  The  court  requires  that  rea- 
sonable promptness  be  exercised  so  that  large  investments  of 
new  money  or  radical  changes  in  the  ownership  of  the  stock  or 
property  may  not  be  prevented  or  jeopardized  by  an  unreason- 
able delay  on  the  part  of  a  stockholder  in  objecting  to  the 
transaction.  Various  illustrations  of  this  principle  of  law  are 
given  in  the  notes  below.' 

poration  is  a  member,  yet  where  this 
has  been  done  tor  nine  years  without 
objection,  a  stockholder  cannot  claim 
for  the  corporation  the  benefit  of  the 
firm's  i^-ofits  from  such  contract. 
Warren  v.  Para,  etc.  Co.,  IGG  Mass. 
97  (189G).  Where  a  person  buys  land 
for  $24,000,  and  afterwards  becomes 
a  director  and  then  sells  it  to  the 
corporation  for  $80,000,  a  majority  of 
the  board  being  disinterested,  the 
company  cannot,  nine  years  after- 
wards, claim  that  it  should  pay  only 
the  then  market  value  of  the  land. 
Higgins  V.  Lansingh,  154  III  301  (1895). 
Delay  for  two  years  on  the  i)ai't  of 
one  who  claims  he  is  entitled  to  come 
into  a  reorganization  is  fatal  Farm- 
ers' L.  &  T.  Co.  V.  Bankers',  etc. 
Tek  Co.,  119  N.  Y.  15  (1890),  the  pur- 
chaser having  denied  any  reorgan- 
ization agreement  during  that  time. 
A  stockholder  who  objects,  but  waits 
from  October  17  to  March  7,  and  tlien 
at  the  annual  meeting  tries  to  have 
action  taken,  is  not  guilty  of  laches. 
Byrne  v.  Schuyler,  etc.  Co.,  65  Conru 
33G  (1895).  A  stockholder  who  is  also 
a  director  cannot  complain  of  a  di- 


1  Jlorris  v.  Stevens,  178  Pa.  St.  563 
(1897). 

2  In  Twin  Lick  Oil  Co.  v.  IMarbury, 
91  U.  S.  587  (1875),  Mr.  Justice  Miller 
gives  a  clear  statement  of  the  law 
herein.  Taylor  v.  South,  etc.  R'y,  4 
Woods  (U.  S.),  575  (1882);  Fredericks 
V.  Pennsylvania  Canal  Co.,- 109  Pa.  St. 
50  (1885);  Nashua,  etc.  R.  R  v.  Boston, 
etc.  R  R,  27  Fed.  Rep.  821,  826  (1886). 

3  Where  the  trustee  sells  trust  prop- 
erty to  himself  personally,  and  the 
cestiiis  que  trust  are  cognizant  thereof 
and  do  not  object  for  several  years, 
they  cannot  set  the  transaction  aside. 
Hoyt  V.  Latham,  143  U.  S.  553  (1892). 
See  also  Foster  v.  Mansfield,  etc.  R  R, 
146  U.  S.  88  (1893'.  Where  a  stock- 
holder delays  for  a  year  in  complain- 
ing of  a  sale  of  corporate  property  to 
two  of  the  directors,  and  innocent 
third  parties  have  acquired  rights  in 
the  propei-ty  in  the  meantime,  the 
stockholder's  remedy  is  barred  by 
laches.  Snow  v.  Boston,  etc.  Co.,  158 
Mass.  325  (1893).  See  §  733,  w/ra.  Al- 
though a  shoe  company  employs  as 
selling  agents  a  firm  in  whicli  the  pres- 
ident and  general  manager  of  the  cor- 


1579 


To3.]       DELAY  AS  A  BAH   TO    STOCKHOLDER'S    ACTIONS.       [CH.  XLIY. 


There  has  been  considerable  doubt  and  difficulty  in  deter- 
mining whether  the  statute  of  limitations  will  be  applied  by  a 

pany  caused  an  independent  valua- 
tion to  be  made,  and  for  three  years 
acquiesced  in  the  purchase,  it  cannot 
then  complain.  Stetson  v.  Northern 
Inv.  Co.,  73  N.  W.  Eep.  869  (Iowa, 
1898).  Nine  years'  delay  on  the  part  of 
a  minority  stockholder  in  complain- 
ing of  the  act  of  the  directors  in  caus- 
ing the  corporation  to  purchase  stock 
upon  which  they  received  a  secret 
profit  is  fatal  to  the  suit.  Cullen  v. 
Coal  Creek,  etc.  Co.,  42  S.  W.  Rop.  G93 
(Tenn.,  1897);  26  N.  Y.  App.  Div.  499. 
A  reorganization  agreement  can- 
not be  successfully  attacked  by  stock- 
holders two  years  after  it  was  made, 
especially  where  the  stockholders  do 
not  offer  to  jiay  the  debt  due  nor  the 
expenses  of  foreclosure,  and  where 
"  the  relief  they  ask  under  their  bill, 
if  granted,  would  not  only  be  value- 
less to  them  and  other  stockholders, 
but  would  saddle  the  company  with 
a  vast  debt  of  nearly  $25,000,000, 
wholly  due,  and  bearing  a  high  rate 
of  interest."  Carey  v.  Houston,  etc 
R'y,  52  Fed.  Rep.  671  (1892).  Three 
years'  time  having  elapsed  before  a 
stockholder  ascertained  a  fraudulent 
sale  of  the  company's  stock  by  the 
directors  to  themselves,  relief  will 
be  denied  where  that  sale  has  been 
of  great  benefit  to  the  remaining 
stock.  Squair  v.  Lookout  Mountain 
Co.,  42  Fed.  Rep.  729  (1890).  Thirteen 
years'  delay  by  stockholders  in  com- 
plaining of  a  gift  of  town  lots  to  the 
town  by  a  committee  of  the  stock- 
holders upon  the  dissolution  of  the 
corporation  is  fataL  Norton  v.  Kel- 
logg, 41  Fed.  Rep.  452  (1890).  A  delay 
of  twenty  years  in  complaining  that 
a  lease  taken  by  the  company  was 
due  to  the  fact  that  a  part  of  the  di- 
rectors were  interested  in  the  stock 
and  bonds  of  the  lessor  company  is 
fatal.  Jesup  v.  Illinois  Cent.  R.  R., 
43  Fed,  Rep.  483  (1890).     "Means  of 


version  of  funds  by  the  manager 
arising  from  an  unauthorized  "  swap- 
ping "  of  checks,  and  is  barred  of  re- 
lief where  he  had  known  of  its  con- 
tinuance for  two  years.  Streight  v. 
Junk,  59  Fed.  Rep.  321  (1893).  Where 
for  a  long  time  an  irrigation  com- 
pany acquiesces  in  a  certain  con- 
struction of  an  agreement  to  furnish 
water,  and  such  construction  is  equi- 
table, a  stockholder  cannot  object, 
even  though  some  of  the  directors 
are  interested  personally.  Foster  v. 
Bear  Valley  Irr.  Co.,  65  Fed.  Rep.  836 
(1895).  A  stockholder  who  delays 
nine  years  before  intervening  in  a 
foreclosure  suit  cannot  then  inter- 
vene after  the  sale  is  completed  and 
the  money  ready  for  distribution. 
Boston,  etc.  Trust  Co.  v.  American 
Rapid  Tel.  Co.,  67  Fed.  Rep.  165  (1895). 
Where  the  directors  of  a  failing  linen- 
manufacturing  corporation  sell  a 
part  of  the  plant  for  stock  of  a  knit- 
goods  manufacturing  corporation,  a 
stockholder  who  does  not  complain 
for  two  years  cannot  hold  the  direct- 
ors liable  for  liis  share  of  the  prop- 
erty so  exchanged  for  stock.  Pinkus 
V.  Minneapolis  Linen  Mills,  65  Minn. 
40  (1896).  Where  the  directors  sell 
tmissued  stock  at  a  discount  to  a 
party  who  resells  part  of  it  to  a  di- 
rector, other  stockholders  cannot,  ten 
years  afterwards,  hold  him  liable. 
Keeney  v.  Converse,  99  Mich.  316 
(1894).  Four  years'  delay  in  bringing 
suit  to  compel  a  corporate  officer  to 
account  for  property  purchased  by 
him  at  an  execution  sale  is  fataL 
Horbach  v.  Marsh,  37  Neb.  22  (1893). 
A  stockholder  who  for  two  years 
knows  that  an  illegal  salary  is 
being  paid  cannot  afterwards  object. 
Brown  v.  De  Young,  47  N.  E.  Rep. 
863  (111.,  1897).  Even  though  a  di- 
rector sells  property  to  the  company 
and  overvalues  it,  yet  if  the  com- 


1580 


CH,  XLIV.]       DELAY  AS  A  BAE   TO    STOCKHOLDEe's  ACTIONS.       [§  T3 


TP.O, 


court  of  equity  to  cases  of  this  nature.     It  has  been  held  in 
England  that  the  statute  will  be  applied  to  a  corporate  action 


knowledge,  plainly  within  reach  of 
stockholders  by  the  exercise  of  the 
slightest  diligence,  is  in  legal  effect 
equivalent  to  knowledge."  Jesup  v. 
lUinois  Cent.  R.  R.,  43  Fed.  Rep.  483 
(1890).  Laches  is  a  bar  to  a  suit 
against  a  corporation  the  same  as 
against  individuals,  especially  as  new 
stockholders  are  continually  coming 
in.  St.  Paul,  etc.  Ry  v.  Sage,  49  Fed. 
Rep.  315  (1892).  Eleven  and  one-half 
years  is  no  bar  to  a  stockholder's 
smt  to  set  aside  illegal  bonds  and  a 
mortgage,  where  no  attempt  was 
made  to  enforce  the  bonds.  Chicago 
V.  Cameron,  120  111.  447  (1887).  Eleven 
years'  delay  is  fatal  to  a  complaint 
that  another  corporation  has  pur- 
chased a  majority  of  the  stock  of  the 
corporation  in  which  the  complain- 
ant stockholder  holds  stock.  Alex- 
ander V.  Searcy,  81  Ga.  586  (1889'. 
Where  for  seven  years  a  stockholder 
who  owned  a  majority  of  the  stock 
elected  himself  and  two  of  his  dum- 
mies as  directors  of  the  company, 
and  caused  the  board  to  vote  a  large 
salary  to  himself  as  president  and 
manager,  and  had  leased  to  the  com- 
pany his  property  at  a  large  rental, 
the  salary  and  rental  are  illegal. 
Where  the  company  had  failed  to 
pay  its  dividends  by  reason  of  such 
acts,  a  court  of  equity,  upon  the  suit 
of  another  stockholder,  ordered  the 
president  to  account,  and  appointed 
a  receiver  of  the  company  and  di- 
rected that  its  affairs  be  wound  up. 
Miner  v.  Belle  Isle  Ice  Co.,  93  ]\Iich. 
97  (1892).  Although  a  stockholder 
may  enjoin  a  consolidation  of  liis 
company  with  another  under  a  stat- 
ute passed  after  the  incorporation, 
the  object  of  the  consolidation  being 
different  from  that  of  the  original 
corporation,  yet  where  the  stock- 
holder delays  applying  to  the  court 
for  nearly  a  year,  and  in  the  mean- 


time the  consolidated  company  has 
borrowed  money  and  given  mort- 
gages, and  such  mortgages  are  abovit 
to  be  foreclosed,  the  complaining 
stockholder  is  guilty  of  laches  and 
his  remedy  is  barred.  Rabe  v.  Dun- 
lap,  51  N.  J.  Eq.  40  (1893).  Where  a 
fraudulent  foreclosure  was  made  on 
April  5th,  and  the  fraud  became 
known  on  June  oth,  and  suit  was 
brought  in  September,  the  suit  may 
be  maintained,  no  one  having  been 
prejudiced  by  the  delay.  Ex-Mission, 
etc.  Co.  V.  Flash,  97  CaL  610  (1893). 
Seven  years'  delay  in  complaining 
that  the  directors  issued  bonds  to 
themselves  for  no  consideration,  and 
then  foreclosed  and  bought  the  road 
in,  is  fetal.  Burgess  v.  St.  Louis 
Coimty  R.  R.,  99  Mo.  496  (1890). 
Where  a  pledgee  bank,  having  a 
right  to  sell  at  private  sale  and  with- 
out notice,  sells  the  pledge  through 
its  president,  who  buys  the  pledge 
himself,  and  the  president  openly 
pays  the  bank  for  it,  long  delay  on 
the  part  of  the  bank  in  complaining 
is  fatal.  Raymond  v.  Palmer,  41  La. 
Ann.  425  (1889).  Laches  is  a  bar. 
Moore  v.  Silver,  etc.  Co.,  104  N.  C.  534 
(1'890).  A  consolidation  of  railroads 
under  an  amendment  to  the  charter 
may  be  prevented  by  a  single  stock- 
holder. But  several  years'  delay  in 
complaining  is  fataL  The  stock- 
holder then  can  only  recover  the 
value  of  his  stock  and  past  dividends. 
Deposit  Bank  v.  Barrett,  13  S.  W. 
Rep.  337  (Ky.,  1890).  Where  a  stock- 
holder delays  in  bringing  a  suit  for 
an  unreasonable  length  of  time  for 
the  purpose  of  ascertaining  whether 
the  act  complained  of  will  be  profit- 
able to  him,  his  suit  to  set  aside  the 
act  will  faiL  Boyce  v.  Montauk,  etc. 
Co.,  37  W.  Va.  73" (1892).  A  director's 
purchase  for  the  creditors  and  cer- 
tain mortgage  bondliolders  of  the 


1581 


§  732.]      DELAY  AS  A  BAE   TO    STOCKHOLDEk's  ACTIONS.       [CH.  XLIV. 


to  compel  a  director  to  pay  over  to  the  corporation  money  re- 
ceived by  him  as  a  bribe,  and  that  the  statute  begins  to  run 


mortgaged  property  at  a  foreclosure 
sale  cannot  be  set  aside  by  a  stock- 
holder five  years  after  the  sale,  where 
the  road  was  sold  for  all  it  was  worth, 
and  was  badly  in  debt,  and  required 
large  expenditul-es,  and  there  was 
no  possible  means  of  raising  more 
money;  and  the  stockholders  knew 
of  the  condition  of  things,  but  made 
no  effort  to  prevent  a  sale;  and  the 
director  offered  to  allow  the  stock- 
holders to  come  into  a  reorganization, 
and  offered  to  resell  the  property  for 
less  than  what  he  paid  for  it.  This 
is  the  laile  even  though  the  property 
subsequently  becomes  very  valuable. 
Osborne  v.  Monks,  21  S.  W.  Rep.  101 
(Ky.,  1893).  The  regularity  or  au- 
thorization of  a  corporate  mortgage 
cannot  be  successfully  attacked  by 
a  stockholder  in  an  action  to  fore- 
close the  mortgage  where  for  twelve 
years  the  interest  has  been  paid 
upon  the  bonds  with  the  knowledge 
and  acquiescence  of  the  stockholder. 
Warren  v.  Bigelow  Blue  Stone  Co., 
74  Hun,  304  (1893).  A  hotel  company 
having  bought  a  competing  hotel 
and  paid  for  it  in  stock  and  held  the 
property  for  two  years,  a  stockliolder 
cannot  have  the  purchase  set  aside. 
Steger  v.  Davis,  8  Tex.  Civ.  App.  23 
(1894).  In  Fitzgerald  v.  Fitzgerald, 
etc.  Co.,  41  Neb.  37|  (1894),  it  was 
held  that  where  two  corporations, 
having  contract  relations,  are  con- 
trolled by  the  same  board  of  direct- 
ors and  a  fraud  is  committed,  the 
delay  and  acquiescence  of  a  minority 
director  did  not  prevent  his  suing  to 
remedy  the  fraud.  Stock  voted  to 
the  president  as  a  salary  at  a  meet- 
ing where  his  presence  is  necessary 
to  form  a  quorum  may  be  recovered 
back,  but  acquiescence  for  ten  years 
is  fatal.  U.  S.  etc.  Co.  v.  Reed,  2  How. 
Pr.  (N,  S.)  253  (1885). 


See  also  Downes  v.  Ship,  L.  R  3 
H.  L.  343  (1868);  Ashhurst's  Appeal, 
GO  Pa.  St.  290  (18G9);  Zubriskie  v.  Hack- 
ensack,  etc.  R.  R.,  18  N.  J.  Eq.  178 
(1867) ;  Nashua,  etc.  R  R  u  Boston, 
etc.  R  R,  27  Fed.  Rep.  821,  826  (1886); 
London,  etc.  Assoc,  v.  Kelk,  L.  R.  26 
Ch.  D.  107  (1884);  McLoughlin  v. 
Detroit,  etc.  R'y,  8  Mich.  100  (1860); 
Gray  u  Chaplin,  2  Russ.  Ch.  126  (1826), 
where  the  stockholder  had  acqui- 
esced forty-seven  years  in  an  ultra 
vires  lease.  In  Mills  u  Central  R.  R., 
41  N.  J.  Eq.  1,  9  (1886),  it  was  very 
properly  held  that  a  delay  of  fifty- 
four  days  was  no  bar,  and  also  that  a 
failure  to  vote  against  the  act  was 
no  bar.  In  Gifford  v.  New  Jersey  R. 
R  &  T.  Co.,  10  N.  J.  Eq.  171  (1854),  a 
delay  of  twenty  years  was  held  to  be 
a  bar.  In  the  following  cases  the 
court  held  delay  to  be  a  bar:  Peabody 
V.  Flint,  88  Mass.  52  (1863),  the  delay 
being  three  and  a  half  years;  Greg- 
ory V.  Patchett,  33  Beav.  595  (1864), 
six  years;  International,  etc.  R  R.  v. 
Bremond,  53  Tex.  96  (1880),  two  years; 
Graham  v.  Birkenhead,  etc.  Co.,  2 
Macn.  &  G.  146  (1850),  eighteen 
months;  Kitchen  v.  St.  Louis,  etc. 
R'y,  69  Mo.  224  (1878),  five  years; 
Boston,  etc.  R.  R.  v.  New  York,  etc. 
R  R,  13  R  L  260  (1881);  Ashhurst's 
Appeal,  60  Pa.  St.  290  (1869),  seven 
years;  Sheldon,  etc.  Co.  v.  Eicke- 
meyer,  etc.  Co.,  90  N.  Y.  607  (1882), 
four  years;  Pneumatic  Gas  Co.  v. 
Berry,  113  U.  S.  322  (1884);  Graham 
V.  Boston,  etc.  R  R,  118  U.  S.  161 
(1886);  Be  Pinto  Silver  Min.  Co.,  L.  R 
8  Ch.  D.  273  (1878);  Royal  Bank  v. 
Grand  Junction  R  R,  125  Mass.  490 
(1878);  Re  Magdalena,  etc.  Co.,  6  Jur. 
(N.  S.)  975  (1860),  where  a  delay  of 
two  years  was  held  a  bar;  Brother- 
hood's Case,  31  Beav.  365  (1862),  twelve 
years;   Hervey  v.  Illinois,  etc.   R'y, 


1583 


CH.  XLIV.]       DELAT  AS  A  BAR   TO    STOCKHOLDEe's  ACTIONS.       [§  T32. 


from  the  time  when  the  corporation  discovers  the  f acts.^  In  the 
United  States,  under  the  statutes  of  the  different  states  of  the 
Union,  the  courts  often  apply  to  a  suit,  brought  to  remedy 


28  Fed.  Rep.  169  (1884);  Tliompson  v. 
Lambert,  44  Iowa,  239  (1876);  Vigers 
t?.  Pike,  8  CL  &  F.  562,  650  (1840);  Za- 
briskie  v.  Cleveland,  etc.  E..  R,  23 
How.  381  (1859);  Allen  v.  Wilson,  28 
Fed.  Rep.  677  (1886).  Cf.  Boardman 
V.  Lake  Shore,  etc.  R'y,  84  N.  Y. 
157  (1881);  Badger  v.  Badger,  3  Wall 
87(1864);  Harwood  u  Railroad  Co.,  17 
Wall.  78  (1872);  Rochdale  Canal  Co. 
V.  King,  2  Sim.  (N.  S.)  78  (1851);  §§  161, 
162,  198,  supra.  Seventeen  years'  de- 
lay bars  the  right  of  preferred  stock- 
holders to  reach  a  fund  which  was 
to  be  given  them  as  a  compromise 
by  first  bondholders,  a  foreclosure  by 
second  bonds  having  subsequently 
followed.  Sullivan  v.  Portland,  etc. 
R  R,  94  U.  S.  806  (1877).  Five  years' 
delay  in  attacking  a  consolidation  is 
too  late.  Bell  v.  Pennsylvania,  etc. 
R  R,  10  Atl.  Rep.  741  (N.  J.,  1887). 
But  a  delay  of  eleven  years  and  a  half 
was  held  not  fatal  to  a  stockholder's 
action  to  set  aside  an  ultra  vires  issue 
of  bonds,  where  the  railroad  had  been 
abandoned,  the  bonds  never  dealt  in 
nor  enforced,  and  the  complainant 
had  in  view  the  removal  of  the  lien, 
and  intended  to  proceed  and  con- 
struct the  road.  Chicago  v.  Cameron, 
120  111.  447  (1887).  Four  years'  delay 
in  suing  to  set  aside  an  ultra  vires 
assignment  of  property  held  fatal 
Descombes  v.  Wood,  91  Mo.  196  (1887). 
Where  a  corporation  is  insolvent, 
and  turns  in  its  property  at  a  fair 
price  to  a  creditor  whose  debt  is  also 
secured  by  the  guaranty  of  the  presi- 
dent of  the  corporation,  and  the  cred- 
itor at  once  sells  the  property  to  the 
president  at  an  advanced  price,  a 


stockholder  who  delays  suit  for  two 
years,  during  which  time  the  prop- 
erty becomes  valuable  and  the  presi- 
dent, who  purchased,  dies,  is  barred 
from  complaining.  Hancock  v.  Hol- 
brook,  40  La.  Ann.  53  (1888).  Laches 
bars  the  right  of  preferred  stockhold- 
ers to  object  to  an  tiltra  vires  lease. 
Emerson  v.  N.  Y.  etc.  R  R.,  14  R.  L 
555  (1884),  aff' g  Boston,  etc.  R  R  v. 
New  York,  etc.  R  R,  13  R  L  260 
(1881).  Three  years'  delay  is  fatal  to 
a  stockholder's  suit  to  hold  the  presi- 
dent liable  for  illegal  acts,  where  the 
former  was  also  treasurer.  Dunphy 
V.  Traveller  Assoc,  146  Mass.  495 
(1888).  A  lease  of  corporate  property 
may  be  ratified  by  one  hundred  days' 
delay  of  the  company  in  repudiating 
it,  the  lessee  in  the  meantime  expend- 
ing money  thereon.  Hoosac,  etc.  Co. 
V.  Donat,  10  Colo.  529  (1888).  A  lessor 
railroad  cannot,  nineteen  years  after 
the  lease,  sue  in  equity  to  set  aside 
the  lease  as  ultra  vires.  Laches  is  a 
bar.  St.  Louis,  etc.  R  R  n  Terre 
Haute,  etc.  R  R.,  33  Fed.  Rep.  440 
(1888);  aff'd,  145  U.  S.  393  (1892).  Ten 
years'  delay  bars  an  action  by  a  stock- 
holder to  set  aside  a  fraudulent  fore- 
closure of  a  mortgage  given  by  the 
company.  Foster  v.  Mansfield,  etc. 
R  R,  36  Fed.  Rep.  627(1888);  aff'd, 
146  U.  S.  88  (1892).  A  lease  of  a  water 
company's  property  to  an  ice  com- 
pany, with  the  privilege  to  the  stock- 
holders of  the  former  to  take  stock 
in  -the  latter,  will  not  be  set  aside  at 
the  instance  of  stockholders  who  did 
not  offer  to  take  such  stock  until  too 
late,  and  who  delayed  complaining 
until  after  the  ice  company  proved 


1  Metropolitan  Bank  v.  Heiron,  L,  R.  notice  of  the  fraud  came  only  to  the 
5  Exch.  D.  319  (1880).  The  statute  of  directors,  part  of  whom  were  also 
limitations  is  no  bar  to  an  action  implicated.  Re  Fitzroy,  etc.  Co.,  50 
against  a  director  for  fraud,  when    L.  T.  Rep.  144  (1884). 

1583 


§  732.]       DELAY  AS  A  BXR   TO    STOCKHOLDEk's  ACTIONS.       [CU.  XLIV. 

the  frauds,  idtra  vires  acts,  or  negligence  of  directors,  the  regu- 
lar statute  of  limitations.^  It  is  established  law  that  where 
equity  and  law  have  concurrent  jurisdiction  of  a  case,  equity 
will  apply  the  statute  of  limitations.^ 

Where  there  are  a  series  of  transactions  between  the  presi- 
dent and  the  company,  the  statute  of  limitations  docs  not  begin 
to  run  until  his  official  connection  ceases.'     If  tlie  runnim:^  of 


a  success.  Sliaaber's  Appeal,  17  AtL 
Rep.  209  (Pa.,  1889).  The  time  con- 
sumed by  the  guilty  officers  in  legal 
proceedings  to  collect  their  gains  is 
not  included  in  the  time  which  consti- 
tutes laches  on  the  stockholders'  part. 
Davis  V.  Gemmell,  70  Md.  356  (1889). 
iWatts's  Appeal,  78  Pa.  St  370 
(1875).  See  also  Taylor  v.  South,  etc. 
R  R.,  4  Woods,  575  (1882).  Also  in 
California.  See  Danumeyer  v.  Colo- 
man,  11  Fed.  Rep.  97  (1882),  holding 
that  under  the  statute  in  California 
the  three-years'  limitation  to  actions 
based  on  fraud  after  discovery  thereof 
applies  to  directors'  frauds  herein. 
But  see  Philippi  v.  Philippe,  115  U.  S. 
151  (1885);  Twin  Lick,  etc.  Co.  v.  Mar- 
bury, ^91 U.  S.  587  (1875);  Moyle  v.  Lan- 
ders, 31  Paa  Rep.  1133  (CaL,  1889).  See, 
in  general,  Coit  v.  Campbell,  82  N.  Y. 
509,  514  (1880);  Farnam  v.  Brooks,  26 
Mass.  212, 242  (1830) ;  Godden  v.  Kim- 
mell,  99  U.  S,  201,  210  (1879);  Preston 
V.  Preston,  95  U.  S.  200  (1877);  Badger 
V.  Badger,  2  Wall.  87  (1864);  Meader 
V.  Norton,  11  Wall  442  (1870);  Bow- 
man V.  Wathen,  1  How.  189  (1843); 
Beckford  v.  Wade,  17  Ves.  Jr.  87 
(1805).  The  statute  of  limitations  is 
a  bar  to  an  action  against  directors 
for  negligence  in  allowing  overdrafts 
and  illegal  loans.  Williams  v.  Hal- 
liard, 38  N.  J.  Eq.  373,  383  (1884).  An 
action  against  a  third  person  to  re- 
cover money  paid  by  the  corporation 
to  him  for  stock  must  be  brought 
within  six  years  or  it  is  barred  by 
the  statute  of  limitations.  Pierson 
V.  McCurdy,  33  Him,  520  (1884j.  But 
in  Pierson  v.  Morgan,  20  Abb,  N.  Cas. 
(N.  Y.,  1887),  and  Brijickerhoff  v.  Bost- 


wick,  99  N.  Y.  185  (1SS5),  the  ten-year 
statute  was  applied  to  fraud.  The 
statute  of  limitations  may  constitute 
a  bar  to  an  action  by  the  corporation 
against  its  secretary  for  funds  appro- 
priated by  him.  Landis  v.  Saxton, 
105  Mo.  486  (1891).  The  six-years' 
statute  of  limitations  runs  against  an 
action  to  hold  a  director  liable  for  in- 
vesting corporate  funds  in  the  stock 
of  another  company.  Re  Lands  Al- 
lotment Co.,  [1894]  1  Ch.  616.  An  ac- 
tion by  a  receiver  to  recover  money 
from  directors  is  barred  in  six  years, 
but  a  similar  action  by  a  stockholder, 
being  in  equity  alone,  is  barred  in  ten 
years,  in  New  Yorlc  ]\Iason  v.  Henry, 
83  Hun,  546  (1895).  The  statute  of 
limitations  does  not  run  as  against 
the  president's  misappropriation  of 
funds,  where  the  delay  was  due  to  his 
misrepresentations.  Coxe  v.  Hunts- 
ville  Gas  Light  Co.,  106  Ala.  373  (1895). 
The  statute  of  limitations  at  law  ap- 
plies, since  it  is  a  legal  right  that  is 
being  enforced  in  equity.  As  to  neg- 
ligence the  time  is  within  six  years 
from  the  negligent  act,  in  Tennes- 
see. Wallace  v.  Lincoln  Sav.  Bank, 
89  Tenn.  630  (1891).  The  directors 
may  be  liable  for  causing  the  railroad 
company  to  purchase  the  stock  of 
another  railroad  company,  but  the 
six-years'  statute  of  limitations  is  a 
bar  to  a  stockholders'  suit  to  hold 
them  liable,  no  fraud  being  alleged. 
Whitwam  v.  Watkin,  78  L.  T.  Rep. 
188  (1898). 

^  Baker  v.  Cummings,  169  U.  S.  189 
(1898). 

3  Danville,  etc.  R.  R.  v.  Kase,  89 
AtL  Rep.  301  (Pa.,  1898).    A  national 


1584 


XLIV.J      DELAY  AS  A  BAR    TO    STOCKHOLDEe's  ACTIONS.       [{ 


■i6i 


CH. 

the  statute  has  been  stopped  as  to  one  complaining  stockholder 
it  is  stopped  as  to  all.^  In  general  a  court  of  equity  mil  apply 
the  statute  or  will  not  apply  it,  as  may  seem  most  just,  and 
will  even  shorten  the  time.^ 

The  statute  of  limitations  is  no  bar  to  a  receiver  s  action  to 
recover  back  from  directors  a  salary  which  was  paid  in  breach 

of  trust.'  ,      ,        .         ^  7    7.^„ 

8  733.  3IisceIIaneous  applications  of  tlie  doctrine  of  laches 
liercin  -It  is  well  settled  that  the  ratification  of  an  act  which 
the  stockholder  might  have  complained  of  does  not  authorize 
or  ratify  in  advance  a  repetition  of  that  act.*  A  stocldiolder  s 
rio-ht  to  object  to  a  director's  act  can  be  exercised  by  him 
•  alone  ^  It  is  also  well  established  that  the  ratification  which 
wiU  bind  a  stockholder  must  be  by  himself  alone.  It  cannot 
be  by  the  other  stockholders.^  But  the  acquiescence  of  a  stock- 
holder bars  an  action  by  any  transferee  of  that  stock.' 

If  neither  the  defendants  nor  others  have  been  induced  by 
the  delay  to  act  upon  the  matters  which  are  complamed  of 
laches  may  not  be  a  bar  to  the  stocldiolder's  action.«    It  is  not 


bank  may  hold  its  officers  Uable  for 
making  loans  to  an  individual  in  ex- 
cess of  ten  per  cent  of  the  capital 
stock,  and  also  for  making  other  loans 
in  violation  of  the  statutes,  and  such 
suit  may  be  in  equity  where  the 
transactions  are  complicated  The 
statute  of  limitations  does  not  begin 
to  run  until  such  officers  have  gone 
out  of  office.  National  Bank,  etc.  v. 
Wade,  84  Fed.  Rep.  10  (1897). 

iBrinckerhoffr.  Bostwick,  99N.Y. 
185, 194  (18S5).  See  also  Richmond  v. 
Iroias,  131  U.  S.  27  (1887).  But  see 
Ashley's  Case,  L.  R.  9  Eq.  Cas.  263 
(1870);  also  §  163,  supra. 

•■J  Sullivan  v.  Portland,  etc.  R.  R.,  94 
U.  S.  806,  811  (1876).  See  also  Ernest 
r.  Croysdill,  2  De  G.,  F.  &  J.  175 
(1860);  Re  Exchange  Banking  Co., 
L.  Pu  21  Ch.  D.  519  (1882). 

SEUisr.Ward,  137  IlL  509  (1890). 
The  statute  of  limitations  is  no  bar. 
A  court  of  equity  is  governed  by  the 
rules  of  laches  instead.  Ellis  v.  Ward, 
137  IlL  509  (1890). 

100  1585 


<  Irvine  v.  Union  Bank  of  Australia, 
L.  R.  2  App.  366  (1877);  Bloxham  v. 
MetropoUtanR'y,  L.  R,  3  Ch.  337,  354 

(1868). 

5  Taylor  v.  Cliichester,  etc  R.  R., 
L.  R.  2  Exch.  356,  378  (1867). 

« Hazard  v.  Durant,  11  R.  L   195 
(1875).    This  principle  of  law  is  sub- 
stantially a  mere  restatement  of  the 
principle  that  the  majority  cannot 
bind  the  minority  as  regards  ultra 
vires  acts;  nor  can  the  directors.  See 
Gallery  v.  National  Exch.  Bank,  41 
Mich.  169  (1879).    The  fact  that  an 
officer  of  the  company  took  part  in 
a  swindluig  scheme  does  not  deprive 
the  company  of  its  right  to  recover 
back  moneys  of  which  it  was  wrong- 
fully deprived  by  such  scheme.   Far- 
row V.  Holland  Tnist  Co.,  74  Hun,  585 

(1893). 

7  See  §§  40,  730,  supra,  and  §  733, 
.    infra. 

8  Whitman  v.  Bowden,  27  S.  C.  53 

(1887). 


§  733.]       DELAY  AS  A  BAR   TO    STOCKHOLDER'S  ACTIONS.       [CH.  XLIV. 

necessary  to  allege  that  the  stockholders  have  been  free  from 
acquiescence  or  laches.^  The  question  of  laches  should  be  raised 
by  answer  and  not  by  demurrer.^ 

Delay  due  to  the  fact  that  a  bill  had  previously  been  filed  and 
dismissed  on  technical  grounds  is  not  laches.''  Where  all  the 
stockliolders  consent  to  the  company  buying  property  owned 
by  one  of  the  directors,  a  stockholder  w^ho  was  present  and  does 
not  object  cannot  complain.*  The  failure  of  a  stockholder  to 
attend  the  stockholders'  meeting  is  not  a  waiver  of  his  right  to 
object  to  the  acts  of  the  meeting  as  ultra  vires,  even  though  the 
notice  of  the  meeting  stated  what  was  to  be  done.*  Ratification 
does  not  arise  from  the  mere  fact  that  the  directors'  minutes 
were  ratified  at  a  stockholders'  meetino-.s 

If  it  is  evident  that  the  stockholder  waited  to  see  whether 
the  unauthorized  act  would  be  profitable  to  the  corporation,  the 
court  will  refuse  to  grant  him  any  relief.'  So  also,  if  the  stock- 
holder, after  a  full  knowledge  of  the  facts,  stands  by  and 
allows  large  operations  to  be  completed,  or  money  expended,  or 
alterations  to  be  made,  before  he  brings  suit,  he  is  guilty  of 
laches,  and  his  remedy  is  barred.^    But  delay  after  the  damage 

iHorn  Silver  Min.  Co.  u  Ryan,  43  SMcFadden  v.  Leeka,  48  Ohio  St. 

Minn.  196  (1889).  513  (1891). 

2  A  demurrer  is  not  the  proper  way  « Ives  v.  Smith,  8  N.  Y.  Supp.  46 

to  raise  the  question  of  laches.    Zeb-  (1889). 

ley  V.  Farmers'  K  &  T.  Co.,  139  N.  Y.  '  Story,  Eq.  Jur.  §  1539a;  Kitchen 

461  (1893);  Sage  v.  Culver,  147  N.  Y.  v.  St.  Louis,  etc.  R'y,  69  Mo.  224  (1878); 

241  (1895).     Cf.  Crumlish  v.  Shenan-  Gregory  v.  Patchett,   33  Beav.   595 

doah  Valley  R.  R.,  28  W.  Va.   623  (1864);  Atchison,  etc.  R.Ru  Fletcher, 

(1886).     The  complainant  need  not  35  Kan.   236,  250  (1886);    Banks    v. 

allege  that  he  did  not  take  part  in  Judah,  8  Conn.  145  (1830);  Watts's 

the  transaction,  but  the  question  of  Appeal,  78  Pa.  St.  370  (1875);  Sheldon, 

laches  may  be  raised  by  demurrer,  etc.  Co.  v.  Eickemeyer,  etc.  Co.,  90 

George  u  Central  R.  R.  etc.  Co.,  101  N.  Y.  607  (1882);  Boyce  v.  Montauk, 

Ala.  607  (1894).    The  bill  for  relief  etc.  Co.,  37  W.  Va.  73  (1892).    Quoted 

from  fraud  perpetrated  a  long  time  and  approved  in  Steger  v.  Davis,  8 

prior  thereto  must  explain  in  detail  Tex.  Civ.  App.  23  (1894). 

the  reason  of  the  delay.  Laches  may  8 See  §  732,  supra;  also  Houldsworth 

be  raised  by  demurrer.    Hubbard  v.  v.  Evans,  L.  R.  3  H.  L.  263,  276  (1868). 

Manhattan  Trust  Co.,  87  Fed.  Rep.  51  Delay  of  eight  months  held  fatal 

i^^^^)-  Great  Western  R'y  v.  Oxford,  etc.  Ry, 

3Mmer  v.   Belle  Isle  Ice   Co.,   93  3  De  G.,  M.  &  G.  341  (1853).     See  also 

Mich.  97  (1892).  Boston,  etc.  R  R  u  New  York,  etc. 

♦Stem way  v.  Steinway,  2  N.  Y.  R  R,  13  R.  L  260  (1881);  Aurora,  etc. 

App.  Div.  301  (1896).  Soc.  v.  Paddock,  80  III  263  (1875); 

1586 


CH.  XLIV.]       DELAY  AS  A  BAR   TO    STOCKHOLDEe's  ACTIONS.       [§  733. 


is  done,  and  while  the  complaining  stockholder  served  as  a  di- 
rector in  the  hope  of  bettering  things,  is  not  a  bar.^ 

Although  a  corporate  debt  is  not  incurred  with  the  formali- 
ties required  by  statute,  yet  acquiescence  therein  by  a  stock- 
holder bars  any  complaint  by  him.'^ 


Stewart  v.  Erie,  etc.  Transp.  Co.,  17 
Minn.  372  (1871);  Goodin  v.  Evans,  18 
Ohio  St.  IjO  (1868).  In  Covington, 
etc.  R.  R.  V.  Bowler,  9  Bush  (Ky.),  4G8 
(1873),  however,  the  court  held  that 
a  delay  of  six  years  was  not  a  bar  to 
the  stockholder's  remedy;  and  the 
court  said  that  "  merely  remaining 
passive  does  not  deprive  a  party  of 
the  right  to  seek  relief,  unless,  in  ad- 
dition thereto,  he  does  some  act  to 
induce  or  encourage  others  to  expend 
their  money  or  to  alter  their  condi- 
tion, and  thereby  render  it  uncon- 
scientious for  him  to  enforce  liis 
rights."  But  see  Pacific  R  R.  of  Ma 
V.  Missouri  Pac.  R'y,  111  U.  S.  505 
(1884),  reversing  12  Fed.  Rep.  641,  hold- 


ing that  delay  pending  appeal  is  not 
fatal.  See  also  §§  161, 162,  supra.  A 
stockholder  who  lies  by  and  allows 
his  corporation,  which  is  not  a  suc- 
cess, to  be  merged  with  other  prop- 
erty into  a  new  company,  payment 
being  made  in  stock  of  the  latter 
company,  and  the  enterprise  proves 
a  success,  cannot  cause  to  be  set  aside 
an  assessment  to  pay  a  debt  incurred 
for  expenses  in  bringing  about  such 
results.  Taylor  v.  North  Star,  etc 
Co..  79  CaL  285  (1889). 

1  Landis  r.  Sea  Isle,  etc.  Co.,  53  N.  J. 
Eq.  054  (1895). 

2  Manhattan  Hardware  Co.  v.  Ro- 
land, 128  Pa.  St.  119  (1889). 


1587 


CHAPTER  XLY. 


PARTIES,  PLEADINGS,  ETC.,  IN  SUITS  BY  STOCKHOLDERS  IN 
BEHALF  OF  THE  CORPORATION  — SUITS  BY  OR  AGAINST 
THE  CORPORATION  IN  GENERAL. 


A.    SUITS    BY    STOCKHOLDERS    IN    BE- 
HALF OP  THE  CORPOltATION. 

§  734.  Jurisdiction  of  the  court  — 
Jurisdiction  of  the  federal 
courts  in  such  cases  —  Juris- 
diction over  foreij^n  corpora- 
tions —  When  is  tlie  remedy- 
in  equity  and  when  at  law? — 
The  complainant  in  equity 
must  sue  in  behalf  of  himself 
and  all  other  stockholders  — 
The  results  of  tlie  suit  be- 
long to  the  corporation- 

735.  Parties   plaintiff  —  Wlio  may 

bring  the  suit — Unregistered 
transferees  —  Trustees  — 
Pledgees  —  Stock  that  has 
voted  in  favor  of  the  act  — 
Small  stockholders  —  Corpo- 
rate creditors  —  Receiver. 

736.  Riile  when  the  plaintiff  stock- 

holder sues  in  tlie  interest 
of  a  rival  company,  or  pur- 
chases stock  for  the  purpose 
of  bringing  suit. 

737.  Ninety-fourth  rule  in  federal 

courts  against  suits  by  trans- 
ferees. 

738.  Parties  defendant  herein — ^The 

corporation — D  irectors — 
Third  persons — The  receiver. 

739.  Complainant's   bill  must  not 

improperly  join  two  or  more 
causes  of  action  herein. 

740.  Complainant  must  allege  that 

he  requested  the  corporation 
to  bring  the  suit,  and  that 
the  corporation  refused  or 
neglected  to  do  so  —  Ninety- 
fom-th  rule  of  the  federal 
courts  on  this  subject  —  Re- 
quest to  receiver. 

741.  When  such  an  allegation  may 

be  omitted. 

743.  Miscellaneous  allegations  of 
the  complaint. 

743.  Prayer  for  relief. 

744  Property  received  under  the 
act  objected  to  must  be  re- 
turned upon  that  act  being 
set  asida 


1588 


^  745.  Injunction  restraining  the 
corporate  officers  and  others 
from  doing  specific  acts. 

746.  Appointment  of  a  receiver  — 

Injunction  against  corporate 
officers  acting  at  all  —  Re- 
moval of  directors  by  the 
court  or  corporation. 

747.  Miscellaneous  remedies. 

748.  The  complaining  stockholder 

controls  the  conduct  of  the 
suit  —  Costs  and  disburse- 
ments—  Similar  suits  else- 
whera 

749.  No   contribution    among  the 

directors. 

B.  SUITS  BY  OR  AGAINST  THE  CORPO- 
RATION IN  GENERAL. 

750.  The  discretion  of  the  directors 

in  refusing  to  institute  or 
to  defend  an  action  involv- 
ing corporate  interests  is  not 
generally  interfered  with  by 
the  courts  —  Intervention  by 
stockholders. 

751.  Suits  by  and  against  the  cor- 

poi'ation  —  Must  be  in  corpo- 
rate name. 

753.  Service  —  Appearance  —  An- 
swer. 

753.  Allegation  and  proof  of  incor- 
poration. 
•   754  Confession  of  judgment. 

755.  Injunction  and  contempt. 

756.  Contempt  and  sequestration. 

757.  Foreign  corporations  may  sue 

and  be  sued  —  Stockholders' 
suits  against  foreign  corpo- 
rations—  Garnishment  — 
Statute  of  limitations  — 
Usury. 

758.  Service  in  suits  against  a  for- 

eign corporation. 

759.  Jurisdiction  of  the  federal 

courts  —  "  Dummy  "  corpo- 
rations —  Residence  of  cor- 
porations —  Jurisdiction 
where  service  is  on  an  officer 
temporarily  in  the  state  — 
Federal  corporations. 


CH.  XLY.] 


PAKTIES,  PLEADINGS,  ETC. 


[§  734. 


A.    SUITS   BY    STOCKHOLDEKS   IN    BEHALF   OF   THE    COEPOKATION. 

S  734   Jurisdiction  of  the  court  —  Jurisdiction  of  the  federal 
courts  in  such  cases- Jurisdiction  over  foreign  corporations- 
When  is  the  remedy  in  equity  and  when  at  laiof-lhe  com- 
vJainant  in  equity  must  sue  in  hehalf  of  himself  and  all  other 
stocMolders-The  results  of  the  suit  belong  to  the  corporar 
tion-Theve  has  been  some  difficulty  in  determmmg  whether 
the  'federal  courts  have  jurisdiction  of  a  stockholder's  suit 
herein  when  the  corporation  and  such  directors  as  must  be 
made  parties  are  citizens  of  one  state  and  the  complainant 
stockholder  is  a  resident  of  another  state.    Inasmuch  as  the 
suit  is  for  the  benefit  of  the  corporation,  it  has  been  claimed 
that  the  non-residence  of  the  stockholder  is  insufficient  to  give 
iurisdiction.    The  federal  courts  have  decided,  however,  that 
such  iurisdiction  exists,  and  it  is  in  these  courts  that  a  large 
proportion  of  these  suits  are  brought.^     The  defendant  corpo- 

1  Dodge  V.  Woolsey,  18  How.  331  Jersey,  and  those  ^^  •*^«/^^.'^^^!^^ 

(1855);  lames  v.  Kornegay,  62  Fed.  of  the  controversy  are  a  No-  Jersey 

Rep  671(1894);  GreenwooduFreight  corporation    and  other   citizens    of 

Co    105  US  13  (1881);  Pond  v.  Ver-  New  Jersey,  as  well  as  a  Pennsyl- 

mokt  Valley  R.  R,  13  Blatchf.  280  vania   corporation  and  citizens   of 

(1874);  S.  C,  19  Fed.  Cas.  976,  the  Pennsylvania  and  of  Maryland,  ... 

cour^  holdingalsothatthe  complain-  all  the  parties  on  o^^e^.^^eof  this  con. 

ant  mi<^ht  omit  as  party  plaintiff  a  troversy  not  being  citizens  of  differ- 

:^ckho°lderresiding'in  the  state  of  ent  states  from  all  those  upon  the 


the  corporation.  See  also  Hatch  v. 
Chicago,  etc.  R.  R,  6  Blatchf.  105 
(1868);  S.  C,  11  Fed.  Cas.  799;  Foote 
V.  Linck,  5  McLean,  616  (1853);  S.  C, 
9  Fed.  Cas.  366;  Bell  v.  Donohoe,  17 
Fed.  Rep.  710  (1883),  holding  that  the 
court  has  no  jurisdiction  if  the  stock- 


other  side,  the  citizenship  of  the  par- 
ties  did  not  bring  the  case  within 
the  jurisdiction  of  the  circuit  court." 
Kew  Jersey  Cent.  P^  R.  v.  Mills,  113 
U  S  249(1885):  East  Tennessee,  etc. 
R  R  V.  Grayson,  119  U.  S.  240  (1886). 
If  the  two  parties  in  interest  are  both 


court  nasiiu  juiisu.n^uiui-1  It  ^^^^^^^-^ —     —  —  ..  4.  a.       > 

holder  and  one  of  the  defendants,  a    corporations  of  the  same  state,  it 
uuiuci  a.  .       .      „        ,  ^.   , o  +v,n+ Q  cf no Vhnlflp.v  cannot  sue 


third  person  who  is  alleged  to  have 
defrauded  the  corporation,  are  citi- 
zens of  the  same  state.  See  also  Burke 
V.  Flood,  1  Fed.  Rep.  541  (1880).  In 
Hawes  v.  Oakland,  104  U.  S.  450  (1881), 
the  court  vigorously  denounced  trans- 
fers of  stock  made  for  the  purpose  of 
giving  the  federal  courts  jurisdiction. 
The  ninety-fourth  rule  (see  104  U.  S. 
ix)was  made  inconsequence  thereof. 
Where  "  the  parties  on  one  side  of 
the  controversy  are  citizens  of  New 


seems  that  a  stockholder  cannot  sue 
in  the  federal  court  by  reason  of  his 
living  in  another  state.  Quincy  v. 
Steel,  120  U.  S.  241  (1887);  People  v. 
State  Treasurer,  24  Mich.  468  (1872). 
See  also  Huntington  v.  Palmer,  104 
U.  S.  483  (1881).  In  suits  by.  one  or 
more  in  behalf  of  others,  others  wiU 
not  be  allowed  to  come  in  as  parties 
when  to  do  so  would  oust  the  United 
States  court  of  jurisdiction.  Stewart 
V.  Dunham,  115  U.  S.  61  (1885);  Jack- 


1589 


I  734.]  PARTIES,  PLEADINGS,  ETC.  [CH.  XLV. 

ration  cannot  remove  the  case  to  tlie  federal  court  where  indis- 
pensable parties  defendant  are  participants  in  the  act  complained 
of  and  are  of  the  same  state  as  the  complainants.^  A  suit,  how- 
ever, commenced  by  the  stockholder  against  the  corporation 
and  against  another  party  who  has  defrauded  the  corporation 
may  be  removed  to  the  federal  court,  even  though  the  stock- 
holder and  his  corporation  are  citizens  of  the  same  state,  it 
being  shown  that  such  corporation  is  desirous  of  having  the 
complainant  succeed  in  the  suit.^  A  suit  by  several  stockhold- 
ers against  several  of  the  directors  to  hold  them  liable  for  mis- 
appropriation of  corporate  funds  cannot  be  removed  to  the 
federal  court  by  one  of  the  defendants  on  the  ground  that  the 
controversy  is  separable.'  The  question  of  whether  a  court 
will  entertain  jurisdiction  of  a  case  against  a  foreign  corpora- 
tion when  there  is  difficulty  in  obtaining  service  on  the  corpora- 
tion or  enforcing  the  decree  of  the  court  is  discussed  elsewhere 
in  this  chapter.'* 

It  is  a  well-established  rule  of  law  that  a  stockholder's  suit 
to  remedy  a  wrong  done  to  the  corporation  must  be  in  behalf 
of  all  the  stockholders,  since  they  are  all  equally  interested  in 
the  results  of  the  suit.     Accordingly,  the  complainant  or  com- 

son,  etc.  Co.  v.  Burlington,  etc.  R.  R.,  cannot  bring  suit  in  the  federal  court 
29  Fed.  Rep.  474  (1887).  C/.  Thouron  in  Washington  to  hold  non-resident 
V.  East,  etc.  R'y,  38  Fed.  Rep.  673  directors  liable  for  paying  illegal  sal- 
(1889).  As  to  jurisdiction,  see  also  aries  and  neglecting  to  collect  the 
Peninsular  Iron  Co.  v.  Stone,  131  U.  S.  corporate  debts,  and  to  have  a  re- 
631  (1887).  The  United  States  court,  ceiver  appointed.  Leary  v.  Columbia 
which  decreed  a  foreclosure,  has  ju-  River,  etc.  Co.,  82  Fed.  Rep.  775  (1897). 
risdiction  to  set  aside  a  foreclosure  i  Wilder  v.  Virginia,  etc.  Co.,  46 
as  fraudulent,  irrespective  of  citizen-  Fed.  Rep.  676  (1891). 
ship  in  the  latter  case.  Pacific  R.  R.  2Hutton  v.  Joseph  Bancroft,  etc. 
of  Mo.  V.  Missouri  Pac.  R'y,  111  U.  S.  Co.,  77  Fed.  Rep.  481  (1896). 
505  (1884),  rev'g  12  Fed.  Rep.  641.  spox  v.  Mackay,  60  Fed.  Rep.  4 
See  also  g§  827,  562,  notes,  as  to  the  (1894).  A  stockholder's  suit  cannot 
jurisdiction  of  the  United  States  be  removed  to  the  federal  court  on 
courts.  A  stockholder  may  bring  the  gi-ound  of  local  prejudice,  where 
suit  m  the  federal  courts  to  remedy  one  of  the  defendants  is  a  citizen  of 
a  corporate  wrong,  even  though  his  the  same  state  as  most  of  the  corn- 
interest  as  a  stockholder  is  less  than  plaining  stockholders,  and  the  con- 
§2,000.  The  test  is  whether  the  cor-  troversy  is  not  separable.  Gann  v. 
porate  interests  involved  exceed  Northeastern  R.  R.,  57  Fed.  Rep  417 
$2,000.  Hill  V.  Glasgow  R.  R.,  41  (1891). 
Fed.  Rep.  610  (1888).  A  Washington  4  See  §§  757,  758,  infra. 
stockholder  in  an  Oregon  corporation 

1590 


CH.  XLV.] 


PARTIES,  PLEADINGS,  ETC. 


[§  T34. 


plainants  must  bring  the  suit  in  behalf  of  themselves  and  such . 
others  of  the  stockholders  as  care  to  come  in.^ 

There  has  been  considerable  controversy  as  to  whether  a 
suit  to  hold  directors  liable  for  fraud,  negligence,  or  ultra  vires 
acts  should  be  at  law  or  in  equity.  The  well-established  rule 
is  that  such  a  suit,  when  brought  by  a  stockholder,  should  be 
in  equity,  inasmuch  as  it  is  in  the  nature  of  an  accounting  or 
the  prevention  of  illegal  acts.  A  suit  at  law  is  not  the  proper 
remedy.2  In  such  suit  in  equity  the  defendant  cannot  demand 
a  trial  by  jury  as  a  matter  of  right.' 


1  Wickersham  v.  Crittenden,  93  CaL 
17  (1893);  WaUworth  v.  Holt,  4  MyL 
<&  C.  619  (1840);  Taylor  v.  Salmon,  4 
MyL  &  C.  134  (1838),  on  the  ground 
"that  where  the  parties  interested 
are  numerous,  and  the  suit  is  for  an 
object  common  to  them  all,  some  of 
the  body  may  maintain  a  bill  on  be- 
half of  themselves  and  of  the  others ; " 
Beman  v.  Rufford,  1  Sim.  (N.  S.)  550 
(1851);  Baldwin  v.  Lawrence,  2  Sim. 
■&  S.  18  (1824);  Bromley  v.  Smith,  1 
Sim.  8  (1826);  White  v.  Carmarthen, 
etc.  R'y,  1  Hem.  &  M.  786  (1863); 
Bailey  v.  Birkenhead,  etc,  R'y,  12 
Beav.  433  (1850);  Preston  v.  Grand 
€ollier  Dock  Co.,  11  Sim.  327  (1840); 
Winsor  v.  Bailey,  55  N.  H.  218  (1875); 
Blatchford  v.  Ross.  54  Barb.  42  (1869); 
Cunningham  v.  Pell,  5  Paige,  607 
(1836);  Fawcett  v.  Lam-ie,  1  Dr.  & 
Sm.  192  (1860);  March  v.  Eastern  R  R., 
40  N.  H.  548  (1860);  Whitney  v.  Mayo, 
15  UL  251  (1853);  Bethune  v.  Weils, 
94  Ga.  486  (1 894),  See  Cass  v.  Ottawa, 
etc.  Co.,  22  Grant  (U.  C),  512  (1875), 
and  Hoole  v.  Great  Western  R'y,  L.  R. 
3  Ch,  App.  262  (1867),  to  the'  effect 
that  the  rule  is  otherwise  as  regards 
ultra  vires  acts.  If  the  allegations 
show  that  the  suit  is  in  behalf  of  all, 
the  omission  of  a  direct  allegation  to 
that  effect  may  not  be  fatal.  Flynn 
V.  Brooklyn,  etc.  R.  R,  9  N.  Y.  App. 


Div.  269  (1896).  Of  course,  if  aU  the 
stockholders  are  made  parties,  there 
is  no  need  of  the  suit  being  brought 
in  behalf  of  otliers  who  may  choose 
to  come  in.  Rogers  v.  Lafayette 
Agric.  Works,  52  Ind.  296  (1875).  Cf. 
Bengley  v.  Wheeler,  45  Mich.  493 
(1881).  Several  stockholders  may  join 
in  bringing  the  suit.  Marie  v.  Gar- 
rison, 83  N.  Y.  14  (1880).  The  bill 
must  be  filed  in  behalf  of  all  Jeffer- 
son, etc.  Bank  v.  Francis,  23  S.  Rep. 
48  (Ala.,  1898). 

'^  The  leading  case  on  this  point  is 
Smith  V.  Hurd,  53  Mass.  371  (1847), 
the  court  saying:  "An  injury  done 
to  the  stock  and  capital  by  negli- 
gence or  defeasance  is  not  an  injury 
to  such  separate  interest,  but  to  the 
whole  body  of  stockholders  in  com- 
mon." Brinckerhoff  v.  Bostwick,  83 
N.  Y.  52  (1882);  Craig  v.  Gregg,  83 
Pa.  St.  19  (1876).  To  same  effect, 
Allen  V.  Curtis,  26  Conn.  456  (1857). 
"  A  fatal  defect  in  the  plaintiff's  pe- 
tition, both  original  and  amended,  is 
that  it  seeks  no  recovery  in  behalf  of 
the  corporation,  but  seeks  a  direct 
recovery  of  damages  for  the  plaintiff 
individually,  the  case  stated  not  en- 
titling him  to  such  a  recovery." 
Evans  v.  Brandon,  53  Tex.  56  (1880); 
Kent  V.  Jackson,  2  De  G.,  M.  &  G.  49 
(1852).    An  action  at  law  does  not 


3  Brinckerhoff  v.  Bostwick,  105  N. 
Y.  567  (1887);  MacNaughton  v.  Os- 
good, 114  N.  Y.  574  (1889).  Cf.  People 

1591 


V.  State  Treasurer,  24  Mich.  468  (1872), 
See  also  §  701,  supra. 


§  '^34.] 


PARTIES,  PLEADIXGSj  ETC, 


[cn.  XLV. 


Where  a  corporation  sues  its  directors  for  neglect  of  duty, 
the  action  may  be  at  law  or  in  equity,  according  to  the  nature 


lie  at  the  instance  of  a  stockl:older 
against  a  director  for  mismanage- 
ment of  the  corporation.  Howe  v. 
Barney,  45  Fed.  Rep.  668  (1891).  A 
stockholder's  remedy  for  wilful  waste 
on  the  part  of  a  director  is  in  equity, 
and  not  at  law.  Ilirsli  v.  Jones,  56 
Fed.  Rep.  137  (1893).  A  stockholder 
of  a  dissolved  corporation  cannot 
reach  corporate  assets  which  have 
been  fraudulently  diverted,  except 
by  a  suit  in  equity.  Under  the  stat- 
utes of  New  York  an  attachment  can- 
not be  obtained  in  a  suit  in  equity. 
Shiel  V.  Patrick,  59  Fed.  Rep.  993 
(1894).  The  stockholder's  action  may 
be  in  the  nature  of  a  suit  in  equity 
for  conspiracy.  Fox  v.  Hale,  etc.  Co., 
108  Cal.  369,  475,  478  (1895).  Where 
a  stockholder  brings  a  suit  at  law 
against  a  board  of  directors  for  neg- 
ligence in  allowing  the  cashier  to 
wreck  the  bank,  the  directors  having 
been  such  for  different  periods  of 
time,  there  is  a  misjoinder  of  causes 
of  action.  Sayles  v.  White,  18  N.  Y. 
App.  Div.  590  (1897).  A  stockholder's 
remedy  against  directors  for  negli- 
gence is  in  equity.  Bloom  v.  National, 
etc.  Loan  Co.,  81  Hun,  120  (1894). 
The  stockholder's  remedy  is  not  at 
lavF,  although  money  of  the  corpora- 
tion misappropriated  by  the  defend- 
ant constitutes  all  the  assets  of  the 
corporation.  Thompson  v.  Stanley, 
20  N.  Y.  Supp.  317  (1892).  The  suit  is 
in  equity  and  will  not  be  construed 
as  a  suit  for  dissolution.  Watkins  v. 
Watkins,  etc.  Co.,  11  N.  Y.  App.  Div. 
517  (1896).  A  pledgor  of  stock  can- 
not, in  a  suit  brought  by  one  of  his 
creditors  to  reach  the  equity  in  a 
pledge,  raise  an  issue  as  to  the  mis- 
management of  the  corporation.  Mc- 
MuUen  v.  Ritchie,  57  Fed.  Rep.  104 
(1893).  A  contract  between  a  stock- 
holder and  a  third  person,  by  which 
the  third  person  is  to  be  made  a  di- 


rector, and  agrees  to  devote  his  time 
and  attention  to  the  business,  and 
develop  the  property,  and  procure 
the  construction  of  a  railroad,  and 
cause  various  lots  of  land  owned  by 
the  corporation  to  be  sold,  will  not 
sustain  an  action  at  law  for  damages 
by  the  stockholder  for  breach  of  the 
contract  An  action  in  such  a  case 
may  be  maintained  only  by  the  cor- 
poration or  by  the  stockholder  in  its 
behalf.  So  far  as  the  contract  in- 
tended to  control  the  action  of  the 
board  of  directors,  it  was  illegal 
Kountze  v.  Flannagan,  19  N.  Y.  Supp. 
33  (1892).  A  stockholder's  remedy  to 
restore  land  to  the  corporation,  he 
claiming  that  the  land  was  sold 
under  a  mortgage  which  did  not 
cover  such  land,  is  at  law  and  not  ia 
equity,  although  he  might  have  a  re- 
ceiver appointed  to  recover  the  land, 
Knevals  v.  Florida,  etc.  R.  R.,  66  Fed. 
Rep.  224  (1894).  See,  in  general.  Gar. 
diner  v.  Pollard,  10  Bosw.  074  (1863); 
Craig  u.  Gregg,  83  Pa.  St.  19  (1876); 
and  see  §  701,  supra.  This  principle  of 
law  is  assumed  in  nearly  all  the  cases 
cited  in  Part  IV  of  this  work.  In  a 
complicated  case  equity  will  take 
jurisdiction  of  a  suit  to  hold  a  presi- 
dent liable  for  misappropriating 
funds.  Warner  v.  McMullin,  131  Pa. 
St.  370  (1890).  A  vendee  sued  for  the 
price  of  stock  cannot  set  up  tliat  the 
plaintiff  vendor  had  negligently  man- 
aged the  corporation  and  misaj^pro- 
priated  its  assets.  Jlealey  v.  Nicker- 
son,  44  Minn.  430  (1890).  In  Priest  v. 
White,  89  Mo.  609  (1886),  an  action  at 
law  by  a  corporate  creditor  for  fraud 
and  deceit  failed.  In  Kimmel  v. 
Stoner,  18  Pa.  St.  155  (1851),  and  Kim- 
mell  V.  Geeting,  2  Grant  (Pa.),  Cas. 
125  (1853),  where  the  corporation, 
through  its  directors,  ordered  an 
agent  to  purchase  for  the  corpora- 
tion certain  shares  of  its  stock  which 


1593 


CH, 


XLT.] 


PAETIES,  PLEADJNGS,  ETC. 


[§  'J'Si. 


of  the  relief  sought.^  An  action  by  a  receiver  against  direct- 
ors for  negligence  should  be  at  law,  and  there  must  be  a  sepa- 
rate suit  against  each  director.-  The  money  or  property  recov- 
ered from  directors  or  third  persons  in  a  suit  in  equity  instituted 


ttfe  state  was  about  to  sell,  and  after 
the  purchase  the  directors  divided  it 
among  themselves,  it  was  held  that 
a  stockholder  could  sue  such  direct- 
ors in  an  action  on  the  case  and  ob- 
tain damages  for  the  proportionate 
loss  sustained  by  himself.  See  also 
§§  157, 355, 651,  supra,and  %  747,  infra. 
Cf.  Quincy  v.  Steel,  120  U.  S.  241  (1887). 
In  Hanley  v.  Balch,  94  Midi.  315 
(1892),  a  stockholder  sustained  an  ac- 
tion at  law  for  damages  against  an- 
other stockholder  who  had  wrecked 
the  corporation  and  bought  in  the 
property  in  violation  of  an  agree- 
ment to  carry  along  the  corporate 
debt.  In  a  suit  at  law  against  cor- 
porate officers  for  damages  for  wreck- 
ing the  corporation  by  creating  false 
debts  and  causing  all  the  property 
to  be  applied  to  their  payment,  the 
proceedings  by  which  the  property 
was  so  applied  must  be  fully  set 
forth.  Cottrell  v.  Tenney,  48  Fed- 
Rep.  716  (1892).  In  Ritcliie  v.  Mc- 
Mullen,  79  Fed.  Rep.  522  (1897),  the 
court  held  that  if  a  pledgee,  being  in 
control  of  the  corporation,  refuses 
to  develop  the  property  and  to  ac- 
cept subsidies  which  are  offered,  and 
to  accept  profits  under  a  contract 
which  are  possible,  and  to  sell  the 
property  at  a  large  price,  all  for  the 
purpose  of  depreciating  the  pledged 
stock  and  thus  obtain  the  stock  him- 
self, the  pledgor  may  call  the  pledgee 
to  account  for  the  loss  suffered  from 
this  conspiracy  and  wi-ong.  The  court 
held  also  that,  although  the  damage 
was  directly  to  the  corporation,  yet 
that  indirectly  it  was  a  damage  to 
the  pledgor,  and  that  hence  the 
pledgor  could  sue  in  his  own  behalf 
alone,  and  that  the  measure  of  dam- 
age is  the  damage  between  the  mar- 


ket value  at  the  time  of  suit  and 
what  it  would  have  been  if  the  con- 
spiracy had  not  been  set  on  foot.  The 
court  held,  however,  in  the  case  be- 
fore it,  that  the  proofs  did  not  sus- 
tain the  allegations. 

1  Horn,  etc.  Co.  v.  Ryan,  42  ]\Iinn. 
19G  (1889).  A  national  bank  may  hold 
its  officers  liable  for  making  loans 
to  an  individual  in  excess  of  ten  per 
cent  of  the  capital  stock,  and  also 
for  making  other  loans  in  violation 
of  the  statutes,  and  such  suit  may 
be  in  equity  where  the  transactions 
are  complicated.  The  statute  of  lim- 
itations does  not  begin  to  run  until 
such  officers  have  gone  out  of  office. 
National  Bank,  etc.  v.  Wade,  84  Fed. 
Rep.  10  (1897).  The  remedy  of  a  corpo- 
ration  against  its  manager  for  mis- 
management, fraud,  neglect,  and 
wrongful  acts  may  be  in  equity  on 
the  grotrnd  of  an  accounting,  even 
though  an  action  at  law  for  tort 
would  lie.  Empire  State  TeL  Co.  v. 
Bickford,  72  Hun,  580  (1893);  Em- 
pire State  Sav.  Bank  v.  Beard,  81  Him, 
184  (1894),  holding  also  that  all  the 
guilty  parties  should  be  joined  as  de- 
fendants.   See  also  §  701,  supra. 

2  O'Brien  v.  Fitzgerald,  143  N.  Y. 
377  (1894).  A  receiver  cannot  bring 
suit  in  equity  against  various  di- 
rectors for  misconduct  as  to  matters 
in  some  of  which  all  of  the  directors 
are  liable  and  in  others  only  a  part 
of  them.  There  should  be  a  sepa- 
rate' suit  at  law  again  st  each.  O  "Br ien 
V.  Fitzgerald,  6  N.  Y.  A  pp.  Div.  509 
(1896).  The  remedy  of  the  receiver 
against  the  directors  for  negligence 
is  at  law.  Dykman  v.  Keeney,  154 
N.  Y.  483  (1897).  A  receiver's  ac- 
tion against  the  directors  for  neg- 
ligence is  at  law.    Higgins  v.  Tefft,  4 


1593 


§  T34.] 


PARTIES,  PLEADINGS,  ETC. 


[CH.  XLV. 


by  a  stockholder  in  behalf  of  all  the  stockholders  belongs  to  all 
the  stockholders  and  not  to  the  complaining  stockholder.  It 
goes  to  the  corporation.^  The  decree  must  bo  for  the  benefit 
of  the  corporation  and  not  for  the  complainant  stockholders.- 
Where,  however,  an  illegal  salary  has  been  paid,  with  the  con- 
sent of  a  majority  of  the  stockholders,  and  a  minority  stock- 
holder files  a  bill  to  compel  repayment,  the  court  may  order 
the  repayment  to  dissenting  stockholders  of  such  part  of  the 
salary  as  they  would  get  if  the  whole  salary  was  repaid  to  the 
corporation  and  a  dividend  made.' 


N.  Y.  App.  Div.  62  (189G).  A  court 
of  equity  is  the  proper  forum  for  a 
receiver  to  bring  suit  against  direct- 
ors for  negligence  and  loss.  Buist  v. 
]\Ielchers,  44  S.  C.  46  (1895).  If  the  re- 
ceiver refuses  to  sue,  a  stockholder 
may  sue.  See  §  701,  supra,  and  §  740, 
infra. 

1  The  proceeds  of  the  suit  go  to  the 
corporation.  Howe  v.  Barney,  45  Fed. 
Rep.  668  (1891).  The  results  of  a 
stockholder's  suit  against  the  direct- 
ors for  negligence  belong  to  the  cor- 
poration, and  not  to  him.  Wallace 
V.  Lincoln  Sav.  Bank,  89  Tenn.  630 
(1891).  The  proceeds  of  the  suit  be- 
long to  the  corporation.  An  agree- 
ment that  the  attorneys  shall  have 
a  contingent  fee  is  good  where  all 
the  stockholders  stood  by  and  al- 
lowed the  work  to  go  on.  Davis  v. 
Gemmell,  73  Md.  530  (1891).  Mis- 
management by  directors  gives  a 
right  of  action  to  the  corporation  or 
a  stockholder  for  its  benefit,  but  not 
to  a  stockholder  for  damages  to  him 
individually.  McMuUen  v.  Ritchie,  64 
Fed.  Rep.  253  (1894).  The  results  of 
the  suit  belong  to  the  corporation. 
Grant  v.  Lookout  Mountain  Top  Co., 
93  Tenn.  691  (1894).  The  judgment  is 
for  the  benefit  of  the  corporation,  and 
a  receiver  may  be  appointed  to  collect 
and  distribute  it.  Fox  v.  Hale,  etc. 
Co.,  108  Cal.  475  (1895).  Moneys  re- 
covered in  a  stockholder's  suit  be- 
long to  the  corporation,  and  not  to 
him.    Thompson  v.  Stanley,  20  N.  Y. 


Supp.  317  (1892).  Where  a  stockholder 
sues  directors  and  also  parties  to 
whom  the  directors  have  illegally 
transferred  property,  and  asks  for  a 
personal  judgment  in  his  own  be- 
half, the  complaint  is  multifarious. 
Scharf  v.  Warren-Scharf,  etc.  Co.,  5 
N.  Y.  App.  Div.  439  (1896).  The  com- 
plaining stockholder  cannot  ask  for 
his  share  of  the  property  or  money 
involved.  Pratt  v.  Bacon,  27  Mass. 
123  (1830).  That  the  money  or  prop- 
erty recovered  belongs  to  the  corpo- 
ration, see  Evans  v.  Brandon,  53  Tex. 
56  (1880);  Dewing  v.  Perdicaries,  96 
U.  S.  193,  198  (1877);  Smith  v.  Poor, 
40  Me.  415  (1855;;  Carter  v.  Ford,  etc. 
Co.,  85  Ind.  180  (1882).  A  plaintifif  may 
upon  the  trial  be  compelled  to  elect 
whether  he  sues  to  hold  the  promot- 
ers liable  for  fraud,  or  whether  he 
sues  in  behalf  of  all  stockholders  and 
for  the  benefit  of  the  corporation. 
Brewster  v.  Hatch,  122  N.  Y.  349 
(1890).  Where  a  stockholders'  suit 
enjoining  illegal  taxation  is  success- 
ful, the  purchaser  of  the  property  of 
the  corporation  at  a  foreclosure  sale 
succeeds  to  the  benefit  of  that  suit, 
and  may  refuse  to  pay  the  tax. 
Secor  V.  Singleton,  41  Fed.  Rep.  725 
(1890). 

2  Landis  v.  Sea  Isle,  etc.  Co.,  53  N.  J. 
Eq.  654  (1896). 

3  Brown  v.  De  Young,  47  N.  E.  Rep. 
863  (111.,  1897).  In  Eaton  v.  Robin- 
son, 32  AtL  Rep.  339  (R.  L,  1895), 
where  illegal  salaries  had  been  paid. 


1594 


CH.  XLV.] 


PAETIES,  PLEADINGS,  ETC. 


[§  T35. 


§  735.  Parties 2)lcd)itiff —  Wlio  may  hrlnf/  tliesxdt —  Unreg- 
istered transferees  —  Trustees — Pledgees — Stoclc  that  has  voted 
in  favor  of  the  act  —  Small  stocMolders  —  Corporate  credit- 
ors—  Receiver. —  Ordinarily,  a  suit  herein  is  instituted  by  one 
or  more  stockholders  who  are  registered  as  such  on  the  corpo- 
rate books.  It  has  been  held,  however,  that  the  suit  may  be 
brought  by  a  purchaser  of  a  certificate  of  stock  who  has  not 
as  yet  obtained  a  registry  thereof  in  the  corporate  books.^  A 
stockholder  in  a  corporation  which  owns  stock  in  another  cor- 
poration may  file  a  bill  to  enjoin  an  ultra  vires  act  of  the  latter.^ 
Stockholders  who  are  disqualified  from  participating  in  the  suit 
shall  not  be  joined  as  parties  plaintiff.' 


the  court  ordered  the  guilty  parties 
to  pay  to  each  stockholder  his  pro- 
portionate part  of  the  money. 

1  Bagshaw  v.  Eastern  Union  R'y,  7 
Hare,  114  (1849);  Great  Western  R'y 
V.  Rushout,  5  De  G.  &  Sm.  290  (1852): 
Ervin  v.  Oregon,  etc.  Nav.  Co.,  28 
Hun,  2C9  (1882);  Parrott  v.  Byers,  40 
CaL  614  (1871).  Cf.  Landes  v.  Globe, 
etc.  Co.,  73  Ga.  176  (1884),  where  a 
stockholder  had  not  paid  his  subscrip- 
tion; Mills  V.  Northern  R'y,  L.  R.  5 
Ch.  621  (1870),  a  qucere.  An  unreg- 
istered stockholder  brought  suit  in 
tlie  case  of  Houston,  etc.  Co.  v.  Drew, 
36  S.  W.  Rep.  802  (Tex.,  1896),  and  the 
party  in  whose  name  the  stock  stood 
on  the  books  intervened  in  support  of 
the  bill.  Contra,  Ramsey  v.  Erie  R'y, 
7  Abb.  Pr.  (N.  S.)  156  (1869);  Heath  v. 
Erie  R'y,  8  Blatchf.  347  (1871);  S.  C, 
11  Fed.  Cas.  976;  Hersey  v.  Veazie,  24 
Me.  9  (1844).  An  unregistered  holder 
of  certificates  is  very  doubtfully  en- 
titled to  bring  the  action.  Moore  v. 
Silver,  etc.  Co.,  104  N.  C.  534  (1889). 
Where  the  plaintiff's  stock  is  trans- 
ferred on  the  corporate  books,  vmtil 
he  obtains  the  stock  again  he  cannot 
sue  as  a  stockholder,  even  though  he 
claims  that  the  stock  was  trans- 
ferred without  consideration  and  on 
terms  not  performed.  Lawson  v. 
Stanley,  15  N.  Y.  Supp.  707  (1891). 
A  stockholder  may  sue,  although  he 


is  not  a  stockholder  of  record.  Al- 
though he  has  transferred  his  stock 
to  the  president  to  enable  him  to 
control  all  the  stock  and  wind  up  the 
companj'-,  he  may  bring  a  suit  in 
behalf  of  the  corporation  for  frauds 
upon  it.  Thompson  v.  Stanley,  20 
N.  Y.  Supp.  317  (1892).  But  such  a 
stockholder  cannot  maintain  a  suit 
against  directors  for  fraud  where 
his  stock  has  been  transfeiTcd  to  an- 
other, and  he  has  no  interest  therein; 
nor  can  he  maintain  his  suit  on  the 
ground  that  he  owns  a  certificate  of 
stock  standing  in  the  name  of  an- 
other and  transferred  in  blank  on  the 
back  by  the  administratrix  of  the 
stockholder  of  record,  no  proof  being 
given  of  the  administratrix's  being 
such  or  of  having  executed  the  trans- 
fer. Thompson  v.  Stanley,  73  Hun, 
248  (1893);  aff'd,  147  N.  Y.  713.  A  pur- 
chaser of  a  certificate  of  stock  who 
has  not  yet  obtained  a  transfer  of  the 
same  on  the  corporate  books  cannot 
complain  of  fraudulent  or  ultra  vires 
acts.  Brown  v.  Duluth,  etc.  R'y,  53 
Fed.  Rep.  889  (1893). 

2  Carter  v.  Producers',  etc.  Co.,  104 
Pa.  St.  463  (1894). 

3  Clements  v.  Bowes,  1  Drew.  684 
(1853).  Cf.  Parrott  v.  Byers,  40  CaL 
614  (1871),  holding  that  if  one  of  the 
complainants  is  competent  it  is  im- 
material that  the  others  are  not.    See 


1593 


§  Y35.] 


PAKTIES,  PLEADINGS,  ETC. 


[cn.  XLV. 


"Where  a  person  who  holds  stock  as  a  trustee  refuses  to  bring 
the  suit,  the  cestui  qiie  trust  may  institute  it,  making  the  trustee 
a  party  defendant.^  An  administrator  holding  stock  may  bring 
the  suit.'  A  person  who  has  sold  his  stock  cannot  sue;'  nor 
can  a  subscriber  who  has  not  paid  as  required  by  charter;  *  but 
an  unregistered  pledgee  may  sue,'  A  pledgor  of  stock  may 
maintain  the  action.® 

A  stockholder  cannot  institute  such  a  suit  as  this  where  his 
stock  is  all  "  water,"  and  illegal,^  or  the  original  business  of  the 
corporation  was  Illegal.  Thus,  where  the  real  business  of  the 
corporation  is  an  illegal  one  —  a  lottery  —  and  where  the  stock 
is  wholly  fictitious,  the  courts  will  not  aid  a  stockholder.'    A 


also  State  Line  R.  R's  Appeal,  1  R'y 
&  Corp.  L.  J.  139  (ra.,  1886);  Burt  v. 
British,  eta  Assoc,  4  De  G.  &  J.  158 
(1859),  where  the  court  said  that  if 
the  stockholdei-s  "  sue  by  a  plaintiff 
only  who  has  personally  precluded 
himself  from  suing,  that  suit  cannot 
proceed."  See  House  v.  Mullen,  22 
Wall.  42  (1874). 

1  Great  "Western  R'y  v.  Rushout,  5 
De  G,  &  Sm.  290  (1852);  Daft  v.  Daft, 
etc.  Co.,  N.  Y.  L.  J.,  Dec.  3, 1890.  C/. 
Mayer  v.  Denver,  etc.  R  R.,  38  Fed- 
Rep.  197  (1889). 

2  Jones  V.  Pearl  Min.  Co.,  20  Cola 
417  (1894). 

3  A  person  who  is  the  registered 
holder  of  stock,  but  has  actually  sold 
the  certificates  or  scrip,  cannot  main- 
tain the  bill,  nor  will  the  bill  be  sus- 
tained on  the  theoiy  that  he  repre- 
sents the  purchaser  of  the  certificates. 
Doyle  V.  M\mtz,  5  Hare,  509  (1846). 

*■  Busey  v.  Hooper,  35  Md.  15  (1872). 

5  Baldwin  v.  Canfield,  26  Minn.  43 
(1879).  The  pledgee  may  institute  a 
suit  where  his  security  has  been  im- 
paired. Green  v.  Hedenberg,  159  IlL 
489  (1896).  A  pledgee  of  stock  is  as 
fully  protected  against  ultra  vires 
acts  as  a  stockholder  is.  Campbell  v. 
American  Zylonite  Co.,  122  N.  Y.  455 
(1890).     Cf.  §  468,  supra. 

«  Fisher  v.  Patton,  134  Mo.  32  (1895). 

'  A  person  to  whom  watered  stock 


has  been  issued  as  full-paid  stock  is 
not  such  a  bona  fide  stockholder  as 
may  compel  a  creditor  to  return 
bonds  which  were  illegally  issueil. 
The  stock  is  void  under  ^e  Wiscon- 
sin statutes.  Hinckley  v.  Pfister,  83 
Wis.  04  (1892).  Stock  issued  as  full 
paid  for  no  consideration  whatsoever 
Is  void  under  the  constitutional  pro- 
vision that  stock  shall  be  issued  only 
"  for  labor  done,  services  performed, 
or  money  or  property  actually  re- 
ceived." The  original  holders  of  such 
stock  cannot  institute  a  suit  to  rem- 
edy a  wrong  done  to  the  corporation 
by  its  president.  Arkansas,  etc.  Co. 
V.  Farmers',  etc.  Co.,  13  Colo.  587 
(1889). 

8  Le  AVarne  v.  Meyer,  38  Fed.  Rep. 
191  (1889).  A  stockholder  in  a  corpo- 
ration cannot  sustain  a  bill  to  have 
the  charter  forfeited  and  the  corpo- 
ration wound  up  on  the  ground  that 
it  was  formed  to  purchase  and  com- 
bine various  competing  linseed-oil 
mills  for  the  purpose  of  forming  a 
monopoly.  The  state  alone  can  ask 
for  such  a  forfeiture.  Moreover,  the 
stockliolder,  by  being  a  stockholder, 
is  estopped  from  complaining,  and  is 
presumed  to  have  had  knowledge  of 
the  facts  from  the  time  that  he  be- 
came a  stockholder.  Coquard  v.  Na- 
tional L.  S.  Co.,  49  N.  E.  Rep.  563  (111., 
1898). 


1596 


€H.  XLV.]  PARTIES,  PLEADINGS,  ETC.  [§  735. 

stockholder  cannot  enjoin  an  issue  of  bonds  by  a  corporation 
in  which  his  corporation  expects  to  become  a  stockholder.^ 

A  stockholder  who  holds  stock  which  has  been  voted  in  favor 
of  the  act  complained  of  will  fail  in  his  suit.  This  stock  is 
tainted  with  the  fraud  or  illegality.  This  is  a  very  important 
principle  of  law,  and  defeats  many  suits  instituted  by  stockhold- 
ers to  remedy  past  wrongs.  The  law  is  clear  that  a  stockholder 
who  voted  in  favor  of  the  transaction,  or  a  holder  of  stock 
which  at  the  time  of  the  act  complained  of  was  held  by  a  party 
who  participated  in  the  act,  or  acquiesced  therein,  or  voted  the 
stock  therefor,  cannot  bring  suit  to  set  the  transaction  aside.^ 
"Where  the  corporation  is  insolvent  a  stockholder  cannot  main- 
tain a  suit  to  hold  the  directors  liable  for  fraud  unless  he  alleges 
that  the  relief  asked  for  will  be  of  some  benefit  to  him;  in 
other  words,  that  there  will  be  a  surplus  for  the  stockholders 
after  the  creditors  are  paid.' 

A  stockholder  who  has  been  guilty  of  laches,  or  against  whom 
the  statute  of  limitations  has  run,  cannot  complain.*  The  small- 
ness  of  the  stockholder's  interest  will  not  prevent  his  institut- 
ing a  stockholder's  suit  to  remedy  a  corporate  wrong.  An 
owner  of  one  share  is  to  be  protected  by  a  court  of  justice 
equally  with  the  owner  of  a  thousand  shares.  The  old  doctrine 
of  de  minimis  non  curat  lex  has  sometimes  been  applied  to  this 
class  of  cases,  but  such  decisions  are  not  to  be  commended.  If 
there  are  no  suspicious  circumstances  connected  with  the  suit, 

iMayerv.  Denver,  eta  R.R,  38  Fed.  holder  of  the  former  cannot  com- 

Eep.  197  (1889).  plain,  even  though  a  large  amount  of 

2  See  g§  40, 730,  supra.  A  purchaser  watered  stock  vi'as  issued  in  payment, 
of  stock  issued  to  a  contractor  for  and  even  though  the  directors  of  the 
■work  cannot  attack  the  issue  on  the  purchasing  company  were  personally 
ground  that  it  was  watered  stock,  interested  in  the  selling  company 
even  though  the  contractors  imme-  and  had  made  large  profits  in  the 
diately  sell  a  part  of  the  stock  and  construction  of  the  work,  it  appear- 
bonds  at  the  rate  of  ninety  cents  on  ing  tliat  the  purchasing  company  had 
the  dollar  for  the  bonds,  with  nearly  no^roperty  at  all  at  the  time  of  the 
an  equal  amotuit  of  stock  thrown  in.  purchasa  In  such  a  case  no  damage 
Drake  v.  New  York,  etc.  Co.,  26  N.  Y.  is  done  to  the  stockholder,  and  hence 
App.  Div.  499  (1898).  suit  by  liim  does  not  lie.    Srhith  v. 

3  Coming  v.  Barrett,  48  N.  Y.  Supp.  Ferries,  etc.  R'y,  51  Pac.  Rep.  710 
1013  (1898).  See  also  Smith  v.  Hurd,  (CaL,  1897).  See  also  §  848,  infra; 
53  Mass.  371,  385  (1847).  Where  one  Darragh  v.  Wetter  Mfg.  Co.,  78  Fed. 
corporation  buys  out  another,  a  stock-  Eep.  7  (1897). 

*  See  ch.  XLIV,  siqjra. 
1597 


§  735.] 


PAETIES,  PLEADINGS,  ETa 


[cn.  XLV, 


it  is  believed  that  this  maxim  of  the  law  will  not  be  applied  to 
a  case  of  this  character.^ 

The  stockholders  cannot  join  with  tlie  corporation  in  bring- 
ing the  suit.^  Indeed,  the  proper  party  to  institute  the  suit  is 
the  corporation,  and  it  is  only  because  the  corporation  fails  to 
do  so  that  a  stockholder  may  bring  the  suit  where  fraud  or 
iiltra  vires  is  involved.     But  both  cannot  join  in  the  suit.     The 


1  Armstrong  v.  Church  Soc,  13 
Grant,  Ch,  (U.  C.)  552  (18G7),  the  court 
saying:  "  Every  member  of  a  corpo- 
ration has  a  right  to  object  to  any 
illegal  diversions  of  its  funds;  and  in 
this  respect  those  who  contribute 
most  have  no  greater  rights  than 
those  who  contribute  least;"  Seaton 
V.  Grant,  L.  R.  2  Ch.  459  (18G7),  where 
the  court  said  the  maxim  did  not 
apply,  since  the  stockholder  sued  not 
on  his  own  belialf  alone,  but  for  him- 
self and  others.  However,  in  the 
case  of  Diinnmeyer  v.  Coleman,  11 
Fed.  Rep.  97  (1882),  the  court  said: 
"It  is  always  a  suspicious  circum- 
stance where  a  single  stockholder 
among  a  large  number  in  a  corpora- 
tion rushes  into  a  court  of  equity  to 
vindicate,  unaided  and  alone,  the 
rights  of  the  corporation  and  all 
other  stockholders;  and  especially  is 
this  so  where  the  amount  of  stock 
owned  by  him  is  so  very  limited  that 
in  case  of  success  his  own  share  of 
the  recovery  will  be  so  small  as  to 
make  the  maxim  de  viinimis  non 
curat  lex  very  properly  applicable." 
Cf.  Ithaca  Gaslight  Co.  v.  Treman,  93 
N.  Y.  660  (1883).  If  the  complaining 
stockholder  has  but  a  small  interest, 
he  is  aided  only  where  he  makes  out 
a  clear  casa  Benedict  v.  Western 
Union  TeL  Co.,  9  Abb.  N.  Cas.  214, 
222  (1878);  Reiff  v.  Western  Union 
TeL  Co.,  N.  Y.  D.  Reg.,  Aug.  23,  1887. 
In  Charlton  v.  Newcastle,  etc.  R'y,  5 
Jut.  (N.  S.)  1096  (1859).  the  court  said: 
"A  single  shareholder,  holding  five 
or  ten  shares  or  less,  is  perfectly  jus- 


tified in  applying  to  the  court  to 
restrain  a  company,  on  behalf  of  iiim- 
self  and  the  other  shareholders,  by 
injunction,  from  committing  any  ille- 
gal act  beyond  their  powers.  It  does 
not  signify  if  all  the  other  sharehold- 
ers are  pitted  together  against  this 
holder  often  shares;  the  court  holds 
it  is  better  for  the  real  interests  of 
the  company  that  they  should  obey 
the  law,  and  any  one  single  share- 
liolder  who  invokes  the  aid  of  the 
court  is  entitled  to  its  aid  for  that 
purpose."  See  also,  to  the  effect  that 
the  holder  of  a  single  share  may  bring 
the  suit,  Beman  v.  Rufford,  1  Sim. 
(N.  S.)  550,  564  (1851);  Zabriskie  v. 
Cleveland,  etc.  R.  R.,  23  How.  381,  395 
(1859);  Kean  v.  Johnson,  9  N.  J.  Eq. 
401,  410  (1853),  reviewing  the  cases; 
Gifford  V.  New  Jersey  R  R,  10  N.  J. 
Eq.  171  (1854);  Elkins  v.  Camden,  etc. 
R  R,  36  N.  J.  Eq.  5  (1882).  As  to  the 
right  of  the  owner  of  one  share  of 
stock  to  enjoin  an  election,  see  Green- 
ough  V.  Alabama,  etc.  R  R.,  04  Fed. 
Rep.  22  (1894). 

2  Arkansas,  etc.  Co.  v.  Farmers',  etc. 
Co.,  13  Colo.  587  (1889).  Where  a  cor- 
poration  has  abandoned  business  for 
many  years,  and  has  no  known  board 
of  directors,  a  stockholder  may  file  a 
biU  to  wind  up  its  affairs,  but  he 
should  not  join  the  corporation  as  a 
complainant  with  himself.  In  such 
a  case  no  request  to  the  directors  is 
necessary.  Tennessee,  etc.  Co.  v. 
Ayers,  43  S.  W.  Rep.  744  (Tenn., 
1897). 


1598 


on.  XLV,] 


PAETIES,  PLEADINGS,  ETC 


[§  T35. 


subject  of  the  intervention  of  stockholders  in  suits  carried  on 
by  the  corporation  is  considered  elsewhere.^ 

May  a  corporate  creditor  institute  a  suit  to  make  the  officers 
account  for  a  fraudulent  or  uU7'a  vires  act  ?  A  simple  creditor 
certainly  cannot.  Until  judgment  is  obtained  and  execution  is 
returned  unsatisfied,  the  corporate  creditor  has  no  interest  in 
any  specific  corporate  property.  Moreover,  in  case  his  debt  is 
finally  paid,  he  has  no  interest  in  the  management  or  assets  of 
the  corporation,  nor  in  the  acts  of  its  officers  and  stockholders.^ 
The  rule  is  different  as  to  the  trustee  of  a  corporate  mortgage 
or  a  bondholder  secured  by  such  mortgage.  They  may  sue  to 
protect  the  mortgaged  property.^  After  judgment  is  obtained, 
however,  and  execution  returned  unsatisfied,  a  corporate  cred- 
itor may  follow  the  corporate  assets  into  the  hands  of  corporate 
officers  or  of  third  persons  who  have  received  such  assets  fraud- 


1  See  S  750,  infra. 

2  Simple  contract  creditors  of  a 
corporation,  whose  claims  have  not 
been  reduced  to  judgment,  and  wlio 
have  no  express  lien  on  its  property, 
have  no  standing  in  a  federal  court 
of  equity  to  obtain  a  seizure  of  tlieir 
delator's  property  and  collect  unpaid 
subscriptions  and  apply  the  same  to 
the  payment  of  their  debts,  even 
though  they  allege  that  an  existing 
mortgage  on  the  property  is  fraudu- 
lent, and  that  the  company  is  insolv- 
ent, and  a  bill  of  foreclosure  of  the 
mortgage  is  going  on.  Under  certain 
conditions  they  might  intervene. 
Hollins  V.  Brierfield  Coal,  etc.  Co., 
150  U.  S.  371  (1893),  stating  also  that 
the  federal  courts  will  not  even  fol- 
low a  state  statute  authorizing  such 
a  suit,  nor  does  the  fact  that  the  fore- 
closure suit  is  in  the  federal  court 
give  jurisdiction  of  the  creditors' 
suit.  "Neither  the  insolvency  of  a 
corporation,  nor  the  execution  of  an 
illegal  trust  deed,  nor  the  failure  to 
collect  in  full  all  stock  subscriptions, 
nor  all  together,  give  to  a  simple  con- 
tract creditor  of  the  corporation  any 
lien  on  its  property,  or  charge  any  di- 
rect trust  thereon."  Hollins  v.  Brier- 


field  Coal,  etc.  Co.,  150  U.  S.  371  (1893). 
Tlie  capital  stock  is  a  trust  fund 
rather  in  the  administration  of  the 
assets  after  possession  by  a  court  of 
equity  than  a  trust  attaching  to  the 
property  as  such  for  the  direct  benefit 
of  either  creditor  or  stockholder. 
Hollins  V.  Brierfield  Coal,  etc.  Co.,  150 
U.  S.  371  (1893).  A  corporate  creditor 
seeking  to  set  aside  a  fraudulent  sale 
to  a  director  must  allege  a  judgment 
at  law,  and  execution  unsatisfied,  or 
tliat  the  company  has  no  property. 
Kittel  V.  Augusta,  etc.  R.  R.,  65  Fed. 
Rep.  859  (1895).  A  simple  contract 
creditor  of  a  company  cannot  sustain 
a  bill  to  restrain  the  company  from 
dealing  with  their  assets  as  they 
please,  on  the  ground  that  tliey  are 
diminishing  the  fund  for  payment  of 
his  debt.  Mills  v.  Northern  R'y,  etc., 
L.  R.  5  Ch.  App.  621  (1870).  A  general 
creditor  who  has  not  obtained  a  judg- 
ment against  the  corporation  cannot 
hold  directors  liable  for  unauthorized 
acts.  Streight  v.  Junk,  59  Fed.-  Rep. 
321  (1893).     Cf.  §§  848,  788,  766, 863. 

3  A  trustee  of  a  mortgage  may  file  a 
bill  to  prevent  an  illegal  reduction  of 
the  rates  of  the  mortgagor  company. 
See  ch.  XLVllI,  §  816,  infra. 


1599 


§  T35.] 


PARTIES,  PLEADINGS,  ETC. 


[cn. 


XLV, 


ulentlj  and  to  the  injury  of  creditors.'  This  principle  applies 
where  the  corporation  sells  out  all  its  property  to  auothfr  cor- 
poi'ation  in  exchange  for  the  stock  or  bonds  of  the  latter.''  Cor- 
porate creditors  may  also,  under  some  circumstances,  complain 
of  the  issue  of  "  watered  "  stock,'  illegal  dividends,*  and  of  the 
purchase  by  the  corporation  of  its  stock.'  But  there  is  no  such 
fiduciary  relation  between  the  directors  and  the  creditors  as 
there  is  between  the  directors  and  the  stockholders.  Hence 
many  acts  which  would  be  fraudulent  or  illegal  as  against  the 
stockholders  are  not  so  as  against  the  creditors.®  Directors  are 


1  Where  the  corporation  has  been 
dissolved,  and  heuce  a  judgment 
against  it  cannot  be  obtained,  gen- 
eral creditors  may  file  a  bill  in  equity 
to  reach  assets  illegally  transterred 
away  by  the  corporation.  The  suit 
must  be  in  behalf  of  all  creditors. 
All  the  transferees  may  be  brought 
into  one  suit.  Pullman  v.  Stebbins, 
51  Fed.  Rep.  10  (1892).  As  to  other 
exceptions,  authorizing  a  simple 
creditor  to  sue,  see  Consolidated  Tank 
Line  Co.  v.  Kansas  City  Varnish  Co., 
43  Fed.  Rep.  7,  16  (1S91).  A  creditor 
of  an  insolvent  bank  may  hold  the 
directors  liable  for  allowing  the  pres- 
ident to  borrow,  without  good  se- 
curity, an  unreasonably  large  sum, 
and  for  allowing  him  to  purchase 
stock  of  the  bank  with  bank  fimds. 
Such  suit  must  be  for  the  benefit  of 
all  creditors,  and  the  results  of  the 
suit  wull  be  administered  by  the 
court.  Gores  v.  Day,  74  N.  W.  Rep. 
787  (Wis.,  1898). 

2  See  ch.  XL,  §§  669-671,  supra. 

3  See  ch.  Ill,  supra. 

4  See  ch.  XXXII,  supra. 

5  See  §  312,  supra. 

6  "  The  ofiicers  of  a  corporation  act 
in  a  fiduciary  capacity  in  respect  to 
its  property  in  their  hands,  and  may 
be  called  to  an  account  for  fraud,  or 
sometimes  even  mere  mismanage- 
ment in  respect  thereto;  but  as  be- 
tween itself  and  its  creditors,  the 
corporation  is  simply  a  debtor,  and 
does  not  hold  its  property  in  trust  or 


subject  to  a  lien  in  their  favor  in  any 
other  sense  than  does  an  individual 
debtor."  HoUins  v.  Brierfield  Coal, 
etc.  Co.,  150  U.  S.  371,  3S3  (1893). 
Corporate  creditors  cannot  object 
that  the  corporation  sold  property-to 
directors,  where  the  sale  has  been 
ratified  by  the  stockliolders  as  well 
as  directors.  Crymble  v.  Mulvaney, 
21  Colo.  203  (1895).  A  pledgee  of 
bonds  from  the  corporation  cannot 
attack  another  pledge  of  bonds  to 
the  president  to  secure  a  debt  due 
the  president,  especially  where  the 
former  took  the  bonds  in  pledge  with 
knowledge  of  the  pledge  to  the  presi- 
dent. Hook  V.  Ayers,  63  Fed.  Rep. 
347  (1894).  A  creditor  whose  debt 
was  incurred  after  the  directors'  neg- 
ligence complained  of  cannot  sue  in 
equity  for  false  representations.  Nor 
are  the  directors  liable  as  trustees 
for  the  stockholders.  They  are  liable 
in  equity  for  moneys  belonging  to  the 
company  and  received  by  them,  but 
no  farther.  Landis  v.  Sea  Isle,  etc. 
Co.,  53  N.  J.  Eq.  654  (1895).  Where  a 
railroad  has  been  sold  under  fore- 
closure proceedings,  a  judgment  cred- 
itor of  the  company,  who  seeks  to  set 
the  sale  aside,  on  the  ground  that  the 
mortgage  was  invalid,  is  in  the  posi- 
tion of  one  who  asks  to  be  let  in  to 
redeem  from  a  mortgagee  in  posses- 
sion under  an  unforeclosed  mortgage. 
He  cannot  in  the  same  action  ask 
that  the  purchaser  at  foreclosure  sale, 
who  is  about  to  bond  the  property, 


1600 


CH.  XLV.] 


PARTIES,  PLEADINGS,  ETC. 


[§  735. 


not  liable  to  corporate  creditors  for  negligence  in  the  manage- 
ment of  the  affairs  of  the  corporation.^ 

corporate  mortgage  on  the  ground 
that  its  stockholders  did  not  author- 
ize it,  as  required  by  statute.  IMan- 
hattan  Hardware  Co.  v.  Phalen,  128 
Pa.  St.  110  (1889).  A  general  cred- 
itor cannot  intervene  the  same  as  a 


shall  pay  the  judgment  creditors 
claim  out  of  such  bonds.    IMerriman 
V.  Chicago,  etc.  R.  R,  64  Fed.  Rep. 
535  (1894).   "Where  one  company  owns 
a  majority  of  the  stock  of  another 
company,  and  the  property  of  the  lat- 
ter company  is  leased  to  the  former 
at  a  fixed  rental,  the  rent  to  be  paid 
to  bondholders  of  the  latter,  a  judg- 
ment creditor  of  the  latter  cannot 
have  the  lease  set  aside  unless  he 
can  show  that  the  income  of  the  lat- 
ter company  is  more  than  sufficient 
to  pay  the  rental,  there  being  no 
proof  that  the    rental  was  unfair, 
and  there  being  proof  that  the  rental 
is  more  than  the  company  earned. 
The  principle  that  the  owner  of  a 
majority  of  the  stock  will  not  be 
permitted  to  defraud  stockhoWers  or 
creditors  does  not  apply.    Sidell  v. 
Missouri  Pac.  R'y,  78  Fed.  Rep.  724 
(1897).    Creditors  cannot  object  to  a 
contract   between    the    corporation 
■     and  a  director,  where  the  stockhold- 
ers have  assented  thereto  and  the  con- 
tract is  a  fair  one.  Welch  v.  Import- 
ers', etc.  Bank,  123  N.  Y.  177  (1890). 
A  creditor    cannot   complain    of  a 
mortgage  or  deed  from  his  debtor,  a 
corporation,  even  though  the  mort- 
gage and  deed  were  to  another  cor- 
poration having  the  same  board  of 
directors  as  the  debtor  corporation. 
A  stockholder  might  complaui,  but 
there  is  no  fiduciary  relation  between 
corporate    creditors   and    directors. 
The  mortgage  was  given  when  the 
company  was  solvent,  and  the  deed 
after  it  became  insolvent.   O'Connor, 
etc.  Co.  V.  Coosa  Furnace  Co.,  95  Ala. 
614  (1891).    The  creditors  of  a  corpo- 
ration are  not  allowed  to  attack  a 


stockholder.    Kansas,  etc.  R'y  v.  Fitz- 
gerald, 33  Neb.  137  (1891).    It  is  diffi- 
cult for  a  corporate  creditor  to  seek 
collection  by  making  out  a  conspir- 
acy.   Brackett  v.  Griswold,  13  N.  Y. 
Supp.  192  (1891).     A  suit  in  equity  by 
a  creditor  of  a  national  bank  against 
a  director  for  mismanagement  does 
not  He  where  the  statutes  prescribe 
the  remedy  through  the   receiver. 
National  Exch.  Bank  v.  Peters,  44 
Fed.  Rep.  13  (1890).    A  creditor  hold- 
ing  an  unpaid  promissory  note  can- 
not, by  a  bill  in  equity  to  collect  the 
debt,  vmite  with  a  claim  that  the 
company  was  not  duly  incorporated 
a  claim  to  hold  the  directors  Uable 
for  false   representations,  and  also 
bring  in  a  subsequent  corporation 
that°took  all  the  assets  of  the  first, 
as  well  as  the  persons  who  finally 
obtained  such  effects.   Jefferson  Nat 
Bank  V.  Texas  Inv.  Co.,  74  Tex.  421 
(1889).  See  also,  in  general,  Columbus, 
etc.  R.  R.  V.  Burke,  20  Week.  L.  BulL 
287  (1888),  and  Belden  v.  Burke,  re- 
ferred to  in  §  7GG,  note,  infra;  :Mills 
u  Northern  R'y,  L.  R.  5  Ch.  621  (1870); 
Consolidated,  etc.  Co.  v.  Kansas  City 
Varnish,  etc.  Co.,  45  Fed.  Rep.  7  (1891), 
and  ^§  830,  870,  infra.    For  various 
cases  which  corporate  creditors  have 
sustained  in  this  connection,  see  War- 
ner V.  Hopkins,  111  Pa.  St.  328  (1885); 
Lothrop  V.  Stedman,  42  Conn.  583 
(U.  S.  C.  C,  1875);  S.  C,  15  Fed.  Cas. 
922;  Brown  v.  Orr,  112  Pa.  St.  233 


iDeadr:ck  v.  Bank  of  Com.,  45 
S.  W.  Rep.  786  (Tenn.,  1898).  Bank 
directors  who  are  guilty  of  negli- 
eence  in  the  management  of  the  bank 

101  ico^ 


may  be  held  liable  by  a  depositor. 
Wolf  V.  Simmons,  23  S.  Rep.  586 
(Miss.,  1898). 


§  735.] 


PAKTIES,  PLEADINGS,  ETO. 


[CH. 


XLV. 


A  judgment  creditor's  remedy  is  not  at  law,^  but  is  in  equity .^ 
"Where  a  receiver  has  been  appointed,  it  is  for  him  and  not  for 
a  stockholder  to  hold  the  directors  responsible  for  mismanage- 
ment of  the  corporation.'  The  receiver  of  an  insolvent  corpo- 
ration which  has  been  rendered  insolvent  by  reason  of  its  assets 
having  been  disposed  of  by  another  corporation  may  hold  its  di- 
rectors liable  for  the  loss,  and  his  suit  may  be  at  law  or  in  equity.* 


(1886);  but  see  Balliet  v.  Brown,  103 
Pa.  St.  546  (1883);  Pond  v.  Framing- 
ham,  etc.  Co.,  130  Mass.  194  (1881); 
Gravenstine's  Appeal,  49  Pa.  St.  310 
(1865);  Heath  v.  Erie  R'y,  8  Blatchf. 
847  (1871);  S.  C,  11  Fed.  Cas.  976; 
Cvirrier  v.  New  York,  etc.  R.  R.,  35 
Hun,  355  (1885).  See  N.  Y.  Code  Civ. 
Pro.,  §§  1781, 1782;  also  Conro  v.  Gray, 
4  How.  Pr.  166  (1849);  Fisk  v.  Union 
Pac.  R.  R.,  10  Blatchf.  518(1873);  S.  C, 
9  Fed.  Cas.  167;  Irons  v.  Manufactur- 
ers' Nat.  Bank,  6  Biss.  301  (1875);  S.  C, 
13  Fed.  Cas.  100;  Van  Weel  v.  Wins- 
ton, 115  U.  S.  228  (1885);  Cole  v. 
Knickerbocker,  etc.  Co.,  23  Hun,  255 
(1880);  aff'd,  91  N.  Y.  641;  Mills  v. 
Northern  R'y,  L.  R.  5  Ch.  621  (1870); 
Paulsen  v.  Van  Steenbergh,  65  How. 
Pr.  342  (1883).  In  Bewley  v.  Equitable 
Life  Ass.  Soc,  61  How.  Pr.  344  (1881), 
where  a  policy-holder  sought  to  hold 
liable  for  misuse  of  funds  the  direct- 
ors who  were  elected  by  the  holders 
of  the  $100,000  of  stock  of  that  corpo- 
ration, it  was  held  that  the  action  by 
him  would  not  lie.  If  he  had  been  a 
judgment  creditor  and  the  corpora- 
tion had  been  insolvent,  a  different 
rule  would  have  applied,  thus  distin- 
^shing  Evans  v.  Coventry,  5  De  G., 
M.  &  G.  911  (1854);  Aldebert  v.  Leaf 
<or  Kearns),  1  Hem.  &  M.  681  (1864); 
Ee  State  F.  Ins.  Co.,  11  W.  R.  746 
(1863);  Belknap  v.  North  America, 
etc.  Co.,  11  Hun,  282  (1877).  Judg- 
ment creditors  may  attack  a  prefer- 
ence to.other  creditors  forbidden  by 
statute.  "Wood  v.  Sidney,  etc.  Co.,  92 
Hun,  22  (1895).  Where  all  the  corpo- 
rate assets  have  been  misappropri- 


160S 


ated  by  the  stockholders,  corporate 
creditors  may  unite  in  a  bill  in  equity 
to  compel  restitution.  Ellis  v.  Pull- 
man, 95  Ga.  445  (1895).  A  bill  by 
judgment  creditors  to  set  aside  ille- 
gal conveyances  to  directors,  and  to 
enforce  a  statutory  liability  and  also 
a  subscription  liability,  is  multifari- 
ous. Von  Auw  V.  Chicago  Toy.  etc. 
Co.,  70  Fed.  Rep.  939  (1895).  Direct- 
ors are  liable  for  damages  in  an  ac- 
tion on  the  case  brought  by  deposit- 
ors in  a  bank  after  it  was  insolvent, 
the  directors  having  neglected  to 
know  of  the  insolvency.  Delano  v. 
Case,  121  111.  247  (1887),  aff'g  17  111. 
App.  531.  See  §  701,  supra,  as  to  a 
request  to  the  receiver  to  sue.  For 
a  suit  by  a  creditor  against  directors 
under  the  Wisconsin  statute,  see 
Hurlbut  V.  Marshall,  62  Wis.  590 
(1885).  A  stockholder  who  partici- 
pates in  a  corporate  act  cannot,  as  a 
corporate  creditor,  attack  that  act. 
Fort  Madison  Bank  v.  Alden,  129 
U.  S.  372  (1889).  See  Mellen  v.  Moline, 
etc.  Works,  131  U.  S.  352  (1889);  Le 
Wame  v.  Meyer,  38  Fed.  Rep.  191 
(1889). 

iBraem  v.  Merchants'  Nat.  Bank, 
127  N.  Y.  508  (1891). 

2  Consolidated  Tank  Line  Co.  v. 
Kansas  City  Varnish  Co.,  45  Fed.  Rep. 
7  (1891);  PuUman  v.  Stebbins,  51  Fed. 
Rep.  10  (1892) ;  Ctunmings  v.  American 
Gear,  etc.  Co.,  87  Him,  598  (1895). 

3  Howe  V.  Barney,  45  Fed.  Rep.  668 
(1891). 

<  Mason  v.  Henry,  152  N.  Y.  529 
(1897).  As  to  whether  the  suit  is  at 
law  or  in  equity,  see  also  §  701,  supra. 


CH.  XLV.] 


PAitTIES,  PLEADINGS,  ETC. 


[§  T35. 


A  receiver  may  bring  an  action  against  directors  to  hold  tliem 
liable  for  negligence.^  But  a  stockbolder  or  creditor  may  some- 
times hold  a  director  liable  for  negligence  where  a  receiver 
cannot.^  The  receiver  of  an  insolvent  railroad  corporation  may 
file  a  bill  in  equity  to  compel  the  directors  and  their  attorney 
to  disgorge  corporate  funds  which  they  divided  among  them- 
selves.' A  receiver  may  hold  liable  a  director,  where  upon  the 
consolidation  of  two  companies  large  sums  are  used  out  of  the 
corporate  funds  to  effect  the  consolidation  and  the  company 
becomes  insolvent.^  A  receiver  may  bring  suit  to  set  aside 
illegal  transfers  of  property  which  have  been  made  by  the  cor- 
poration to  the  directors.'  Where  a  receiver  has  been  appointed, 
he  alone  can  bring  an  action  to  compel  stockholders  to  refund 
corporate  moneys  which  they  have  taken  after  paying  in  the 
same  on  their  subscriptions.^  But  if  the  receiver  refuses  to 
bring  such  an  action,  a  creditor  may  apply  to  the  court  for  per- 
mission to  bring  it,  making  the  receiver  a  party  defendant.''  A 
stockholder  may  bring  a  suit  in  behalf  of  the  corporation  where 
the  directors  are  guilty  of  a  fraud,  even  though  a  receiver  of  the 


1  Robinson  v.  Hall,  59  Fed  Rep.  648 
(1894);  O'Brien  r.  Fitzgerald,  143  N. 
Y.  377  (1894).  A  receiver  of  a  national 
bank  may  sue  the  directors  for  neg- 
ligence and  fraud  on  their  part. 
Cockrill  V.  Abeles,  86  Fed.  Rep.  505 
(1898).  A  receiver  may  sue  them  for 
negligence,  as  the  corporation  might 
iiave  dona  Movius  v.  Lee,  30  Fed. 
Rep.  298  (1887).  As  to  the  right  of 
corporate  creditors  to  sue  for  negli- 
gence, and  an  action  by  a  receiver  or 
assignee  in  behalf  of  them,  see  War- 
ner V.  Hopkins,  111  Pa.  St.  328  (ISSG). 
Where  a  receiver  sues  directors  for 
negligence,  stockholders  are  not 
proper  parties.  Eamball  v.  Ives,  30 
Hun,  568  (1883).  See  also  g  701,  supra. 

2  Briggs  V.  Spaulding,  141 U.  S.  132, 
150  (1891).     See  also  p.  870  infra. 

»  Gindrat  v.  Dane,  4  Cliff.  2G0  (1874) ; 
S.  C,  10  Fed.  Cas.  434 

<Pierson  v.  Cronk,  13  N.  Y.  Supp. 
845  (1890);  Mason  v.  Cronk,  125  N.  Y. 
496  (1891).  A  receiver  of  an  insolvent 
bank   may  file  a  bill  in  equity  to 

160: 


compel  its  president  and  another 
bank  to  pay  back  the  price  of  stock 
in  the  insolvent  bank  which  the  in- 
solvent bank  through  the  instinimen- 
tality  of  its  president,  who  was  also 
cashier  of  the  other  bank,  had  pur- 
chased of  the  other  bank  on  the  eve 
of  the  insolvency  of  the  former. 
Bridgens  v.  Dollar  Sav.  Bank,  66  Feii 
Rep.  9  (1895). 

5  Jones  V.  Blun,  145  N.  Y.  333  (1895); 
Varnumu  Hart,  119  N.  Y.  101  (1890); 
Dutcher  v.  Importers',  etc.  Nat.  Bank, 
59  N.  Y.  5  (1874);  Robinson  u  Bank  of 
Attica,  21  N.  Y.  400  (I860,);  Brouwer 
V.  Harbeck,  9  N.  Y.  589  (1854);  Mil- 
bank  V.  De  Riesthal,  82  Hun,  537 
(1894);  French  v.  Andrews,  81  Hun, 
272  (1894);  Nealis  v.  American  Tube, 
etc.  Co.,  76  Hun,  220  (1894);  Milbank 
V.  Welch,  74  Hun,  497  (1893);  Kings- 
ley  V.  First  Nat.  Bank,  31  Hun,  329 
(1884). 

"  South  Bend,  etc.  Co.  v.  Pierre  F. 
&  M.  Ins.  Co.,  4  S.  D.  173  (1893). 

'  See  §  740,  infra. 


§  736.]  PARTIES,  PLEADINGS,  ETC.  [cH.  XLV. 

corporation  has  been  appointed  in  another  state.^  A  stock- 
holder in  this  class  of  cases  should  not  sue  in  the  double  capac- 
ity of  stockholder  and  creditor.^ 

§  736.  Bule  ivlicn  tlie  plaintljf  slocldioldcr  sues  in  tJie  interest 
of  a  rival  com2)any,  or  i^ut'chascs  stock  for  the  imrimse  of  bring- 
ing suit. —  The  law  is  well  settled  that  if  a  stockholder  institutes 
a  suit  in  behalf  of  himself  and  other  stockhohlers  to  enjoin  or 
to  bring  to  an  accounting  the  corporate  directors,  and  such  suit 
is  instituted,  not  to  protect  and  benefit  the  stockholders'  inter- 
est in  the  corporation,  but  to  benefit  some  other  corporation, 
the  court  will  refuse  to  entertain  the  suit  and  will  dismiss  it.' 
The  application  of  a  stockholder  herein  to  a  cornet  of  equity  will 
not  be  denied  merely  because  it  is  for  the  interest  of  the  public 
or  of  the  corporation,  or  of  the  stocklioldcr  himself,  that  the  act 
complained  of  be  allowed  to  stand.  The  law  docs  not  depend 
on  the  opinion  of  the  court  as  to  the  benefit  of  the  act.* 

In  regard  to  jnirchases  of  stock  for  the  very  purpose  of  bring- 
ing a  stockholder's  suit  herein,  there  is  some  difference  of  opin- 
ion. The  common  law  clearly  is  that  such  a  stockholder  has 
the  same  right  to  bring  the  suit  that  his  transferrer  had.**    Such 

1  Fitzgerald    v.     Fitzgerald,     etc.    tlie  fact  that  the  complainant  stock- 
Constr.  Co.,  41  Neb.  374  (1894).  holder  has  business  relations  with 

2  See  §  739,  infra.  the  rival  company  and  is  aided  by  it 
5  The  difficulty  herein  is  in  proving    in  preparing  his  case  is  no  bar,  and 

that  the  complainant  is  suing  for  the  tliat,  if  it  were,  the  objection  is  to  be 

rival  company.    If,  however,  the  lat-  raised  by  a  plea  in  abatement.  Ffooks 

ter  is  paying  the  costs  of  the  suit,  v.  Southwestern  R'y,  1  Sm.  &  G.  142 

that  is  sufficient  proof.    Forrest  v.  (1833).    See  also,  where  this  defense 

Manchester,  etc.  R'y,  4  De  G.,  F.  &  J.  failed,  Sandford  v.  Railroad,  24  Pa.  St. 

126  (18G1);   Belmont  v.  Erie  R'y,  52  378  (1855);  Colman  v.  Eastern  Coun- 

Barb.  637  (1869);   Filder  v.  London,  tiesR'y,  10  Beav.  1(1846),  where  a  rival 

etc.   R'y,  1   Hem.  &  K  489  (1863);  company  instigated  the  suit;  Central 

Camblos  v.  Philadelphia,  etc.  R.  R.,  4  R.  R.  v.  Collins,  40  Ga.  582  (1869),  where 

Brewst.  563  (U.  S.  C.  C,  1873);  S.  C, '  the  plaintiff  was  interested  in  a  rival 

4  Fed.  Cas.  1089;  Waterbury  v.  Mer-  company;  27  N.  Y.  App.  Div.  553. 
chants'  Union  Exp.  Co.,  50  Barb.  157        *  Hoole  v.  Great  Western  R'y,  L.  R. 

(1867);  Rogers  v.  Oxford,  etc.  R'y,  2  3  Ch.  262  (1867);  Stevens  v.  Rutland, 

De  G.  &  J.  662  (1858).     Where  the  etc.  R.  R.,  29  Vt.  545  (1851). 
stockholder's  suit  is  brought  at  the        5  winsor  v.  Bailey,  55  N.  H.  218 

instance  of  a  competing  company,  (1875);  Bloxam  v.  Metropolitan  R'y, 

which  directs  the  suit  and  pays  the  L.  R.  8  Ch.  337  (1868),  where  the  com- 

costs,  the  suit  will  fail.    Beshoar  v.  plainant,  on  December  13,  1867,  ad- 

Chappell,  6  Colo.  App.  323  (1895).    See,  vertised  to  induce  the  stockholders 

however,  Dinsmore  v.  Central  R.  R.,  to  combine;  on  Januaiy  15. 1868,  pur- 

19  Fed.  Rep.  153  (1883),  holding  that  chased  stock  himself,  and  on  Janu- 

1604 


CH.  XLV.] 


PARTIES,  PLEADINGS,  ETC. 


[§  T36. 


is  the  rule  even  tliougli  the  stock  was  purchased  for  the  puii^ose 
of  bringing  the  suit.  The  law  has  nothing  to  do  with  the  mo- 
tive of  a  legal  act.^ 

ary  25  1868,  commenced  suit.  So  The  right  of  a  stocldiolder  to  eiijom 
also  see  Seaton  v.  Grant,  L.  R  2  Ch.  an  interference  with  an  election  is 
459  (1867),  where  the  court  sustained    not  defeated  by  the  fact  that  a  rival 


the  suit,  although  it  said:  "He  buys 
five  shares  in  the  company,  and  then 
files  this  bill  in  order  to  induce  the 
company  to  buy  off  the  litigation. 
That,  no  doubt,  is  a  course  of  con- 
duct which  would  meet  with  little 
approval  in  this  court,  or,  indeed,  in 
any  other  court;  and  such  conduct 
might  be  material  at  the  hearing 
with  reference  to  the  amount  of  re- 
lief which  the  plaintiff  could  obtain, 
or  wliether  he  was  entitled  to  any 
relief  at  alL"    Nevertheless  the  court 


company  purchased  his  stock  for 
him.  Camden,  etc.  R.  R  v.  Elkins,  37 
N.  J.  Eq.  273  (1883).  Parties  buying 
stock  for  the  mere  purpose  of  bring- 
ing suit  are  not  favored  by  the  com-ts, 
and  an  injunction  will  be  denied 
where  their  rights  can  be  preserved 
by  damages.  Kingman  v.  Rome,  etc. 
R  R,  30  Hun,  73  (1883).  A  person 
may  purchase  stock  for  the  purpose 
of  bringing  suit.  Pender  v.  Lushing- 
ton,  L.  R  6  Ch.  D.  70  (1877).  A  bond- 
holder's   foreclosure    is   valid    even 


said,  also,  that  however  questionable    though  he  purchased  the  bonds  at  the 
the  mode  of  the  plaintiff's  introduce    instigation  of  certain  interests  hos- 


tion  to  the  company  may  have  been, 
he  has-  an  actual  interest  in  the  sub- 
ject-matter of  the  suit.  Du  Pont  v. 
Northern  Pac.  R  R,  18  Fed.  Peep.  467 
(1883).  See  also  Atchison,  etc.  R  R 
V.  Fletcher,  35  Kan.  230  (1880);  Ervin 
V.  Oregon,  etc.  Nav.  Co.,  35  Hun,  544 
(1885);  S.C.,28  Hun,  209  (1882);  Young 
V.  Drake,  8  Hun,  61  (1876);  Kingman 
V.  Rome,  etc.  R  R,  30  Hun,  73  (1883). 
If,  however,  the  transferrer  partici- 


tile  to  the  railroad,  and  even  though 
he  expects  those  interests  to  protect 
him  from  loss.  If  he  owns  the  bonds 
himself  this  is  sufficient.  McFadden 
V.  ]\Iay's  Landing,  etc.  R  R.,  49  N.  J. 
Eq.  170  (1891).  A  purchaser  of  stock 
for  the  very  purpose  of  enjoining  an 
ultra  vires  act  which  will  injure  an- 
other enterprise  of  the  plaintiff  may 
obtain  an  injunction.  Carson  v.  Iowa 
City,  etc.  Co.,  80  Iowa,  038  (1890).    A 


pated  or  acquiesced  in  the  act  com-    person  may  buy  stock  to  comnaence 
plained  of,  then  the  transferee  is  also    a  suit.    Frothingham  u  Broadway, 


barred.  See  §g  40, 730,  sztj^ra.  A  per- 
son who  acted  as  a  broker  in  purchas- 
ing the  stock  of  one  railroad  corpora- 
tion for  another  railroad  corporation 
cannot,  by  purchasing  shares  in  the 
latter  corporation,  hold  its  directors 


etc.  R  R,  9  N.  Y.  Civ.  Proc.  304 
(1886).  But  where  a  railroad  con- 
tracts to  run  trains  on  Sunday,  and 
afterwards  a  person  buys  five  shares 
of  stock  and  brings  suit  to  enjoin  the 
company,  his  real  object  being  to 


personally  hable  for  the  ultra  vires    preserve  the  Sabbath,  equity  will  not 


purchasa    Whitwam  v.  Watkin,  78 
L.  T.  Rep.  188  (1898). 

1  Cases  mjira;  also  Elkins  v.  Cam- 
den, etc.  R  R,  36  N.  J.  Eq.  5  (1882); 
Ramsey  v.  Gould,  57  Barb.  398  (1870), 
where  the  motive  was  "bringing 
men  to  justice;  "  Salisbury  r.  Metro- 
politan R'y,  38  L.  J.  (Ch.)  249  (1869) 


aidhun.  Sparhawk  v.  Union  Pass. 
R'y,  54  Pa.  St.  401,  453  (1867).  As  re- 
gards the  motive  of  a  stockholder, 
see  also  Clark  v.  American  Coal  Co., 
86  Iowa,  436  (1892).  The  motive  of  a 
bondholder  foreclosing  a  mortgage  is 
immaterial  Toler  v.  East  Tennessee, 
etc.  R'y,  67  Fed.  Rep.  168,  177  (1894). 


1005 


§  V37.] 


PAETIES,  PLEADINGS,  ETO. 


[Cn.  XLV. 


But  where  the  transfer  is  merely  nominal  the  transferee 
cannot  bring  suit  herein,  since  he  has  no  pecuniary  interests  of 
his  own  to  protect,  and  equit}^  will  not  aid  him.' 

§  Y37.  Rule  9J{.  in  federal  courts  against  suits  ly  transferees. 
In  the  federal  courts  peculiar  rules  prevail.  It  was  found  that 
transfers  of  stock  were  frequently  made  for  the  purpose  of  se- 
curing jurisdiction  of  the  case  in  tlie  federal  courts.  Litigation 
that  properly  belonged  to  the  state  courts  was  added  to  the 
already  overburdened  calendars  of  the  United  States  courts.' 
Accordingly  the  supreme  court  of  the  United  States  made  it  a 
rule  of  the  federal  courts  that  a  transferee  of  stock  cannot  sus- 
tain a  stockholder's  suit  to  remedy  a  corporate  wrong  which 
was  perpetrated  before  he  became  a  stockholder.'  Where  tho 
complainant  is  merely  the  nominal  holder  of  the  stock,  the  de- 
fendant may  set  up  that  the  complainant  holds  the  stock  merely 


1  M'Donnell  v.  Grand  Canal  Co.,  3 
Ir.  Ch.  Rop.  (N.  S.)  578  (1853);  Robson 
V.  Dodds,  L.  R.  8  Eq.  301  (1SG9). 

2  See  the  vigorous  denunciation  of 
such  transfers  by  Mr.  Justice  Miller, 
in  Hawes  v.  Oakland,  104  U.  S.  450 
(1881). 

3 Rule  94,  as  follows:  "Every  bill 
brought  by  one  or  more  stockholders 
in  a  cori^oration  against  the  corpora- 
tion and  other  parties,  founded  on 
rights  which  may  properly  be  as- 
serted by  the  corporation,  must  be 
verified  by  oath,  and  must  contain 
an  allegation  that  the  plaintiff  was  a 
shareholder  at  the  time  of  the  trans- 
action of  which  he  complains,  or  that 
his  share  had  devolved  on  him  since 
by  operation  of  law,  and  that  the 
suit  is  not  a  collusive  one  to  confer 
on  a  court  of  the  United  States  juris- 
diction of  a  case  of  which  it  would 
not  otherwise  have  cognizanca"  Pro- 
mulgated January  23,  1883.  (See  104 
U.  S.  ix.)  See  Dimpfell  v.  Ohio,  etc. 
R'y,  110  U.  S.  209  (1884).  But  see  Leo 
V.  Union  Pac.  R'y,  17  Fed.  Rep.  273 
(1883);  S.  C,  19  Fed.  Rep.  283.  In 
Lafayette  Co.  v.  Neely,  21  Fed.  Rep. 
738  (1884),  it  is  held  that  this  rule 


does  not  bar  the  stockliolder's  riglit 
to  bring  the  action  after  a  dissolu- 
tion of  tlie  corporation.  Rule  94,  in 
the  United  States  court,  against  a 
purchaser  of  stock  bringing  suit  on 
certain  causes  of  action  accruing  be- 
fore he  purcliases  the  stock,  does  not 
apply  to  causes  removed  from  the 
state  court.  Evans  v.  Union  Pac. 
R'y,  58  Fed.  Rep.  497  (1893).  '•;As  a 
general  proposition,  the  purchaser  of 
stock  in  a  coi-poration  is  not  allowed 
to  attack  the  acts  and  management 
of  the  company  prior  to  the  acquisi- 
tion of  his  stock."  United  Elec.  Se- 
curities Co.  V.  Louisiana  Elec.  Light 
Co.,  68  Fed.  Rep.  073,  675  (1895).  See 
also  Wliittemore  v.  Amoskeag  Nat. 
Bank,  26  Fed.  Rep.  819  (1885):  Venner 
V.  Atchison,  etc.  R  R.,  28  Fed.  Rep. 
581  (1886).  Under  equity  rule  94,  one 
who  purchases  shares  of  stock  in  a 
corporation  after  a  plan  of  reorgan- 
ization has  been  adopted  and  par- 
tially carried  out  is  not  in  a  position 
to  maintain  a  suit  to  set  the  same 
aside  on  the  ground  of  fraud  and 
neglect  of  duty  by  its  trustees  and 
other  parties.  Symmes  v.  Union  Trust 
Co.,  60  Fed.  Rep.  830  (1894). 


1606 


CH.  XLV.] 


PARTIES,  PLEADINGS,  ETC. 


[§  ^38. 


to  give  jurisdiction  to  the  United  States  courts  In  Georgia 
the  rule  of  the  federal  courts  has  been  adopted  that  a  subse- 
quent stockholder  cannot  complain.^  _ 

S738.  Parties  defendant  lierein-- The  corporahon^ Direct- 
ors-Third  persons -The  receiver.-The  corporation  itseli 
is  an  indispensable  party  defendant  to  a  stockholder  s  action 
for  the  purpose  of  remedying  a  wrong  which  t^e^^^^^^^^^JJ 
itself  should  have  remedied.^  This  rule  is  due  to  the  fact  that 
a  similar  possible  suit  by  the  corporation  is  thereby  prevented, 
the  ri-hts  of  the  corporation  are  duly  ascertained,  and  the  rem- 
edy m°ade  effectual  against  the  corporation  as  well  as  others. 
It  is  not  necessary  or  proper  to  join  the  directors  of  the  corpo- 
ration as  parties  defendant  where  the  only  object  of  the  suit  is 
to  enjoin  an  act  or  to  set  aside  an  ultra  vires  act.  The  decree 
acrainstthe  corporation  is  effective  and  binding  upon  al  the 
officers  of  the  corporation.*    Where,  however,  the  object  of  the 

1  MacVeagh  v.  Denver  City  W.  W. 
Co.,  85  Fed.  Rep.  74  (1897). 

2  Alexander  v.  Searcy,  81  Ga.  536 

(1888). 

3  Davenport  v.  Dows,  18  Wall  626 
(1873);  Coxe  v.  Hart,  53  Mich.  557 
(1884);  Black  v.  Huggins,  2  Tenn. 
Ch.  780  (1877);  Samuel  v.  ndladay, 
Woohv.  400  (1809);  S.  C.,21  Fed.  Cas. 
306;  Allen  v.  New  Jersey,  etc.  R.  R., 
49  How.  Pr.  14  (1875);  Bagshaw  v. 
Eastern  Union  R'y,  7  Hare,  114  (1849); 
Gregory  v.  Patchett,  83  Beav.  595 
(1864);  Charleston,  etc.  Co.  v.  Sebring, 
5  Rich.  Eq.  (S.  C.)  342  (1853);  Brinck- 
erhoff  V.  Bostwick,  88  N.  Y.  52  (1882); 


Bnischke  v.  Nord  Chicago,  etc.  Verein, 
145  IlL  433  (1893);  Mount  v.  Radford 
Trust  Co.,  93  Va.  427  (1890);  Hamil- 
ton V.  Desjardins  Canal  Co.,  1  Grant, 
Ch,  (Can.)  1  (1849);  Cunningham  v. 
Pell,  5  Paige,  607  (1836),  holding  also 
that,  if  the  corporation  is  foreign, 
service  may  be  by  publication;  Put- 
nam V.  Ruch,  54  Fed.  Rep.  216  (1893); 
Byers  v.  Rollins,  13  Colo.  22  (1889); 
Chicago  V.  Cameron,  120  IlL  447 
(1887);  Stromeyer  v.  Combes,  2  N.  Y. 
Supp.  232  (1888);  American,  etc.  Co. 
V.  Linn,  93  Ala.  610  (1890).     As  to 


why  the  company  must  be  made  a 
party,   see  Willoughby  v.   Cliicago, 
etc.  Co.,  50  N.  J.  Eq.  656  (1892).    In 
a  stockholder's  suit  against  a  for- 
eign corporation  holding  a  majority 
of  the  stock  of  a  domestic  corpora- 
tion and  fraudulently  refusing  to  per- 
form its  contract  with  the  latter,  the 
latter  is  a  necessary  party,  and  the 
case  cannot  be  removed  to  the  fed- 
eral courts.    Douglas  v.  Richmond, 
etc.  R  R.,  106  N.  C.  05  (1890).    In  Con- 
soUdated  Water  Co.  v.  Babcock,  76 
Fed.  Rep.  243  (1896),  the  court  held 
that  where  the  owner  of  the  bonds 
and  most  of  the  stock  of  a  water 
company  wished  to  enjoin  the  city 
from  contracting  with  another  water 
company  in  violation  of  the  rights  of 
the  former  water  company,  the  for- 
mer water  company  was  a  necessaiy 
party  to  the  suit.    The  company  is  a 
necessary  party  defendant  and  may 
be  compelled  to  make  a  disclosure  of 
the  facts.   Spokes  v.  Grosvenor  Hotel 
Co.,  76  L.  T.  Rep.  679  (1897). 

4  See  §§  745,  746,  752,  755,  infra; 

•  Winch  V.  Birkenhead,  etc.  R'y,  5  De  G. 

&  Sni.  5G2  (1852),  where  the  court  said: 

"  I  do  not  think  it  is  necessary  that 


1007 


T38.] 


PAETIES,  PLEADINGS,  ETC. 


[CH.  XLY. 


suit  is  to  hold  the  directors  personally  liable  for  frauds  or  for 
negligence,  the  rule  is  different.  In  such  cases  they  of  course 
are  necessary  parties  defendant.^  As  regards  outside  parties, 
they  are  to  be  joined  as  parties  defendant  whenever  the  relief 
asked  would  affect  their  riHits.^    After  a  receiver  has  been 


the  directors  should  be  parties.  The 
act  that  is  sought  to  be  restrained  is 
the  act  of  the  company.  The  com- 
pany itself  cannot  act  except  by 
means  of  its  officers; "  Pioneer,  etc. 
Co.  V.  Baker,  20  Fed.  Rep.  4  (1884); 
Heath  v.  Erie  R'y,  8  Blatchf.  347 
(1871);  S.  C,  11  Fed.  Cas.  976;  Chase 
V.  Vanderbilt,  62  N.  Y.  307,  314  (1875); 
Bagshaw  v.  Eastern  Union  R'y,  7 
Hare,  114  (1849);  Aliens.  New  Jersey, 
etc.  R.  R.,  49  How.  Pr.  14  (1875),  the 
court  saj'ing:  "They are  represented 
by  the  corporation  of  which  they  are 
alleged  to  be  directors,  and  when  the 
corporation  itself  is  made  a  party  de- 
fendant it  is  improper  to  add  the 
trustees  or  directors  as  parties  when 
no  personal  claim  or  judgment  is 
asked  against  them."  But  see  Ribon 
V.  Railroad  Cos.,  16  Wall.  446  (1872); 
Slattery  v.  St.  Louis,  etc.  Co.,  91  Mo. 
217  (1886).  Where  the  minority  sue  to 
set  aside  fraudulent  acts  of  the  major- 
ity, the  guilty  directors  are  not  neces- 
sary parties  defendant.  Woodroof  v. 
Howes,  88  Cal.  184  (1891). 

1  The  director  who  sold  property  to 
the  corporation  is  a  necessary  party 
defendant  in  a  stockholder's  action 
attacking  the  transaction.  Tutwiler 
V.  Tuskaloosa,  etc.  Co.,  89  Ala.  391 
(1889).  The  omission  of  part  of  the 
guilty  directors  as  parties  defendant 
is  not  fatal  Anderton  v.  Wolf,  41 
Hun,  571  (1886).  The  directors  taking 
part  in  an  ultra  vires  transfer  of 
property  are  proper  parties  defendant 
to  an  injunction  suit.  Small  v.  Min- 
neapolis, etc.  Co.,  10  N.  Y.  Supp.  456 
(1890).  See  also  cases  in  ch.  XXXIX 
and  ch.  XLII,  supra;  Duckett  v. 
Cover,  L.  R.  6  Ch.  D.  82  (1877);  Mason 
V.  Harris,  L.  R.  11  Ch.  D.  97  (1879); 


Ferguson  v.  Wilson,  L.  R.  2  Ch.  App. 
77,  90  (1866);  Imperial,  etc.  Assoc,  v. 
Coleman,  L.  R.  6  H.  L.  189  (1873), 
rev'g  L.  R  6  Ch.  App.  558;  Bryson  v. 
Warwick,  etc.  Co.,  1  Sm.  &  G.  447 
(1853).  The  president  should  not  be 
joined  as  a  party  defendant  for  pur- 
poses of  discovery  only.  Tutwiler  v. 
Tuskaloosa,  etc.  Co.,  89  Ala,  391  (1889). 
Where  a  person  in  control  of  a  com- 
pany obtains  control  of  a  rival  com- 
pany, and  allows  judgments  against 
the  latter  and  the  sale  of  its  bonds 
at  execution  at  nine  cents  on  the 
dollar,  and  executes  a  mortgage  and 
controls  the  business  all  for  the  bene- 
fit of  the  former  corporation,  he  and 
the  dummy  directors  and  third  per- 
sons may  be  joined  in  a  bill  filed  by 
a  minority  stockholder  to  enjoin 
their  acts  and  obtain  a  personal  judg- 
ment. Gray  v.  Fuller,  17  N.  Y.  App. 
Div.  29  (1897). 

2  Russell  V.  Wakefield,  etc.  Co.,  L.  R. 
20  Eq.  474  (1875),  the  court  saying: 
"  When  you  have  got  the  second  cor- 
poration or  person  a  party  to  the  suit, 
it  may  happen  that,  in  addition  to 
the  relief  that  you  are  entitled  to  as 
regards  the  first,  you  are  entitled  to 
have  relief  against  the  second  for 
something  that  has  been  done  under 
the  ultr^a  vires  agreement.  You  may 
be  entitled  to  have  money  paid  back 
which  has  been  paid  under  the  ultra 
vires  agreement,  .  .  .  and  you  may 
be  entitled  to  have  property  returned 
or  other  acts  done;"  Hare  v.  London, 
etc.  R'y,  1  Johns.  &  H.  252  (1860), 
holding  that  in  an  action  to  set  aside 
a  traffic  contract  all  the  corporations 
who  were  parties  to  the  contract  are 
necessary  parties;  Tyson  v.  Virginia, 
etc.  R.  R.,  1  Hughes,  80  (1871) ;  S.  C,  24 


1008 


CH.  XLV.] 


PARTIES,  PLEADINGS,  ETC. 


[§  «38. 


appointed,  a  stocldiolder's  suit  against  officers  to  compel  them 
to  account  for  fraudulent  misappropriations  of  corporate  prop- 
erty must  join  the  receiver  as  a  party  defendant.^ 


Fed.  Cas.  493,  to  the  effect  that,  in  an 
action  to  set  aside  a  consolidation, 
the  other  corporation  is  a  necessary 
party;  Bell  v.  Donohoe,  17  Fed.  Rep. 
710  (18S3);  Taylor  v.  Miami,  etc.  Co., 
5  Ohio,  163  (1831),  where  a  guilty 
stockholder  was  made  a  party  de- 
fendant;  Abbot  V.  American  Hard 
Rubber  Co.,  4Blatchf.  489  (1861) ;  S.  C, 
1  Fed.  Cas.  13;  Bengley  v.  Wheeler, 
45  Mich.  493  (1881);  Shawhanu.  Zinn, 
79  Ky.  300  (1881),  holding  that  the 
objection  to  a  defect  of  parties  herein 
may  be  raised  at  the  trial,  and  need 
not  be  raised  by  demurrer;   Caas  v. 
Ottawa,  etc.  Co.,  22  Grant  (U.  C),  512 
(1875),  holding  that  the  attorney-gen- 
eral is  not  a  necessary  party  defend- 
ant    Cf.  Ryan  v.  Ray,  33  Alb.  L.  J. 
321  (Ind,,  1886).    Sometimes  tlie  di- 
rectors of  another  corporation  are 
proper  parties  defendant.    See  Ter- 
hune  V.  Midland  R  R.,  38  N.  J.  Eq. 
423  (1884).    In  a  suit  by  a  minority  of 
the  stockholders  of  a  railroad  com- 
pany to  restrain  it  and  a  trust  com- 
pany from  issuing  bonds  to  a  con- 
struction company,  the  charge  being 
made  that  tlie  majority  stockholders 
controlled  also  the  construction  com- 
pany and  the  issue  of  bonds  was  cor- 
rupt, the  trustee  is  a  necessary  and 
not  a  merely  nominal  party.  Mayer 
V.  Denver,  etc.  R  R,  41  Fed.  Rep.  723 
(1890).  The  action  may  be  continued 
against  the  executor  of  a  deceased 
defendant.    Fox  v.  Hale,  etc.  Co.,  103 
CaL  478  (1895).  Parties  in  league  and 
the  guilty  officers  may  be  made  par- 
ties defendant.    Meyers  v.   Scott,  2 
N.  Y.  Supp.  753  (1888). 

A  person  may  be  made  a  party  de- 
fendant for  purposes  of  discovery 
only.    See  Lewis  v.  St.  Albans,  etc. 


Works,  50  Vt  477  (1878).    In  an  ac- 
tion by  a  person  against  a  corpora- 
tion for  any  cause  of  action,  a  secre- 
tary and  book-keeper  may  be  made  a 
party  defendant  for  the  purpose  of 
getting  an  answer  of  discovery  imder 
oath,  which  the  corporation  cannot 
make.    Wych  v.  Meal,  3  P.  Wms.  310 
(1734).    See  also  §  519,  supra;  Chase 
V.  Vanderbnt,  62  N.  ¥.307,314(1875); 
Many  v.  Beekman  Iron  Co.,  9  Paige, 
188  (1841);  Masters  v.  Rossie,  etc.  Co., 
2  Sandf.  Ch.  301  (1845);    Brumly  v. 
Westchester,  etc.  Soc,  1  Johns.  Ch. 
366  (1815);   Mclntyre  v.  Union  Col- 
lege, 6  Paige,  239  (1837);  Vermilyea 
V.  Fulton  Bank,   1   Paige,  37  (1828). 
But  not  where  the  corporation  is  not 
a   party.      Ellsworth    v.    Curtis,  10 
Paige,  105  (1843).     In  a  stockholders 
suit  in  behalf  of  a  dissolved  corpora- 
tion,   the   receiver   is   a   necessary 
party.     Clark  v.  San  Francisco,  53 
CaL  306  (1878).    In  a  suit  to  set  aside 
a  lease,  both  the  lessor  and  lessee 
railroad  companies  are  necessary  par- 
ties.   New  Jersey  Cent.  R  R  v.  Mills, 
113  U.  S.  249  (1885);  East  Tennessee, 
etc.  R.  P^  V.  Grayson,  119  U.  S.  240 
(1886).    A  director  who  resigned  be- 
fore the  acts  complained  of  were  done 
is  not  to  be  made  a  defendant,  even 
though  the  resignation  was  never  ac- 
cepted.   Nor  is  a  director  liable  who 
was  absent  by  reason  of  sickness. 
Movius  V.  Lee,  30  Fed.  Rep.  298  (1887). 
In  a  suit  to  compel  directors  to  turn 
over  the  corporation  profits  improp- 
erly realized  by  them,  a  separate  ac- 
tion may  be  brought  against  each 
director.    Langdon  v.  Fogg,  18  Fed. 
Rep.  5  (1883);   but  see  Chandler  v. 
Bacon,  30  Fed.  Rep.  538  (1887),  hold- 
ing that  the  liability  is  joint  and  sev- 


1  Porter r.Sabin,  149 U.S. 473 (1893);    (1894).    See  also  §  740,  infra,  on  re- 
Swope  V.  Villard,  61  Fed.  Rep.  417    quest  to  receiver. 

1609 


§  739.]  PARTIES,  PLEADINGS,  ETa  [CH.  XLV. 

§739.  Complainanfs  hill  viust  not  i)}q)ropcrly  join  two  or 
more  causes  of  action  herein. —  If  the  complainant's  bill  is  mul- 
tifarious, it  of  course  cannot  succeed  as  against  the  objection 
of  the  defendants.  Thus,  it  has  been  held  that  the  stockhold- 
ers cannot  join  an  action  in  reference  to  dividends  with  one  for 
an  injunction  to  restrain  the  corporate  directors  from  commit- 
ting a  fraud.*  A  bill  combining  an  action  to  restrain  the  corpo- 
ration from  investing  in  the  stock  of  another  company,  and  ono 
to  restrain  it  from  aiding  that  company,  has  been  held  to  be 
multifarious.'  The  stockholders  cannot  join  a  suit  against  the 
corporation  with  one  against  third  persons  in  behalf  of  the  cor- 
poration.' An  action  to  be  allowed  to  enter  a  reorganized 
company  and  one  to  hold  its  oiTiccrs  liable  for  fraud  cannot  bo 
joined.*  The  plaintiff  cannot  join  causes  of  action  accruing  to 
himself  personally  with  the  cause  of  action  which  he  brings 
suit  upon  in  behalf  of  the  company.*  A  bill  seeking  to  attack 
a  fraudulent  sale  of  property  by  a  director  to  the  corporation, 
and  also  to  enjoin  a  sale  of  complainant's  stock  under  a  forfeit- 
ure for  non-payment  of  a  subscription,  is  multifarious.'  A  bill 
is  multifarious  where  there  are  several  defendants  and  no  com- 
bination between  them  is  sho^vll.^  Although  the  complaint  is 
multifarious  and  obscure,  yet  a  demurrer  does  not  necessa- 
rily lie.^  A  stockholder  cannot  join  a  personal  action  against 
parties  with  an  action  brought  as  a  stockholder  in  behalf  of 

eral,  the  coiirt  saying:  "When  the  have  a  dissolution  is  not  multifarious, 

conduct  of  parties  operates  as  a  fraud  Mills  v.  Hurd,  33  Fed.  Rep.  127  (1887). 

or  deceit  upon  third  persons,  what-  ^  Thomas  v.  Hobler,  8  Jur.  (N.  S.) 

ever  their  private  intention,  the  rela-  125  (1862).    And  see,  in  general,  on 

tion  of  partnership  may  be  said  to  mvdtifariousness  herein.  Merchants', 

exist  as  to  such  third  persons."    To  etc.  Line  v.  Waganer,  71   Ala.  581 

same  effect,  Ervin  v.   Oregon,  etc.  (1882);  Smitli  v.   Rathbun,  22  Hun, 

Nav.  Co.,  20  Fed.  Rep.  577  (1881).  See  150  (1880);  Lewarne  v.  Mexican  Int. 

§  656,  supra.  Imp.  Co.,  38  Fed.  Rep.  629  (1889). 

iWinsor  v.  Bailey,  55  N.  H.  218  <  Stanton  v.  Missouri  Pac.  R'y,  15 

(1875).    A  stockholder's  suit  is  not  N.  Y.  Civ.  Pro.  296  (1888). 

multifarious,  although  it  is  to  compel  *  Whitney  v.  Fairbanks,  54    Fed. 

the  treasurer  to  pay  back  certain  Rep.  985  (1893).    . 

funds,  and  also  to  have  a  dividend  ^  Tutwiler  v.  Tuskaloosa,  etc.  Co., 

declared  therefrom.   Dmiphy  v.  Trav-  89  Ala.  391  (1889). 

eller  Newsp.  Assoc,  146  Mass.  495  '  American,  etc.  Co.  v.  Linn,  93  Ala. 

(1888) ;  78  L.  T.  Rep.  729  (1898).  610  (1890). 

2  Salomons  v.  Laing,  12  Beav.  339  8  Moyle   v.    Landers,   83    CaL  579 

(1850).    But  a  bill  by  stockholders  (1890). 
and  creditors  to  restrain  acts  and 

1610 


CH.  XLT.]  PAETIES,  rLEADISGS,  ETC.  [§l39. 

hivnself  and  other  stockholders  "S-^^'^^^^'^lfrf  let 
lendant.'    A  suit  to  enforce  the  statutory  I'.^'l' '  *>'  ^    f  "'^ 
holder,  cauuot  include  a  cause  of  action  agamst  the  d  rectors 
for  mismanagement.^    A  stockholder's  bdl  to  ^^P^l  «*-^  ^° 
pay  their  subscriptions  and  to  hold  some  of  them  liable  for 
U  J.al  acts  is  muUifarious.'    The  bill  is  multi  uncus  whe  e 
seeks  to  hold  certain  directors  liable  for  acts  <'«;'«-;->-,'• 
and  other  directors  for  acts  in  another  year '    A  bill  "^y  ^  =  °^'- 
holder  and  creditor  in  behalf  of  liinisel  and  all  -^^"^fl^^^' 
ers  and  creditors,  to  set  aside  a  sale  of  the  corporate  property 
for  stock  to  be  divided  bet,yeen  the  creditors  and  prefer  ed 
ck  otle.^,  is  multifarious  in  that  «-  stoddioldcrs    r^hts 
may  clash  «-^tli  each  other  or  with  creditors'  righ  s  and  the 
Tme  complainant  cannot  represent  all.'    A  bill  aslon,,  f.r  a 
dissolution  and  a  distribution  ot  assets  so  as  to  pay  Ct  tl.o  e 
stockholders  who  were  fraudulently  i-'-«\'°  ^it  a,  d 
multifarious.    The  averment,  moreover,  must  be  deiinite  anc 
Te  Ui^"   A  creditor's  bill  to  hold  the  president  liab  e  for  fraud 
tn  e^nvertin.  the  corporate  assets,  and  also  to  collect  unpaid 
"tecr  pTL:  is  multiLious.'    A  bill  to  rescind  a  subscription 
on   he  ground  of  fraud  and  also  to  have  a  receiver  appoined 
on  account  of  the  mismanagement  of  directors  is  multitanous. 
V  bUUs  not  multifarious  even  though  the  defendants  are  not 
'to  be  held  liable  to  the  same  extent  or  in  the  same  way,  inas- 
much as  the  court  may  mould  its  decree  so  as  to  do  eqmty  to. 
Zv    Various  other  instances  of  multifariousness  are  given  in 

the  notes  below.'" 

Ti  11,^,1  rr,nt  Co   74  3  Ch.  App.  263  (1SC7),  holding  that 

'^"=-T,««f  there  tl!ere  are  different  classes  of 

""siurtevantLarrabee  Co.  v.  Mast,  stockholders  a  stockholder  may  file 

etc'cTcO  N.  W.  BOP  .U  (Minn.,  a  b«Un  M.-^  of  h.s  eUs.    ^^^^  ^ 

'?Ho,ton  .  WaUae^ee  Fe.  Ee,    ^e^^^^J^  ^  ^  _,^„„^„^ 

ent  directoi^.  t   '^  29(1897).     C/.  note  4,  supra. 

Higgins  u  Tefit,  4  N  oVn93  >°  A  suit  to  dctemiine  what  stock 

''f^J'::t^^^^o,  KY.  is  watered  stock  alleged  to  be  ove. 

T    llch  Zv  488  (1874).    See  also  issued  stock)  and  also  to  set  aside 

Ho^e  V    Gfe'a?-WeirnW  I^  R-  transactioas  by  which  the  corporate 


1611 


§  T40.] 


PAETIES,  PLEADINGS,  ETC. 


[CH.  XLr. 


§  740.  Complainant  must  allege  that  he  requested  tlie  corjw- 
ration  to  'bring  the  suit,  and  that  the  corporation  refused  or 
neglected  to  do  so  —  Bule  94-  of  the  federal  courts  on  this  sub- 
ject— Hequest  to  receiver. —  Inasmuch  as  a  fraudulent,  idira 
vires,  or  negligent  act  of  the  directors  of  a  corporation  is  an 
injury  done  to  the  corporation  itself,  it  is  the  duty  and  proper 
function  of  the  corporation  to  institute  any  action  that  may  be 
brought  to  remedy  the  injury  to  the  corporation.  As  already 
explained,  however,  a  stockholder  may  bring  the  action  if  the 
corporation  improperly  refuses  or  neglects  to  institute  such  suit. 
Before  the  stockholder  brings  suit  he  must  make  a  formal  re- 
quest to  the  corporate  officers  that  suit  be  instituted  by  the 
corporation.  Upon  its  refusal  or  neglect  to  comply  with  that 
request,  he  may  then  bring  suit  himself.  It  is  well  settled, 
however,  that  he  must  allege  in  his  bill  in  equity  that  such  a 


property  has  been  misapplied  is  mul- 
tifarious. Cliurch  V.  Citizens'  Street 
R'y,  78  Fed.  Rep.  526  (1897).  A  judg- 
ment creditor's  bill  is  multifarious 
where  it  asks  to  hold  the  defendant 
liable  on  a  subscription  for  stock, 
and  as  an  officer  for  causing  the  cor- 
poration to  buy  its  own  stock,  and  as 
an  outsider  for  obtaining  real  estate 
of  the  company  without  considera- 
tion, and  as  an  outsider  misrepresent- 
ing the  condition  of  the  company. 
First  Nat.  Bank  v.  Peavey,  75  Fed. 
Rep.  154  (1896).  Where  the  <lirectors 
for  the  sum  of  $15,000  resign  and  put 
in  other  directors,  and  the  new  di- 
rectors mismanage  the  company  and 
cause  its  insolvency,  the  receiver  of 
the  company  cannot  join  a  suit  for 
the  $15,000  with  a  suit  to  hold  the 
resigning  directors  liable  for  breach 
of  trust.  The  complaint  is  multifa- 
rious. McClure  v.  Wilson,  13  N.  Y. 
App.  Div.  274  (1897).  Stockholders 
and  corporate  creditors  cannot  join 
in  the  same  bill,  the  former  to  rescind 
their  subscriptions  and  to  bring  the 
officers  to  an  account,  and  the  latter 
to  bring  the  officers  to  an  accounting, 
even  though  the  officers  have  been 


guilty  of  all  the  frauds  in  the  cate- 
gory. Brown  v.  Bedford  City,  etc. 
Co.,  91  Va.  31  (1895).  As  to  not  being 
multifarious,  see  Stevens  v.  South, 
etc.  Co.,  47  Pac.  Rep.  81  (Utah,  1896). 
A  bill  in  equity  is  not  multifarious 
when  filed  by  a  receiver  of  an  insolv- 
ent corporation  against  the  stock- 
holders and  bondholders,  alleging 
that  some  of  them  as  owners  of  a 
large  number  of  paper  mills,  and 
others  as  promoters  of  the  same, 
caused  them  to  be  conveyed  to  the 
corporation  for  bonds  and  prefeiTed 
stock  and  common  stock,  the  par 
value  of  all  of  which  was  much 
greater  than  the  actual  value  of  the 
property  so  conveyed,  even  though 
such  bill  asks  that  the  claims  of 
the  bondholders  be  reduced  to  the 
amount  actually  paid  for  the  bonds, 
and  that  the  stockholders  be  held 
liable  for  such  part  of  the  par  value 
as  was  not  fairly  paid  for  by  the 
property,  and  even  though  such  bill 
asks  that  the  pi'omoters  be  held  lia- 
ble on  loss  due  to  stock  and  bonds 
which  passed  into  bo7ia  fide  hands. 
See  V.  Heppenlieimer,  30  AtL  Rep.  966 
(N.  J.,  1897). 


1612 


CH.  XLV.] 


PAKTIES,  PLEADINGS,  ETC. 


[§  HO. 


reouest  has  been  made  and  has  not  been  complied  vnth}   There 
hTbe  n   onsiderable  discussion  as  to  whether  the  stockhoWer 
in  addition  to  his  request  to  the  corporate  officers  to  institute 
he  suit,  should  not  also  be  required  to  attempt  to  induce  the 


1  Holton  V.  New  Castle,  etc.  R'y,  138 
Pa.  St.  Ill  (1890);  Byers  v.  Rollins.  13 
Colo.  22  (1889).    Failure  to  request 
the  corporation  to  bring  suit  is  fatal. 
Bad  faith  on  the  part  of  the  com- 
plainant is  fataL    Weidenfeld  v.  Al- 
legheny, etc.  R.  R.,  47  Fed,  Rep.  11 
(1891).    Three  directors  cannot  sue 
as  stockliolders  where,  for  aU  that 
appears,  they  are  a  majority  of  the 
board  and  could  cause  the  corpora- 
tion to  sue.    Hodgson  v.  Duluth,  etc. 
R.  R.,  46  Minn.  451  (1891).    A  stock- 
holder's action  to  restrain  a  levy  of 
execution  by  a  judgment  creditor  on 
the  property  of  the  corporation  faUs 
where  he  does  not  allege  a  request 
and  show  his  interest  in  the  corpo- 
ration.   Southwest  Nat.  Gas  Co.  v. 
Fayette  Fuel  Gas  Co.,  145  Pa.  St.  13 
(1892).    A  request  made  to  a  railroad 
corporation  to  prevent  a  competing 
raUroad  from  voting  its  stock  is  suf- 
ficient to  authorize  a  stockholder's 
suit.    Memphis,  etc.  R.  R.  v.  Woods, 
88  Ala.  630  (1889).    See  also  Cogswell 
V  Bull,  39  CaL  320(1870);  Hazard  u 
Durant,  11  R.  L  195  (1875),  the  coui-t 
saymg  that  the  allegations  of  request 
"  will  be  sustained  by  proof  of  a  re- 
quest to  the  stockholders  in  corpo- 
rate meeting,  or  to  the  directors  in 
office  when  the  suit  began,  or  in  any 
other  mode  so  that  it  be  in  legal 
effect  a  request  to  the  corporation; " 
Talbot  V.  Scripps,  31  Mich.  268  (1875); 
Ware  v.  Bazemore,  58  Ga.  316  (1877); 
Merchants',  etc.  Line  v.  Waganer,  71 
Ala.  581  (1882);  Hersey  v.  Veazie,  24 
Me.  9  (1844);   Memphis  v.  Dean,  8 
Walk  64  (1868);  House  v.  Cooper,  30 
Barb.  157  (1858);  Wilkie  v.  Rochester, 
etc.  R'v,  12  Hun,  242  (1877);  O'Brien 
V.  0-Connell,7  Hun,  228  (1876);  Ab- 
bott V.  Merriam,  62  Mass.  588  (1851) 


Stevens  v.  Rutland,  etc.  R.  R.,  29  Vt 
545  (1851).    But  a  request  to  bring 
the  suit  in  a  federal  com-t  is  insuffi- 
cient.   See  Newby  v.  Oregon  Cent. 
Ry,  1   Sawyer,  63   (1870);   S.  C  18 
Fed.  Cas.  42.    The  leading  case  of 
Foss  V.  Harbottle,  2  Hare,  461  (1843), 
failed  by  reason  of  a  failure  to  make 
this  effort  to  induce  the  corporation 
to  act.    See  also  the  important  case 
of  Greaves  v.  Gouge,  69  N.  Y.  154 
(1877);  CogsweU  v.  Bull,  39  CaL  320 
(1870);  McGeorge  v.  Big  Stone  Gap 
Imp.   Co.,  57  Fed.  Rep.   262  (1893); 
Putnam  v.  Ruch,  56  Fed.  Rep.  416 
(1893);  Atchison,  etc.  R.  R.  v.  Sumner 
County,  51  Kan.  617  (1893);  New,  etc. 
Co.  V.  Blevins,  34  S.  W.  Rep.  828  (Tex., 
1896);  Palmer  v.  Hawes,  73  Wis.  46 
(1888).    The  defendant  cannot  raise 
this  point  in  the  appellate  court  for 
the  first  time.    See  Bulkley  v.  Big 
Muddy  Iron  Co.,  77  Mo.  105  (1883). 
The  request  to  the  directors  must  be 
made  in  good  faith,  and  the  actual 
wrong  set  forth,  and  the  directors 
must  not  be  charged  in  the  request 
as  being  guilty  imless  they  really 
are  so.    Bacon  v.  Irvine,  70  CaL  221 
(1886).    A  simple  allegation  that  the 
corporation  neglected  is  insufficient. 
Refusal  must  be  aUeged.    LesUe  v. 
LoriUard,  31  Hun,  305  (1883).  It  need 
not  be  aUeged  specifically  that  the 
present  board  of  directors  have  re- 
fused   to    act.    Brown    v.    Buffalo, 
etc:  R  R.,  27  Hun,  342   (1882).    A 
stockholder  suing  in  behaK  of  his  cor- 
poration, which  has  been  dissolved 
many  years,  must  nevertheless  show 
that  he  sought  to  have  the  directors 
bring  suit.    Taylor  v.  Holmes,  127  U. 
S.  489  (1888).    Where  the  corporation 
is  dissolved,  but  by  statute  suits  may 
be  brought  during  the  three  succeed- 


1613 


r^o.] 


PAETIES,  PLEADINGS,  ETC. 


[cn.  XLV. 


stockliolders  in  meeting  assembled  to  take  action  by  directing 
the  directors  to  bring  suit,  or  by  refusing  to  re-elect  them  at  the 
next  election.  The  facts,  however,  that  the  stockholders  in 
meetino:  assembled  cannot  control  the  discretion  of  the  direct- 
ors  m  bringing  such  a  suit;  that  the  remedy  of  refusing  to  re- 
elect them  involves  delay,  and  involves  the  assumption  that  a 
minority  of  the  stockholders  can  by  the  election  control  such 
a  suit;  that  irreparable  injury  or  the  vesting  of  great  financial 
interests  may  occur  m  the  meantime;  and  that  laches  may 
arise  as  a  oar  to  the  stockholder's  suit  —  have  settled  the  rule 
that  the  stockholder's  request  to  the  corporate  directors  to  in- 
stitute the  suit  is  suflicicnt.  lie  need  not  also  apply  to  a  stock- 
holders' meeting.^  The  law  on  this  subject  seems  to  be  as 
follows:  First,  as  to  acts  ultra  vires  of  both  the  directors  and 
majority  of  stockholders,  the  directors  or  majority  of  stock- 
holders cannot  ratify  the  same,  and  hence  no  request  to  the 
stockholders  to  vote  on  the  subject  is  necessary,^  and  it  has  been 


ing  years,  a  stockholder  must  request 
the  directors  to  sue  before  he  sues  to 
compel  a  creditor  to  restore  property 
illegally  taken.  General  Electric  Co. 
V.  West  Asheville  Imp.  Co.,  73  Fed. 
Rep.  38G  (1896).  Where  a  stockholder 
brings  suit  for  an  injunction  and  re- 
ceiver on  the  ground  that  the  presi- 
dent is  using  the  assets  to  construct 
an  insolvent  road  organized  by  him- 
self, and  is  misappropriating  the  cor- 
porate funds,  and  controls  a  majority 
of  the  directors  and  also  of  the  stock, 
the  allegations  are  insufficient  where 
it  appears  that  no  member  of  the 
board 'excepting  the  president  is  in- 
terested in  the  railroad  company, 
and  no  effort  has  been  made  to  in- 
duce the  directors  to  bring  the  suit. 
Roman  u  Woolfolk,  98  Ala.  219  (1893). 
1  Mason  v.  Harris,  L.  R.  11  Ch.  D.  97 
(1879),  holding  also  that  the  cotirt 
has  no  power  to  order  such  a  meet- 
ing. See  a  discussion  of  this  ques- 
tion in  Brewer  v.  Boston  Theater,  104 
Mass.  378  (1870).  See  also  Gregory  v. 
Patchett,  33  Beav.  595  (1864).  In  Mac- 
Dougall  V.  Gardiner,  L.  R.  1  Ch.  D.  13, 
23  (1875),  the  difficulty  herein  prob- 


ably arose  from  cases  where  a  stock- 
holder sought  to  enjoin  acts  which 
the  directors  could  not  do,  but  which 
the  majority  of  stockholders  could 
do.  If  the  stockholders  have  the 
power  to  remove  the  directors,  a  re- 
quest to  the  stockholders  to  act  must 
be  made  before  suit  is  brought  by  a 
stockholder.  Rathbone  v.  Parkers- 
burg  Gas  Co.,  31  W.  Va.  798  (1888). 
In  Miller  v.  Murray,  17  Colo.  408 
(1892),  the  court  refused  to  sustain 
an  action  by  the  minority  stockhold- 
ers to  set  aside  an  alleged  fraudulent 
sale  of  the  corporate  property  at  fore- 
closure sale,  the  property  having  been 
subsequently  purchased  by  one  of  the 
officers,  inasmuch  as  the  complain- 
ing stockholders  had  votes  enough 
to  elect  a  board  of  directors,  and  thus 
have  the  sviit  brought  in  the  corpo- 
rate name.  In  Latimer  v.  Richmond, 
etc.  R  R.,  39  S.  C.  44  (1893),  the  court 
seemed  to  follow  the  federal  rule  that 
an  effort  must  be  made  to  induce 
the  stockholders  to  act  as  well  as  the 
directors. 

2  A  stockholder  may  file  a  bill  to 
enjoin  or  set  aside  an  ultra  vires  act, 


1614 


en. 


XLY.]  PARTIES,  PLEADINGS,  ETC.  [§  74:0. 


held,  with  much  reason,  that  not  even  a  request  to  the  direct- 
ors is  necessary ;  ^  second,  as  to  acts  idtm  vires  of  the  directors, 
but  intra  vires  of  the  stockholders,  a  single  stockholder  cannot 
sue  if  the  majority  of  the  stockholders  confirm  such  acts  of  the 
directors,  and  hence  a  vote  of  the  stockholders  is  necessary ;  ^ 
third,  as  to  frauds  perpetrated  on  the  corporation  by  outside 
parties,  such  causes  of  action  are  like  other  causes  of  action 
which  the  corporation  may  have,  and  the  discretion  of  the  di- 
rectors as  to  the  advisability  of  suing,  not  suing,  compromising, 
or  settling  such  claims  is  final; '  fourth,  as  to  acts  of  the  direct- 
ors themselves  which  are  fraudulent  in  the  eye  of  the  law,  but 
which  the  majority  of  the  stockholders  might  have  authorized, 
there  is  reason  for  requiring  a  stockholders'  vote  thereon  be- 
fore a  single  stockholder  sues  to  remedy  the  wrong;  *  and  fifth, 
as  to  acts  of  the  directors  which  are  fraudulent,  and  which  not 
even  the  majority  of  the  stockholders  could  have  authorized, 
no  stockholders'  vote  would  be  of  any  avail,  and  hence  such  a 
vote  is  unnecessary.* 

In  the  federal  courts  the  necessity  of  an  allegation  that  the 
corporation  has  been  requested  to  sue  and  has  refused  is  fixed 
by  a  rule  of  the  court.^    The  request  may  be  made  to  the  presi- 

even  though  every  other  stockholder  vires.     Botts   v.    Sirapsonville,  etc. 

is  opposed  to  him.    Hoole  v.  Great  Tump.  Co.,  88  Ky.  54  (1888). 

Western  R'y,  L.  R  3  Ch.  App.  263  2  See  S  684,  siipro. 

(1867);    Beman  v.   Rufford,    1   Sim.  ^  See  %  "50,  infra. 

550  (1851),  where  a  majority  of  the  *See  ch.  XXXIX,  «*pra,  for  illus- 

stockholders  had  even  voted  to  ratify  trations,  especially  §  663. 

the  illegal  act;  Bagshaw  v.  Eastern  ^See  ch.  XXXIX,  supra,  for  illus- 

Union  R'y,  19  L.  J.  (Ch.)  410  (1850);  trations. 

Hare  v.  London  &  N.  W.  R'y,  30  L.  J.  SRule  94  (104  U.  S.  ix):  "It  [the 
(Ch.)  817, 829  (1861);  Winch  v.  Bkken-  bill]  must  set  forth  with  particular- 
head,  etc.  R'y,  16  Jur.  1035  (1853).  ity  the  efforts  of  the  plaintiff  to  se- 
iNo  request  is  necessary  to  the  cure  such  action  as  he  desires  on 
board  of  directors  before  a  stock-  the  part  of  the  managing  directors 
holder  brings  siiit  to  cancel  an  illegal  or  trustees;  and,  if  necessary,  of  the 
subscription  to  stock  by  a  municipal-  shareholders,  and  the  causes  of  his 
ity,  inasmuch  as  said  subscription  is  failure  to  obtain  such  action."  Mo- 
ultra  vires.  Stebbins  v.  Perry  County,  Henry  v.  New  York,  etc.  R  R.,  23 
47  N.  E.  Rep.  1048  (III,  1897).  Are-  Fed.  Rep.  130  (1884);  S.  C,  25 -Fed- 
quest  must  be  made  to  the  board  of  Rep.  65,  114.  See  Leo  v.  Union  Pac. 
directors,  even  though  the  act  com-  Ry,  19  Fed.  Rep.  283  (1884) ;  S.  C,  17 
plained  of  is  an  wZf?-a  fires  act  Hut-  Fed.  Rep.  273;  Converse  v.  Dimock, 
ton  V.  Bancroft,  etc.  Co.,  83  Fed.  Rep.  22  Fed.  Rep.  573  (1884);  Bill  v.  West- 
*  17  (1897).  No  request  to  the  direct-  em  Union  TeL  Co.,  16  Fed.  Rep.  14 
ors  is  necessary  if  the  act  is  ultra  (1883);  Quincy  r.  Steel,  120  U.  S.  241 

1615 


§  T40.] 


PAKTIES,  PLEADINGS,  ETC. 


[cn.  XLV. 


dent,^  althongli  this  is  denied  in  Tennessee.'^    If  a  receiver  is 
in  charge  the  request  is  to  be  made  to  him.'    A  request  to  the 


(1887);  Foote  v.  Cunard  Min.  Co.,  17 
Fed.  Rep.  40  (1883),  holding  tliat  au 
allegation  that  the  corporation  would 
probably  refuse  relief  is  insufficient. 
This  cannot  be  omitted  merely  be- 
cause the  guilty  party  owns  a  ma- 
jority of  tlie  stock.  Allen  v.  Wil- 
son, 28  Fed.  Rep.  677  (188G),  holding 
also  that  the  fact  that  the  guilty 
party  elected  the  existing  board  of 
directors  does  not  excuse  request. 
A  suit  by  a  stockholder  to  remedy 
frauds  on  the  part  of  the  president 
does  not  come  within  the  ninety- 
fom-th  rule,  and,  even  if  it  does,  an 
allegation  that  the  guilty  parties 
control  the  board  of  directors  ex- 
cuses any  request  to  them  to  sue. 
Ranger  v.  Champion,  etc.  Co.,  52 
Fed.  Rep.  611  (1892).    Concerning  the 


United  States  rule  as  to  the  request 
to  the  company,  see  also  "Wliitney  v. 
Fairbanks,  54  Fed.  Rep.  985  (1893). 
Under  rule  94,  in  the  federal  coiurts 
(104  U.  S.  ix),  it  is  not  enough  to  al- 
lege that  the  guilty  parties  are  iu 
control  of  the  corporation.  This  is 
not  enough  to  dispense  with  a  re- 
quest to  the  directors  to  bring  suit. 
Squair  v.  Lookout  Mountain  Co.,  42 
Fed.  Rep.  729  (1890).  In  the  federal 
courts  the  stockholder  must  set  out 
in  his  pleading  when  or  how  the  re- 
quest to  sue  was  made,  upon  what 
showing  of  facts,  and  that  the  di- 
rectors so  requested  are  still  in  of- 
fice. Swope  V.  ViUard,  61  Fed.  Rep. 
417  (1894).  Where  the  guilty  par- 
ties control  the  board  of  directors, 
the  ninety-fourth  rule  does  not  re- 


1 A  request  to  and  refusal  by  the 
president,  who  is  also  the  manager, 
suffices,  even  though  he  is  the  party 
guilty  of  the  acts  complained  of. 
Chicago  u  Cameron,  120  111.  447  (1887). 
A  request  made  to  the  president  is 
good,  though  he  replies  that  he 
had  resigned  two  years  previously, 
it  appearing  that  his  resignation  had 
not  been  accepted  and  no  meetings 
held  since  the  resignation.  AveriU 
V.  Barber,  6  N.  Y.  Supp.  255  (1889). 
A  request  by  one  of  the  stockholders 
to  the  officers  and  president  is  suffi- 
cient. Becker  v.  Gulf  City,  etc.  Co., 
80  Tex.  475  (1891). 

2  In  a  stockholder's  suit  to  hold  the 
directors  liable  for  negligence  the 
request  must  be  to  the  board  of  di- 
rectors. A  request  to  the  president 
is  insufficient.  Wallace  v.  Lincobi 
Sav.  Bank,  89  Tenn.  630  (1891). 

3  Nelson  v.  Burrows,  9  Abb.  N.  Cas. 
280  (1881);  Fisher  v.  Andrews,  37  Hun, 
176  (1885);  Kelsey  v.  Sargent,  40  Hun, 
150  (1886).  That  it  is  the  duty  of  a  re- 
ceiver to  bring  suit,  see  §  735,  supra. 


The  request  of  the  stockholders 
should  be  to  the  receiver,  and  upon 
his  refusal  to  bring  the  suit  the 
stockholder  may  bring  it.  Streight 
V.  Junk,  59  Fed.  Rep.  321  (1893).  Re- 
dress must  first  be  sought  through 
the  board  of  directors,  or  through 
the  receiver  who  is  in  charge  of  the 
property.  Holton  v.  Wallace,  77  Fed. 
Rep,  61  (1896).  It  is  not  enough  that 
the  receiver  has  refused  to  sue.  The 
stockholder  must  apply  to  the  court 
to  order  the  receiver  to  sue.  Swope 
V.  Villard,  61  Fed.  Rep.  417  (1894).  The 
statute  authorizing  suit  against  re- 
ceivers without  previous  request  does 
not  apply  to  a  stockholder's  suit  to 
remedy  wrongs  committed  before 
the  receiver  was  appointed.  Swope 
V.  Villard,  61  Fed.  Rep.  417  (1894). 
After  a  receiver  has  been  appointed, 
a  stockholder's  suit  against  officers  to 
compel  them  to  account  for  fraudu- 
lent misappropriations  of  coi-porate 
property  must  join  the  receiver  as  a 
party  defendant.  Porter  v.  Sabin,  149 
U.  S.  473  (1893). 


1616 


CH.  XLV.] 


PAETIES,  PLEADINGS,  ETC. 


[§  T^l. 


executive  committee  is  sufficient.'  A  request  by  a  stockholder 
to  the  trustee  in  insolvency  of  a  corporation  is  sufficient  to  en- 
able the  former  to  bring  suit  to  hold  the  directors  liable  for 
negligence  if  the  trustee  refuses  to  sue.^ 

§  741.  When  such  an  allegation  may  he  omitted. —  There  are 
occasions  when  the  allegation  that  the  stockholder  has  re- 
quested the  directors  to  bring  suit  and  they  have  refused  may 
be  omitted,  since  the  request  itself  is  not  required.  This  occurs 
when  the  corporate  management  is  under  the  control  of  the 
guilty  parties.  No  request  need  then  be  made  or  alleged,  since 
the  guilty  parties  would  not  comply  with  the  request;  and  even 
if  they  did  the  court  would  not  allow  them  to  conduct  the  suit 
against  themselves.*    IMevertheless,  instead  of  this  allegation. 


quire  the  complainant  stockholder 
to  set  forth  with  particularity  his 
efforts  to  have  the  du-ectors  act.  De 
Neufville  v.  New  York  &  Northern 
R'y,  81  Fed.  Eep.  10  (1897).  No  at- 
tempt to  get  the  officers  to  bring  suit 
need  be  made  under  rule  94,  where 
the  officers  themselves  are  the  guilty 
parties  complained  of.  Excelsior,  etc. 
Co.  V.  Brown,  74  Fed.  Rep.  321  (1896). 
Under  the  ninety-fourth  equity  rule, 
if  the  board  of  directors  is  controlled 
by  the  guilty  parties  "  it  is  still  re- 
quired that  an  effort  should  be  made 
to  induce  action  by  the  body  of  the 
corporation, —  by  the  stockliolders, — 
and  that  if  action  cannot  be  obtained 
either  from  the  board  of  directors  or 
from  the  body  of  the  stockholders, 
the  bill  shall  show  the  character  and 
extent  of  the  efforts,  and  shall  par- 
ticularly show  the  reasons  why  the 
party  who  brings  liLs  suit  failed  to 
obtain  remedial  action  within  the 
body  of  the  corporation."  Chm-ch  v. 
Citizens'  Street  R'y,  78  Fed.  Rep.  526 
(1897).  Equity  rule  number  94  does 
not  apply  to  suits  removed  into  the 
federal  court  from  state  courts.  Earle 
V.  Seattle,  etc.  Ry,  56  FecL  Rep.  909 
(1893;.  A  request  to  the  directors  is 
first  necessary,  and  is  not  excused  by 
vague  and  general  averments  as  to 
complicity  on  the  part  of  the  direct- 


ors in  the  wrongs  complained  of. 
Ziegler  v.  Lake  Street  Elev.  R.  R.,  76 
Fed.  Rep.  662  (1896). 

1  Hazard  v.  Durant,  11   R  L   196 
(1875). 

2  Wallace  v.  Lincoln  Sav.  Bank,  89 
Tenn.  630  (1891). 

3  Wayne  Pike  Co.  v.  Hammonds, 
129  Ind.  368  (1891);  Hannerty  v.  Stan- 
dard Theater  Co.,  109  Mo.  297  (1891); 
Wickersham  v.  Crittenden,  93  CaL 
17  (1892);  Ashton  v.  Dashaway  Assoc, 
84  CaL  61  (1890);  Barr  v.  Pittsburgh, 
etc.  Co.,  40  Fed.  Rep.  412  (1889);  Smith 
V.  Dorn,  96  Cal.  73  (1892);  Eschweiler 
V.  StoweU,  78  Wis.  316  (1890);  Ponca 
Mill  Co.  V.  Mikesell,  75  N.  W.  Rep.  46 
(Neb..  1898) ;  AndertonuWolf,41  Hun, 
571  (1886);  Bjomgaard  v.  Goodhue 
County  Bank,  49  Minn.  483  (1892).  No 
request  is  necessary  where  the  own- 
ers of  a  majority  of  the  stock  cause 
the  directors  to  sell  the  property  to 
a  person  who  buys  for  them.  Chi- 
cago Hansom  Cab  Co.  v.  Yerkes,  141 
ni. -320  (1892);  Brinckerhoff  v.  Bost- 
wick,  88  N.  Y.  52  (1882);  Rogers  v. 
La  Fayette,  etc.  Works,  52  Ind.  296 
(1875) ;  Tazewell  Comity  v.  Farmers', 
etc.  Co.,  12  Fed.  Rep.  752  (1882);  Davis 
V.  Gemmell,  70  Md.  356  (18S9);  Tippe- 
canoe County  V.  La  Fayette,  etc.  R.  R., 
50  Ind.  85  (1875);  Wilcox  v.  Bickel,  ll 
Neb.  154  (1881),  wliere  the  officers  had 


102 


1617 


§  741.] 


PARTIES,  PLEADINGS,  ETC. 


[cn.  XLV. 


the  complainant  must  allege  the  facts  which  excuse  such  a  de- 
mand or  request  to  the  directors,  and  these  facts  must  be  stated 


absconded ;  Currier  v.  New  York,  etc. 
E.  R,  35  Hun,  355  (1885);  Ramsey  v. 
Gould,  57  Barb.  398  (1870);  Kelsey  v. 
Sargent,  40  Hun,  150  (188G);  Moyle  v. 
Landers,  21  Pac.  Rep.  1133  (Cal.,  1889); 
Parrott  v.  Byers,  40  Cal.  614  (1871); 
Fisher  v.  Andrews,  37  Hun,  176  (1885) ; 
Young  V.  Drake,  8  Hun,  61  (1876); 
Higgins  V.  Lansingh,  154  111.  301  ( 1895) ; 
Young  V.  Alhambra  Min.  Co.,  71  Fed. 
Rep.  810  (1895);  Sage  v.  Culver,  147 
N.  Y.241  (1895);  Green  v.  Hedenberg, 
159  111.  489  (1896);  Gerry  v.  Bismarck 
Bank,  47  Pac.  Rep.  810  (Mont.,  1897); 
George  v.  Central  R.  R  etc.  Co.,  101 
Ala.  607  (1894);  Bell  v.  Montgomery 
Light  Co.,  103  Ala.  275  (1894);  Fitzger- 
ald V.  Fitzgerald,  etc.  Co.,  41  Neb.  374 
(1894) ;  Pondir  v.  New  York,  Lake  Erie, 
etc.  R.  R,  72  Hun,  384  (1893) ;  Mount  v. 
Radford  Trust  Co.,  93  Va.  427  (1896); 
Cowles  V.  Glass,  30  S.  W.  Rep.  291 
(Tex.,  1895);  Loftus  v.  Farmers',  etc. 
Assoc,  65  N.  W.  Rep.  107G  (S.  Dak., 
1896);  Heath  v.  Erie  R'y,  8  Blatchf. 
347  (1871);   S.  C,  11   Fed.  Cas.  976, 
the  court  saying:  "It  would  be  a 
mockery  to  require  or  permit  a  suit 
against  tnem  to  be  brought  and  prose- 
cuted under  their  management  to 
obtain  relief  sought  by  this  bill;" 
Mussina  v.  Goldthwaite,  34  Tex.  125 
(1870);  Doud  v.  Wisconsin,  etc.  R'y, 
65  Wis.  108  (1886);  Pond  v.  Vermont 
Valley  R.  R,  12  Blatchf.  280  (1874); 
S.  C,  19  Fed.  Cas.  976.  But  an  allega- 
tion that  the  management  is  under 
the  control  of  persons   appointed  by 
the  guilty  parties  is  insufficient.    See 
McMurray  v.  Northern  R'y,  22  Grant 
(U.  C),  476  (1875).    And  an  allegar 
tion  that  the  directors  are  "  nearly 
if  not  entirely  "  in  league  with  the 
guilty  parties  is  insufficient.     Cogs- 
well V.  Bull,  39   CaL   320  (1870).     If 
the  directors  are  the  guilty  parties, 
a  stockholder  suing  to  prevent  their 
running  the  corporation  for  the  bene- 


1618 


fit  of  a  partnership  need  not  allege  a 
request  to  them  to  sue.     Rothwell  v. 
Robinson,  39  Minn.  1  (1888).    If  the 
fraud  has  been  by  the  majoi-ity  of 
the  stockholders  on  the  minority,  no 
request  to  the  directors  to  sue  need 
be  made.    Nathan  v.  Tompkins,  83 
Ala.  437  (1887).    No  request  is  neces- 
sary to   the  directors  to   undo  an 
illegal  lease  when  they  cannot  undo 
it  except  witli  the  consent  of  another 
company.    Tippecanoe  County  v.  La- 
fayette, etc.  R  R.,  50  Ind.  85  (1875). 
A  request  to  the  directors  is  not  ex- 
cused by  tlie  fact  that  the  guilty 
party — the    corporate    treasurer  — 
owns  a  majority  of  the  stock.    Dun- 
phy  V.  Traveller  Newsj}.  Assoc,  146 
Mass.  495  (1888).     In  North  Carolina 
it  would  seem  that  a  demand  on  the 
guilty  officers  is  necessary  in  any 
case.    Moore  v.  Silver,  etc.  Co.,  104 
N.  C.  534  (1889).    In  a  stockholder's 
suit  to  enjoin  a  rival  company  from 
voting    stock    in  the    stockholders 
company,  a  request  to  the  directors 
to  sue  is  unnecessary  where  the  di- 
rectors are  controlled  by  such  rival 
company.    Mack  v.  De  Bardeleben, 
etc  Co.,  90  Ala.  396  (1890).     A  stock- 
holder may  be  permitted  to  bring 
suit  against  the  receiver  of  the  cor- 
poration to  set  aside  a  fraudulent 
assessment  by  him  on  stock,  and  a 
request  need  not  be  made  to  the  re- 
ceiver to  bring  the  suit,  he  being 
guilty  of  the  fraud.    Farwell  v.  Great 
Western  Tel.  Co.,  161  III  522  (1896). 
A  request  is  unnecessaiy  in  a  suit  to 
recover  back  an  illegal  salary  where 
the  guilty  parties    are    in   control 
Eaton  V.  Robinson,  18  R  I.  396  (1893). 
A  stockholder  may  bring  suit  in  be- 
half of  the  corporation  to   compel 
the  president  to  pay  his  subscription 
where  the  president  is  in  control  of 
the  company  and  refuses  to  pay  such 
subscription.    No  request  to  the  di- 


CH.  XLV.] 


PARTIES,  PLEADINGS,  ETC. 


[§  T42. 


with  particularity  and  definiteness;  The  stockholder  may 
bring  his  suit  although  the  corporation  has  been  dissolved. 
S742  3£iscellaneous  allegations  of  the  com2)lainant.—  The 
allegations  which  set  forth  the  complaining  stockholder's  cause 
of  action  will  of  course  depend  largely  on  the  particular  facts 
of  each  case.  It  is  necessary,  however,  to  determine  first 
whether  the  allegations  are  to  make  out  a  case  of  fraud,  or  ot 
an  ultra  vires  act,  or  of  a  negligent  act.  If  an  ultra  vires  act 
is  complained  of,  the  gist  of  the  action  is  not  fraud,  and  fraud 
need  not  be  and  should  not  be  alleged.'    But  where  the  action 


rectors  is  necessary  in  such  a  case. 
Knoop  V.  Bohmrich,  49  N.  J.  Eq.  83 
(13&1).  A  request  is  not  excused  by 
the  fact  that  a  majority  of  the  stock- 
holders sustain  the  acts  complained 
of.  Decatur,  etc.  Co.  v.  Pahn,  21  S. 
Rep.  315  (Ala.,  1896).  In  Barnes  v. 
Komegay,  63  Fed.  Rep.  671  (1894),  the 
court  very  properly  held  that  no  re- 
quest need  be  made  where  the  state 
owned  most  of  the  stock  and  con- 
trolled the  directors  and  was  about 
to  destroy  an  exemption  from  taxa- 
tion.   See  also  §  740,  supra. 

1  See  cases  in  preceding  note.    An 
allegation  that  frequent  protests  had 
been  made  is  not  a  sufficient  allega- 
tion of  a  request  to  sue.    Boyd  v. 
Sims,  87  Tenn.  771  (1889),  holding  also 
that  it  is  insufficient  to  show  that 
a  majority  of  the  directors  are  large 
stockholders  in  a   competing  com- 
pany, although  the  charge  is  that 
such  directors  are  fraudulently  favor- 
ing the  latter  company.    It  is  not 
svifficient  to  allege  that  a  majority 
of  the  directors  "  are  acting  in  the 
interest  of,  and  are  under  the  control 
of,"  the  guilty  directors.    It  must  be 
alleged  that  they  are  wilfully  disre- 
gardf  ul  of  the  interests  of  the  corpo- 
ration, or  would  be  if  informed  of 
the  mjurious  effect  of  their  actions, 
or  would  yield  to  the  influence  or 
control   of  the    guilty  directors    if 
aware  of  the  purposes  and  uses  for 
which  that  influence  is  exercised. 
Brewer  v.  Boston  Theatre,  104  Mass. 

1019 


378  (1870).    A  request  is  not  excused 
by  an  allegation  that  the  complain- 
ant had  offered  to  assume  the  ex- 
pense and  conduct  of  the  litigation. 
Warren  v.  Para  Rubber  Shoe  Co.,  166 
Mass.  97  (1896).     A  request  is  neces- 
sary, and  it  is  insufficient  that  the 
plaintiff  had  demanded  his  part  of 
what  he  would  have  received  if  the 
illegal  act  had  not  been  committed. 
Flynn  v.  Brooklyn  City  R.  R,  9  N.  Y. 
App.  Div.  269  (1890).     No  request  is 
necessary  where,  in  case  the  directors 
brought  suit,  the  suit  would  be  sub- 
ject to  the  control  of  persons  op- 
posed to  its  success,  and  where  the 
directors  themselves  are  the  wrong- 
doers or  the  partisans  thereof.    The 
allegation    of  these  facts  must  be 
statements  of  fact  and  not  conclu- 
sions of  law.    The  manner  in  which 
the  directors  are  interested  must  be 
pointed  out.    Steiner  v.  Parsons,  103 
Ala.  215  (1893). 

2  Lafayette  Co.  v.  Neely,  21  Fed. 
Rep.  738  (1884);  Taylor  v.  Holmes, 
127  U.  S.  489  (1888). 

3  Clinch  V.  Financial  Corp.,  L.  R.  5 
Eq..450,  482  (1868).  If  the  pleadings 
charge  fraud  as  the  basis  of  the  suit, 
fraud  must  be  proved;  otherwise  the 
suit  fails,  even  though  the  evidence 
shows  a  right  to  relief  on  the  ground 
of  account,  discovery,  or  some  other 
ground  of  equitable  jurisdiction. 
Spies  V.  Chicago,  etc.  R.  E.,  40  Fed. 
Rep.  34  (1889). 


§  T43.]  PARTIES,  PLEADINGS,  ETC.  [cH.  XLV. 

is  to  remedy  a  fraud,  the  allegations  must  clearly  charge  to  that 
effect.  The  word  "  corrupt "  has  been  held  insufficient  herein.^ 
If  the  action  is  to  set  aside  an  ultra  vires  act,  the  act  itself  must 
be  stated  with  particularity .2  The  complaint  need  not  alleo-o 
who  the  other  stockholders  are,  how  numerous,  or  whether 
a  majority.3  The  stockholder  need  not  allege  that  he  was  a 
stockholder  at  the  time  of  the  act,  or  that  his  stock  has  since 
come  to  him  by  operation  of  law.''  It  is  not  necessary  to  allege 
that  the  stockholders  have  been  free  from  acquiescence  or 
laches.® 

In  IS'orth  Carolina  it  is  held  that  the  complaining  stockholder 
must  aver  that  he  is  a  "  lona  fide  owner  of  the  stock ;  that  he 
bought  the  same  in  good  faith,  and  not  for  mere  vexatious  pur- 
poses."«  Fraud  need  not  be  alleged  if  there  has  been  a  breach 
of  the  fiduciary  relation.'^  A  general  allegation  that  the  board 
of  directors  were  negligent  does  not  render  a  particular  director 
liable.8  A  demurrer  is  not  the  proper  way  to  raise  the  question 
of  laches.^ 

§  743.  Prayer  for  relief.—  The  relief  for  which  prayer  is 
made  in  the  bill  wiU  depend  upon  the  character  of  the  act  com- 
plained of,  and  also  of  the  facts  in  the  particular  case.  Gener- 
ally it-is  to  compel  the  director  or  third  parties  to  tm-n  over  to 
the  corporation  money  or  property  fraudulently  held  by  the  de- 
fendants, or  to  enjoin  acts,  or  to  set  aside  transactions,  or  for  a 
receiver,  or  for  dissolution,  or  for  more  than  one  of  these.     It 

1  Russell  V.  Wakefield  Waterworks  porate  property,  see  Beecher  r.  Schief- 
Co.,  L.  R.  20  Eq.  474  (1875).  felin,  4  N.  Y.  Civ.  Proc.  230  (1883). 

2  Leo  V.  Union  Pac.  R'y,  19  Fed.  Rep.  '  Warren  v.  Para  Rubber  Shoe  Co., 
283  (1884);  S.  C.  17  Fed.  Rep.  273.  The  166  Mass.  97  (1896).  Where  stockhold- 
plaintiff  must  allege  that  the  corpo-  ers  desire  to  attack  a  deed  of  the  cor- 
ration  is  one  for  profit.  Applegarth  poration  on  the  ground  of  fraud,  they 
V.  McQuiddy,  77  Cal.  408  (1888).  must  do  so  affirmatively,  and  not  by 

SDescombes  v.  Wood,  91  Mo.  196  simply  denying  its  execution.  Morrill 

O-^^^)-  V.  Little  Falls,  etc.  Co.,  53  Miun.  371 

4  Parsons  v.  Joseph,  93  Ala.  403  (1893).  In  a  suit  against  an  ofiicer  to 
(^^^^)-  recover  back  moneys,  his  position  as 

5  Horn,  etc.  Co.  v.  Ryan,  43  Minn,  officer  may  be  proved  by  his  signa- 
196  (1889).  turesassuch  officer.   Putnam  v.  G\m- 

6  Moore  v.  Silver,  etc.  Co.,  104  N.  C.  ning,  163  Mass.  553  (1895). 

534  (1889).    For  the  various  allega-        8  Fisher  v.  Graves,  80  Fed.  Rep.  590 
tions  to  be  made  in  a  complaint  to    (1897). 

set  aside  an  illegal  alienation  of  cor-        9  Zebley  v.  Farmers'  L.  &  T.  Co.,  139 

N.  Y.  461  (1893).    See  also  §  733,  supra. 
1620 


CH.  XLY.] 


PAETIESj  PLEADIXGS,  ETC. 


[§    'ii- 


is  weU  settled  tliat  tlie  prayer  for  reHef  may  be  in  the  alterna- 
tive.i  The  relief  granted  cannot  exceed  that  which  is  asked.^ 
§  744.  Pro2)erty  received  under  tlie  act  objected  to  must  le  re- 
turned upon  that  act  being  set  aside.—  This  is  a  principle  of  law 
that  applies  to  all  the  remedies  given  by  a  court  of  equity  m 
remedying  the  frauds  or  ultra  vires  acts  of  the  directors  or  third 
persons  against  the  corporation.  He  who  seeks  equity  must  do 
equity.  An  ultra  vires  act  will  not  be  set  aside  unless  the 
money  or  property  received  by  the  corporation  from  third  per- 
sons thereby  is  returned  to  such  persons.^    But  a  tender  prior 


1  Colton  V.  Ross,  2  Paige,  396  (1831); 
Thomas  v.  Hobler,  4  De  G.,  F.  &  J.  199 
(1861). 

2  Latimer  v.  Eddy,  46  Barb.  61  (1864). 

3  The  benefits  received  by  the  cor- 
poration must  be  returned  in  order 
to  sustain  an  action  setting  aside  a 
fraudulent  contract.     Barr  v.  New- 
York,  etc.  R.  R,  125  N.  Y.  263  (1891). 
Stockliolders  complaining  of  a  reor- 
ganization must  offer  to  pay  their 
share  of  what  may  be  fovmd  due  if 
the  transaction  is  set  aside.    Symmes 
V.  Union  Trust  Co.,  60  Fed.  Rep.  830 
(1894).     Where  the    directors   of   a 
railway  company  enter  into  a  con- 
tract with  third  persons,  whereby  a 
new  company  is  organized,  franchises 
secured,  and  a  road  built  and  leased 
to  the  old  company,  and  the  profits 
realized  from  the    transaction  are 
equally  divided  between  the  direct- 
ors and  the  third  persons,  the  latter 
are  not  liable  for  their  profits,  even 
though  exorbitant,  on  a  suit  by  the 
stockholders  of  the  old  company,  un- 
less the  contract  of  lease  is  rescinded 
and  the  road  restored  to  the  new 
company.    Hitchcock  v.  Barrett,  50 
Fed.  Rap.  653  (1892);  Buford  v.  Keo- 
kuk, etc.  Co.,  69  Mo.  611  (1879);  Har- 
pending  v.  Munson,  91 N.  Y.  650  (1883) ; 
New  Castle,  etc.  R  R  u  Simpson,  23 
Fed.  Rep.  214  (1885),  aUowing  to  the 
party  outlays,  compensation,  and  in- 
terest.    Cf.  Gray  v.  New-  York,  etc. 
Co.,  5  Thorn  p.  &  C.  224  (1875);  Thomas 
V.  Raih-oad  Co.,  101  U.  S.  71  (1879); 


Louisiana  v.  Wood,  102    U.  S.   294 
(1880);  Chapman  u  Douglas  Coimty, 
107  U.  S.  848  (1882);  Salt  Lake  City  v. 
Hollister,  118  U.  S.  256,  263  (1885); 
Green's  Brice,  Ultra  Vires,  717.    The 
consideration  must  be  returned.  Pier- 
son  V.  ]\IcCurdy,  33  Hun,  520  (1884), 
where  a  receiver  sued  a  director  for 
fimds  used  to  purchase  stock.    See 
also  Goidd  v.  Cayuga,  etc.  Bank,  86 
N.  Y.  75  (1881);  but  see  Allerton  v. 
Allei-ton,  50  N.  Y.  670  (1872).    Where 
the  president  of  a  corporation  by 
fraud  causes  a  purchase  of  property 
by  the  company  from  himself  at  an 
excessive  price,  he  cannot  demand 
that  he  be  put  in  statu  quo  before  re- 
lief is  granted  the  company.     Geriy 
V.  Bismarck  Bank,  47  Pac.  Rep.  810 
(Mont.,  1897).  Payment  by  bondsmen 
of  moneys  used  by  the  directors  in 
illegal  purchases  of  bonds  prevents 
action  by  the  receiver  of  the  corpo- 
ration against  the  directors.    Hun  v. 
Van  Dyck,  26  Hun,  567  (1882).    As  to 
the  right  of  the  fraudulent  possessor 
to  compensation  for  improvements, 
see  Jackson  v.  Ludeling,  99  U.  S.  513 
(1878).    If,  however,  the  complainant 
never  received  the  consideration  and 
cannot  compel  others  to  retm-n  it,  it 
is  not  necessary  for  him  to  offer  to 
retiu-n  it.    See  Lamb  v.  San  Pedro, 
etc.  Co.,  3  N.  M.  632  (1886).    Where 
the     majority    have     fraudulently 
caused  the  directors  to  sell  land  to 
them  and  to  buy  stock  of  them,  the 
minority  need  not  offer  to  restore 


1621 


§  T45.] 


PARTIES,  PLEADINGS,  ETC. 


[CH.  XLV. 


to  the  suit  need  not  be  made,  where  the  amount  to  be  tendered 
is  an  unascertained  amount.  It  is  sufficient  to  offer  in  the  com- 
plaint to  pay  or  perform  whatever  obligations  may  exist.*  A 
stockholder  who  brings  suit  to  have  a  municipal  subscription 
canceled  on  the  ground  that  it  is  illegal  need  not  first  return 
to  the  municipality  bonds  which  have  been  received  in  payment 
of  the  subscription.2  AVhere,  at  the  instance  of  a  stockholder, 
the  court  sets  aside  a  transfer  of  corporate  property  to  a  di- 
rector, the  stockholder,  however,  being  obliged  to  repay  the 
consideration,  for  which  the  decree  gives  him  a  lien  upon  the 
property  therefor,  the  stockholder  may  foreclose  such  lien  and 
may  have  a  receiver  of  the  corporation  appointed.' 

§  74:5.  Injunction  restraining  the  corporate  officers  and  otliers 
from  doing  specified  acts. —  The  ordinary  remedy  of  the  stock- 
holder is  an  injunction  by  a  court  of  equity  restraining  the 
corporate  officers  from  doing  the  specified  fraudulent  or  ultra 
vires  act  which  the  stockholder  complains  of.*     Generally  the 


anything  in  order  to  institute  suit. 
■Woodroof  u  Howes,  88  Cal.  184(1891). 
A  stockholder  need  not  make  a  tender 
to  a  purchaser  in  bad  faith  of  corpo- 
rate property  fraudulently  sold  by 
the  directors.  The  action  was  to  en- 
join and  set  aside  the  sales.  Gray  v. 
New  York,  etc.  Co.,  3  Hun,  383  (1875). 
Where  two  religious  corporations 
united  by  one  conveying  its  property 
to  the  other  and  the  latter  paying 
the  debts  of  the  former,  a  judgment 
setting  aside  such  sale  will  also  re- 
quire the  former  to  restore  to  the  lat- 
ter the  money  advanced  by  it.  Madi- 
son Ave.  Bapt.  Ch.  v.  Oliver  St.  Bapt. 
Ch.,  73  N.  Y.  82  (1878).  A  stockholder 
seeking  to  have  corporate  bonds  can- 
celed must  offer  to  return  the  consid- 
eration. Spencer  v.  Clarke,  1  N.  Y. 
Supp.  533  (1888).  It  is  clear,  liowever, 
that  the  stockholder  himself  cannot 
be  expected  to  repay  this  considera- 
tion. A  just  rule  would  allow  him 
to  pray  in  his  bill  that  the  corpora- 
tion repay  the  consideration.  Cf. 
Atlantic,  etc.  Tel.  Co.  v.  Union  Pac. 
R'y,  1  McCrary,  541  (1880),  holding 

162 


that  though  a  contract  be  ultra  vires 
a  corporation  will  be  restrained  from 
recovering  possession  of  property 
conveyed  by  it,  except  by  due  process 
of  law  and  after  return  of  the  con- 
sideration. A  stockholder  suing  to 
set  aside  need  not  tender  if  the  party 
sued  knew  of  the  stockholder's  dis- 
sent at  the  time  when  he  entered 
into  the  act.  Metropolitan  Elev.  R'y 
V.  Manhattan  Elev.  R'y,  11  Daly,  373 
(1884). 

1  Zebley  v.  Farmers'  L.  &  T.  Co.,  139 
N.  Y.  461  (1893). 

2  Stebbins  v.  Perry  County,  47  N.  K 
Rep.  1048  (111.,  1897). 

3  Ponca  Mill  Co,  v.  Mikesell,  75  N. 
W.  Rep.  46  (Neb.,  1898). 

4  Where  a  proposed  consolidation  is 
attacked  by  a  stockliolder,  a  prelim- 
inary injimction  granted  so  as  not  to 
render  useless  the  whole  suit,  in  case 
it  is  successful,  will  not  be  disturbed 
by  the  court  of  appeals.  Young  v. 
Rondout,  etc.  Co.,  129  N.  Y.  57  (1891); 
River  Dun  Nav.  Co.  v.  North  Midland 
R'y,  1  R'y  Cas.  135, 153(1838);  Blatch- 
ford  V.  Ross,  54  Barb,  43  (1869).    In 


€U, 


XLV.] 


PARTIES,  PLEADINGS,  ETC. 


[§  ne. 


injunction  runs  to  the  corporation  itself;  and  tliis  is  sufficient 
to  make  it  effective  and  binding  upon  all  corporate  officers  to 
whose  notice  it  comes.^ 

§  746.  Aiyimintment  of  a  receiver  —  Injunction  against  cor- 
porate officers  acting  at  all  —  liemoval  of  directors  l)y  the  court 
or  corporation. — The  law  is  well  settled  that  the  courts  have 
no  power  to  remove  corporate  officers.^  'Eov  can  the  stock- 
holders, in  meeting  assembled,  remove  the  officers.'  It  is  also 
well  established  that  a  court  of  equity  will  not  practically  re- 
move corporate  officers  by  enjoining  them  from  performing 
any  of  their  customary  duties,  and  by  appointing  a  receiver  to 
manage  the  corporate  affairs.* 


Indiana  it  is  held  that  no  injunction 
^vill  be  granted  against  the  payment 
of  an  unfounded  claim  by  the  direct- 
ors, but  that  the  action  will  proceed 
and  other  relief  be  granted.  Rogers 
V.  Lafayette  Agric.  Works,  52  Ind. 
296  (1876). 

1  See  §  738,  supra,  and  §  755,  infra; 
also  Hatch  v.  Chicago,  etc.  R.  R.,  6 
Blatchf.  105  (1868);  S.  C,  11  Fed.  Cas. 
799;  Trimmer  v.  Pennsylvania,  etc. 
R.  R.,  36  N.  J.  Eq.  411  (1883),  holding, 
liowever,  that  the  officers  are  not  lia- 
ble herein  for  contempt  by  reason  of 
the  acts  of  subcontractors.  See  Peo- 
ple V.  Sturtevant,  9  N.  Y.  263  (1853); 
People  V.  Pendleton,  64  N.  Y.  622 
(1876).  A  director  may  resign  after 
the  company  and  officers  have  been 
enjoined  from  interfering  with  the 
corporate  assets  and  may  then  pur- 
sue his  remedies  as  a  coi-porate  cred- 
itor. Mexican  Ore  Co.  v.  IMexican, 
etc  Co.,  47  Fed.  Rep.  351  (1891). 

2  Neall  V.  Hill,  16  CaL  145  (1860),  the 
court  saying:  "  It  is  well  settled  that 
there  is  no  jurisdiction  in  equity  with 
regard  to  the  removal  of  corporate 
officers  of  any  description."  Also 
Johnston  v.  Jones,  23  N.  J.  Eq.  216 
(1872),  and  g§  618, 711,  mpra. 

3  Imperial  Hotel  Co.  v.  Hampson, 
L.  R.  23  Ch.  D.  1  (1882).  See  §  711, 
supra. 


*  People  V.  Albany,  etc.  R.  R.,  55 
Barb.  344,  383  (1869);  Einstein  v. 
Rosenfeld,  38  N.  J.  Eq.  309  (1884); 
Howe  V.  Deuel,  43  Barb.  504  (1865); 
AVaterbury  v.  Merchants'  Union  Exp. 
Co.,  50  Barb.  157  (1867);  Cicotte  v. 
Anciavix,  53  Midi.  227  (1884);  La 
Grange  v.  State  Treasurer,  24  Mich. 
468  (1872).  In  New  York  an  injunc- 
tion order  suspending  "the  general 
and  ordinary  business  "  of  a  foreign 
or  domestic  corporation  in  New 
York  can  be  obtained  only  after  no- 
tice to  the  corporation.  Code  Civ. 
Proc,  §  1809.  Cf.  §  1787.  Hence  an 
ex  parte  injunction  against  the  re- 
moval of  the  treasurer  is  void.  Wilkie 
V.  Rochester,  etc.  R'y,  12  Hun,  243 
(1877).  An  injunction  against  an  offi- 
cer doing  any  corporate  business  dur- 
ing the  pendency  of  a  suit  against 
him  for  maladministration,  etc.,  will 
not  always  be  set  aside,  even  under 
the  rule  that,  where  the  defendant 
specifically  denies  tmder  oath  all 
charges,  the  injunction  must  be  dis- 
solved. Hay  t  V.  Malone,  9  N.  Y.  Supp. 
877 '(1890).  The  court  will  not  enjoin 
the  officers  from  acting.  Foss  v.  Har- 
bottle,  2  Hare,  401  (1843);  Mozley  v. 
Alston,  16  L.  J.  (Ch.)  217  (1847);  Hat- 
tersley  v.  Shelburne,  31  L.  J.  (Ch.)  873 
(1802).  So  also  Manneck,  etc.  Co.  v. 
Manneck,  23  Alb.  L.  J.  216  (1881X 


1623 


§  T46.] 


\ 

PARTIES,  PLEADINGS,  ETC. 


[cn.  XLV. 


The  appointment  of  a  receiver  as  a  remedy  for  the  frauds  or 
iiltra  vires  acts  of  tlie  directors  is  a  piiniGhment  of  the  innocent 
and  complaining  party  for  the  acts  of  the  guilty  party.  As 
■was  well  said  by  an  Illinois  court,  "  In  principle  this  is  very 
much  like  sending  the  creditor  to  jail  because  his  debtor  can- 
not pay  him,  and  is  so  opposed  to  that  spirit  of  justice  which 
pervades  all  the  true  doctrines  of  equity  jurisprudence  that  it 
will  not  bear  discussion."  ^    It  must  be  conceded  that  a  court 


1  Hyde  Park  Gas  Co.  v.  Kerber,  5 
IlL  App.  132  (1879),  where  a  decree 
had  been  made  that  a  receiver  be  ap- 
pointed unless  the  officers  paid  over 
money  received  by  them  in  fraud  of 
corporate  rights.  The  court  set  aside 
the  decree.  United  Elect.  Securities 
Co.  V.  Louisiana  Elect.  Light  Co.,  68 
Fed.  Eep.  673  (1895).  A  court  will 
not  appoint  a  receiver  merely  be- 
cause some  of  the  stockholders  dis- 
approve of  the  management.  Edison 
V.  Phonograph  Co.,  53  N.  J.  Eq.  620 
(1894).  Where  two  directors,  forming 
a  majority  of  the  board,  vote  them- 
selves very  large  salaries,  and  refuse 
information  to  another  director  who 
is  the  only  other  stockholder,  and  re- 
fuse to  declare  dividends,  and  proceed 
to  convey  the  property  of  the  company 
to  another  company  controlled  by 
themselves,  a  court  of  equity  will  set 
aside  the  illegal  conveyances  and  the 
resolutions  authorizing  the  salaries, 
and  will  order  the  books  to  be  opened 
to  the  other  director,  and  will  order 
dividends  to  be  declared.  The  com-t, 
however,  will  not  appoint  a  receiver 
and  enjoin  the  continuance  of  the 
business,  and  will  not  order  a  distri- 
bution of  the  assets  of  the  company. 
Laurel  Springs  Land  Co.  v.  Fougeray, 
50  N.  J.  Eq.  756  (1893).  A  court  has 
no  power  to  appoint  a  receiver  in  a 
stockholder's  suit  for  fraud.  Fischer 
V.  San  Francisco  Super.  Ct.,  110  CaL 
128  (1895);  Stockton  v.  Harmon,  32 
Fla.  312  (1893).  A  receiver  was  de- 
nied in  Dooming  v.  Dunlap  Coal, 
etc.  Co.,  93  Tenn.  221  (1893),  where 


all  the  allegations  of  the  bill  were 
denied  in  the  answer.  A  court  of 
equity  has  no  jurisdiction  to  apjioint 
a  receiver  of  and  dissolve  a  solvent 
beneficial  assessment  association  on 
the  ground  of  mismanagement,  fraud, 
and  the  abuse  of  corporate  powers. 
Mason  v.  Equitable  League,  77  ]Md. 
483  (1893).  A  stockliolder  cannot  have 
a  receiver  appointed  on  the  ground 
of  mismanagement,  where  it  appears 
that  the  company  is  solvent,  and  that 
the  officer  charged  with  fraud  is  re- 
sponsible, and  tliat  the  usual  reme- 
dies are  sufficient.  Rmnney  v.  De- 
troit, etc.  Co.,  74  N.  W.  Rep.  1043 
(Mich.,  1898).  A  receiver  appointed  at 
the  instance  of  minority  stockholders 
without  notice  is  illegally  appointed. 
State  V.  Second,  etc.  Court,  50  Pac. 
Rep.  852  (Mont.,  1897).  The  com-t  re- 
fused to  appoint  a  receiver  in  Mc- 
George  v.  Big  Stone  Gap,  etc.  Co.,  57 
Fed.  Rep.  262  (1893),  and  discharged 
a  temporary  receiver  who  had  been 
appointed  in  a  stockholders'  and 
bondholders'  suit.  In  Lowe  v.  Pio- 
neer Threshing  Co.,  70  Fed.  Rep.  646 
(1895),  the  coiui;  enjoined  the  com- 
pany from  transferring  nearly  all  of 
its  property  to  a  few  stockholders  in 
purchase  of  their  stock,  but  the  court 
refused  to  appoint  a  receiver.  It  is 
no  ground  for  a  receivership  that  the 
business  has  been  largely  contracted, 
no  fraud,  negligence,  or  ultra  vires 
acts  being  shown.  Hunt  v.  American 
Grocery  Co.,  80  Fed.  Rep.  70  (1897). 
Although  there  are  but  two  stock- 
holders, and  the  whole  property  of 


1624 


CH.  XLY.] 


PAKTIESj  PLEADINGS,  ETO. 


[§  ne. 


of  equity  has  poTver  to  appoint  a  receiver  wliere  there  is  such 
fraud  or  dissensions  as  to  make  it  impossible  for  the  corpora- 
tion to  carry  on  its  business  honestly  and  to  the  advantage  of 
its  stockholders,  but  such  receivership  should  be  granted  rarely, 


the  corporation  consists  of  stock  in 
another  corporation,  and  these  two 
stockholders  disagree,  yet  one  of  them 
cannot  have  a  receiver  appointed. 
Wallace  v.  Pierce,  etc.  Co.,  70  N.  W. 
Ecp.  216  (Iowa,  1897).  The  court  stated 
that  it  would  reqxiire  a  very  strong 
case  to  jvistify  the  appointment  of  a 
receiver.    A  receiver  will  not  be  ai>- 
pointed  although  bonds  have  been 
issued  in  excess  of  the  charter  limit, 
and  although  the  directors  are  not 
managing  for  the  best  interests  of 
the  stockholders.     Peatman  v.  Cen- 
terville,  etc.  Co.,  69  N.  W.  Rep.  541 
(Iowa,  1896).     Even  though  the  di- 
rectors have  sold  preferred  stock  held 
by  them  to  the  corporation,  and  taken 
its  notes  therefor,  when  the  corpora- 
tion was  insolvent,  yet  a  receiver 
should  not  be  appointed  at  the  in- 
stance of  a  stockholder.    The  remedy 
is   an    injunction    and   accotmting. 
Empire  Hotel  Co.  v.  INIain,  98  Ga,  176 
(1896).    A  general  creditor  of  an  in- 
solvent coi-poration  cannot  have  a 
receiver  appointed  and  obtain  a  mar- 
shaling of  the  assets.    Neither  can  a 
stockholder.     Steele  Lumber  Co.  v. 
Laurens  Lumber  Co.,  98  Ga.  329  (18961 
A  receiver  will  not  be  appointed. 
New,  etc.  Co.  v.  Blevins,  34  S.  W.  Rep. 
828  (Tex.,  1896);  Wenzel  v.  Palmetto, 
etc.  Co.,  26  S.  E.  Rep.  1  (S.  C.  1896). 
A  receiver  will  not  be  appointed  for 
a  benevolent  society  in  a  suit  by  a 
member  charging  that  illegal  exptil- 
sions  have  been  made,  and  illegal 
elections  held,  even  though  the  ille- 
gal officers  are  rvmning  tlie  business; 
nor  will  a  receiver  be  appointed  al- 
though the  purpose  of  the  company  is 
impracticable,  the  member  bringing 
the  suit  having  been  a  party  thereto. 
Equity  will  not  interfere  although 


the  company  is  wholly  illegal  and 
unauthorized.   The  remedy  is  at  law. 
Crombie  v.  Order  of  Solon,  157  Pa. 
St.  588  (1893).    No  receiver  for  fraud 
of    directors.     People's  Inv.   Co.  i\ 
Crawford,  45  S.   W.  Rep.  738  (Tex., 
1898).     Dissatisfaction   by   the   mi- 
nority with  the  management  of  the 
majority  is  not    sufficient   for  the 
appointment   of  a  receiver  of  the 
corporation.   Fluker  v.  Emporia  City 
R'y,  48  Kan.  577  (1892);    American, 
etc.  Co.  V.  Toledo,  etc.  R'y,  29  Fed. 
Rep.  416  (1886).  A  receiver  will  not  be 
appointed  for  mere  mismanagement. 
The  proceeding  must  comply  with 
the  statutory  provisions  for  dissolu- 
tion of  the  corporation.  Port  Huron, 
etc.  R"y  V.  St.  Clair  Circuit  Judge,  31 
Mich.  456  (1875).    The  court  wiU  not 
appoint  a  receiver  of  a  solvent  corpo- 
ration, even  though  the  president  has 
embezzled  some  of  the  funds  and  is 
disposing  of  his  property,  and  is  ai>- 
parently  sustained  by  a  majority  of 
the  stockholders.    Ranger  v.  Cham- 
pion, etc.  Co.,  52  Fed.  Rep.  609  (1892). 
See  also  Bayles  u  Orne,  Freem  Ch. 
(Miss.)  161  (1841);  People  v.  Conklin, 
5  Hun,  452  (1875);  Hand  v.  Dexter,  41 
Ga.  454  (1871);    Baker  v.  Backus.  33 
III  79  (1863);   People  v.  Albany,  etc. 
R.  R.,  7  Abb.  Pr.  (N.  S.)  290  (1869); 
Belmont  v.  Erie  R'y,  52  Barb.  637 
(1869 1 ;  Overton  u  Memphis,  etc.  R.  R., 
10    Fed.   Rep.   866  (1882);    Smith  v. 
Wejls,  20  How.  Pr.  158  (1860).    Even 
where  two  rival  boards  of  directors 
are  litigating  their  respective  rights, 
the  com-t  cannot  turn  the  corporate 
affairs  over  to  a  receiver.  See  Karnes 
V.  Rochester,  etc.  R.  R.,  4  Abb.  Pr. 
(N.S.)  107  (1867);    Gravenstine's  Ap- 
peal, 49  Pa.  St.  310  (1865),  holding 
that  the  appointment  of  a  receiver  is 


1625 


719.] 


HOW   COEPOBATE    CONTKACTS   AKE   MADE.        [CH.  XLIII. 


is  also  general  manager  and  has  entire  charge  of  the  business 
of  a  corporation,  he  may  bind  it  by  his  contract  to  pay  for  pro- 


and  mill,  and  also  to  open  a  mine  of 
his  own,  all  without  the  knowledge 
of  the  company  or  of  the  employees, 
who  supposed  they  were  working  for 
the  company,  the  company  is  liable 
for  their  wages.  Oro,  etc.  Co.  v.  Kai- 
ser, 4  Colo.  App.  219  (1893).  A  general 
manager  authorized  to  pay  commis- 
sions on  receipts  from  sales  may 
agree  to  pay  commissions  on  sales 
irrespective  of  the  receipts.  Ameri- 
can, etc.  Co.  V.  Mam-er,  10  Atl.  Rep. 
763  (Pa.,  1887).  A  contract  for  a  cor- 
poration by  its  general  superintend- 
ent to  give  a  right  of  way  to  another 
railroad  may  become  binding  by  ac- 
quiescence. Alabama,  etc.  R.  R.  v. 
South,  etc.  R.  R.,  84  Ala.  570  (1887). 
The  president  and  manager  of  a  mill- 
ing company  cannot  purchase  flour. 
Getty  V.  Barnes,  etc.  Co.,  40  Kan.  281 
(1888).  As  to  insurance  agents,  see 
Insurance  Co.  v.  McCain,  96  U.  S.  84 
(1877).  A  treasurer  of  a  corporation 
not  authorized  to  sell  any  part  of  its 
property,  but  who  was  its  sole  man- 
aging agent,  may  pass  a  valid  title 
of  personal  property  to  a  vendee  as 
against  the  claim  of  one  who  levied 
upon  it  under  a  judgment.  Phillips 
V.  Campbell,  43  N.  Y.  271  (1870).  A 
general  manager  has  implied  power 
to  make  a  time  contract  of  employ- 
ment. Stahlberger  v.  New  Hartford 
Leather  Co.,  92  Him,  245  (1895).  A 
general  manager  has  no  power  to  en- 
gage an  employee  for  five  years.  Ca- 
macho  v.  Hamilton,  etc.  Co.,  2  N.  Y. 
App.  Div.  369  (1896).  An  executive 
officer  having  power  to  employ  per- 
sons does  not  thereby  have  power  to 
employ  a  person  for  life.  Carney  v. 
New  York  L.  Ins.  Co.,  19  N.  Y.  App. 
Div.  160  (1897).  The  managing  agent 
may  employ  a  person,  but  not  for  a 
long  time  in  the  future.  Smith  v. 
Cook,  etc.  Assoc,  12  Daly,  304  (1884). 
He  cannot  employ  a  broker.    Alle- 


gheny, etc.  Co.  V.  Moore,  95  Pa.  St. 
412  (1880).  The  general  manager  of 
a  mining  company  has  no  inherent 
power  to  contract  for  it  for  machin- 
ery. Victoria,  etc.  Co.  v.  Fraser,  3 
Colo.  App.  14  (1892).  The  general 
manager  of  a  live-stock  company  has 
implied  power  to  sell  a  part  of  such 
stock.  Hamm  v.  Drew,  83  Tex.  77 
(1892).  Long  acquiescence  in  a  per- 
son's assuming  to  act  for  the  com- 
pany is  the  same  as  expressly  author- 
izing his  action.  Craig  Medicine  Co. 
V.  Merchants'  Bank,  59  Hun,  560 
(1891).  A  general  manager  has  no 
power  to  deed  the  company's  real 
estate,  and  a  purchaser  other  than  a 
bona  fide  one  from  the  vendee  can- 
not retain  the  title.  Allowance  was 
made  for  improvements.  Especially 
is  the  deed  invalid  where  the  gi'antee 
was  a  director.  Schetter  v.  Southern, 
etc.  Co.,  19  Oreg.  192  (1890).  Th© 
president  and  general  manager  of  a 
lumber  company  may  engage  a  law- 
yer for  the  season.  Ceeder  v.  Loud, 
etc.  Co.,  86  Mich.  541  (1891).  Where 
the  president  carries  on  the  negotia- 
tions in  regard  to  a  contract,  and 
also  the  modifications  of  that  con- 
tract, and  is  the  manager  and  in 
control,  and  as  manager  assents  to 
the  modifications,  the  company  is 
boupd  thereby.  Nichols  v.  Scranton 
Steel  Co.,  137  N.  Y.  471  (1893).  A 
general  manager  has  no  power  to 
sell  rights  for  a  particular  state,  and 
a  power  of  attorney  which  has  been 
revoked  is  insufficient  to  be  relied 
upon.  Johnson  v.  Alabama,  etc.  Co., 
90  Ala.  505  (1890).  Where  the  by- 
laws give  the  general  manager  power 
to  sell,  he  has  power  to  sell  the  prod- 
uct for  a  certain  space  of  time  in 
the  futui'e.  Robert,  etc.  Min.  Co.  v. 
Omaha,  etc.  Co.,  16  Colo.  118  (1891). 
For  a  discussion  of  what  constitutes 
the  appointment  of  a  resident  gen- 


1526 


CH.  XLIII.]        HOW    COErOKATE    COXTEACTS   AEE   ilADE. 


[§  719. 


moting-expenses.^  The  by-laws  may  give  to  the  general  manager 
power  to  carry  on  the  business  of  the  company .^  Although  a 
general  manager  exceeds  his  authority  in  agreeing  to  an  arbi- 
tration, yet,  if  the  company  does  not  repudiate  his  agreement 
promptly,  it  is  bound.'  A  managing  director  may,  by  a  by- 
law, be  given  the  powers  of  the  board.  An  outside  party  need 
not  inquire  as  to  whether  his  appointment  was  validly  made, 
and  may  assume  that  such  director  has  the  powers  which  the 
board  might  delegate  to  him.* 

A  railroad  superintendent  may  employ  a  physician  in  cases 
of  accident,^  and  may  offer  rewards  for  the  conviction  of  per- 


eral  agent  by  a  corporation,  see  Rath- 
bun  V.  Snow,  123  N.  Y.  343  (1890).  A 
general  manager  has  no  power  to 
employ  a  person  on  a  long-time  con- 
tract. Smith  V.  Co-operative,  etc. 
Assoc,  12  Daly,  304  (1884).  Where  a 
superintendent  negotiates  sales  and 
the  president  fixes  the  price,  the  cor- 
poration is  responsible  for  the  super- 
intendent's representations.  Decker 
V.  Gutta  Percha,  etc.  Co.,  61  Hun,  516 
(1891). 

1  Oakes  v.  Cattaraugus  Water  Co., 
143  N.  Y.  430  (1894). 

2  Burden  v.  Burden,  8  N.  Y.  App. 
Div.  160  (1896).  A  general  manager 
authorized  to  "take  full  charge  of 
the  company's  business,  and  to  enter 
into  such  negotiations  and  contracts 
as  he  thinks  best  for  the  company's 
interest,"  may  appoint  a  local  agent 
and  empower  him  to  hire  a  barge. 
Tennessee  River  Transp.  Co.  v.  Kavar 
naugh,  101  Ala.  1  (1893). 

3  Central  Trust  Co.  v.  Ashville  Land 
Co.,  72  Fed.  Rep.  361  (1896).  Where 
a  corporation  allows  its  manager  to 
largely  control  its  business,  it  is  liable 
on  a  contract  made  by  him  in  the 
name  of  the  company,  and  in  the 
line  of  its  business.  Carrigan  v.  Port 
Crescent  Imp.  Co.,  6  Wash.  590  (1893). 
So  also  as  to  its  president  and  secre- 
tary. Duggan  V.  Pacific  Boom  Co.,  6 
Wash.  593  (1893),  Where  a  party  who 
buys  a  mine  does  not  object  to  a  lease 


thereof  made  by  the  superintendent 
without  authority,  but  on  the  con- 
trary allows  the  lessee  to  proceed  and 
receives  the  rent,  he  thereby  ratifies 
the  lease.  Bicknell  v.  Austin  Min, 
Co.,  62  Fed.  Rep.  432  (1894). 

<Biggerstaflf  v.  Rowatt's  Wliarf, 
[1896]  2  Ch.  93. 

5  Pacific  R  R  V.  Thomas,  19  Kan. 
257  (1877);  Toledo,  etc.  R'y  v.  Rod- 
rigues,  47  IlL  188  (1868);  Atlantic, 
etc.  R.  R.  V.  Reiser,  18  Kan.  458  (1877). 
Contra,  Stephenson  v.  New  York,  etc. 
R.  R.,  2  Duer,  341  (1853);  Shriver  v. 
Stevens,  12  Pa.  St.  258  (1849),  holding 
that  the  agent  of  a  stage  line  cannot. 
A  yardmaster  cannot  employ  a  phy- 
sician for  the  company.  Marquette, 
etc.  R.  R  V.  Taft,  28  Mich.  289  (1873). 
Nor  an  engineer.  Cooper  v.  New  York, 
etc.  R  R,  6  Hun,  276  (1875).  Nor  a 
station  agent.  Tucker  v.  St.  Louis, 
etc.  R.  R,  54  Mo.  177  (1873);  Cox  v. 
Midland,  etc.  R  R.,  3  Exch.  268  (1849). 
Unless  the  superintendent  ratifies  it 
by  silence  upon  being  notified  thereof. 
Cairo,  etc.  R.  R  v.  Mahoney,  82  ILL 
73  (1876);  Toledo,  etc.  R  R  u  Prince, 
50  ni.  26  (1869).  The  general  man- 
ager cannot  render  the  company  lia- 
ble for  medical  services  rendered  on 
an  occasion  of  a  private  brawL  Dale 
V.  Donaldson  Limiber  Co.,  48  Ark.  188 
(1887);  Wood,  Railw.  Law,  pp.  439- 
444 


1527 


§  T47.] 


PARTIES,  PLEADINGS,  ETO. 


[cn.  XLV, 


§  ViT.  Miscellaneous  remedies. —  It  Las  been  held  and  clearly 
established  that  a  stockholder  cannot  bring  about  the  dissolu- 
tion of  the  corporation  merely  because  the  officers  litlH'c  been 

oflBcers  refused  to  call  meetings  of 
the  directors,  and  refused  to  publish 
tlie  proceedings  as  requireil.  Order 
of  Iron  Hall  v.  Baker,  13-1  Ind.  293 
(1893).  Where,  at  the  instance  of  a 
stockholder,  the  coui't  sets  aside  a 
transfer  of  corporate  property  to  a 
director,  the  stockholder,  however, 
being  obliged  to  repay  the  considera- 
tion, for  which  the  decree  gives  him 
a  lien  upon  the  property  therefor, 
the  stockholder  may  foreclose  such 
lien  and  may  have  a  receiver  of  the 
corporation  appointed.  Ponca  Mill 
Co.  V.  Mikesell,  75  N.  W.  Rep.  4G 
(Neb.,  1898).  A  stockholder  may  have 
a  receiver  appointed  of  a  foreign  cor- 
poration which  is  insolvent  and  is  in 
the  hands  of  a  receiver  in  the  state 
creating  it.  Phoenix,  etc.  Co.  v. 
North  River,  etc.  Co.,  33  Hun,  156 
(1884).  A  receiver  will  be  appointed 
if  the  corporation  is  practically  de- 
funct and  tliere  has  been  a  breach 
of  trust.  Hall  v.  Astoria,  etc.  Co.,  5 
R'y  &  Corp.  L.  J.  413  (Louisville  Ct., 
1889).  See  also,  in  general,  Frostburg 
Bldg.  Assoc.  V.  Stark,  47  Md.  338 
(1877).  In  Haywood  v.  Lincoln  Lvim- 
ber  Co.,  64  AVis.  639  (1885),  the  cor- 
poration was  insolvent.  In  Law- 
rence V.  Greenwich  F.  Ins.  Co.,  1 
Paige,  587  (1839),  the  court  appointed 
a  receiver  to  preserve  the  corporate 
property,  there  having  been  no  oflB- 
cers elected  by  the  stockholders.  In 
Forbes  v.  Memphis,  etc.  R.  R.,  2 
Woods,  323  (1872);  S.  C,  9  Fed.  Cas. 
408,  a  receiver  was  appointed  upon 
default  of  the  defendants  to  answer, 
the  bill  being  filed  by  a  stockholder, 
a  bondholder,  and  the  trustee  for  the 
bondholders  on  behalf  of  themselves 
and  all  other  stockholders  and  bond- 
holders to  prevent  the  directors  of 
the  insolvent  company  from  fraud- 
ulently disposing    of  the  property. 


point  another  at  the  instance  of  tlie 
controlling  stockholders  who  are 
charged  with  fraud,  where  tlie  re- 
ceiver's management  has  been  able 
and  impartial.  Street  v.  Maryland 
Central  Ry,  58  Fed.  Rep.  47  (1893). 
A  receiver  was  appointed  in  a  stock- 
/  holder's  suit  in  Aiken  v.  Colorado 
River  Irr.  Co.,  72  Fed.  Rep.  591  (1890), 
where  it  was  charged  that  the  con- 
trol liE^d  been  obtained  by  spurious 
stock  and  the  funds  had  been  di- 
verted. Where  an  improvement  com- 
pany and  a  development  company 
have  practically  the  same  officers, 
and  the  business  is  conducted  largely 
as  one  concern,  and  the  real  estate 
involved  is  being  sold  for  taxes  and 
judgments  obtained,  and  the  ac- 
counts are  not  properly  kept  and  the 
funds  misapplied,  a  stockholder  of 
the  latter  company  may  have  a  re- 
ceiver appointed,  it  being  shown  that 
the  officers  are  so  implicated  in  the 
confusion  that  they  will  not  properly 
conduct  the  business.  Bridgeport 
Development  Co.  v.  Tritsch,  110  Ala. 
274  (1895).  Where  a  promoter  to 
whom  nearly  the  entire  stock  has 
been  issued  sells  a  part  of  it  on  the 
fraudulent  representation  that  the 
stock  belongs  to  the  company,  and 
then  causes  the  company  to  be  wound 
up  and  himself  to  be  released  from 
certain  subscriptions,  and  the  prop 
erty  to  be  sold  by  a  trustee  named 
by  him,  the  court  will  appoint  a  re- 
ceiver at  tlie  instance  of  the  party 
so  defrauded,  for  the  purpose  of  re- 
covering back  the  property  of  the 
company.  Du  Puy  v.  Transportation, 
etc.  Co.,  83  Md.  408  (1896).  A  policy- 
holder in  a  mutual  benefit  associa- 
tion may  have  a  receiver  appointed 
where  it  is  alleged  that  the  officers 
have  converted  three-quarters  of  the 
assets  to  their  own  use,  and  that  the 


1628 


CH.  XLV.J 


PARTIES,  PLEADINGS,  ETC. 


[§  n7. 


guilty  of  a  breach  of  trust.*  Kor  can  lie  defeat  an  action  for 
his  subscription  by  alleging  such  a  defense.^  There  are  various 
other  remedies  and  rules  which  govern  this  subject.' 


Where  there  are  but  two  stockhold- 
ers and  one  dies,  and  his  administra- 
tor takes  possession  of  the  coi-porate 
property  as  though  it  belonged  to  the 
estate,  the  other  stockholder  may 
have  a  receiver  appointed.  Re  Bel- 
ton,  47  La.  Ann.  1G14  (1895).  The 
court  may  appoint  a  receiver  to  pre- 
vent waste  and  destruction.  Hous- 
ton, etc.  Co.  V.  Drew,  36  S.  W.  Rep. 
803  (Tex.,  1896);  Stevens  v.  South, 
etc.  Co.,  47  Pac.  Rep.  81  (Utah,  189G). 
Where  the  stockholder  alleges  that 
the  president  is  fraudulently  con- 
tracting a  debt  to  himself,  and  is 
about  to  sell  out  the  whole  property 
illegally,  a  receiver  will  be  appointed. 
Stewart  v.  Belt,  19  S.  Rep.  957  (:\liss., 
1896).  A  receiver  may  be  appointed 
under  the  New  York  statutes  in  a 
stockholder's  action  for  fraud  on  the 
part  of  the  directors.  Halpin  v.  Mut- 
ual Brewing  Co.,  91  Him,  220  (1895). 
In  Duncan  v.  Treadwell  Co.,  82  Hun, 
376  (1894),  the  court  upheld  a  dis- 
charge of  a  receiver  appointed  by 
reason  of  directors'  wrong  doing, 
new  directors  having  Leen  elected 
since  the  ai)pointment.  Where  the 
majority  take  all  the  profits,  keep 
false  books,  buy  a  worthless  fran- 
chise, and  mortgage  the  coi'porate 
property  in  order  to  wreck  the  cor- 
poration, a  receiver  will  be  appointed 
pending  suit  to  cancel  the  mortgage. 
State  V.  Second  Judicial,  etc.  Coui-t, 
15  Mont.  324  (1895).  A  receiversliip 
in  one  state  in  a  suit  between  claim- 
ants for  office  does  not  prevent  a  re- 
ceivership in  another  state  in  behalf 
of  the  bondholders  to  take  charge  of 
the  property  in  such  latter  state. 
Schmidt  v.  Mitchell,  98  Ky.  218  (1895). 
The  appellate  court,  in  Florida  Constr. 
Co.  V.  Young,  59  Fed.  Rep.  721  (1892),  re- 
fused to  reverse  an  order  in  an  action 
brought  by  stockholders  in  a  con- 

16 


struction  company  for  an  accounting 
between  the  company  and  a  railroad 
company,  and  a  disti'ibution  of  the 
assets  of  the  former,  although  the 
order  appointed  a  receiver  of  the  for- 
mer and  gi-anted  an  injunction.  See 
aLso  g  684,  supra.  As  to  the  appoint- 
ment of  a  receiver  for  the  purpose  of 
distributing  the  assets,  see  §  629, 
supra. 

1  See  §  629,  supra.  A  stockholder's 
prayer  for  relief  that  the  corporation 
be  dissolved  and  the  assets  distrib- 
uted because  a  director  has  sold  prop- 
erty to  it  at  an  overvaluation  will  be 
denied.  Tutwiler  v.  Tuskaloosa,  etc. 
Co.,  89  Ala.  391  (1889).  Where  a  cor- 
poration has  abandoned  its  author- 
ized business  and  engaged  in  another, 
it  will  be  wound  up.  This  is  differ- 
ent from  a  case  where  the  directors 
have  merely  and  incidentally  com- 
mitted ultra  vires  acts.  JRe  Crown 
Bank,  L.  R.  44  Ch.  D.  634  (1890). 

2  See  §  187,  supra;  also  Clietlain  v. 
Republic  L.  Ins.  Co.,  86  111.  220  (1877); 
South  Georgia,  etc.  R  R.  u  Ayres,  56 
Ga.  230  (1876).  Nor  can  the  stock- 
holder enjoin  a  calk  Ex  parte  Booker, 
18  Ark.  338  (1857).  If  an  illegal  con- 
solidation is  set  aside,  the  stockhold- 
ei^s  of  the  new  company  may  recover 
back  the  amount  paid  in  by  them. 
Be  Bank  of  Hindiistan,  L.  R.  16  Eq. 
417  (1873). 

3  Where  money  is  recovered  and  is  to 
be  distributed  among  the  stockliold- 
ers,  see  Pacific  R'y  of  Mo.  v.  Cutting, 
27  Fed.  Rep.  638  (188(f).  The  corpora- 
tion may  appeal  from  the  judgment. 
Sheridan  v.  Sheridan  Electric  L.  Co., 
38  Hun,  396  (1886).  Even  though  the 
plaintiff  proves  fraud,  yet  if  the  find- 
ings are  not  full  enough  to  sustain 
the  judgment,  the  higher  court  will 
reverse  a  judgment  in  the  plaintiff's 
favor.    Beach  v.  Cooper,  72  CaL  99 

29 


§  748.] 


PAETIES,  PLEADINGS,  ETC. 


[cn.  XLV. 


§  748.  The  complaining  stocMoJder  controls  the  conduct  of 
the  suit —  Costs  and  disbursements  —  Similar  suits  elsewhere. — 
It  is  a  principle  of  equity  practice,  when  a  person  brings  a  suit 
in  behalf  of  himself  and  such  others  as  may  wish  to  come  in 
who  are  similarly  situated,  that  the  complaining  stockholder 
controls  the  case  and  may  continue,  compromise,  abandon,  or 
discontinue  it  at  his  pleasure.*  In  case  the  suit  is  successful 
the  complaining  stockholder  is  entitled  to  have  his  costs  and 
attorney's  fees  paid  by  the  corporation.^ 

Judgment  rendered  in  one  stockholder's  suit  is  a  bar  to  a 
similar  suit  by  another  stockholder,  even  though  the  latter 
commenced  his  suit  before  judgment  was  rendered  in  the  for- 
mer.3  ^  stockholder  may  institute  a  suit  although  there  is 
already  one  pending  in  another  court  at  the  instance  of  another 


(1887).  Before  an  accounting  is  or- 
dered the  fact  of  misapplication  must 
be  proved.  Stokes  v.  Stokes,  91  Hun, 
G05  (1895).  Pledgees  of  a  majority  of 
the  corporate  stock  who,  by  voting 
their  stock,  cause  men  of  their  choice 
to  be  elected  directors,  are  not  liable 
for  the  misconduct  of  such  direct- 
ors. Higgins  V.  Lansingh,  154  IlL  301 
(1895). 

1 "  The  plaintiff,  as  he  acts  upon  his 
ovvrn  mere  motion  and  at  his  own  ex- 
pense, retains  (as  in  other  cases)  the 
absolute  dominion  of  the  suit  until 
decree,  and  may  dismiss  the  bill  at 
his  pleasure.  After  deci'ee,  however, 
he  cannot,  by  his  conduct,  deprive 
other  persons  of  the  same  class  of  the 
benefit  of  the  decree,  if  they  think  fit 
to  prosecute  it."  1  Daniells,  Cli.  PI. 
(6th  Am.  ed.)  244;  Brinckerhoff  v. 
Bostwick,  99  N.  Y.  185,  194  (1885); 
Allen  V.  New  Jersey,  etc.  R.  R.,  49 
How.  Pr.  14  (1875) ;  Tremain  v.  Guard- 
ian, etc.  Ins.  Co.,  11  Hun,  286  (1877), 
allowing  discontinuance,  and  review- 
ing cases.  See  also  the  valuable 
briefs  in  this  case.  But  see  Seaton 
V.  Grant,  L.  R.  2  Ch.  459  (1867);  and 
see  Salisbury  v.  Binghamton  Pub.  Co., 
85  Hvm,  99  (1895),  refusing  to  allow 
a  creditor  to  discontinue.  In  Bel- 
mont V.  Erie  R'y,  52  Barb.  637  (1869), 


the  court  held  that  the  other  stock- 
holders could  intervene  in  the  man- 
agement of  the  case.  If  the  guilty 
directors  settle  with  the  complaining 
stockholder  by  paying  him  out  of  the 
coriDorate  treasury,  the  corporation 
may  subsequently  recover  back  the 
money  so  paid.  Erie  R'y  v.  Vander- 
bilt,  5  Hun,  123  (1875).  See  also  Derby 
V.  Yale,  13  Hun,  273  (1878).  The  stock- 
holder who  sues  may  discontinue  or 
go  on.  Mattison  v.  Demarest,  1  Rob. 
(N.  Y.)  717  (1863).  Cf.  Tliom-on  v. 
East  Tennessee,  etc.  Ry,  38  Fed.  Rep. 
673  (1889);  Innes  v.  Lansing,  7  Paige, 
583  (1839).  The  suit  stops  if  the  com- 
plaining stockliolder  is  paid.  Scarth 
V.  Chadwick,  14  Jur.  300  (1850).  After 
other  creditors  have  come  in  as  par- 
ties plaintiff,  the  original  plaintiff 
cannot  dismiss  the  suit  except  with 
their  consent.  Belmont,  etc.  Co.  v. 
Columbia,  etc.  Co.,  46  Fed.  Rep.  336 
(1891).    See  27  N.  Y.  App.  Dir.  180. 

2  See  §  879,  infra. 

3Willoughby  v.  Chicago,  etc.  Co., 
50  N.  J.  Eq.  656  (1892).  Where  two 
suits  for  the  same  pui-pose,  one  by  a 
stockholder  and  one  by  the  corpora- 
tion itself,  are  pending  in  different 
states,  the  first  decision  will  be  fol- 
lowed in  the  other  state,  although 
the  suit  in  the  latter  state  was  com- 


1630 


CH.  XLV.] 


PAKTIES,  PLEADINGS,  ETC 


[§§  Y49,  750. 


stockholder,  bearing  on  the  same  question,  but  after  judgment 
in  one  case  the  other  cases  cease.^ 

Where  the  company  itself  has  already  brought  suit  on  a 
cause  of  action  and  has  been  defeated,  a  stockholder  cannot 
bring  suit  on  the  same  cause  of  action  on  behalf  of  the  corpo- 
ration, even  though  the  former  case  was  decided  in  another 
state.^ 

§  Y49.  No  contribution  among  the  directors. —  There  is  no 
contribution  among  directors  guilty  of  a  breach  of  trust  for 
which  a  part  are  held  liable.^  A  director  cannot  claim  a  set-off,* 
or  banlo-uptcy,  where  he  has  been  guilty  of  fraud.* 


B.    SUITS   BY  OS  AGAINST  THE  CORPORATION  IN  GENERAL SERVICE 

AND   JURISDICTION. 

§  Y50.  The  discretion  of  the  directors  in  refusing  to  insti- 
tute or  to  difend  an  action  involving  corpoi'ate  interests  is  not 
generally  interfered  ivitli  —  Intervention  hg  stoclholders. —  It 
frequently  happens  that  the  corporation  has  a  cause  of  action 

Lansing,  7  Paige,  583  (1839).  As  to 
demurrer  on  the  ground  that  another 
suit  is  i)ending  for  the  same  relief, 
see  Zebley  v.  Farmers'  L.  &  T.  Co., 
139  N.  Y.  461  (1893).  A  corporate  cred- 
itor's suit  in  equity  in  behalf  of  him- 
self and  all  others  to  enforce  the 
stockholders'  statutory  liability  does 
not,  even  though  it  goes  to  a  decree, 
prevent  other  creditors  filing  a  sub- 
sequent bill  for  the  same  purpose. 
Palmer  v.  Woods,  149  IlL  146  (1894). 

2  Alexander  v.  Donohoe,  68  Hun, 
131  (1893);  aff'd,  143  N.  Y.  203  (1894). 

3 Wilkinson  v.  Dodd,  40  N.J.  Eq. 
123  (1885);  Ervin  v.  Oregon,  etc.  Nav. 
Co.,  20  Fed.  Rep.  577  (1884);  Peck  v. 
Ellis,  2  Johns.  Ch.  131  (1816).  See 
Power  V.  O'Connor,  19  W.  R.  923 
(1871).  In  Lingard  v.  Bromley,  1  Ves. 
&  B.  114  (1812),  contribution  was  en- 
forced between  assignees  in  bank- 
ruptcy, one  of  whom  had  improperly 
paid  a  loss  with  the  concurrence  of 
the  others.     In  Ramskill  v.  Edwards. 


menced  first,  unless  there  is  collusion. 
Memphis,  etc.  R.  R.  v.  Grayson,  88 
Ala.  572  (1889). 

1  Brinckerhoff  v.  Bostwick,  99  N.  Y. 
185,  194  (1885).  But  if  the  company 
has  instituted  a  suit  a  stockholder 
cannot.  Memphis  v.  Dean,  8  Wall.  64 
(1868);  Black  v.  Huggins,  2  Tenn.  Ch. 
780  (1877).  See  also,  as  to  who  may  be 
a  complainant  herein,  Green's  Brice, 
Ultra  Vires  (2d  ed.),  649.  In  Dann- 
meyer  v.  Coleman,  11  Fed.  Rep.  97 
(1882),  the  court  queries  whether  each 
stockholder  may  institute  a  separate 
suit  herein.  The  party  with  whom 
the  alleged  illegal  contract  was  made 
cannot  sustain  a  bill  in  equity  to  pre- 
vent a  multiplicity  of  stockholders' 
suits.  Manhattan  R'y  v.  New  York 
Elev.  R  R.,  29  Hun,  309  (1883).  Al- 
though a  creditor  has  brought  suit 
in  behaK  of  himself  and  others,  yet 
another  creditor  may  institute  an- 
other similar  suit.  After  judgment 
in  one,  the  other  ceases.    Innes  v. 


*  Re  Anglo-French  Co-op.  Soc,  L.  R.        5  Emma  Min.  Co.  v.  Grant,  L.  R.  17 
21  Ch,  D.  492  (1882).  Ck  D.  122  (1880). 

1631 


§  T50.] 


PARTIES,  PLEADINGS,  ETC. 


[cn.  XLV. 


against  a  third  party  which  the  directors  think  best  not  to  press, 
or  that  the  corporation  is  sued  and  the  directors  think  best  not 
to  defend,  or,  where  an  action  is  pending,  the  directors  decide 
to  compromise  the  matter.  The  judgment  of  the  directors 
may,  in  the  opinion  of  a  stockhokler,  be  erroneous,  and  yet  it 
cannot  be  controlled  or  changed  by  the  stockholders  except  by 
refusing  to  re-elect  the  directors  to  office.  Tlie  stockholder 
cannot  go  into  court  and  attempt  to  change  the  policy  of  the 
directors  as  regards  the  management  of  the  suit.'  A  stock- 
holder cannot  control  the  discretion  of  the  directors  as  to 
wlaether  to  bring  a  suit  or  not.^  A  stockholder  cannot  bring 
a  suit  to  recover  for  goods  sold  by  the  corporation.  The  cor- 
poration is  the  proper  party  to  sue.'    In  general,  a  corporation 


L.  R.  31  Ch.  D.  100  (1885),  contribu- 
tion was  enforced  against  a  director 
who  subsequently  ratified  an  unau- 
thorized loan  which  another  director 
made  and  was  held  responsible  for. 
■  An  executor  of  a  deceased  director 
was  also  held  liable.  A  director  who 
objects  and  protests  is  not  liable. 

1  These  principles  of  law  follow 
necessarily  from  the  fact  that  the 
management  and  policy  of  tlie  cor- 
poration are  determined  and  con- 
trolled by  the  directors  and  not  by 
the  stockholders.  The  only  cases 
wherein  the  stockliolders  may  inter- 
fere are  cases  where  the  directors 
are  guilty  of  fraud,  ultra  vires  acts, 
or  gross  negligence  in  protecting  the 
corporate  interests. 

"  There  may  be  claims  against  di- 
rectors; there  may  be  claims  against 
officers;  there  maybe  claims  against 
debtors;  there  may  be  a  variety  of 
things  which  a  compan5r  may  well 
be  entitled  to  complain  of,  but  which, 
as  a  matter  of  good  sense,  they  do 
not  think  it  right  to  make  tlie  sub- 
ject of  litigation;  and  it  is  the  com- 
pany, as  a  company,  which  has  to 
determine  whether  it  will  make  any- 
thing that  is  wrong  to  the  company 
a  subject-matter  of  litigation,  or 
whether  it  wiU  take  steps  itself  to 
prevent  the  wrong  from  being  done." 

16: 


MacDougall  v.  Gardiner,  L.  R  1  Cli. 
D.  13  (1875).  See  also  15  Fed.  Rep. 
3G0,  nota  Even  a  majority  of  the 
stockholders  cannot  go  into  court 
and  have  appeals  dismissed  where 
the  directors  order  them  to  be  con- 
tinued. Railway  Co.  v.  Ailing,  99 
U.  S.  463  (1878).  "  Questions  of  policy 
of  management,  of  expediency  of 
contracts  or  action,  of  adequacy  of 
consideration  not  grossly  dispropor- 
tionate, of  lawful  appropriation  of 
corporate  funds  to  advance  corpo- 
rate interests,  are  left  solely  to  the 
lionest  decision  of  the  directors,  if 
their  powei-s  are  without  limitation 
and  free  from  restraint.  To  hold 
otherwise  would  be  to  substitute  the 
judgment  and  discretion  of  others 
in  the  place  of  those  determined  on 
by  the  scheme  of  incorporation. "  EI- 
lerman  v.  Chicago  Jvmction,  etc.  Co., 
49  N.  J.  Eq.  217  (1891).  The  discre- 
tion of  the  directors  cannot  be  ques- 
tioned by  the  stockholders.  Edison 
V.  Edison  United  Phonograph  Co.,  52 
N.  J.  Eq.  G20  (1894).  See  also  §  684, 
siqjra. 

2  La  Grange  v.  State  Treasurer,  24 
Mich.  468  (1872). 

3  Cutshaw  V.  Fargo,  8  Ind.  App.  691 
(1893).  Stockholdex-s  cannot  bring 
suit  in  behalf  of  the  company  to  set 
aside  a  deed  on  the  groxmd  that  the 


CH.  XLV.] 


PAHTIES,  PLEADINGS,  ETC. 


[§  T50. 


represents  and  binds  tlie  shareholders  in  bringing  and  defend- 
ing suits  which  involve  the  rights  and  obligations  of  the  corpo- 
ration, and  binds  them  as  fully  as  in  the  making  of  contracts.^ 
Thus,  it  is  not  for  the  stockholder  to  take  out  an  appeal  or 
certiorari  which  the  corporation  does  not  take  out;^  nor  brino- 
an  action  against  other  corporate  agents  for  injury  and  loss  to 
the  corporation."  The  great  case  of  Dodge  v.  Woolsey,^  how- 
ever, was  on  the  very  point  now  under  discussion,  and  it  was 
decided  under  the  facts  of  that  case,  where  the  corporation  re- 
fused to  defend  itself  against  an  illegal  tax,  that  a  stockholder 
of  the  corporation  might  do  that  which  the  corporation  should 
have  done.^  It  is  witliin  the  power  of  the  directors  to  compro- 
mise a  pending  lawsuit  by  or  against  the  corporation,  and  a 
stockholder  cannot  control  the  directors'  decision.^ 


directors  neglect  to  bring  the  suit, 
where  the  matter  in  dispute  is  being 
litigated  in  another  form.  Bissell  v. 
Taylor,  7  Wash.  324  (1893). 

1  Farnum  v.  Ballard,  etc.  Shop,  66 
Mass.  507  (1853);  Oglesby  v.  Attrill, 
105  U.  S.  605  (1881) ;  Came  v.  Brigham, 
39  Ma  35  (1854);  Lane  r.  Weymouth 
School  Dist.,  51  Mass.  463  (1845);  Gra- 
ham V.  Boston,  etc.  R.  R.,  118  U.  S. 
161  (1886).  affirming  14  Fed.  Eep.  753 
(1883).  It  has  been  held  that  the  mi- 


<  18  How.  331,  345  (1855),  where  the 
court  said:  "Now,  in  o\ir  view,  the 
refusal  upon  the  part  of  the  directors, 
by  their  own  showing,  partakes  more 
of  disregard  of  duty  than  of  an  error 
of  judgment.  It  was  a  non-perform- 
ance of  a  confessed  official  obliga- 
tion, amounting  to  what  the  law 
considers  a  breach  of  trust,  though  it 
may  not  involve  intentional  moral 
delinquency."  See  also  Memphis,  etc. 
Co.  V.  Williamson,  9  Heisk.  (Tenn.)  314 


nority  bringing  suit  against  a  third    (1872),  where  suit  was  brought  on  the 


person  to  enforce  a  right  which  the 
corporation  ought  to  enforce  must 
make  the  corporate  officers  co-defend- 
ants. Slattery  v.  St.  Louis,  etc.  Co., 
91  Mo.  217  (1886).  But  see  ;i  738,  mpra. 
A  stockholder  cannot  appeal  from 
a  decree  against  the  company.  Ex 
varte  Cutting,  94  U.  S.  14  (1876). 
Stockholders  are  not  entitled  to  no- 
tice of  the  suit.  Peirce  v.  Somers- 
worth,  10  N.  H.  369  (1839). 

2  Silk  Mfg.  Co.  V.  Campbell,  27  N.  J. 
L.  539  (1859).  Under  the  statute  of 
Ohio  a  stockholder  may  sometimes 
appeal  where  the  corporation  does 
not.  Henry  v.  Jeanes,  47  Oliio  St.  116 
(1890). 

3  Forbes  v.  AVhitlock,  3  Edw.  Ch. 
446  (1841).  See  also  Quincy  v.  Steel, 
120  U.  S.  241  (1887). 


103 


1633 


bond  which  the  plaintiff  in  Memphis 
V.  Dean,  8  Walk  64  (1868),  gave  in  ob- 
taining an  injunction. 

5  See  also  Park  v.  Petroleum  Co.,  25 
W.  Va.  108  (1884);  S.  C,  26  W.  Va. 
486  (1885). 

6  It  cannot  be  contended  that  the 
directors  of  a  corporation  do  not  pos- 
sess authority,  acting  in  good  faith 
and  in  the  exercisaof  their  best  judg- 
ment, to  settle  a  pending  action,  or 
that  the  settlement  is  not  binding 
on  their  stockholders,  even  though  it 
may  subsequently  appear  that  they 
failed  to  secure  the  best  terms  to 
which  the  corporation  might  have 
been  entitled."  Donohoe  v.  Mariposa, 
etc.  Co.,  66  CaL  317,  319  (1S85).  See 
also  Shawhan  v.  Zinn,  79  Ky.  300 
(1881).    The  board  of  directors  may 


§  750.]  PAETIES,  PLEADINGS,  ETC.  [CH.  XLV. 

Even  though  a  contract  is  of  doubtful  validity,  the  corpora- 
tion may  compromise  the  claim.*  A  stockholder  cannot  sue  to 
enjoin  a  person  from  slandering  the  title  of  property  belonging 
to  the  corporation.-  A  stockholder  in  a  railroad  company  may 
file  a  bill  to  enjoin  an  unreasonable  reduction  of  the  rates  made 
by  act  of  the  legislature;'  and  a  stockholder  may  enjoin  his 
company  from  paying  an  illegal  income  tax.*  A  stockholder 
may  enjoin  a  rival  company  from  appropriating  the  right  of 
way  and  property  of  his  own  company,  where  a  majority  of  the 
directors  of  the  latter  are  allowing  these  acts  to  be  done.'  A 
stockholder  may  bring  suit  in  behalf  of  the  corporation  to  com- 
pel the  president  to  pay  his  subscription,  where  the  president  is 
in  control  of  the  company  and  refuses  to  pay  such  subscription.® 

It  has  been  held  that  a  stockholder  may  bring  suit  on  behalf 
of  the  corporation  to  remove  a  cloud  from  the  corporate  title 
to  real  estate,^  and  that  a  stockholder  may  sue  for  the  corpora- 
tion to  compel  delinquent  stockholders  to  pay  in  their  unpaid 
subscriptions.^  In  one  case  it  has  been  held  that  where  there 
is  a  controversy  among  the  stockholders  as  to  how  many  direct- 
ors one  of  the  stockholders  —  a  municipality  —  is  entitled  to,  a 
stockholder  may  file  a  bill  to  settle  it,  since  the  corporation  is 

compromise    claims   and    lawsuits.  ^gmyth   v.   Ames,   169  U.   S.   466 

New  Albany  v.  Burke,  11  WalL  96  (1898). 

(1870);  First  Nat.  Bank  v.  National  « Pollock  v.  Farmers' L.  &  T.  Co., 

Exch.  Bank,  92  U.  S.  132  (1875),  aff'g  157  U.  S.  429  (1895);  S.  C,  158  U.  S. 

39  Md.  600;  Pneumatic  Gas  Co.  v.  601. 

Berry,  113  U.  S.  332  (1885) ;  Frankfort  5  Weidenfeld  v.  Sugar  Run  R  R,  48 

Bank  v.  Jolmson.  34  Me.  490  (1844);  Fed.  Rep.  615  (1893). 

Seeley  v.  San  Jose,  etc.  Co.,  59  CaL  23  «  No  request  to  directors  is  neces- 

(1881).    The  sureties  of  a  corporate  sary  in  such  a  case.    Knoop  v.  Bohm- 

treasurer  are  liable  for  the  deficiency  rich,  49  N.  J.  Eq.  83  (1891).    If  a  trustee 

existing  after  the  compromise  by  the  who  holds  land  for  the   benefit  of 

corporation   of  a  claim  which  the  a  corporation  commits  a  breach  of 

treasurer  illegally    created.      Good-  trust,  any  stockholder  may  cause  him 

year,  etc.  Co.  v.  Caduc,  144  Mass.  85  to   be  removed.    Fisk  v.   Patton,  7 

(1887).  Utah,  399  (1891).    The  president  may 

1  Farmers',  etc.  Co.  v.  Meese,  69  N.  institute  a  suit  to  compel  a  majority 
W.  Rep.  113  (Neb.,  1896).  An  adjust-  of  the  board  of  directors  to  accoimt 
ment  of  a  claim  by  the  board  of  di-  for  fraud,  even  though  they  are  op- 
rectors  is  binding  on  the  stockhold-  posed  to  the  suit.  Recamier  Mfg.  Co. 
ers  unless  fraud  and  bad  faith  are  v.  Seymour,  5  N.  Y.  Supp.  648  (1889). 
shown.  Chambers  u  Chambers,  etc.  7  Baldwin  u  Canfield,  36  Minn.  43, 
Co.,  39  Atl.  Rep.  833  (Pa.,  1898).  56  (1879). 

2Langdon  v.  Hillside,  etc.  Co.,  41  8  Wallworth  u.  Holt,  4  MyL  &  C.  619 

Fed.  Rep.  609  (1890).  (1840). 

1634 


OH.  XLT.]  PAETIES,  PLEADINGS,  ETC.  [§  '^^l. 

BOt  bound  to  decide  or  test  the  matter-  "  A  stocktolder  of  a 
ioratio.  is  so  far  a  privy  to  a  judgment  ag--  t^e  corp^ 
ration  that  he  cannot  attack  the  judgment  m  any  col  ateral  pro- 
ceeding " '  By  reason  of  this  principle  of  law  and  the  fm-ther 
Set  thtt  a  multiplicity  of  suits  should  be  avoided  the  courts 
.nU,  in  some  instances,  allow  a  stocldiolder  to  mtervene  n  a 
suit  brought  by  or  against  the  corporation  and  thus  enable  hmi 
to  assist  and  protect  the  corporate  interest  m  such  smt.  This 
snhipct  however,  is  considered  elsewhere."  . 

TC;ule  which  ordinarily  prevents  a  stockholder  from  msh- 
tuting  or  defending  a  suit  against  third  persons  herem  is  clearly 
to  be  distinguished  from  all  other  classes  of  actions  treated  of 
in  the  fourth  part  of  this  work.  The  actions  now  bemg  con- 
sidered  are  those  which  exist  for  or  against  the  corporation  m 
a  multitude  of  cases,  and  which  are  of  daily  occurrence  to  all 
great  corporations.  They  are  actions  not  invo  ving  frauds  or 
ultra  vires  acts  of  the  directors,  but  involve  at  the  most  only  a 
neo-lect  of  the  directors  to  begin  or  defend  smts. 

There  is  a  class  of  cases  which  are  midway  between  these  two 

classes.  This  third  class  involves  a  "^glf;- """^f, '^"'it™!!! 
defend  a  suit  against  the  corporation,  and  the  further  fact  that 
the  defense  is  not  made  on  account  of  the  fraud  and  collusion 
of  the  directors  with  the  complainants  m  the  suit.  This  gen- 
erally happens  in  foreclosures  of  mortgages  on  the  property  of 
the  corporation,  a  subject  which  is  considered  elsewhere. 

S  761.  Suits  T>y  and  against  corporations  mnstU  in  corpora^ 
„„,„<, -It  is  stated  by  Blackstone  that  one  of  the  distinguish- 
in..  features  of  a  corporation  is  that  it  may  sue  and  be  sued  m 
its°  corporate  name.  This  is  an  elementary  prmciple  of  law. 
Consequently,  the  stockholders  are  not  to  be  made  parties  in 
suits  against  the  corporation.'  Moreover,  a  smt  by  or  agamst 
the  corporation  must  be  by  or  against  it  in  its  corporate  name, 
and  not  in  the  names  of  its  oiBcers.'    The  president  of  the  com- 

.  Wheeling  v.  Baltimore.  1  Hughes,       »  Kelley  --J^^'VVi  Cent.  E.  E., 
on  MRfioi- S  C   29  Fed.  Cas.  914  1  Fed.  Eep.  564  (1880). 

Staai  Fovmdry,  etc.  Works  v.       •  An  action  against  an  mdmdual^ 

Sizi  nSorrisr^^rgh 


§  T52.] 


PAKTiES,  PLEADINGS,  ETC. 


[Cn.  XLV, 


pany  may  employ  an  attorney  to  bring  suit  or  to  appear  for 
the  company.^ 

§  752.  Service  — Appearance  — Ansiver. —  If  the  suit  is  against 
the  corporation,  service  is  made  upon  it,  not  by  service  upon  a 
stookholder,^  but  upon  the  chief  officer  of  the  corporation  within 
the  jurisdiction.'    "  At  common  law  service  was  made  on  such 


Bank  v.  Van  Eensselaer,  G  Hill,  240 
(1843).  An  action  against  the  stock- 
holders does  not  bind  or  affect  the 
corporation  unless  it  is  made  a  party 
by  name  and  service.  Lillard  v.  Por- 
ter, 3  Head  (Tenn.),  177  (1838).  When 
there  is  no  prayer  for  process  against 
a  corporation  by  its  corporate  name, 
but  only  against  its  officers,  and  the 
body  of  the  bill  does  not  describe  the 
corporation  as  a  party,  the  corpora- 
tion is  not  before  the  court,  though 
it  is  in  the  title.  Verplanck  v.  Mer- 
cantile Ins.  Co.,  2  Paige,  438  (1831). 
An  important  exception  to  this  rule 
arises,  of  course,  where  the  corpora- 
tion refuses  to  sue  and  a  stockholder 
sues  for  it.  See  Paii;  IV  of  this  work 
generally.  Process  running  to  A  as 
president  of,  etc.,  runs  to  A  individ- 
ually, and  the  company  is  not  thereby 
made  a  party,  and  an  amendment 
without  new  service  cannot  cure. 
Plemmons  v.  Southern  Imp.  Co.,  108 
N.  C.  614  (1891).  An  attachment 
or  garnishment  against  "William 
Milnes,  president  Shenandoah,"  etc., 
Kailroad,  is  not  good  as  against  the 
company.  It  is  against  Milnes  as  an 
individual  Fidelity,  etc.  Co.  v.  Shen- 
andoah Valley  R.  R.,  33  W.  Va.  761 
(1890).  A  corporation  may  appeal 
from  an  order  for  the  examination 
of  one  of  its  officers.  Sherman  v. 
Beacon  Const.  Co.,  58  Hun,  143  (1890). 
In  a  suit  to  enjoin  a  corporation  from 
lowering  the  level  of  a  lake,  the  pres- 
ident may  be  joined  as  a  party  de- 
fendant. Cedar  Lake  Hotel  Co.  v. 
Cedar  Creek,  etc.  Co.,  79  Wis.  297 
(1891).  Where  suit  is  brought  against 
a  corporation,  and  its  officers  are 
made  parties  defendant  for  purposes 

16: 


of  discoveiy,  the  latter  are  not  merely 
nominal  i^arties.  Doyle  v.  San  Diego, 
etc.  Co.,  43  Fed.  Rep.  349  (1890). 
Where  an  answer  under  oath  is 
waived,  and  no  discovery  is  sought 
in  an  action  against  a  corporation, 
the  officers  are  not  proper  parties  de- 
fendant. Colonial,  etc.  Co.  v.  Hutch- 
inson Mortgage  Co.,  44  Fed.  Rep.  219 
(1890).  See  also  §  738,  mpra.  Pro- 
cess should  not  run  to  a  person  as 
president  of  a  company.  It  should 
run  to  the  company  itself.  State  v. 
Montegudo,  48  La.  Ann,  1417  (1896). 

^  See  §  716,  supra.  In  a  suit  against 
a  corporation  and  its  president,  both 
parties  are  liable  for  the  fees  of  their 
attorneys.  Hmues  v.  Decatur  Land, 
etc.  Co.,  98  Ala.  461  (1893). 

2Bache  v.  Xashville,  etc.  Soc,  10 
Lea  (Tenn.),  436  (1882);  Lillard  v.  Por- 
ter, 2  Head  (Tenn.),  177  (1858);  De 
Wolf  V.  Mallett,  3  Dana  (Ky.),  214 
(1835).  Service  in  Colorado  by  stat- 
ute may  be  on  a  stockholder  if  there 
is  no  resident  agent.  Service  cannot 
be  avoided  by  a  transfer  of  his  stock 
by  a  stockholder  for  that  purpose 
only.  Colorado  Iron  Works  v.  Sierra 
Grande  Min.  Co.,  15  Colo.  499  (1890). 
See  also  §  758,  notes,  infra. 

3  Service  of  notice  of  attachment 
in  a  garnishment  case  upon  two  of 
the  officers  aiid  directors  of  a  corpo- 
ration has  been  held  sufficient  notice 
to  the  corporation.  Boyd  v.  Ches- 
apeake, etc.  Canal  Co.,  17  ]\Id.  195 
(18G0).  Notice  of  a  motion  for  a  rule 
to  establish  the  election  of  directors 
is  sufficient  if  served  on  the  directors 
whose  election  is  questioned,  and  it 
need  not  be  served  on  the  other  di- 
rectors or  on  the  president.   Ex  parte 


OH.  XLV.] 


PARTIES,  PLEADINGS,  ETC 


[§  T52. 


head  officer  of  a  corporation  as  secured  knowledge  of  tlie  pro- 
cess to  the  corporation."  ^  The  subject  of  service  upon  a  for- 
eign corporation  is  considered  elsewhere.^ 

Generally  the  statutes  of  the  state  specify  the  corporate  offi- 
cers upon  whom  service  may  be  made.  The  corporation  may 
appear  generally,  or  may  appear  specially  for  the  purpose  of 
objecting  to  the  service.^  Formerly  a  corporation  made  com- 
plaint or  answer  in  a  suit  by  attaching  the  corporate  seal  to  the 
bill  of  complaint  or  answer.  But  this  rule  left  the  pleading 
unverified,  and  consequently,  by  statute  now,  it  is  generally 


Holmes,  5  Cow.  426  (1826).  Upon  affi- 
davit that  the  corporation  had  no 
presiding  officer  or  treasurer,  and 
that  the  secretary  had  left  the  coun- 
try, the  court  ordered  service  to  be 
on  the  trustee.  Tom  v.  First  Society, 
etc.,  19  Wend.  25  (1837).  Where  the 
president  and  treasurer  of  a  corpora- 
tion misinform  a  process  server  and 
induce  him  to  serve  process  upon  an- 
other party  which  was  intended  to 
be  served  upon  the  president,  the 
service  is  good  as  against  the  corpo- 
ration. Wilson  V.  California  Wine 
Co.,  95  Midi.  117  (1893).  "  At  common 
law  the  process  against  a  corpora- 
tion could  only  be  served  on  its  head 
or  principal  officer  within  the  juris- 
diction of  the  sovereignty  where  the 
artificial  body  existed."  Young  v. 
Dexter,  18  Fed.  Rep.  201,  208  (1883). 
Service  upon  the  vice-president  is 
good  vmder  a  statute  authorizing 
service  on  the  president  or  other 
head.  Comet,  etc.  Co.  v.  Frost,  15 
Colo.  310  (1890).  Service  upon  one 
who  has  ceased  to  be  president,  di- 
rector, or  other  officer  renders  the 
judgment  void.  Beardsley  v.  John- 
son, 121 N.  Y.  224  (1890).  Even  though 
an  officer  resigns  for  the  purpose  of 
preventing  service  upon  the  com- 
pany, yet,  if  the  resignation  is  ac- 
cepted, service  cannot  be  made  upon 
him.  Sturgis  v.  Crescent,  etc.  Co., 
10  N.  Y.  Supp.  470  (1890).  Service  on 
one  as  secretary,  when  he  never  had 
been  secretary,  is  not  good.    Collier 

1637 


V.  Morgan's,  etc.  R.  R,  41  La.  Ann.  87 
(1889).  Where  the  corporation  had 
suspended  business,  and  the  chair- 
man of  the  directors  was  dead,  the 
court  directed  service  to  be  made  on 
the  deputy  chairman  and  secretaiy 
who  had  last  served  as  such  for  the 
corporation.  Gaskell  v.  Chambers,  26 
Beav.  252  (1858).  Service  on  the  chief 
resident  agent  has  been  held  suffi- 
cient. Newby  v.  Von  Oppen,  L.  R  7 
Q.  B.  293  (1872).  A  notice  of  a  Uen 
served  on  the  secretary  is  sufficient. 
Heltzell  V.  Cliicago,  etc.  R  R,  77  Mo. 
315  (1883).  Service  on  the  president 
is  sufficient.  Chamberlin  v.  Mam- 
moth Min.  Co.,  20  Mo.  96  (1854).  But 
not  on  a  mere  agent.  McCaU  v. 
Byram  Mfg.  Co.,  6  Conn.  428  (1827). 
A  sviit  against  a  supposed  corpora- 
tion is  not  good  against  its  members, 
there  being  merely  a  copartnership. 
Ser\'ice  on  the  general  manager  does 
not  make  him  a  party  defendant. 
Leatherman  v.  Times  Co.,  88  Ky.  291 
(1889).    See  §  758,  infra. 

1  Kansas  City,  etc.  E.  R.  v.  Daugh- 
try,  138  U.  S.  298,  305  (1891). 

2See§g757,  758,  tn/ro. 

'  See  §  758,  infra.  A  corporation, 
like  a  natural  person,  may  appear 
voluntarily  by  attorney,  and  such 
appearance  gives  jurisdiction  to  the 
same  extent  as  if  there  was  actual 
service  of  process.  Att'y-Geru  v. 
Guardian,  etc  Ins.  Co.,  77  N.  Y.  273 
(1879). 


§  Y53.] 


PARTIES,  PLEADINGS,  ETC. 


[CH.  XLV. 


prescribed  tliat  some  officer  of  the  corporation  shall  verify  the 
pleading  for  the  corporation.^  Originally  a  corporation  could 
not  file  an  answer  without  the  corporate  seal  except  by  con- 
sent.^ 

§  753.  Allegation  and  in'oof  of  incorjm ration. —  If  the  cor- 
poration is  plaintiff  it  is  customary  to  allege  that  it  has  been 
and  is  incorporated.'    If  the  defendant  pleads  the  general  issue 


iln  an  answer  by  a  corporation: 
"  The  answer  should  be  made  by  the 
principal  officer  of  the  defendant 
corporation,  who  should  be  able  to 
admit  or  deny  the  facts  charged  and 
interrogated  about,  or  to  state  want 
of  knowledge  clearly  and  truly  as  a 
reason  for  not  doing  either."  Hale  v. 
Continental  L.  Ins.  Co.,  16  Fed.  Rep. 
718  (1883).  An  injunction  against  a 
corporation  is  not  dissolved  by  an 
answer  verified  by  the  present  sec- 
retary, who  became  such  after  the 
acts  occurred,  and  who  verified  that 
his  acts  therein  referred  to  were 
true,  and  that  the  acts  of  others  he 
believed  to  be  true.  Some  ofiicer 
cognizant  of  the  facts  m\ist  verify. 
Fulton  Bank  v.  New  York,  etc.  Canal 
Co.,  1  Paige,  311  (1829).  At  common 
law  a  corporation  answers  by  at- 
taching its  seaL  The  answer  is  not 
evidence,  since  it  is  not  sworn  to. 
If  a  sworn  answer  is  desired,  some 
of  the  officers  or  members  miist  be 
made  co-defendants.  Baltimore,  etc. 
R.  R.  V.  Wheeling,  13  Gratt.  (Va.)  40 
(1855).  In  legal  proceedings  answers 
which,  if  made  by  an  individual, 
should  be  under  oath,  are  made  by 
corporations  under  their  corporate 
seals.  1  Daniell,  Ch.  PL  (6th  Am. 
ed.)  146;  Ransom  v.  Stonington  Sav. 
Bank,  13  N.  J.  Eq.  213  (1860);  Bron- 
son  V.  La  Crosse  R.  R.,  2  WalL  283, 
302  (1863);  Baltimore  &  Ohio  R.  R.  v. 
Gallahue,  12  Gratt.  (Va.)  655  (1855), 
answer  of  garnishee.  See  also  Brum- 
ley  V.  Westchester,  etc.  Soc,  1  Johns. 
Cli.  366  (1815);  Vermilyea  v.  Fulton 
Bank,  1  Paige,  37  (1828);  Bouldin  v. 


Baltimore,  15  Md.  18  (1859);  Union 
Bank  v.  Geary,  5  Pet.  99  (1831); 
Haight  V.  Morris  Aqueduct,  4  Wash. 
C.  C.  601  (1826);  S.  C,  11  Fed.  Cas.  156. 
A  statute  requiring  a  corporation  ta 
obtain  the  consent  of  a  judge  to  in- 
terpose a  defense  to  a  suit  on  a 
promissory  note  before  it  can  inter- 
pose a  defense  is  not  applicable 
where  the  corporation  is  an  indorser 
to  a  note.  Shorer  v.  Times,  etc.  Co., 
119  N.  Y.  483  (1890). 

2Gildersleeve  v.  Wolfe  Island,  e£c. 
Canal  Co.,  3  Ch.  Chamb.  (Can.)  358 
(1871).  It  is  necessary  to  attach  the 
corporate  seal  to  its  answer  to  a  biU 
in  equity.  Frank,  etc.  Co.  v.  U.  S. 
etc.  Co.,  38  Atl.  Rep.  990  (Md.,  1897). 

3  Failure  to  allege  incorporation  is 
cured  by  judgment  where  the  de- 
fendant failed  to  object.  St.  Cecelia's 
Academy  v.  Hardin,  78  Ga.  39  (1887). 
The  following  decisions  have  been 
made:  Incorporation  need  not  be  al- 
leged unless  the  fact  of  its  existence 
enters  into  or  constitutes  a  part  of 
the  cause  of  action.  Holden  v.  Great 
Western  E.  Co.,  72  N.  W.  Rep.  805 
(Minn.,  1897).  A  corporation  plaint- 
iff need  not  allege  that  it  is  a  corpo- 
ration; it  suffices  to  state  in  the 
commencement  of  the  declaration 
the  name  of  the  corporation.  Union 
Cement  Co.  v.  Noble,  15  Fed.  Rep. 
502  (1882);  Smythe  v.  Scott,  124  Ind. 
183  (1890);  Shearer  v.  Peale,  etc.  Co., 
9  Ind.  App.  282(1894);  Exchange  Nat. 
Bank  v.  Capps,  32  Neb.  242  (1891). 
Cf.  1  Barb.  Ch.  Pr.  36,  n.  (foot  p.  44, 
2d  ed.).  In  a  suit  against  a  corpora- 
tion on  a  promissory  note  the  incor- 


1633 


CH.  XLV.] 


PAKTIES,  PLEADINGS,  ETC. 


[§  T53. 


he  admits  the  incorporation  of  the  plaintiff.^     The  fact  of  in- 
corporation is  proved  by  putting  in  evidence  the  certificate  of 


poration  need  not  be  alleged,  since 
the  signature  estops  a  denial  of  incor- 
poration. Griffin  v.  Asheville  Light 
Co.,  Ill  N.  G  434  (1892).  An  exami- 
nation before  trial  may  be  had  to 
ascertain  whether  defendants  are 
proper  defendants  or  whether  they 
are  a  corporation.  Sweeney  v.  Stur- 
gis,  24  Hun,  162  (1881).  An  allega- 
tion of  incorporation  made  once  suf- 
fices for  two  causes  of  action  in  one 
suit.  West  V.  Eureka  Imp.  Co.,  40 
Minn.  394  (1889).  The  complaint  need 
not  allege  whether  the  defendant  is 
a  foreign  or  domestic  corporation. 
Rothchild  v.  Grand  Trunk  R'y,  19 
N.  Y.  Civ.  Pro.  53  (1890).  The  allega- 
tion "  a  corporation  under  the  laws 
of  Iowa  "  is  sufficient.    Savmders  v. 


Sioux  City  Nursery,  6  Utah,  431  (1890). 
Incorporation  must  be  alleged.  Mil- 
ler V.  Pine  Min.  Co.,  2  Idaho,  1206 
(1892);  State  v.  Chicago,  etc.  R'y,  4 
S.  D.  261  (1893).  In  California  an 
averment  of  corporate  existence  is 
necessary  in  every  count  of  a  com- 
plaint against  the  corporation.  Peo- 
ple V.  Central  Pac.  R.  R.,  83  Cal.  393 
(1890).  In  a  libel  in  admiralty  such 
averment  should  be  made.  Sun  Mut. 
Ins.  Co,  V.  Mississippi,  etc.  Co.,  14  Fed. 
Rep.  699  (1882).  In  Perine  v.  Grand 
Lodge,  etc.,  48  Minn.  82  (1892),  where 
an  insurance  policy  was  sued  upon, 
the  court  held  that  it  was  immaterial 
that  the  defendant^was  not  incorpo- 
rated, inasmuch  as  it  had  held  itself 
out  as  a  corporation.    If  the  incorpo- 


1  Bailey  v.  Valley  Nat.  Bank,  127 
m.  332  (1889).  But  see  Oregonian 
R'y  V.  Oregon,  etc.  Co.,  23  Fed.  Rep. 
232  (1885),  holding  tliat  the  defense 
of  no  corporate  capacity  to  sue  in  a 
particular  case  is  raised  by  plea  in 
abatement,  and  the  defense  of  no 
corporate  capacity  at  all  by  a  plea 
either  in  abatement  or  bar.  Cf.  Pull- 
man V.  Upton,  96  U.  S.  328  (1878);  and 
see  Bank  of  Auburn  v.  Weed,  19 
Johns.  300  (1822),  holding  that  the 
plea  of  nul  tiel  corporation  is  not 
good,  and  that  the  general  issue 
should  be  pleaded.  Denial  of  corpo- 
rate existence  of  plaintiff  can  be 
only  by  plea  in  abatement.  Denial 
of  merits  waives  this  defense.  Co- 
nard  v.  Atlantic  Ins.  Co.,  1  Pet.  386 
(1828).  Contra,  U.  S.  Bank  v.  Stearns, 
15  Wend.  314  (1836).  An  answer  of 
nul  tiel  corporation  precedes  an  an- 
swer to  the  merits.  De  facto  exist- 
ence must  then  be  proved.  An  an- 
swer alleging  want  of  parties  raises 
the  question  of  whether  the  corpora- 
tion is  more  than  a  partnership. 
Heaston  v.  Cincinnati,  etc.  R  R.,  16 


Ind.  275  (1861).  A  general  denial  in 
a  suit  in  equity  puts  in  issue  tlie 
corporate  character  of  the  plaintiff. 
Bank  of  Jamaica  v.  Jefferson,  92 
Tenn.  537  (1893).  The  plea  of  general 
issue  does  not  deny  the  corporate  ex- 
istence. Rembert  v.  South  Carolina 
R'y,  31  S.  C.  309  (1889).  A  denial 
upon  information  and  belief  that  the 
plaintiff  is  a  corporation  puts  in  issue 
the  incorporation.  Michigan  Ins. 
Bank  v.  Eldred,  143  U.  S.  293  (1892). 
The  plea  that  the  plaintiff  "  is  not  a 
corporation  duly  authorized  by  law 
to  maintain  this  suit  "  is  a  good  plea 
of  nul  tiel  corporation.  The  burden 
is  on  the  plaintiff  to  prove  corporate 
existence.  Johnson  v.  Hanover  Nat. 
Bank,  88  Ala.  271  (1889).  By  the  New- 
York  code,  the  corporate  existence 
of  a  foreign  corporation  plaintiff  is 
not  put  in  issue  where  the  answer 
does  not  expressly  deny  the  same, 
and  where  the  making  of  the  corpo- 
rate contract  in  question  is  admitted. 
Commercial  Bank  v.  Pfeiffer,  108  N. 
Y.  2^12  (1888). 


1039 


§  T53.] 


PARTIES,  PLEADINGS,  ETC. 


[CH.  XLV. 


incorporation,  the  corporate  minutes  proving  an  organization 
by  a  corporate  meeting,  and  proving  user  of  the  corporate 
name  in  business.' 


ration  is  denied  it  must  be  proved. 
Davis  V.  Nebraska  Nat.  Bank,  70  N.  W. 
Rep.  963  (Neb.,  1897).  In  Massachu- 
setts proof  of  incorporation  need  not 
be  given  unless  the  defendant  within 
a  certain  time  files  a  demand  for 
proof.  Cabana  v.  Holj-oke  Conclave, 
160  Mass.  1  (1893).  Wliere  persons 
sued  as  partners  deny  the  paiiner- 
ship,  the  plaintiff  may  have  an  ex- 
amination before  trial  in  order  to 
ascertain  where  they  were  incorpo- 
rated. Clark  V.  Wilcklow,  75  Hun, 
290  (1894).  In  Colorade  the  appear- 
ance by  a  corporation  as  a  defendant 
admits  its  incorporation.  Ganthier 
Decorating  Co.  v.  Ham,  3  Colo.  App. 
559  (1893).  "The  bringing  of  an  ac- 
tion in  a  name  purporting  to  be  a 
corporate  name  is  aj  sufficient  aver- 
ment of  the  existence  of  the  plaint- 
iff as  a  corporation."  Canandarqua 
Academy  v.  McKechnie,  19  Hun,  62 
(1879).  There  has  been  considerable 
controversy  as  to  whether,  at  com- 
mon law,  a  corporation  plaintiff  need 
allege  that  it  is  incorporated.  See 
Henriques  v.  Dutch  West  India  Co., 
2  Ld.  Raym.  1582  (1727);  Central  Mfg. 
Co.  V.  Hartshorne,  3  Conn.  199(1819); 
Ewing  V.  Robeson,  15  Ind.  26  (I860): 
Zion  Church  v.  St.  Peter's  Church,  5 
Watts  &  S.  (Pa.)  215  (1843):  Vance 
V.  Farmers',  etc.  Bank,  1  Blackf.  80 
(1820);  Emery  u  Evansville,  etc.  R.  R., 
13  Ind.  143  (1859);  O'Donald  v.  Evans- 
ville, etc.  R.  R.,  14  Ind.  259  (1860); 
Rees  V.  Conococheague  Bank,  5  Rand. 
(Va!)  326  (1827);  Jackson  v.  Bank  of 
Marietta,  9  Leigh  (Va.),  240  (1838); 
Farmers',  etc.  Bank  v.  Troy  City 
Bank,  1  Doug.  (Mich.)  437  (1844); 
Lighte  V.  Everett  F.  Ins.  Co.,  5  Bosw. 
716  (1860);  Lewis  v.  Bank  of  Ken- 
tucky, 12  Ohio,  132  (1843);  Mississippi, 
etc.  R.  R.  V.  Gaster,  20  Ark.  455  (1859); 
Bank  of  Utica  v.  Smalley,  2  Cow.  770 


(1824);  Jackson  v.  Plumbe,  8  Johns. 
378  (1811);  Dutchess  Cotton  Mfy.  v. 
Davis,  14  Johns.  238^(1817);  Bank  of 
Michigan  v.  Williams,  5  Wend.  483 
(1830);  Bank  of  Watervilleu  Beltser, 
13  How.  Pr.  270  (1856).  Cf.  Chap- 
man V.  Barrfey,  129  U.  S.  677  (1889), 
to  the  effect  that  the  allegation  is 
necessary  in  the  federal  courts  in 
cases  where  the  jurisdiction  depends 
on  it;  Adams  Exp.  Co.  v.  Harris,  120 
Ind.  73  (1889);  La  Fayette  Ins.  Co.  v. 
Rogers,  30  Barb.  491  (1859).  The  cor- 
poration cannot  demur  on  the  ground 
tliat  incoi-poration  is  not  alleged. 
Adams  v.  Lamson,  etc.  Co.,  59  Hun, 
127  (1891);  Rothschild  v.  Grand  Tnink 
R'y,  14  N.  Y.  Supp.  807  (1891).  Contra, 
Schillinger,  etc.  Co.  v.  Arnott,  14 
N.  Y.  Supp.  326  (1891). 

1  Proof  of  incorporation  may  be  by 
an  exemplified  copy  of  the  charter 
and  evidence  of  user.  A  special  char- 
ter may  be  proved  by 'the  statute 
book.  U.  S.  Bank  v.  Stearns,  15 
Wend.  314  (1836).  Incorporation  may 
be  proved  by  putting  in  evidence 
the  records,  books,  and  minutes  of 
the  company  showing  an  organiza- 
tion in  pursuance  of  the  charter. 
Glenn  v.  Orr,  96  N.  C.  413  (1887).  A 
certificate  of  incorporation,  with  evi- 
dence of  organization  and  user,  and 
of  a  judgment  in  another  case  recov- 
ered by  the  corporation  against  de- 
fendant, is  sufficient  proof  that  plaint- 
iff "  had  in  good  faith  attempted  to 
legally  organize  as  a  corporation,  and 
had  long  acted  as  such,  and  was  at 
least  a  corporation  de  facto,  which  is 
all  that  is  necessary  to  enable  it  to 
maintain  an  action  against  any  one, 
other  than  the  state,  who  has  con- 
tracted with  the  corporation  or  who 
has  done  it  a  wrong."  Baltimore, 
etc.  R.  R.  V.  Fifth  Bapt.  Church,  137 
U.  S.  568  (1891).    Fifty  years'  exist- 


1640 


OH.  XLY.] 


PARTIES,  PLEADINGS,  ETC. 


[§  '^54. 


S  Y54.  Confession  of  judgment- A  corporation  may  confess 
judgment,  but  it  is  doubtful  whether  it  can  be  done  except  by 
order  of  the  board  of  directors.^ 


ence  as  a  corporation  is  a  sufficient 
proof  of  incorporation.  Jeffries  Neck 
Pasture  v.  Ipswich,  153  Mass.  43  (1891). 
It  is  sufficient  to  prove  the  de  facto 
existence  of  the  corporation  defend- 
ant in  a  suit  on  contract    Benesch 
V.  John  Hancock,  etc.  Co.,  11  N.  Y. 
Supp.  348  (1890).    An  act  recognizing 
a  corporation  as  such  is  sufficient 
proof  of  incorporation,     Boykin  v. 
State,  96  Ala,  16  (1892).    If  proof  is 
given  by  plaintiff  that  a  copartner- 
ship existed,  and  the  defense  is  that 
it  was  a  corporation,  the  defendant 
must  prove  that  fact.    Proof  of  a  de 
facto  corporation  is  sufficient  to  meet 
the  plea  of  md  tiel  coi-poratioru    Coz- 
zens  V.  Chicago,  etc.  Co.,  46  N.  E.  Eep. 
788  (III.,  1897).    The  de  facto  incorpo- 
ration of  a  national  bank  may  be 
shown  by  oral  evidence  that  it  is  car- 
rying on  a  genei-al  banking  business 
as  a  national  bank  under  a  certain 
nama    YaUima  Nat  Bank  v.  Knipe, 
6  Wash.  348  (1893).    A  certificate  of 
incorporation  in  another  state  under 
the  court  seal  of  the  state  is  admis- 
sible in  evidence  without  being  ex- 
emplified under  the  federal  statutes. 
U.  S.  Vinegar  Co.  v.  Foehrenbach,  74 
Him,  435  (1893).    Proof  of  the  ffiing 
of  the  certificate  of  incorporation  in 
the  county  clerk's  office  is  sufficient 


proof  of  incorporation  without  proof 
of  the  filing  in  the  office  of  the  secre- 
tary of  stata    Georgeson  v.  Caffrey, 
71  Hun,  472  (1893).   Where  the  stock- 
holders are  sued  as  individuals  for 
the  debts  of  the  company,  it  is  for 
them  to  prove  that  the  coi-poration 
existed.    The  testimony  of  two  per- 
sons that  they  complied  with  the 
laws  and  got  a  charter  is  insufficient, 
it  appearing  that  the  law  required  at 
least  three  incorporators.    The  char- 
ter itself  is  the  best  evidence.    "  A 
mere  feigned  compliance  with  the 
laws  of  the  state  of  which  it  is  claimed 
a  corporation  is  a  citizen  "  is  not  suf- 
ficient, nor  is  the  mere  adoption  of 
the  corporate  name  sufficient    Owen 
V.  Shepard,  59  Fed.  Rep.  746  (1894). 
Although  the  company  had  a  presi- 
dent and  secretary,  this  in  itself  does 
not  raise  a  presumption  of  a  corpora- 
tion. Clark  V.  Jones,  87  Ala.  474  (1888). 
The  production  of  the  corporate  books 
showing  an  election  of  officers  is  suf- 
ficient to  raise  a  presumption  of  the 
existence  of  the  corporation.    Wood 
V.  Jefferson  County  Bank,  9  Cow.  194 
(1828).    "  The  production  of  the  act 
of  incorporation  and  proof  of  user 
imder  it  by  the  corporate  body  afford 
presumptive    proof  in  the  first  in- 
stance of  the  fact  of  incorporation." 


1  A  president  and  treasurer  have  no 
power  to  confess  judgment  for  the 
corporation.     Adams  v.  Cross,  etc. 
Co.,  5  R'y  &  Corp.  L.  J.  18  (IlL,  1888). 
Contra,    Chamberlin    v.    Mammoth 
Min.  Co,  20  Mo.  96  (1854).    "Upon  a 
confession  of  judgment  by  a  corpo- 
ration, the  court  in  which  the  action 
is  pending  must  of  necessity  judge 
of  the  authority  of  any  natural  per- 
•  son  who  may  appear  for  the  company 
in  that  behalf ,  .  .  .  audits  judgment 
as  to  the  right  and  authority  of  the 


person  so  appearing  to  bind  the  cor- 
poration must  be  conclusive  in  all 
other  proceedings  where  the  same 
judgment  is  dra-wn  in  question." 
White  V.  Crow,  17  Fed.  Rep.  98  (1883). 
The  treasurer  cannot  confess  judg- 
ment Stevens  v.  Carp  River  Iron 
Co.,  57  Mich.  427  (1885).  A  corpora- 
tion may  confess  judgment  Shute 
V.  Keyser,  29  Pac.  Rep.  386  (Ariz., 
1892).  As  to  the  power  of  the  presi- 
dent and  other  officers  to  confess 
judgment,  see  ch.  XLIH,  supra. 


1641 


§  755.] 


PARTIES,  PLEADINGS,  ETC. 


[CH.  XLV. 


In  IS'ew  York,  by  statute,  a  corporation  cannot  confess  judg- 
ment in  contemplation  of  insolvency.^ 

§  T55.  Injunction  and  contempt. —  An  injunction  against  a 
corporation  should  run  to  the  corporation  in  its  corporate  name. 
All  officers  and  agents  upon  whom  it  is  served,  or  to  whose 
knowledge  it  comes,  are  guilty  of  contempt  of  court  if  they  dis- 
regard it.^    The  corporation  and  also  all  of  its  officers  and  agents 


People  V.  Beigler,  Hill  &  D.  Supp.  133 
(1843).  See  also,  on  the  method  of 
proof,  Chamberlin  v.  Huguenot  I\Ifg. 
Co.,  118  Mass.  532  (1875);  Spring  Val- 
ley Water  Works  v.  San  Francisco, 
22  CaL  434  (18G3);  Eastern,  etc.  Co.  v. 
Vaughan,  14  N.  Y.  540  (185G);  Hughes 
V.  Antietam  Mfg.  Co.,  34  Md.  316 
(1870) ;  Leonardsville  Bank  v.  Willard, 
25  N.  Y.  574  (18G3);  Reynolds  v.  Myers, 
51  Vt.  444  (1879);  WestWinsted  Sav. 
Bank  v.  Ford,  27  Conn.  282  (1858); 
Society  for  Prop.  Gosp.  v.  Pawlet,  4 
Pet.  480  (1830);  Aldeniian,  etc.  v.  Fin- 
ley,  10  Ark.  423  (1850);  Oldtown,  etc 
K.  E.  V.  Veazie,  39  Me.  571  (1855); 
Pullman  v.  Upton,  96  U.  S.  328  (1877); 
Penobscot,  etc.  R.  R.  v.  Dunn,  39  Me. 
587  (1855):  Heaston  v.  Cincinnati, 
etc.  R.  R.  16  Ind.  275  (1861);  Orono  v. 
Wedgewood,  44  Me.  49  (1857);  Litch- 
field Bank  v.  Church,  29  Conn.  137, 
148  (1860);  U.  S.  v.  Insurance  Com- 
panies, 22  Wall.  99  (1874) ;  De  Witt  v. 
Hastings,  40  N.  Y.  Super.  Ct.  463  (1876) ; 
aff'd,  69  N.  Y.  518;  Commonwealth  v. 
Bakeman,  105  Mass.  53  (1870);  South 
Bay,  etc.  Co.  v.  Gray,  30  Me.  547  (1849) ; 
Utica  Ins.  Co.  v.  Tilman,  1  Wend.  555 
(1838);  Jackson  v.  Leggett,  7  Wend. 
377  (1831).  A  foreign  corporation 
proves  incorporation  by  its  papers 
and  proceedings,  and  by  putting  in 
evidence  the  statute  authorizing  in- 
corporation. Savage  v.  Russell,  84 
Ala.  103  (1888).  The  existence  of  a 
plank-road  corporation  is  not  proved 
by  the  fact  that  the  governor  had 
appointed  inspectors  of  it  and  they 
had  certified  that  the  road  was  com- 
pleted. Bill  V.  Fourth,  etc.  Road,  14 
Johns.  416  (1817). 


1643 


1  Re  Waterbury,  8  Paige,  380  (1840) ; 
Kingsley  v.  First  Nat  Bank,  31  Hun, 
329  (1884);  National  Shoe,  etc.  Bank 
V.  Mechanics'  Nat  Bank,  89  N.  Y.  467 
(1882). 

2  An  injunction  against  a  corpora- 
tion in  New  York  may  be  served  on 
a  division  superintendent  of  the  di- 
vision interested.  Moreover,  knowl- 
edge of  the  injimction  is  as  good  as 
servica  Disobedience  is  contempt. 
Rochester,  etc.  R  R.  v.  New  York, 
etc.  R.  R,  48  Hun,  190  (1888).  Tlie 
directors  are  boimd  to  obey  an  in- 
junction against  the  company  if  it 
comes  to  their  notica  Hatch  v.  Chi- 
cago, etc.  R.  R.,  6  Blatchf.  105  (1868); 
S.  C,  11  Fed.  Cas.  799;  People  v. 
Stm-tevant,  9  N.  Y.  263  (1853j.  See 
also  High,  Injunctions;  also  §  745, 
supra.  The  company  may  be  in- 
dicted for  not  obeying  the  order  of 
the  court.  Regina  v.  Birmingham, 
etc.  R'y,  9  Car.  &  P.  469  (1840).  An 
injimction  against  a  foreign  corpora- 
tion may  apply  to  its  acts  out  of  the 
state  as  well  as  in  it.  Prince  Mfg. 
Co.  V.  Prince's,  etc.  Co.,  51  Him,  443 
(1889).  In  a  proceeding  by  a  New 
York  receiver  of  a  dissolved  New 
York  corporation  against  a  former 
director  for  interfering  with  the  as- 
sets against  the  injunction  of  the 
New  York  court,  held,  that  the  di- 
rector could  not  evade  the  injimction 
by  going  out  of  the  state.  Williams  v. 
Hintermeister,  26  Fed.  Rep.  889  (1886). 
Though  a  bank  may  be  in  contempt, 
it  does  not  follow  tliat  each  servant 
or  agent  of  the  bank  also  is  in  con- 
tempt. Southern  Development  Co. 
V.  Houston,  etc.  R'y,  27  Fed.  Rep.  344 


CH.  XLV.] 


PARTIES,  PLEADINGS,  ETC. 


[§  T56. 


who  wilfully  violate  the  injunction  may  be  fined  for  contempt 

of  court.^ 

§  750.  Contempt  and  sequestration.— Although,  a  corporation 
is  an  existence  entirely  distinct  from  its  officers  or  members, 
yet  the  latter  may  be  held  answerable,  and  in  contempt  of  court, 
for  neglect  or  refusal  to  perform  the  orders,  decrees,  or  judg- 
nients'of  courts.^    Moreover,  the  corporation  itself  is  bound  to 


(188C).  Where  the  defendant  is  a  for- 
eign corporation,  and  has  no  property 
in  the  state  which  could  be  reached 
by  sequestration,  a  court  of  chancery 
will  not  decree  an  injunction  which 
cannot  be  enforced.  Bellows  Falls 
Bank  v.  Rutland,  etc.  R.  R.,  28  Vt.  470 
(1856);  King  v.  Barnes,  113  N.  Y.  476 
(1889).  Cf.  %  758,  infra.  An  injunc- 
tion may  bind  a  corporation,  though 
not  a  party  to  tlie  suit.  Eagle  Mfg. 
Co.  V.  Miller,  41  Fed.  Rep.  351  (1890). 
If  the  employee  violates  the  injunc- 
tion, not  knowing  of  it,  and  is  ar- 
rested, he  may  sue  his  corporation 
for  damages  for  withholding  notice  of 
the  injunction.  Guirney  v.  St.  Paul, 
etc.  R'y,  43  Minn.  496  (1890).  In 
Golden  Gate,  etc.  Co.  v.  Yuba  County 
Super.  Ct..  65  CaL  187  (1884),  it  was 
held  that  a  corporation  may  be  pun- 
ished for  contempt  of  court. 

1  Re  Tift,  11  Fed.  Rep.  403  (1881). 
An  injunction  against  certain  direct- 
ors of  the  corporation  from  vising 
patented  articles  is  violated  by  their 
forming  a  new  corporation  to  do  the 
same  acts,  they  being  directors  also  of 
the  latter.  Iowa,  etc.  Wire  Co.  v. 
Southern,  etc.  Wire  Co.,  30  Fed.  Rep. 
123  (1887).  An  injunction  against  a 
coi-poration  running  a  ferry  cannot 
be  evaded  by  the  corporation  transfer- 
ring its  boats  to  its  president  individ- 
ually. The  corporation  was  fined, 
and  the  president  imprisoned  for  con- 
tempt. "  Injmiction  orders  must  be 
fairly  and  honestly  obeyed,  and  not 
defeated  by  subterfuges  and  tricks 
on  the  part  of  those  bound  to  obey 
them;  they  may  be  violated  by'aid- 
ing,  countenancing,  and  abetting  oth 


ers  in  violation  thereof  as  well  as  by 
doing  it  directly;  and  courts  will  not 
look  with  indulgence  vipon  schemes, 
however  skilfully  devised,  designed 
to  thwart  its  orders."  Mayor,  etc.  v. 
New  York  Feriy,  etc.  Co.,  64  N.  Y.  62:3 
(1876).  A  foreign  corporation  violat- 
ing an  injunction  may  be  fined  for 
contempt  of  court.  Service  is  made 
in  the  same  way  as  in  ordinary  cases. 
Its  agent  violating  the  injunction 
may  also  be  fined.  U.  S.  v.  Memphis, 
etc.  R.  R.,  6  Fed.  Rep.  237  (1881). 

2  A  contempt  of  court  by  a  corpo- 
ration may  be  punished  by  pvmishing 
the  corporate  officers  who  do  the  act 
or  control  the  action  of  the  corpora- 
tion.   Sercomb  v.  Catlin,  128  111.  556 
(1889).    The   case   of   Lacharme   v. 
Quartz  Rock,  etc.  Co.,  1  H.  &  C.  134 
(1862),  whereby  an  order  was  enforced 
by  reaching  the  corporate  officers,  is 
based  on  the  English  statute  giving 
the  court  such  a  power.    In  the  an- 
cient case  of  Salmon  v.  Hamborough 
Co.,  1  Cas.  in  Ch.  204(1671),  where  the 
corporation  defendant  did  not  obey 
an  order  of  the  court,  and  had  no 
property,  the  House  of  Lords  issued 
an  order  directed  to  the  corporate 
officers  ordering  them  to  obey  the 
former  order  or  be  committed  for 
contempt.     Cf.  4  Wait,  Pr.  206;  Cur- 
son  V.  African  Co.,  1  Vern.  121  (1632). 
Papers  against  a  corporation  are  not 
to  be  directed  against  its  officers  per- 
sonally, even  as  officers.    Verplanck 
V.  Mercantile  Ins.  Co.,  2  Paige,  438 
(1831).    Where  the  corporation  is  en- 
joined from  doing  a  certain  thing, 
then  the  officers  are  personally  liable 
for  contempt  if  they  do  the  thing  en- 


1643 


§  756.] 


PAETIES,  PLEADINGS,  ETC. 


[cn.  XLV. 


obey  tlie  court,  and  for  failure  to  do  so  the  court  ^Yill  seques- 
trate the  corporate  property.  Sequestration  is  a^chancery  rem- 
edy whereby  the  property  of  a  party  is  seized  by  the  officers 
of  the  court  of  chancery  to  punish  contempts  and  to  compel 
obedience  to  the  order  or  decree  of  the  court.*  It  is  used  not 
only  to  compel  the  corporation  to  do  an  act  commanded  by  a 
court  of  chancery,  but  also  to  subject  the  corporate  property  to 
the  payment  of  a  money  decree  which  a  court  of  chancery  has 
made  against  the  corporation.^  Sequestration  is  the  taking  of 
property  from  the  owner  for  a  time  till  the  rents,  issues,  and 
profits  satisfy  a  demand.  The  judgment  in  such  case  does  not 
dissolve  the  corporation,' 

A  sequestration  reaches  all  the  goods  and  chattels  and  the 
rents  and  profits  of  land  belonging  to  the  corporation;*  but 
there  is  some  doubt  as  to  whether  choscs  in  action  and  the  title 
to  real  estate  can  be  subjected  to  this  remedy  by  a  court  of 
chancery.  It  is  clear  that  originally  the  corporate  realty  could 
not  be  so  reached.* 


joined.  See  §  755,  supra.  In  Davis 
V.  Mayor,  etc.,  1  Duer,  451,  484  (1853), 
the  court  said  that  it  was  admitted 
that  a  mandamus  directed  to  the  cor- 
poration in  its  corporate  name  bound 
all  the  officers  and  members  (citing 
municipal  corporation  cases).  Chan- 
cellor. Bland,  in  McKim  v,  Otlom,  3 
Bland  (Md.),  422  (1829),  with  good 
reason  objects  to  the  technical  and 
senseless  rule  that  corporate  officers 
cannot  be  compelled  to  do  an  act 
which  the  corporation  is  commanded 
to  do.  A  somewhat  similar  instance 
of  the  power  of  the  court  arises  in  a 
mandamus  to  make  a  transfer  of 
stock.    See  §  390,  supra. 

1  See  2  Daniell,  Ch,  Pr.,  p.  1052,  etc. ; 
1  Barb.  Ch.  Pr.,  p.  71,  etc.,  444;  Ang. 
&  A.  Corp.,  §  667,  etc.  As  regards 
corporations,  this  remedy  was  used 
to  compel  the  corporation  to  appear 
and  answer  a  bill  in  equity,  and  also 
to  subject  tlie  property  of  the  corpo- 
ration to  the  payment  of  a  money 
decree  of  a  court  of  chancery.  Se- 
questrations in  chancery  correspond 


greatly  to  executions  at  law.  Seques- 
tration "  is  most  certainly  of  the  nat- 
ure of  an  execution."  It  is  demand- 
able  of  right.  It  issues  though  the 
corporation  has  no  property.  Eeid 
V.  Northwestern  R.  R.,  32  Pa.  St  257 
(1858).  The  case  of  Jones  v.  Boston 
Mill  Corp.,  21  Mass.  507  (1827),  holds 
that  sequestration  is  a  proper  remedy 
to  enforce  a  decree. 

2  If  the  sequestration  is  to  compel 
the  corporation  to  do  something 
other  than  pay  money,  the  corporate 
property  is  merely  seized  and  held 
by  the  court  until  the  corporation 
complies.  If,  however,  the  seques- 
tration is  to  compel  the  payment  of 
a  money  decree,  the  coi-porate  prop- 
erty seized  will  be  sold  and  the  pro- 
ceeds applied  to  that  debt.  See  au- 
thorities cited  supra. 

3  Proctor  V.  Sidney,  etc.  Co.,  8  N.  Y. 
App.  Div.  42  (1896). 

*  See  authorities  in  note  1,  supra. 

5  2DanieU,  Ch.  Pr.,  p.  1054;  Coats 
V.  Elliott,  23  Tex.  606  (1859).  Seques- 
tration is  the  proper  remedy  to  sub- 


1644 


OH.  XLV.] 


PAKTIES,  PLEADIXGS,  ETC. 


[§  757. 


§  757.  Foreign  cojyorations  may  sue  and  he  sued  —  Stoch- 
holders^  suits  against  foreign  coriwrations — Garnishment  — 
Statute  of  limitations  —  Usury. —  A  foreign  corporation  is  con- 
sidered a  resident  of  the  state  wherein  it  was  created ;  and  it 
is  regarded  as  a  citizen  of  that  state  in  all  questions  of  juris- 
diction,^ 


ject  the  net  profits  of  a  turnpike 
company  to  the  payment  of  a  judg- 
ment. Neither  sequestration  nor  a 
common-law  execution  can  effect  a 
sale  of  the  road,  however,  since  the 
francliise  is  a  trust  from  the  state. 
Ammant  v.  New  Alexandria,  etc. 
Road,  13  Serg.  &  R.  (Pa.),  210  (1825). 
But  where,  under  the  statutes,  a  re- 
ceiver is  appointed  in  sequestration 
proceedings,  the  decisions  are  in- 
clined to  hold  otherwise.  Atlas  Bank 
V.  Nahant  Bank,  40  Mass.  480  (1839), 
But  see  Foster  v.  Townshend,  68  N.  Y. 
203  (1877);  N,  Y.  Code  Civ.  Proc, 
§  1772.  In  proceedings  under  N.  Y. 
Code  Civ.  Proc,  §  1784,  etc..  all  the 
corporate  personalty  and  realty  vest 
in  the  receiver.  See,  in  construction 
of  the  New  York  statute.  Bangs  v. 
Mcintosh,  23  Barb.  591  (1857):  Deven- 
dorf  V.  Beardsley,23  Barb.  G56  (1857); 
Judson  V.  Rossie  Galena  Co.,  9  Paige, 
598(1842).  See  also  Devoer.  Ithaca, etc. 
R.  R,  5  Paige,  521  (1835),  as  to  the  prac- 
tice. As  regards  choses  in  action  the 
old  authorities  differed.  1  Barb.  Ch, 
Pr.,p.  71,  says  that  the  choses  in  action 
cannot  be  reached  by  sequestration. 
2  Daniell,  Ch.  Pr.,  p.  1052,  says  that 
possibly  choses  in  action  in  the  pos- 
session of  third  persons  cannot  be 
reached.  The  later  authorities,  how- 
ever, are  inclined  to  extend  this  rem- 
edy to  choses  in  action.  Grew  v.  Breed, 
53  Mass.  363  (1847);  Hosacku  Rogers, 
1 1  Paige,  603  (1845);  White  u.  Geraerdt, 
1  Edw.  Cli.  340  (1832).  It  has  been 
doubted  whether  sequestration  i)ro- 
ceedings  could  reach  the  books  and 
papers  of  the  corporation,  Lowten 
V.  Colchester,  2  Meriv.  395  (1817);  but 
it  would    seem    that    such   papers 


should  be  subject  to  sequestration  so 
far  as  they  contain  information  or 
give  title  to  property  which  has  been 
sequestered. 

^See  §  988,  infra;  Louisville,  etc. 
RR.  V.  Letson,  2  How.  497  (1844);  Staf- 
ford V.  American  Mills  Co.,  13  R  I.  310 
(1881);  Cowardin  v.  Universal  L.  Ins.  ■ 
Co.,  32  Gratt.  (Va.)  445  (1879),  holding 
that  it  is  subject  to  attachment  as  a 
non-resident;  Marshall  v.  Baltimore, 
etc.  R.  R,  16  How.  314  (1853);  Coving- 
ton, etc.  Co.  V.  Shepherd,  20  How.  227 
(1857);  Myers  v.  Dorr,  13  Blatchf.  22 
(1870);  S.  C,  17  Fed.  Cas.  1105;  Mer- 
rick V.  Van  Santvoord,  34  N.  Y.  208 
(1866);  Daly  v.  National  L.  Ins.  Co.,  64 
Ind.  1  (1878);  Hadley  v.  Freedman's, 
etc.  Co.,  2  Tenn.  Cli.  122  (1874);  Hard- 
ing V.  Chicago,  etc.  R.  R.,  80  Mo.  659 
(1883);  McGregor  v.  Erie  R'y,  35  N.  J. 
L.  115(1871);  Stout  v.  Sioux  City,  etc. 
R.  R.,  8  Fed.  Rep.  794  (1881),  holding 
that  a  foreign  corporation  which  had 
filed  its  charter  with  the  secretary 
of  state  and  otherwise  complied  with 
the  local  statute  was  a  domestic  cor- 
poration under  the  law  of  Nebraska. 
A  foreign  corporation  may  be  sued 
in  Massachusetts  by  a  resident. 
Young  V.  Providence,  etc.  Co.,  150 
Mass.  550  (1890).  A  non-resident  may 
sue  a  foreign  corporation  in  Massa- 
chusetts, Youmans  v.  Minn.  etc. 
Trust  Co.,  67  Fed.  Rep.  282  (1895).  A 
provision  in  a  charter  that  the  com- 
pany should  be  sued  only  in  the  state 
where  it  is  incorporated  does  not  pre- 
vent suit  against  it  in  another  state. 
Shields  V.  Union,  etc.  Ins.  Co.,  119 
N.  C.  380  (1896).  Foreign  corporations 
may  be  sued  in  Tennessee.  Telephone 
Co.  V.  Turner,  88  Tenn.  265  (1889).    A 


1645 


■67.] 


PAKTIES,  PLEADINGS,  ETC. 


[CH.  XLV. 


It  is  discretionary,  however,  with  a  court  as  to  whether  it 
will  grant  equitable  relief  against  a  foreign  corporation.  Espe- 
cially is  this  the  case  in  regard  to  suits  brought  by  stockholders. 
The  courts  will  often  refuse  to  grant  relief,  inasmuch  as  there 
may  be  no  means  of  enforcing  the  decree.^  A  suit  to  compel 
a  foreign  corporation  to  issue  new  certificates  of  stock  for  cer- 
tificates lost  will  lie."^  A  stocldiolder  in  a  foreign  corporation 
may  sue  in  the  courts  of  New  York  to  enjoin  fraudulent  acts 


non-resident  may  sue  a  foreign  cor- 
poration in  South  Carolina  when  the 
cause  of  action  arose  within  the  state. 
Central  R.  R.  etc.  Co.  v.  Georgia,  etc. 
Co.,  32  S.  C.  319  (1890).  A  foreign 
corporation  may  plead  the  statute  of 
limitations.  St.  Paul  v.  Chicago,  etc. 
R'y,  45  Minn.  387  (1891).  As  to  re- 
strictions by  the  state  on  the  right 
of  a  foreign  corporation  to  remove 
cases  to  the  federal  courts,  see  §  697, 
supra. 

1  The  courts  of  Massachusetts  will 
not  take  jurisdiction  of  a  suit  by  the 
stockholders  of  a  Missouri  corporar 
tion  to  enjoin  the  corporation  from 
issuing  bonds  secured  by  mortgage 
on  property  in  Missouri.  Kimball  v. 
St.  Louis,  etc.  R'y,  157  Mass.  7  (1892), 
reviewing  tlie  cases,  the  com"t  saying 
that  while  it  had  jm-isdiction  and  its 
judgment  would  be  binding  even  in 
Missouri,  yet  "it  would  be  a  misuse 
of  our  powers  to  attempt  to  control 
the  action  of  those  courts  in  a  case 
like  this  by  an  adjudication  which 
would  depend  upon  them  for  enforce- 
ment, and  which  they  might  say  had 
mistaken  the  Missouri  law."  A  resi- 
dent stockholder  may  enjoin  a  for- 
eign railroad  corporation  from  con- 
stnicting  branch  lines.  Ives  v.  Smith, 
8  N.  Y.  Supp.  46  (1889).  A  non-resi- 
dent stockholder  cannot  enjoin  a 
foreign  corporation  from  making  an 
ultra  vires  transfer  of  its  property 
to  still  another  foreign  corporation. 
Small  V.  Minneapolis,  etc.  Co.,  10  N. 
Y.  Supp.  456  (1890).    Where  one  for- 


eign corporation  is  under  obligation 
to  issue  stock  to  another  foreign  cor- 
poration, a  resident  stockholder  of 
the  latter  may  bring  suit  in  New 
York  courts  to  compel  the  issue  of 
such  stock  Babcock  v.  Schuylkill, 
etc.  R'y,  9  N.  Y.  Supp.  845  (1890). 
The  courts  of  Maryland  will  not  issue 
a  mandamus  to  compel  a  foreign  cor- 
poration to  annul  a  forfeiture  of  stock. 
This  is  a  matter  to  be  litigated  in  the 
courts  of  the  state  creiiting  the  cor- 
poration. North  State,  etc.  Co.  v. 
Field,  64  Md.  151  (1885).  Ordinarily 
the  court  wiU  not  remedy  the  frauds 
of  directors  of  a  foreign  corporation. 
Moore  v.  Silver  Valley  Min.  Co.,  104 
N.  C.  534  (1890).  The  American  stock- 
holders in  an  English  company  or- 
ganized to  own  an  1  work  mines  in 
America  may,  by  suit  in  an  American 
court,  cause  to  be  set  aside  a  reorgan- 
ization made  in  England  in  viola- 
tion of  the  by-laws  of  the  company. 
Brown  v.  Republican,  etc.  Mines,  55 
Fed.  Rep.  7  (1893).  An  American 
corporation  cannot  be  sued  in  Eng- 
land by  service  upon  a  resident  agent 
in  that  country,  although  three- 
quarters  of  the  stockholders  reside 
in  England,  it  appearing  that  all 
of  the  directors  reside  in  America. 
Badcock  v.  Cumberland,  etc.  Co., 
[1893]  1  Ch.  362.  As  to  the  jiirisdic- 
tion  of  the  federal  courts,  see  §  734, 
supra. 

^  Gxiilf ord  v.  Western  U.  TeL  Co., 
59  Minn.  332  (1894). 


1646 


CH.  XLV.] 


PAitTIES,  PLEADINGS,  ETC. 


[§  T57. 


and  hold  the  directors  and  third  persons  personally  liable. 
But  a  stockholder's  suit  to  enjoin  the  company  from  leasing 
its  property  for  an  inadequate  sum  must  be  brought  m  the 
state  where  the  company  is  incorporated.^  A  Washington 
stockholder  in  an  Oregon  corporation  cannot  bring  suit  m  the 
federal  court  in  Washington  to  hold  non-resident  directors  lia- 
ble for  paying  illegal  salaries  and  neglecting  to  collect  the  cor- 
porate debts,  and  to  have  a  receiver  appointed.' 

The  courts  have  frequently  refused  to  entertain  jurisdiction 
over  a  foreign  corporation  in  cases  where  the  decree  of  the 
court  cannot  be  enforced.*     Garnishee  process  does  not  lie 


1  Gray  v.  FuUer,  17  N.  Y.  App.  Div. 

29  (1897). 

2  ]\Iadden  v.  Penn,  etc.  Co.,  37  AtL 
Rep.  817  (Pa.,  1897).  An  article  on 
"Jurisdiction  over  foreign  corpora- 
tions "  is  fovind  in  13  Harvard  Law- 
Review,  1  (1898). 

3  Leary  v.  Columbia  River,  etc.  Co., 
82  Fed.  Rep.  775  (1897). 

*  Williston  V.  Michigan,  etc.  R.  R, 
95  Mass.  400  (1866);  HoweU  v.  Chi- 
cago, etc.  R'y,  51  Barb.  378  (1808),  a 
stockholder's   action  to    enjoin   an 
ultra  vires  act;  Gregory  v.  New  York, 
etc.  R  R.,40  N.  J.  Eq.  38  (1885),  where 
a  resident  stockholder  in  a  foreign 
corporation  sought  to  set  aside  its 
lease  to  a  resident  corporation;  Cun- 
ningham V.  PeU,  5  Paige,  607  (1836), 
holding  that  no  personal  judgment 
could  be  rendered  against  an  absent 
director    who    was    not   personally 
served.    In  Ervin  v.  Oregon,  etc.  Nav. 
Co.,  28  Hun,  269  (1882),  the  court  sus- 
tained the  jurisdiction  where  service 
on  the  directors  was  personal,  even 
though  the  corporate  property  was 
not  in  the  state.    A  West  Virginia 
stockholder  in  a  Pennsylvania  con- 
struction company  may  sue  a  West 
Virginia    railroad    company  which 
owes  bonds  to  the  construction  com- 
pany, and  compel  an  accounting  and 
distribution  of  such  bond  assets,  when 
the  Pennsylvania  company  is  insolv- 
ent and  has  been  dissolved.    No  re- 

164 


quest  to  the  directors  is  necessary. 
Cnmilish  v.  Shenandoah  Valley  R  R., 
28  W.  Va.  023  (1886).    It  has  been  held 
that  a  resident  stockholder  of  a  for- 
eign corporation  may  enjoin  it  from 
making  an  ultra  vires  extension  of 
its  line  by  building  branches,  etc. 
Ives  V.  Smith,  3  N.  Y.  Supp.  645  (1888). 
But  it  will  not  be  ordered  to  pay  a 
dividend.    Redmond  v.  Enfield  Mfg. 
Co.,  13  Abb.  Pr.  (N.  S.)  332  (1872).    Nor 
has  the  court  jurisdiction  where,  of 
two  bodies  of  men,  each  claim  to  be 
the  rightful  stockholders.    Wilkins 
V.  Thome,  60  Md.  253  (1883).    Nor  will 
the  court  enjoin  a  foreign  corpora- 
tion from  delivering  stock  and  bonds 
to  a  construction  company,  though 
the  plaintiff  claims  that  he  has  the 
contract  for  construction.    Kansas, 
etc.  Pu  R  V.  Topeka,  etc.  R  R,  135 
Mass.  34  (1883).     A  court  will  not 
order  a  domestic  corporation  to  do 
an  act  in  another  state,  such  as  open- 
ing ditches,  etc.    Port  Royal  R  R  v. 
Hammond,  58  Ga.  523  (1877).   Cf.  Fisk 
u  Chicago,  etc.  R.  R.,  53  Barb.  513 
(1868);  Prouty  u  Michigan,  etc.  R  R,  1 
Hun,  655  (1874) ;  Prouty  v.  Lake  Shore, 
etc.  R  R,  85  N.  Y.  273  (1881);  Board- 
man  V.  Lake  Shore,  etc.  R'y.  8^  ^-  Y. 
157  (1881).    See  also  Ervin  v.  Oregon, 
etc.  Nav.  Co.,  28  Hun,  269  (1882),  35 
Hun,  544  (1885).     A  foreign  corpora- 
tion cannot  sue  another  foreign  cor- 
poration in  New  York  to  compel  a 


§  T57.] 


PAKTIES,  PLEADINGS,  ETC. 


[cn,  XLY. 


against  a  foreign  corporation  to  reach  a  sura  of  money  clue 
from  sucli  corporation  to  a  non-resident.*  A  foreign  corpora- 
tion cannot  set  up  the  statute  of  limitations  where  a  non-resi- 
dent could  not  set  it  up.''  A  foreign  corporation  may  set  up 
the  statute  of  limitations  in  Tennessee,  if  it  has  had  an  office 
in  the  state  during  the  entire  period.'  The  defense  of  usury  is 
considered  elsewhere.* 

By  the  comity  of  states  the  courts  of  a  state  will  entertain  a 
suit  brought  by  a  foreign  corporation.* 


convej'ance  of  land  located  in  an- 
other state.  Cumberland,  etc.  Co.  v. 
Hoffman,  etc.  Co.,  30  Barb.  159,  171 
(1859).  See  Berford  v.  New  York  Iron 
Mine,  4  N.  Y.  Supp.  836  (1888). 

lAn  attachment  or  garnishment 
in  Michigan  of  a  debt  due  from  an 
Illinois  corporation  to  a  Washington 
corporation,  and  payable  in  Wash- 
ington, is  not  good,  even  though 
the  Illinois  corporation  is  doing  busi- 
ness in  Michigan.  Reimers  v.  Seatco 
Mfg.  Co.,  70  Fed.  Rep.  573  (1895). 
The  question  of  garnishment  by  serv- 
ice on  the  debtor  corporation  in  a 
state  other  than  its  domicile  is  fully 
discussed  in  National  F.  Ins.  Co.  v. 
Chambers,  53  N.  J.  Eq.  468  (1895).  See 
also  Alabama,  etc.  R.  R.  v.  Chumley, 
93  Ala.  317  (1890);  Straus  v.  Chicago 
Glycerine  Co.,  46  Hun,  216  (1887).  A 
foreign  corporation  cannot  be  gar- 
nished by  service  upon  an  agent 
within  the  state.  Associated  Press 
V.  United  Press,  29  S.  E.  Rep.  869 
(Ga.,  1898). 

2 A  foreign  corporation  cannot  plead 
the  statute  of  limitations,  inasmuch 
as  it  has  been  "out  of  the  state." 
Larson  v.  Aultman,  etc.  Co.,  86  Wis. 
281  (1893),  reviewing  the  authorities. 
A  foreign  corporation  cannot  plead 
the  New  York  statute  of  limitations. 
It  must  plead  the  statute  of  limita- 
tions of  its  own  state.  Robeson  v. 
Central  R  R.,  76  Hun,  444  (1894).  In 
Texas  a  foreign  corporation  may 
plead    the    statute    of   limitations. 


Thompson  v.  Texas,  etc.  Cattle  Co., 
24  S.  W.  Rep.  856  (Tex.,  1893). 

STurcott  V.  Yazoo,  etc  R.  R,  45  S. 
W.  Rep.  1067  (Tenn.,  1898). 

*  See  §  76G,  infra. 

*  Silver  Lake  Bank  v.  North,  4 
Johns.  Ch.  370  (1820);  Newburg  Pe- 
troleum Co.  V.  Weare,  27  Ohio  St.  343 
(1875);  Lewis  v.  Bank  of  Kentucky, 
12  Ohio,  132  (1843);  Smith  v.  Weed  S. 
Machine  Co.,  26  Ohio  St.  563  (1875), 
holding  also  that  it  need  not  allege 
in  its  pleading  the  terms  of  its  char- 
ter showing  its  capacity  to  sue; 
Hanna  v.  International  Petroleum 
Co.,  23  Ohio  St.  622  (1873);  Lathrop  v. 
Commercial  Bank  of  Scioto,  8  Dana 
(Ky.),  114  (1839);  Louisville,  etc.  R  R 
V.  Letson,  2  How.  497  (1844);  Bank  of 
Augusta  V.  Earle,  13  Pet.  519  (1839); 
Bank  of  Michigan  v.  Williams,  5 
Wend.  478  (1830);  Beaston  v.  Farm- 
ers' Bank,  12  Pet.  102,  135  (1838); 
Marine,  etc.  Bank  v.  Jauncey,  1  Barb. 
486.(1847),  holding  that  its  authority 
to  sue  need  not  be  set  forth  in  its 
pleading;  Tombigbee  R  R  v.  Knee- 
land,  4  How.  16  (1846);  New  York 
Dry  Dock  v.  Hicks,  5  McLean,  111 
(1850);  S.  C,  18  Fed.  Cas.  151;  Lucas 
V.  Bank  of  Georgia,  3  Ala.  (O.  S.)  147 
(1829);  Guaga  Iron  Co.  v.  Dawson,  4 
Blackf.  202  (1836);  New  Jersey,  etc. 
Bank  v.  Thorp,  6  Cow.  46  (1826) ;  Mut- 
ual Benefit  L.  Ins.  Co.  v.  Davis,  12 
N.  Y.  569  (1855);  Direct  U.  S.  Cable 
Co.  V.  Dominion  TeL  Co.,  84  N.  Y.  153 
(1881);    Hibernia  Nat.   Bank  v.  Lar 


1648 


CH.  XLV.] 


PAKTIES,  PLEADINGS,  ETC. 


[§  ToS. 


§758.  Service  in  suits  against  a  foreign  corjwration.— At 
common  law  a  foreign  corporation  could  not  be  sued  outside 
of  the  state  creating  it,  inasmuch  as  service  on  its  officers  was 
held  insufficient.  This  view  of  the  law  is  now  abandoned. 
Jurisdiction  over  a  foreign  corporation  may  be  acquired,  in 
suits  on  contracts  made  or  business  done  within  the  jurisdic- 
tion, by  service  upon  an  officer  of  the  corporation,  or  upon  its 
agent  engaged  in  the  state.^    There  has  been  a  vast  amount  of 


combe,  84  N.  Y.  367  (1881),  holding 
that  it  has  the  same  right  to  rem- 
edies   and  liens    as    citizens;    Wil- 
liams V.  Creswell,  51  IMiss.  817  (1876), 
where  a  District  of  Columbia  corpo- 
ration was  complainant;  American 
Mut.  L.  Ins.  Co.  V.  Owen,  81  Mass.  491 
(1860) ;  Leasure  v.  Union,  etc.  Ins.  Co., 
91  Pa.   St.  491    (1879);    Portsmouth 
Livery  Co.  v.  Watson,  10  Jlass.  91 
(1813);  Bank  of  Edwardsville  f.  Simp- 
son, 1  Mo.  184  (1822);  National  Bank 
V.  De  Bernales,  1  Car.  &  P.  569  (1825); 
Henriques  v.  Dutch  West  India  Co., 
2  Ld.  Raym.  1533  (1727);  Lycoming 
F.  Ins.  Co.  V.  Langley,  62  Md.  196 
(1884);  British  American  Land  Co.  v. 
Ames,  47  Mass.  301  (1843),  holding  that 
a  corporation  of  a  foreign  country 
may  sue ;  Importing,  etc.  Co.  v.  Locke, 
50  Ala,  332  (1874);  Savage  Mfg.  Co.  v. 
Armstrong,  17  Me.  34  (1840);  Ameri- 
can Colonization  Soc.  v.  Gartrell,  23 
Ga.  448  (1857).    In  this  case  the  char- 
ter declared  the  corporation  to  be 
created  for  a  specified  purpose,  "  and 
for  no  other  purpose,"  and  its  right 
to  sue  in  another  state  was  ques- 
tioned.    Bank  of  Marietta  v.  Pindall, 
2  Rand.  (Ya.)  465,  473  (1824);  Hahne- 
mannian  L.  Ins.  Co.  v.  Beebe,  48  III 
88  (1868),  where  the  right  to  sue  in  an- 
other state  for  libel  was  questioned; 
U.  S,  V.  Insurance  Cos.,  22  Wall  99 
(1874),  holding  that  corporations  cre- 
ated merely  for  domestic  and  busi- 
ness purposes  in  the  seceding  states 
during  the  rebellion  may  sue  in  the 
federal  courts;  Insurance  Co.  v.  Tlie 
"C.  D.,  Jr.,"  1  Woods,  72  (1870);  S.  C, 


13  Fed.  Cas.  65,  holding  that  it  may 
sue  either  in  state  or  federal  courts; 
Fidelity  Ins.  etc,  Co.  v.  Niven,  5 
Houst.  (Del.)  416  (1878),  holding  that 
if  empowered  to  act  as  an  adminis- 
trator it  may  sue  as  such  in  another 
state.  But  the  statutes  of  a  state 
may  prohibit  suit  in  its  courts  against 
a  foreign  corporation,  except  in  such 
cases  as  the  statute  may  designate. 
A  statute  to  this  effect  exists  in  New 
York.  Code  Civ,  Proc,  §  1780;  Rob- 
inson V.  Oceanic  Steam  Nav.  Co.,  113 
N,  Y.  315  (1889).  But  the  New  York 
statute  is  avoided  by  an  assignment 
of  the  cause  of  action  to  a  resident. 
McBride  v.  Farmers'  Bank,  26  N.  Y. 
450  (1863). 

1  St.  Clair  u  Cox,  106  U,  S.  350  (1883); 
Hayden  v.  Androscoggin  ]\Iills,  1  Fed. 
Rep.  93  (1879),  where  service  was  on 
the  president.  See  also  §  752,  sitpra; 
Peckham  v.  North  Parish,  33  3Iass. 
274,  286  (1834);  Martens  v.  Interna- 
tional, etc.  Soc,  53  N.  Y,  339  (1873); 
City  F.  Ins.  Co.  v.  Carrugi,  41  Ga.  660 
(1871);  Henning  v.  Planters'  Ins.  Co., 
28  Fed.  Rep.  440  (1886),  holding  that 
the  judgment  is  conclusive  only 
when  it  shows  that  the  corporation 
was  doing  business  in  the  jurisdic- 
tion; Barnett  v.  Chicago,  etc.  R.  R., 
4  Hun,  114  (1875);  Angerhoefer  v. 
Bradstreet  Co.,  22  Fed,  Rep.  305(1884). 
A  suit  by  a  non-resident  against  a 
foreign  corporation  for  causes  aris- 
ing out  of  the  state  by  service  on 
the  treasurer  gives  no  jm-isdiction. 
Newell  V.  Great  Western  R'y,  19 
Mich.  336  (1869),    But  in  Massachu- 


104 


1619 


§  758.] 


PAKTIES,  PLEADINGS,  ETO. 


[cn.  XLV. 


litigation,  however,  as  to  when  the  service  of  process  upon  an 
officer  or  agent  of  a  foreign  corporation  is  sufficient  to  confer 
jurisdiction  over  the  corporation. 


setts  a  bill  lies  to  subject  the  assets  of 
a  foreign  corporation  to  the  payment 
of  its  debts.  Silloway  v.  Columbia 
Ins.  Co.,  74  Mass.  199  (1857).  And  at- 
tachment lies  against  it.  Ocean  Ins. 
Co.  V.  Portsmouth  Marine  R'y,  44 
Mass.  420  (1841).  And  if  it  has  a 
place  of  business  in  the  state  it  may 
be  sued  under  the  statute.  National 
Bank  of  Commerce  v.  Huntington, 
129  Mass.  444  (1880).  At  common 
law,  service  on  the  oiRcer  in  charge 
of  the  resident  business  of  a  foreign 
corporation  gives  jvirisdiction  for  a 
cause  of  action  arising  in  the  juris- 
diction. Newby  v.  Von  Oppen,  etc. 
Co.,  L.  R.  7  Q.  B.  293  (1872).  But 
service  of  injunction  papers  on  a 
resident  selling  agent  is  insufficient. 
Carron  Iron  Co.  v.  Maclaren,  5  H.  L. 
Cas.  416  (1855).  A  corporation  incor- 
porated by  the  United  States  may 
be  reached  by  service  on  the  presi- 
dent anywhere  in  the  country.  Eby 
V.  Northern  Pac.  R  R.,  13  Phila.  144 
(1879).  An  Iowa  corporation  could 
not  be  sued  in  the  District  of  Colum- 
bia (Lathrop  v.  Union  Pac.  R'y,  1 
MacAi-th.  234  —  1873),  until  a  statute 
authorized  service.  Dallas  v.  Atlan- 
tic, etc.  R.  R.,  2  MacArth.  146  (1875). 
Where  foreign  corporations  are  for- 
bidden to  do  business  in  the  state 
under  a  penalty  of  a  fine,  imless  a 
certificate  is  filed,  this  is  the  only 
penalty.  Contracts  made  by  a  for- 
eign corporation  without  filing  a  cer- 
tificate are  enforceable.  Toledo,  etc. 
Co.  V.  Thomas,  33  W.  Va.  566  (1890). 
An  attachment  of  property  in  the 
state  does  not  make  the  cause  one 
arising  in  the  state.  Whitehead  v. 
Buffalo,  etc.  R'y,  18  How.  Pr.  230 
(1859).  A  foreign  corporation  doing 
business  in  the  state  may  be  sued. 
Thomas  v.  Placerville,  etc.   Co.,  65 


Cal.  600  (1884).  Service  of  notice  of 
attachment  on  a  director  suffices. 
Boyd  V.  Chesapeake,  etc.  Canal  Co., 
17  Md.  195  (1800).  Service  on  the 
treasurer  is  insufficient  to  compel 
the  transfer  of  patents.  Desper  v. 
Continental,  etc.  Co.,  137  Mass.  253 
(1884).  Service  on  a  stockholder  of 
a  foreign  corporation  is  not  good. 
Rand  v.  Upper  Locks  and  Canals, 
3  Day  (Conn.),  441  (1809).  See  also 
g  752,  supra;  O'Brien  v.  Shaw's 
Flat,  etc.  Co..  10  Cal.  343  (1858).  A 
default  is  effectual  only  when  the 
papers  show  a  proper  servica  Willa- 
mette, etc.  Co.  V.  Williams,  1  Oreg. 
112  (1854);  Bawknight  v.  Liverpool, 
etc.  Ins.  Co..  55  Ga.  194  (1875),  hold- 
ing that  in  Georgia  a  foreign  corpo- 
ration cannot  be  sued  in  personam 
except  upon  a  contract  made  there. 
The  remedy  upon  a  foreign  contract 
or  foreign  judgment  is  in  rem  by  at- 
tachment and  garnishnipnt.  Cam- 
den Rolling-mill  Co.  v.  Swede  Iron 
Co.,  32  N.  J.  L.  15  (1866),  holding  that 
a  foreign  corporation  which  has  no 
place  of  business  in  New  Jersey  can- 
not be  sued  in  the  courts  of  that  state 
on  a  contract  made  in  another  state, 
but  otherwise  on  a  contract  made  in 
the  state.  See  National  Cond.  Milk 
Co.  V.  Brandenburgh,  40  N.  J.  L.  Ill 
(1878) ;  Bushel  v.  Commonwealth  Ins. 
Co.,  15  Serg.  &  R.  (Pa.)  173  (1827), 
holding  that  an  attachment  will  lie 
against  it.  To  same  effect,  St.  Louis, 
etc.  Ins.  Co.  v.  Cohen,  9  Mo.  416  (1845) ; 
Andrews  v.  Michigan  Cent.  R.  R.,  99 
Mass.  534  (1868);  Barr  v.  King,  96  Pa. 
St.  485  (1880),  holding  that  it  may  be 
garnished  on  execution;  Smith  v. 
Mutual  L.  Ins.  Co.,  90  Mass.  336  (1867). 
holding  that  a  citizen  of  another  state 
cannot  sue  in  tlie  courts  of  Massachu- 
setts a  corjioration  which  is  foreign 


1650 


CH.  XLV.] 


PAKTIES,  PLEADINGS,  ETC. 


[§  T58. 


In  most  of  the  states  there  are  statutes  which  provide  for 
service  in  suits  against  foreign  corporations  by  service  on  an 
officer  or  agent,^  the  particular  officer  or  agent  being  specified. 


to  that  state  on  a  cause  of  action 
which  did  not  arise  within  the  juris- 
diction. 

The  leading  case  of  McQueen  v. 
Middletown  Mfg.  Co.,  16  Johns.  5 
(1819),  states  the  common-law  rule 
as  to  suits  against  a  foreign  corpora- 
tion. Process  against  a  foreign  cor- 
poration cannot  be  served  upon  its 
officers  who  may  be  found  within 
the  jurisdiction  of  the  court  unless 
such  service  is  authorized  by  the 
statutes  of  the  state  where  suit  is 
brought.  Pomeroy  v.  New  York,  etc. 
R  R,  4  Blatchf.  120  (1857);  S.  C,  19 
Fed.  Cas.  965;  Eaton  v.  St.  Louis,  etc. 
Co.,  2  McCrary,  363  (1881);  Latimer 
V.  Union  Pac.  R'y,  43  Mo.  105  (1868); 
Weight  V.  Liverpool,  etc.  Ins.  Co.,  30 
La,  Ann.  1186  (1878),  holding  that 
process  cannot  be  served  on  a  local 
agent;  Moch  v.  Virginia  F.  &  'M.  Ins. 
Co.,  10  Fed.  Rep.  696  (1882),  as  to  judg- 
ment by  service  on  agent  doing  busi- 
ness in  the  state.  Also  Block  v. 
Atchison,  etc.  R  R,  21  Fed.  Rep.  529 
(1884);  Emerson,  etc.  Co.  v.  McCor- 
mick,  etc.  Co.,  51  Mich.  5  (1883),  hold- 
ing that  foreign  corporations  may 
sue  each  other  in  Michigan  if  both 
are  doing  business  within  the  state 
and  the  cause  of  action  accrued  there. 
See  also  Pennoyer  v.  Neff,  95  U.  S.  714 
(1877);  American  Exp.  Co.  v.  Conant, 
45  Mich.  642  (1881);  Moulin  v.  Tren- 
ton, etc.  Ins.  Co.,  24  N.  J.  L.  222  (1853); 
Pope  V.  Terre  Haute,  etc.  Co.,  87  N.  Y. 
137  (1881);  Good  Hope  Co.  v.  Rail- 
way, etc.  Co.,  23  Fed.  Rep.  635  (1884); 
Camden  Rolling-mill  Co.  v.  Swede 
Iron  Co.,  32  N.  J.  L.  15  (1866).  If, 
under  a  statute,  the  foreign  corpora- 
tion appoints  an  agent  in  the  state  to 
accept  service,  a  personal  judgment 
may  be  rendered  against  the  corpo- 
ration. Wilson  V.  Martin-Wilson,  etc. 
Co.,  149  Mass.  24  (1889).    See  on  this 


subject  generally,  an  article  in  43 
Central  L.  J.  497. 

1  Service  of  a  summons  in  a  cause 
of  action  arising  out  of  the  state  may 
be  made  on  the  head  of  a  department 
in  New  York,  the  company,  a  foreign 
corporation,  having  an  office  in  New 
York.  Tuchband  v.  Chicago,  eta  R. 
R,  115  N.  Y.  437  (1889).  Under  the 
New  York  statute  service  on  a  for- 
eign corporation  cannot  be  made  by 
serving  its  attorney.  Taj'Ior  v.  Gran- 
ite State  Prov.  Assoc,  136  N.  Y.  343 
(1893).  In  Nebraska  service  may  be 
made  upon  a  managing  agent  of  a 
foreign  corporation  doing  business  in 
the  state.  Klopp  v.  Creston  City,  etc. 
Co.,  34  Neb.  808  (1892).  In  Michigan,  if 
service  is  made  on  a  person  as  a  prin- 
cipal officer  of  a  foreign  corporation, 
and  that  person  shows  by  affidavit 
that  he  was  not  such,  the  service  is 
set  aside.  First  Nat.  Bank  v.  Burch, 
76  Mich.  608  (1889).  Service  on  the 
resident  agent  of  a  foreign  corpora- 
tion is  sufficient.  Vorheis  v.  People's, 
etc.  Soc,  86  Midi.  31  (1891).  See  Hil- 
ler  V.  Burlington,  etc.  R  R,  70.N.  Y. 
223  (1877);  Childs  v.  Hams  Mfg.  Co, 
104  N.  Y.  477  (1887);  Pope  v.  Terre 
Haute,  etc.  Co.,  87  N.  Y.  137  (1881). 
Sei-vice  cannot  be  upon  an  oflBcer 
who  has  resigned,  and  the  resignation 
accepted.  Ervin  v.  Oregon,  etc.  Nav. 
Co.,  22  Hun,  598  (1880).  As  to  Penn- 
sylvania, see  Hussey  Mfg.  Co.  v.  Deer- 
ing,  20  Fed.  Rep.  795  (1884).  See  Bar- 
nett  V.  Chicago,  etc.  R.  R.,  4  Hun,  114 
(1875),  to  the  effect  that  sometimes 
the  judgment  is  binding,  though  the 
corporation  has  no  property  in  the 
jurisdiction.  The  legislature  may 
change  the  mode  of  service.  Rail- 
road Co.  V.  Heclit,  95  U.  S.  168  (1877). 
The  statute  must  be  strictly  followed. 
St.  Clair  v.  Cox,  106  U.  S.  350  (1882). 
Attaclunent  does  not  lie  against  a 


1651 


:5S.] 


PARTIES,  PLEADIXGS,  ETC. 


[cn.  XLV. 


A  requirement  that  a  foreign  corporation  shall  file  its  charter 
with  the  secretary  of  state  does  not  create  a  domestic  corpora- 
tion of  such  company  so  far  as  the  jurisdiction  of  the  United 
States  courts  is  concerned,  even  though  the  statute  says  that  a 


foreign  corporation  after  a  receiver 
of  it  has  been  appointed  in  the  state 
where  it  exists.  Thomas  v.  Mer- 
chants' Bank,  9  Paige,  216  (1841). 
For  service  under  the  Pennsylvania 
statute,  see  Benwood  Iron  Works  v. 
Hutchinson,  101  Pa.  St.  359  (1882); 
Hussey  Mfg.  Co.  v.  Deering,  20  Fed. 
Rep.  795  (1884).  Service  on  a  resident 
agent  whose  agency  is  for  other 
states  only  is  not  good.  Schmidlapp 
V.  La  Couliance  Ins.  Co.,  71  Ga.  246 
(1883).  Service  under  the  Utah  stat- 
ute. Walker  v.  Continental  Ins.  Co.,  2 
Utah,  231  (1879);  the  Missouri  stat- 
vite,  McNichol  v.  U.  S.  etc.  Agency, 
74  Mo.  457  (1881).  Service  must  be 
on  the  de  facto  officers.  Berrian  v. 
Methodist  Soc,  4  Abb.  Pr.  424  (1857). 
Service  on  a  clerk  under  the  statute. 
Libbey  ?;.  Hodgdon,  9  N.  H.  394  (1838). 
Service  under  the  New  Jersey  stat- 
ute. National  Cond.  Milk  Co.  v.  Bran- 
denburgh,  40  N.  J.  L.  Ill  (1878).  On 
a  contract  made  in  the  state,  service 
on  an  agent  suffices  in  New  York, 
though  the  foreign  corpoi'ation  does 
no  business  and  has  no  property  in 
the  state.  Barnett  v.  Chicago,  etc. 
R.  R,  4  Hun,  114  (1875). 

Frequently  the  statute  allows  serv- 
ice on  a  "  managing  agent."  Diffi- 
culty arises  in  defining  this  term.  It 
has  been  held  that  a  person  is  a 
"  managing  agent  "  if  he  is  a  general 
manager,  Carr  v.  Commercial  Bank, 
19  Wis.  272  (1865);  a  local  insiu-ance 
agent.  Bain  v.  Globe  Ins.  Co.,  9  How. 
Pr.  448  (1854);  a  local  agent,  Ameri- 
can Exp.  Co.  V.  Johnson,  17  Ohio  St. 
641  (1867);  a  general  freight  agent, 
Palmer  v.  Pennsylvania  Co.,  35  Hun, 
369  (1885) ;  the  agent  who  made  the 
contract,  Estes  v.  Belford,  22  Fed. 


Rep.  275  (1884).  But  a  stock  transfer 
agent  is  not  a  mann-ing  agent.  Red- 
dington  v.  Mariposa,  etc.  Co.,  19  Hun, 
405  (1879):  nor  is  an  assistant  secre- 
tary, Sterett  v.  Denver,  etc.  R'y,  17 
Hun,  316  (1879):  nor  is  a  horse-car 
superintendent,  Emerson  v.  Auburn, 
etc.  R  R,  13  Hun,  150  (1878);  nor  is 
a  ticket  agent.  Doty  v.  Michigan 
Cent.  R.  R.,8  Abb.  Pr.  427  (1859);  nor 
is  a  baggage-master,  Flynn  v.  Hud- 
son River  R.  R.,  6  How.  Pr.  308  (1851); 
nor  is  a  boat  captain.  Upper  Miss. 
Transp.  Co.  v.  Whittaker,  16  Wis.  220 
(1862).  The  term  "special  agent" 
includes  a  conductor.  New  Albany, 
etc.  R  R.  V.  Grooms,  9  Ind.  243  (1857); 
New  Albany,  etc.  R.  R  v.  Tilton,  12 
Ind.  3  (1859);  Ohio,  etc.  R  R  v.  guier, 
16  Ind.  440  (1861);  the  person  in 
charge  who  attends  to  the  business, 
Angerhoefer  v.  Bradstreet  Co.,  22 
Fed.  Rep.  305(1884);  but  not  the  trav- 
eling agent,  Parke  v.  Commonwealth 
Ins.  Co.,  44  Pa.  St.  422  (1803);  nor  the 
collecting  attorney,  IMoore  v.  Free- 
man's Nat.  Bank,  92  N.  C.  590  (1885). 
For  many  other  cases  on  these  and 
similar  statutes  and  on  the  general 
principles  governing  service  of  pro- 
cess on  corporations,  see  8  Southern 
Law  Rev.  199;  and  1  Barb.  Ch.  Pr.  52. 
In  Oregon  the  statute  is  construed  to 
hold  that  a  domestic  corporation 
must  be  sued  in  the  county  of  the 
principal  office,  or  where  the  cause 
arose.  Holgate  v.  Oregon  Pac.  R.  R., 
16  Oreg.  123  (1888).  Contra,  Glaize 
V.  South  Carolina  R.  R,  1  Strobh.  L. 
(S.  C.)  70  (1846).  A  vice-president 
and  general  superintendent  is  an 
"  officer  "  upon  whom  service  may  be 
made  under  a  statute.  Norfolk,  etc. 
R  R.  V.  Cottrell,  83  Va.  512  (1887). 


1052 


CH, 


XLV.] 


PARTIES,  PLEADINGS,  ETC. 


[§  T58. 


domestic  corporation  is  thereby  created.^  Merely  being  licensed 
to  do  business  in  the  state  does  not  make  a  foreign  corporation 
a  resident  of  the  state.^  Where  a  domestic  railroad  is  leased  to 
a  foreign  corporation,  under  a  statute  which  thereby  expressly 
makes  the  latter  a  domestic  corporation,  it  becomes  such  for 


Service  on  the  foreign  corporation  is 
sufficient  where  the  company  has  an 
office  and  general  agent  doing  a  sub- 
stantial business  in  the  state.  But 
see  §  759,  infra;  Tuchband  v.  Chicago, 
etc.  R.  R.,  115  N.  Y.  487  (1889).  Cf. 
Barnes  v.  Mobile,  etc.  R  R.,  13  Hun, 
126  (1877). 

Where  service  on  an  agent  is  al- 
lowed if  certain  officers  cannot  be 
found  in  the  county,  the  retui*n  of 
service  on  an  agent  must  show  that 
the  officers  were  not  within  the  ju- 
risdiction. Miller  v.  Norfolk,  etc.  R.  R., 
41  Fed,  Rep.  431  (1889).  Service  upon 
a  director  of  a  foreign  corporation 
sustained  under  the  New  York  stat- 
ute. McElroy  v.  Continental  R'y,  6 
N.  Y.  Supp.  306  (1889).  A  Maine  cor- 
poration may  sue  a  New  Jersey  cor- 
poration in  Massachusetts,  where  tlie 
latter  company  has  filed  an  agree- 
ment with  the  state  of  Massachusetts 
agreeing  that  it  might  be  sued  there. 
Consolidated,  etc.  Co.  v.  Lamson,  etc. 
Co.,  41  Fed.  Rep.  833  (1890).  Foreign 
corporations  doing  business  in  the 
state  may  be  sued  on  a  cause  of  ac- 
tion that  arose  out  of  the  state,  and 
service  may  be  made  on  an  agent  or 
depot-master  if  the  statutes  author- 
ize service  to  be  made  in  this  way. 
Humphreys  v.  Newport  News,  etc. 
Co.,  33  W.  Va.  135  (1889).  Service 
may  be  on  the  superintendent  of  in- 
surance at  Albany  although  the  ac- 
tion is  in  the  city  court  of  New  York. 
People  V.  City  Court  Justices,  11 N.  Y. 
Supp.  773  (1890).  Under  the  Michi- 
gan statutes  service  may  be  made  on 
foreign  corporations  by  service  on  a 
resident  agent  who  is  in  charge  of 
the  property.  Shaf er  Iron  Co.  v.  Iron 


County  Circuit  Judge,  88  Mich.  464 
(1891).  Under  the  statutes  of  Michi- 
gan service  on  a  foreign  corporation 
may  be  made  on  a  traveling  sales- 
man in  a  cause  of  action  which  arose 
within  the  state.  Ryerson  v.  Steere, 
72  N.  W.  Rep.  131  (Mich.,  1897).  An 
advertising  agent  is  not  an  "  agent " 
upon  whom  service  may  be  made 
under  the  New  Jersey  statute.  Mul- 
hearn  v.  Press  Pub.  Co.,  53  N.  J.  L. 
150  (1800).  A  local  agent  of  a  do- 
mestic insurance  company  is  not  an 
agent  employed  in  the  general  man- 
agement of  the  business.  State  Ins. 
Co.  V.  Waterhouse,  78  Iowa,  674 
(1889).  Service  may  be  upon  a  gen- 
eral superintendent  when  the  statute 
authorizes  it  on  a  managing  agent. 
Barrett  v.  American,  etc.  Co.,  56  Htm, 
430  (1890).  An  employee  who  attends 
to  the  publication  of  a  periodical,  and 
the  printing,  binding,  and  mailing,  is 
not  a  "  managing  agent."  Rviland  v. 
Canfield  Pub.  Co.,  10  N.  Y.  Supp.  913 
(1890).  An  agent  is  not  an  "  officer." 
Banks  v.  Gay  Mfg.  Co.,  108  N.  C.  283 
(1891).  Where  by  statute  the  state 
superintendent  of  insurance  is  made 
agent  to  accept  service  of  process  on 
foreign  insurance  companies  doing 
business  in  the  state,  service  on  him 
by  mail  is  insufficient.  Farmer  v. 
National  Life  Assoc,  50  Fed.  Rep.  829 
(1892).  The  attachment  papers  in  an 
attachment  against  a  foreign  corpo- 
ration must  show  the  jurisdiction  of 
the  court.  Oliver  v.  Walter,  etc.  Co., 
10  N.  Y.  Supp.  771  (1890). 

1  St.  Louis,  etc.  R"y  v.  James,  161 
U.  S.  545  (1896). 

2  Martin  v.  Baltimore,  etc.  R.  R,  151 
U.  S.  073  (1894). 


1653 


§  759.] 


PAKTIES,  PLEADINGS,  ETC. 


[CU,  XLV. 


purposes  of  jurisiliction.*  The  various  states  have  different  stat- 
utes on  this  subject  and  they  are  set  forth  elsewhere,* 

Sometimes  the  statutes  require  a  foreign  corporation  to  ap- 
point a  resident  agent  to  accept  service  before  it  does  business 
in  the  state.^ 

§  759.  Jurisdiction  of  the  federal  courts  —  ^^  Dummy  ^^  cor- 
jmralions  —  Residence  of  corporalions  —  Jurisdiction  where 
service  is  on  an  officer  temporarihj  in  the  state  —  Federal  cor- 
porations.—  Although  a  bill  in  equity  sets  forth  that  a  cor- 
poration is  merely  a  pretended  corporation,  as  a  part  of  a 
fraudulent  scheme,  and  is  really  nothing  but  a  partnership, 
nevertheless,  if  such  corporation  has  an  existing  charter,  it  ex- 
ists as  a  corporation,  sulhciently  at  least  to  oust  the  federal 
court  of  jurisdiction  of  the  case.*    But  where  property  is  trans- 


1  Western,  etc.  R.  R.  v.  Roberson,  61 
Fed.  Rep.  592  (1894).  The  fact  that 
by  statute  a  foreign  corporation  by 
filing  certain  papers  is  declared  to  be 
a  domestic  corporation  does  not  pre- 
vent it  from  removing  a  case  to  the 
federal  court  as  being  a  foreign  cor- 
poration. Markwood  v.  Southern  R'y, 
65  Fed.  Rep.  817  (1895).  Although  a 
statute  authorizes  a  foreign  corpora- 
tion to  build  a  road  in  tlie  state,  this 
does  not  make  the  corporation  a  do 
mestic  corporation  so  far  as  the  juris- 
diction of  the  federal  courts  is  con- 
cerned. Chapman  v.  Alabama,  etc. 
R.  R,  59  Fed.  Rep.  370  (1894). 

2  See  Part  VII,  infra. 

3  Goodwin  v.  Colorado,  etc.  Co.,  110 
U.  S.  1  (1884);  Gibbs  v.  Queen  Ins. 
Co.,  63  N.  Y.  114  (1875).  See  also 
§§  697-700,  supra;  also  note  3,  p.  1658. 
A  judgment  obtained  by  such  serv- 
ice cannot  be  impeached  in  other 
jurisdictions.  Lafayette  Ins.  Co.  v. 
French,  18  How.  404  (1855);  Moch  v. 
Virginia  F.  &  M.  Ins.  Co.,  10  Fed.  Rep. 
696  (1882).  Transacting  business  with- 
out filing  is  equivalent  to  filing.  Ehr- 
man  v.  Teutonia  Ins.  Co.,  1  McCrary, 
123  (1880).  The  appointment  of  such 
an  agent  does  not  affect  the  right  of 
the  corporation,  as  a  citizen  of  an- 
other state,  to  sue  and  be  sued  in  the 

1654 


federal  courts.  Stevens  v.  Phoenix 
Ins.  Co.,  41  N.  Y.  149  (1809);  Gray  v. 
Quicksilver  Min.  Co.,  21  Fed.  Rep.  288 
(1884).  For  decisions  under  the  Mas- 
sachusetts statute  requiring  foreign 
insurance  companies  to  appoint  an 
agent  to  accept  service,  see  Thayer  v. 
Tyler,  76  Mass.  164  (1857);  National 
Mut.  F.  Ins.  Co.  V.  Pursell,  92  Mass. 
231  (1865);  Leonardo.  Washburn,  100 
Mass.  251  (1868);  Gillespie  v.  Commer- 
cial, etc.  Ins.  Co.,  78  Mass.  201  (1858); 
Morton  v.  Mutual  L.  Ins.  Co.,  105  Mass. 
141  (1870).  An  appointment,  under 
statute,  of  a  resident  agent  to  accept 
service  continues  until  a  new  appoint- 
ment is  made.  Gibson  v.  Manufact- 
urers' Ins.  Co.,  144  Mass.  81  (1887). 

••Empire,  etc.  Transp.  Co.  v.  Em- 
pire, etc.  Min.  Co.,  150  U.  S.  159  (1893). 
In  Irvine  Co.  v.  Bond,  74  Feci  Rep. 
849  (1896),  an  owner  of  land  in  Cali- 
fornia incorporated  a  company  under 
the  laws  of  West  Virginia  and  trans- 
ferred to  it,  in  payment  for  stock,  cer- 
tain portions  of  his  land.  He  owned 
all  the  stock,  and  caused  one  share 
each  to  be  issued  to  his  lawyer,  his 
wife,  and  three  employees.  The  court 
held  that  the  corporation  was  legal 
so  far  as  the  jurisdiction  of  the  United 
States  court  was  concerned. 


CH.  XLV.] 


PARTIES,  PLEADINOS,  ETC. 


[§  T59. 


f erred  to  a  non-resident  corporation  for  the  sole  purpose  of  en- 
ablino-  the  parties  to  litigate  a  claim  in  the  United  States  courts, 
the  United  States  courts  will  refuse  to  take  jurisdiction.^  The 
jurisdiction  of  the  federal  court  depends  upon  the  state  wherein 
the  corporation  is  incorporated,  and  not  upon  the  state  or  states 
wherein  the  stockholders  reside.^  Where  a  raikoad  runs  through 
several  federal  districts  in  a  state,  it  is  a  citizen  and  inhabitant 
of  the  district  where  it  does  the  general  business  and  has  its 
headquarters  and  general  offices.^  The  objection  that  neither 
of  the  parties  resides  in  the  district  where  suit  is  brought  is 
waived  by  appearing  generally.*  In  the  circuit  court  of  the 
United  States  it  was  formerly  the  law  that  a  corporation  incor- 
porated beyond  the  circuit  in  which  the  suit  was  brought  might 

ton,  13  Wall.  270,  283  (1871),  holding 
that  a  corporation  is  deemed  to  be  a 
citizen  of  the  state  creating  it  for  the 
purpose  of  conferring  jurisdiction 
upon  the  courts  of  the  United  States, 
and  the  legislation  of  other  states 
will  not  affect  this  presumption;  In- 
surance Co.  V.  Francis,  11  Wall  210 
(1870),  holding  that  an  allegation  that 
a  New  York  corporation  is  located 
and  doing  business  in  Mississippi  was 
not  an  allegation  that  it  was  a  citizen 
of  the  latter  state;  Steamship  Co.  v. 
Tugman,  106  U.  S.  118  (1882),  holding 
that  the  residence  of  the  corporation 
does  not  at  all  depend  on  the  resi- 
dence of  its  stockholders. 

3  Galveston,  etc.  R'y  v.  Gonzales, 
151  U.  S.  496  (1894). 

4  Interior  Constr.  &  Imp.  Co.  v.  Gib- 
ney,  160  U.  S.  217  (1895).  A  New 
York  corporation  may,  by  bill  filed 
in  the  Virginia  district  of  the  United 
States  court,  have  a  receiver  ap- 
pointed of  property  there  of  a  New 
Jersey  corporation,  if  the  defendant 
does  not  object  to  the  jurisdictioru 
Stockholders  and  creditors  of  the 
defendant  company  cannot,  by  inter- 
vening, raise  the  question  of  juris- 
diction. Central  T.  Co.  v.  ]McGeorge, 
151  U.  S.  129  (1894). 


1  Lehigh,  etc.  Co.  v.  Kelly,  100  U.  S. 
327  (1895). 

-'St.  Louis,  etc.  Ry  v.  James,  161 
U.  S.  545  (1896).    In  Interstate  Com. 
Commission  v.  Texas  &  Pac.  R'y,  57 
Fed.  Rep.  948  (1893),  the  court  held 
that  the  principal  office  and  domicile 
of  the  defendant  was  in  New  York 
city,  where  the  company  held  its 
stockholders  and  directors'  meetings 
and  kept  its  stock  books  and  records, 
even  though  the  general  or  adminis- 
trative offices  of  the  heads  of  depart- 
ments were  in  Texas.    The  company 
itself  existed  under  a  charter  granted 
by  congress.     "The  members  of  a 
corporate  body  must  be  conclusively 
presumed  to  be  citizens  of  the  state 
in  which  the  corporation  is  domi- 
ciled."   Shaw  V.  Quincy  Min.  Co.,  145 
U.  S.  444  (1892).     A  corporation  is  a 
resident  only  of  the  state  that  incor- 
porates it,  so  far  as  the  jurisdiction 
of  the  federal  courts  is  concerned. 
Myers  v.  Murray,  etc.  Co.,  43  Fed. 
Rep.  695  (1890).    The  place  of  resi- 
dence of  a  corporation  is  the  state 
wherein  it  is  incorporated.    So  held 
under  the  act  for  the  removal  of 
causes.    Miller  v.  Wheeler,  etc.  Co., 
46  Fed.  Rep.   882  (1891);    Overman 
Wheel  Co.  v.  Pope  Mfg.  Co.,  46  Fed. 
Rep.  577  (1891);  Railway  Co.  v.  Whit- 

16 


§  759.] 


PARTIES,  PLEADINGS,  ETC. 


[cn.  XLV. 


be  made  a  defendant  by  such  service  as  suffices  in  the  state 
wherein  the  suit  was  brought,  if  it  did  business  there.^  But  by 
the  act  of  congress  of  1887  a  suit  in  the  federal  courts  can  be 
instituted  only  in  the  district  where  either  the  plaintiff  or  de- 
fendant resides,  where  the  jurisdiction  of  the  court  is  duo  to 
the  parties  being  citizens  of  different  states.''  Nevertheless 
where  a  removable  suit  is  properly  commenced  in  a  state  court 


iNew  England  Mut.  Ins.  Co,  v. 
Woodworth,  111  U.  S.  138, 146  (1883); 
Eaton  V.  St.  Louis,  etc.  Co.,  7  Fed. 
Rep.  139  (1881):  M'Coy  t?.  Cincinnati, 
etc.  R  R,  13  Fed.  Rep.  3  (1882);  St. 
Louis,  etc.  Co.  v.  Consolidated,  etc. 
Co.,  32  Fed.  Rep.  802  (1887);  Hunter 
V.  International  R'y  Imp.  Co.,  26  Fed. 
Rep.  299  (1886);  Block  v.  Atchison, 
etc.  R.  R,  21  Fed.  Rep.  529  (1884); 
Carpenter  v.  Westinghouse  Air-brake 
Co.,  32  Fed.  Rep.  434  (1887).  But  see 
Good  Hope  Co.  v.  Railway,  eta  Co., 
22  Fed.  Rep.  635  (1884),  holding  that 
service  on  the  president,  who  was 
there  to  adjust  a  difficulty,  was  in- 
sufficient. Cf.  Estes  V.  Belford,  22 
Fed.  Rep.  275  (1884),  where  a  patent- 
right  had  been  used  in  the  jurisdic- 
tion. Service  on  an  agent  of  a  do- 
mestic corporation  does  not  give  ju- 
risdiction over  a  foreign  corporation, 
though  the  latter  operates  through 
the  former.  U.  S.  v.  American  Bell 
TeL  Co.,  29  Fed.  Rep.  17  (1886).  Un- 
less the  state  statute  provide  other- 
vp-ise,  no  jurisdiction  is  acquired  by 
attachment  of  property  and  service 
of  papers  on  resident  officers  of  a  for- 
eign corporation.  Boston  Electric 
Co.  V.  Electric  Gas  L.  Co.,  23  Fed.  Rep. 
838  (1885),  reviewing  the  authorities. 
Where  the  foreign  corporation  has 
appointed  a  resident  agent  to  accept 
service,  the  federal  court  has  juris- 
diction by  service  on  such  agent. 
Ux  parte  Schollenberger,  96  U.  S.  369 
(1877);  Knott  v.  Southern  L.  Ins.  Co., 
2  Woods,  479  (1874);  S.  C,  14  Fed.  Cas. 
785;  Merchants'  Mfg.  Co.  v.  Grand 
Trunk  R'y,  63  How.  Pr.  459   (1882, 


U.  S.  C.  Ct.),  where  a  foreign  corpo- 
ration sued  an  alien  corporation; 
Lung  Chung  v.  Northern  Pac.  R'y, 
19  Fed.  Rep.  254  (1884),  where  service 
was  insufficient;  Gray  v.  Quicksilver 
Min.  Co.,  21  Fed.  Rep.  288  (1884).  The 
fact  that  a  state  is  a  stockholder  in 
a  coriwration  does  not  deprive  the 
United  States  courts  of  jurisdiction 
where  the  corporation  is  a  party. 
Bank  of  U.  S.  v.  Planters'  Bank,  9 
Wheat.  904  (1824).  In  the  federal 
courts  service  on  a  ticket  solicitor  of 
a  railroad  defendant  for  a  cause  of 
action  arising  in  another  circuit  is 
insufficient.  Maxwell  v.  Atchison, 
etc.  R.  R,  34  Fed,  Rep.  286  (1888).  As 
to  the  affidavit  to  be  made  by  the 
corporation  in  order  to  remove  a  case 
to  the  United  States  court,  see  Mix 
V.  Andes  Ins.  Co.,  74  N.  Y.  53  (1878). 
An  order  to  show  cause  may  be 
served  on  the  cashier  of  an  insolvent 
bank,  although  the  bank  is  in  a  re- 
ceiver's hands.  Piatt  v.  Archer,  9 
Blatchf.  559  (1872);  S.  C,  19  Fed-  Cas. 
822.  A  Connecticut  corporation  can- 
not be  sued  by  an  alien  in  the  Cali- 
fornia circuit  court  of  the  United 
States.  Denton  v.  International  Co., 
36  Fed.  Rep.  1  (1888);  Filli  v.  Delaware, 
etc.  R  R.,  37  Fed.  Rep.  65  (1888),  But 
see  Riddle  v.  New  York,  etc.  R  R,  39 
Fed.  Rep.  290  (1889).  See  also  Connor 
V.  Vicksburg,  etc.  R  R.,  36  Fed.  Rep. 
273  (1888);  Preston  v.  Fire  Extin- 
guisher Mfg.  Co.,  36  Fed.  Rep.  721 
(1888), 

2  Stat,  at  L.  1887,  sess.  II,  ch-  373. 
See  also  cases  in  preceding  note. 


1656 


OH.  XLV.] 


PAKTIESj  PLEADINGS,  ETC. 


[§  T5D. 


it  may  be  removed  to  the  federal  court,  thougli  neither  of  the 
parties  resides  in  that  district.^ 

A  iudo-ment  against  a  foreign  corporation  based  on  service 
upon  the°president  while  temporarily  in  the  state  is  not  enforce- 
able in  other  states,  the  corporation  not  being  engaged  m  busi- 
ness or  having  any  agent  in  the  state  where  the  judgment  was 

obtained.-  _    ^    ,     .  . 

The  federal  courts  refuse  to  follow  the  Kew  York  decisions 
and  statute  allowing  suit  to  be  brought  against  a  foreign  cor- 
poration by  service  upon  the  president  while  temporarily  withm 
the  state,  the  corporation  not  being  engaged  in  business  m  the 
state  On  removal  of  the  case  to  the  federal  court  the  service 
will  be  set  aside.  A  special  appearance  for  that  purpose  may 
be  put  in.' 


1  Kansas  City,  etc.  R  R.  v-  Inter- 
state Lumber  Co.,  37  Fed.  Rep.  3 
(1888).  See  also  Zambrino  v.  Galves- 
ton, etc.  R'y,  38  Fed.  Rep.  449  (1889); 
Riddle  v.  New  York,  etc.  R.  R>,  39 
Fed.  i;ep.  290  (1889).  Where  a  state 
sues  a  corporation  in  a  state  court, 
the  defendant  cannot  remove  the 
case  into  the  federal  court  on  the 
ground  of  diverse  citizenship,  inas- 
much as  the  state  is  not  a  citizen. 
Postal  TeL  Cable  Co.  v.  Alabama,  155 
U.  S.  482  (1894). 

2  Goldey  v.  Morning  News,  156  XJ.  S. 
518  (1895).    Service  on  the  president 
of  a  foreign  corporation  in  a  cause  of 
action  not  arising  in  the  state  gives 
no    jurisdiction.    State    v.    Ramsey 
County  Dist.  Ct.,  26  ^linn.  233  (1879). 
Service  on  the  secretary  who  is  cas- 
ually in  the  state  is  not  good.    Mid- 
dlebrooks  v.  Springfield  F.  Ins.  Co., 
14  Conn.  301  (1841).     A  foreign  cor- 
poration cannot  be  boimd  by  obtain- 
ing service  upon  an  oflScer  who  is 
casually  in  the  state,  where  the  stat- 
ute is  silent  on  the  subject    Aldrich 
V.  Anchor  Coal  Co.,  24  Oreg.  32(1893). 
Service  of  process  upon  the  president 
of  a  foreign  corporation  who  is  tem- 
porarily within  the  state  is  not  good 
service  in  Pennsylvania,    Phillips  v. 


Burlington  Library  Co.,  141  Pa.  St 
462  (1891).    Service  on  a  domestic  cor- 
poration cannot  be  made  by  personal 
service  on  the  president  outside  of 
the  jurisdiction.    Dillard  v.  Central 
Va.  Iron  Co.,  82  Va.  734  (1887).  Judg- 
ment in  another  state  against  a  for- 
eign corporation  doing  business  there, 
serA'ice  being  on  an  officer  who  is  ac- 
cidentally in  the  state,  is  conclusive 
and  valid.    Moulin  v.  Trenton,  etc. 
Ins.  Co.,  24  N.  J.  L.  222  (1853).    Serv- 
ice on  a  corporation  which  does  no 
business  in  the  state  cannot  be  made 
by  service  on  an  agent  who  is  tem- 
porarily in  the  stata    Crook  v.  Gi- 
rard,  etc.  Co.,  39  AtL  Rep.  94  (Md., 
1898).    The  manager  may  be  served, 
although  only  temporarily    in    the 
state  on  special  business,  such  suit 
being  connected  with  such  business. 
Houston  V.  Filer,  etc.  Co.,  85  Fed.  Rep. 
757  (1898). 

3  Glews  V.  Woodstock  Iron  Co.,  44 
Fed.  Rep.  31  (1890).  Sen-ice  on  an 
officer  of  a  foreign  corporation  who 
temporarily  comes  within  the  state 
is  not  good  and  will  be  set  aside. 
Goldey  v.  Morning  News,  42  Fed. 
Rep.  112  (1890).  A  foreign  corpora- 
tion sued  in  state  coiurts  by  service 
on  a  director  casually  in  the  state 


165'; 


§  T59.] 


PAKTIESj  PLEADINGS,  ETC. 


[CH.  XLV. 


Moreover,  the  federal  court  in  "New  York  may  have  jurisdic- 
tion of  a  suit  at  law  brought  by  a  non-resident  against  a  for- 
eign corporation,  even  though  under  the  statutes  of  New  York 
the  state  courts  would  have  no  jurisdiction  of  such  case.^  An 
alien  corporation  may  be  sued  wherever  service  may  legally  be 
obtained  upon  it.^ 

A  large  number  of  decisions  are  given  in  the  notes  below  on 
the  various  phases  of  the  jurisdiction  of  the  federal  courts  in 
suits  brought  against  foreign  corporations.' 


may  remove  to  United  States  court 
and  have  the  suit  dismissed.  Bent- 
lif  V.  London,  etc.  Corp.,  44  Fed,  Rep. 
667  (1890).  On  removal  to  the  fed- 
eral court,  a  suit  commenced  by  serv- 
ice on  the  president,  who  casually 
was  in  the  jurisdiction  on  private 
business,  will  be  dismissed,  the  com- 
pany never  having  transacted  busi- 
ness or  maintained  an  office  in  the 
state.  Reifsnider  v.  American,  etc. 
Co.,  45  Fed.  Rep.  433  (1891).  "  Where 
a  foreign  corporation  is  not  doing 
business  in  a  state,  and'the  president 
or  any  officer  is  not  there  transact- 
ing business  for  the  corporation  and 
representing  it  in  the  state,  it  cannot 
be  said  that  the  cori3oration  is  within 
the  state  so  tliat  service  can  be  made 
upon  it."  Fitzgerald,  etc.  Co.  v.  Fitz- 
gerald, 137  U.  S.  98  (1890).  Where  a 
corporation  appears,  demurs,  removes 
the  case  into  the  federal  court,  and 
answers,  it  cannot  attack  the  juris- 
diction of  the  court,  even  though 
service  was  on  the  president,  who 
was  enticed  into  the  state.  Fitz- 
gerald, etc.  Co.  V.  Fitzgerald,  137  U.  S. 
98  (1890).  Where  a  foreign  corpora- 
tion sued  in  a  state  court  wishes  to 
remove  the  case  to  the  federal  court, 
and  there  have  the  service  set  aside 
on  the  ground  of  want  of  jurisdic- 
tion, it  must  enter  a  special  appear- 
ance in  the  state  court  for  the  pur- 
pose of  objecting  to  the  jurisdiction, 
and  then,  after  filing  the  objection, 
but  before  a  hearing  thereon,  remove 
the  whole  case  into  the  federal  court. 


Tallman  v.  Baltimore,  etc.  R.  R,,  45 
Fed.  Rep.  156  (1891).  See  also  note  2, 
p.  1662. 

1  Barrow  S.  S.  Co.  v.  Kane,  170  U.  S. 
100  (1898). 

2  If  it  has  financial  agents  in  New 
city,  and  an  office  there  for  the  trans- 
action of  its  monetary  and  financial 
business  in  the  United  States,  service 
in  New  York  upon  the  head  of  the 
firm  which  acts  as  the  agents  of  the 
corporation  is  a  sufficient  service  upon 
the  corporation  itself.  Re  H^horst, 
150  U.  S.  653  (1893). 

3  A  corporation  organized  in  one 
state  cannot  be  sued  in  the  federal 
court  in  another  state  by  a  citizen  of 
a  third  state.  Shaw  v.  Quincy  Min. 
Co.,  145  U.  S.  444  (1892),  holding  also 
that  the  defendant  may  appear  spe- 
cially. Service  upon  the  highest  offi- 
cer within  the  county  is  sufficient 
where  the  statutes  so  prescribe.  Kan- 
sas City,  etc.  R  R.  v.  Daughtry,  138 
U.  S.  298  (1891).  Service  upon  an  at- 
torney of  a  corporation,  appointed 
under  a  state  statute  to  accept  serv- 
ice, is  good  service  for  the  federal 
courts.  lie  LouisviUe  Underwriters, 
134  U.  S.  488  (1890).  Under  a  state 
statute  authorizing  service  of  process 
upon  a  local  agent  of  a  foreign  corpo- 
ration, jurisdiction  may  be  obtained 
by  the  federal  courts.  Societe  Fon- 
ciere  v.  Milliken,  135  U.  S.  304  (1890). 
The  status  of  a  corporation  in  regard 
to  the  jurisdiction  of  the  federal 
courts  is  stated  in  U.  S.  v.  Southern 
Pac.  R.  R.,  49  Fed.  Rep.  297  (1892).    A 


1658 


CH. 


XLV.] 


PAETIES,  rLEADIXGS,  ETC. 


[§  T59. 


A  corporation  incorporated  by  the  United  States  may,  by 


foreign  corporation  doing  business  in 
Ohio  and  having  a  managing  agent 
there  may  be  garnished  there  under 
the  statutes  of  Ohio.  Rainey  v.  Maas, 
51  Fed.  Rep.  580  (1892).  A  railroad 
corporation  is  a  resident  of  each  fed- 
eral district  through  which  it  runs. 
East  Tennessee,  etc.  R.  R.  v.  Atlanta, 
etc.  R.  R.,  49  Fed.  Rep.  608  (1892). 
Where  an  alien  co:-poration  appoints 
a  resident  agent  to  accept  service,  it 
becomes  an  "  inhabitant,"  and  may 
be  sued  in  the  federal  court.  Gilbert 
V.  New  Zealand  Ins.  Co.,  49  Fed.  Rep. 
884  (1892).  The  word  "inhabitant" 
applies  to  corporations,  in  respect  to 
statutory  jurisdiction  of  courts.  Gil- 
bert r.  New  Zealand  Ins.  Co.,  49  Fed. 
Rep.  884  (1892).  A  corporation  is  not 
an  "  inhabitant "  of  any  state  except 
the  one  wlierein  it  is  incorporated. 
Campbell  v.  Duluth,  etc.  R'y,  50  Fed. 
Rep.  241  (1892).  It  has  been  held  that 
a  limited  partnership  organized  under 
the  laws  of  Pennsylvania  is  not  a  citi- 
zen of  that  state  so  as  to  enable  it  to 
remove  a  case  to  the  federal  court, 
irrespective  of  the  citizenship  of  its 
members.  Carnegie,  etc.  Co.  v.  Hul- 
bert,  53  Fed.  Rep.  10  (1892).  A  foreign 
corporation  may  be  sued  in  the  fed- 
eral court  in  the  state  where  the 
plaintiff  resides,  although  it  had  filed 
its  certificate  of  incorporation  with 
the  secretary  of  state  vmder  the  stat- 
ute, and  had  stipulated  not  to  remove 
any  case  into  the  federal  court.  Such 
a  stipulation  is  unconstitutional  and 
void.  Southern  Pac.  Co.  v.  Denton, 
14G  U.  S.  202  (1892).  The  place  of  resi- 
dence of  a  corporation  is  the  state 
wherein  it  is  incorporated.  So  held 
under  the  act  for  the  removal  of 
causes.  Miller  v.  Wheeler,  etc.  Co., 
46  Fed.  Rep.  882  (1891);  Overman 
Wheel  Co.  v.  Pope  Mfg.  Co.,  46  Fed. 
Rep.  577  (1891).  A  foreign  corpora- 
tion filing  a  certificate  as  required 
by  statute  is  not  a  non-resident  as  re- 


gards the  right  to  remove  cases  to 
the  federal  courts.  Scott  v.  Texas, 
etc.  Co.,  41  Fed.  Rep.  225  (1889).  A 
corporation  is  a  resident  only  of  the 
state  wlierein  it  is  incorporated,  as 
regards  tlie  jurisdiction  of  the  United 
States  coui'ts.  Although  another 
party  defendant  is  an  actual  resident 
in  the  district  where  suit  is  brought, 
yet  the  foreign  corporation  cannot 
be  sued  there  on  that  account.  Ben- 
singer,  etc.  Co.  V.  National  Cash  Reg. 
Co.,  42  Fed.  Rep.  81  (1890).  If  two 
corporations  sued  on  a  tort  are  liable 
severally,  one  may  remove  the  case, 
although  the  other  cannot,  to  the  fed- 
eral court.  Spangler  v.  Atchison,  etc. 
R.  R.,  42  Fed.  Rep.  305  (1890).  An  alien 
corporation  may  remove  a  case  to 
the  federal  courts.  Purcell  v.  British, 
etc,  Co.,  42  Fed.  Rep.  465  (1890). 

A  consolidated  railroad  running 
into  two  states  is  a  separate  corpora- 
tion in  each  state,  and,  being  sued  in 
one  state,  cannot  remove  the  case  to 
the  federal  court  on  the  ground  that 
it  is  a  citizen  of  the  other  state.  Paul 
V.  Baltimore,  etc.  R'y,  44  Fed.  Rep. 
513  (1890).  A  foreign  corporation  de- 
fendant may  remove  a  case  to  the 
federal  court  although  it  has  filed 
a  statutory  certificate  authorizing 
service  on  a  designated  agent.  Ams- 
den  V.  Norwich,  etc.  Ins.  Soc,  44  Fed. 
Rep.  515  (1890).  A  statute  prohibit- 
ing a  foreign  corporation  from  suing 
in  the  state  courts  unless  it  has  filed 
a  copy  of  its  articles,  etc.,  in  the 
state,  if  it  is  doing  business  in  the 
state,  does  not  prevent  such  a  corpo- 
ration from  bringing  suit  in  the  fed- 
eral courts,  although  it  has  not  filed 
its  articles,  etc.  Bank  of  British  N.  A 
V.  Barling,  44  Fed.  Rep.  641  (1890). 
A  judgment  creditor  of  an  insolvent 
corporation  may  file  a  bill  in  equity 
in  the  federal  court  to  subject  the 
property  to  the  payment  of  the  debt, 
although  a  suit  is  pending  in  the 


1659 


759.] 


PARTIES,  PLEADINGS,  ETC. 


[CH.  XLV. 


reason  of  that  fact,  bring  suits  in  or  remove  them  to  the  fed- 


state  court  to  reduce  the  amount  of 
complainant's  claim  to  a  less  figure. 
The  issues  are  different.  Coffin  v. 
Chattanooga,  etc.  Co.,  44  Fed.  Rep. 
533  (1891).  A  suit  cannot  be  brought 
in  the  federal  court  against  a  corpo- 
ration except  in  the  district  where 
the  company  is  incorporated.  Na- 
tional Typog.  Co.  V.  New  York  Tj7)og. 
Co.,  44  Fed.  Rep.  711  (1890).  When  a 
defendant  foreign  corporation  seeks 
to  remove  a  case  to  the  federal  courts 
it  must  aver  it  is  a  non-resident.  An 
averment  of  its  citizenship  is  insuffi- 
cient. Hirschl  v.  J.  I.  Case,  etc.  Co., 
43  Fed.  Rep.  803  (1890).  A  foreign 
corporation  may  be  sued  in  the  fed- 
eral courts  although  it  has  an  office 
and  does  business  in  the  state.  Hen- 
ning  V.  Western  U.  Tel.  Co.,  43  Fed. 
Rep.  97  (1890).  Although  a  Missouri 
corporation  is  made  an  Arkansas 
corporation  also  by  statute,  yet  it 
may  remove  cases  to  the  federal 
court  as  though  it  were  a  Missouri 
corporation  alone.  Stephens  v.  St. 
Louis,  etc.  R  R.,  47  Fed.  Rep.  530 
(1891).  The  fact  that  the  C,  B.  &  Q. 
R.  R.  Co.,  an  Illinois  corporation,  first 
took  a  lease  of  and  then  purchased 
the  road  of  the  B.  &  M.  R.  R.  Co.  in 
Iowa,  does  not  make  the  former  com- 
pany an  Iowa  corporation.  It  con- 
tinues an  Illinois  coi'poration.  Conn 
V.  Chicago,  etc.  R.  R.,  48  Fed.  Rep. 
177  (1891).  A  railroad  corporation  of 
one  state  purchasing  a  railroad  in 
another  state  does  not  thereby  be- 
come a  resident  of  the  latter  state  so 
as  to  prevent  its  removing  cases  to 
the  federal  court.  Morgan  v.  East 
Tennessee,  etc,  R.  R.,  48  Fed.  Rep. 
705  (1883).  If  no  objection  is  raised 
in  the  proper  manner  the  jurisdic- 
tion of  the  federal  court  cannot  be 
questioned.  The  proceedings  are  not 
void.  McBride  v.  Grand,  etc.  Co.,  40 
Fed.  Rep.  163  (1889).  An  alien  cor- 
poration doing  business  in  Oregon 


may  be  sued  there  in  the  federal 
courts.  It  is  an  "  inhabitant "  to  that 
extent.  Miller  v.  Eastern,  etc.  Miru 
Co.,  45  Fed.  Rep.  345  (1891).  A  stat- 
ute requiring  foreign  corporations 
to  file  a  stipulation  which  is  for- 
feited in  case  the  corporation  re- 
moves any  case  to  the  federal  courts 
is  void.  And  even  if  valid  the  cor- 
poration cannot  be  forbidden  to  liti- 
gate past  rights  or  recover  property 
already  acquired.  Texas,  etc.  Co.  v. 
W^orsham,  76  Tex.  556  (1890).  Al- 
though a  New  York  corporation  does 
practically  all  of  its  business  in  Mis- 
souri, yet  it  is  a  citizen  of  New  York. 
Baughman  v.  National,  etc.  Co.,  4& 
Fed.  Rep.  4  (1891). 

A  company  organized  under  the 
statutes  of  Pennsylvania  and  having 
mixed  characteristics  of  a  partner- 
ship and  corporation  is  a  corporation 
so  far  as  removal  to  the  federal  court 
is  concerned.  Bushnell  v.  Park,  46 
Fed.  Rep.  209  (1891);  Blackburn  v. 
Selma,  etc.  R.  R.,  2  Flipp.  525  (1879); 
S.  C,  3  Fed.  Cas.  526,  holding  that  en- 
tering appearance  waives  the  right 
to  object  to  the  jurisdiction  of  a  fed- 
eral court.  To  same  effect,  De  Sobry 
V.  Nicholson,  8  Wall.  420  (1805);  Hay- 
den  V.  Androscoggin  Mills,  1  Fed. 
Rep.  93  (1879),  holding  that  it  may 
be  sued  in  federal  courts,  though  its 
property  has  been  attached,  if  doing 
business  in  the  state  and  process  can 
be  served;  Boston  Electric  Co.  v. 
Electric  Gas.  L.  Co.,  23  Fed.  Rep.  838 
(1835).  In  this  case  a  Maine  coi'pora- 
tion had  its  principal  office  in  Massa- 
chusetts, where  also  a  majority  of  its 
officers  and  directors  resided.  Held, 
that  the  federal  courts  of  Massachu- 
setts had  no  jurisdiction  over  it, 
though  suit  was  begun  by  attach- 
ment and  service  upon  the  corporate 
officers.  Hatch  v.  Chicago,  etc.  R.  R., 
6  Blatchf.  105  (1868);  S.  C,  11  Fed. 
Cas.   799,  holding   that    having    an 


1660 


€H.  XLV.] 


PARTIES,  PLEADINGS,  ETC. 


[§  T59. 


eral  courts,  unless  the  statute  provides  otherwise.^  A  Pennsyl- 
vania "  partnership  association  "  organized  under  the  statutes 
of  Pennsylvania  is  a  corporation  so  far  as  the  jurisdiction  of 

office  and  doing  business  in  another 
state  does  not  affect  its  citizenship; 
Williams  v.  Missouri,  etc.  R'y,  3  Dill. 
267  (1875);  S.  C,  29  Fed.  Cas.  1377; 
Stevens  v.  Phoenix  Ins.  Co.,  41  N.  Y. 
149  (1869). 

1  Pacific  R  R.  Removal  Cases,  115 
U.  S.  2  (1885);  Union  Pac.  R.  R.  v. 
McComb,  1  Fed.  Rep.  799  (1880);  Eby 
V.  Northern  Pac.  R.  R.,  36  Leg.  Int. 
164  (1879);  Hughes  v.  Northern  Pac. 
R'y,  18  Fed.  Rep.  106  (1883);  Allen  v. 
Texas,  etc.  R'y,  25  Fed.  Rep.  518  (1885), 
where  even  a  consolidation  with  do- 
mestic corporations  had  been  made 
and  state  statutes  prohibited  the  re- 
moval. A  case  to  the  contrary  is 
Myers  v.  Union  Pac.  R'y,  16  Fed.  Rep. 
292  (1882).  As  to  national  banks,  see 
Cruikshank  v.  Fourth  Nat.  Bank,  16 
Fed.  Rep.  888  (1883);  Farmers'  Nat. 
Bank  v.  McElhinney,  42  Fed.  Rep.  801 
(1890);  Farmers',  etc.  Nat.  Bank  v. 
Bearing,  91  U.  S.  29  (1875),  followed 
in  Rhoneru  First  Nat.  Bank,  14  Hun, 
136  (1878),  holding  that  an  attachment 
cannot  be  issued  against  national 
banks  until  after  fiual  judgment;  and 
overruling  Southwick  v.  First  Nat. 
Bank,  7  Hun,  96  (187G),  and  Bo  wen 
V.  First  Nat.  Bank,  34  How.  Pr.  408 
(1867).  It  has  been  held  that  they 
are  so  far  foreign  corporations  that 
they  may  be  required  to  give  secu- 
rity for  costs.  See  National  Park 
Bank  v.  Gunst,  1  Abb.  N.  Cas.  292 
(1876).  But  they  may  obtain  an  at- 
tachment on  property  to  the  same 
extent  that  a  domestic  coriDoration 
may.  ]\Iarket  Nat.  Bank  v.  Pacific 
Nat.  Bank,  64  How.  Pr.  1  (1882).  A 
company  incorporated  in  a  territory 
cannot  thereby  remove  a  case  to  the 
United  States  courts.  Adams  Exp. 
Co.  V.  Denver,  etc.  R'y,  16  Fed.  Rep. 
712  (1883).  A  right  to  change  of  venue 
to  the  residence  of  the  defendant  ma v 


enable  a  corporation  defendant  to 
change  it  to  the  place  where  it  does 
its  business,  though  incorporated  else- 
where. Guinn  v.  Iowa  Cent.  R'y,  14 
Fed.  Rep.  323  (1882).  A  District  of 
Columbia  insurance  company  cannot 
remove  cases  to  a  federal  court  for 
that  cause  alone.  Scheffer  v.  Na- 
tional Life  Ins.  Co.,  25  Minn.  534 
(1879).  National  banks  are  citizens 
of  the  state  wherein  they  are  located- 
National  Park  Bank  v.  Nichols,  4 
Biss.  315  (18G9);  S.  C,  17  Fed.  Cas. 
1228;  Manufacturers'  Nat.  Bank  v. 
Baack,  8  Blatchf.  137  (1871);  S.  C,  16 
Fed.  Cas.  671 ;  Davis  v.  Cook,  9  Nev. 
134  (1874).  Cf.  Kennedy  v.  Gibson,  8 
Wall  498  (1869);  U.  S.  Rev.  Stat.,  §640; 
Wilson  Coimty  v.  National  Bank,  103 
U.  S.  770  (1880);  Osborn  v.  Bank  of 
U.  S.,  9  Wheat.  738  (1824);  Cooke  v. 
State  Nat.  Bank,  52  N.  Y.  96  (1873); 
St.  Louis  Nat.  Bank  v.  Allen,  5  Fed. 
Rep.  551  (1881);  First  Nat.  Bank  v. 
Bohne.  8  Fed.  Rep.  145  (1881);  Third 
Nat.  Bank  v.  Harrison,  8  Fed.  Rep. 
721  (1881);  Union  Nat.  Bank  v.  Miller, 
15  Fed.  Rep.  703  (1883),  holding  that 
the  act  of  July  12,  1882,  placed  na- 
tional and  other  banks,  as  to  their 
right  to  sue  in  the  fedei-al  coui'ts,  on 
the  same  footing.  Cf.  Acts  of  Con- 
gress, 1888,  ch.  866.  As  to  unincor- 
porated joint-stock  companies,  see 
Chapman  v.  Barney,  129  U.  S.  677 
(1889).  A  railway  corporation  cre- 
ated by  act  of  congress  "  is,  in  every 
state  and  territory  of  the  Union  in 
whicTi  it  may  lawfully  exercise  its 
powers,  a  domestic  institution,"  and 
may  be  sued  in  the  federal  courts 
in  any  district  where  it  is  doing  busi- 
ness and  has  an  agent  upon  whom 
service  can  be  made.  Where  a  lease 
is  made  without  statutory  authority, 
the  lessor  may  be  served  with  process 
as  though  no  lease  had  been  mada 


1601 


759.] 


PAKTIES,  PLEADINGS,  ETC. 


[cn. 


XLV 


the  United  States  is  concerned.*  If  a  foreign  corporation  de- 
sires to  deny  that  it  has  been  properly  served,  it  may  put  in  a 
special  appearance  and  raise  the  objection  of  no  jurisdiction.- 


Where  the  statutes  of  a  state  pre- 
scribe the  mode  in  which  service 
raay  be  made,  all  corporations  subse- 
quently doing  business  in  the  state 
are  bound  by  service  so  mada  Van 
Dresser  v.  Oregon,  etc.  Nav.  Co.,  48 
Fed.  Rep.  203  (1891).  "The  circuit 
court  of  the  United  States  has  no 
jurisdiction,  eitlier  original  or  by  re- 
moval from  a  state  court,  of  a  suit  as 
one  arising  imder  the  constitution, 
laws,  or  treaties  of  the  United  States, 
unless  that  appears  by  the  plaintiff's 
statement  of  his  own  claim.  .  ,  . 
While  the  court  does  not  say  in  terms 
that,  to  authorize  the  removal  of  a 
cause  from  a  state  to  a  federal  court, 
it  must  appear  from  the  plaintiff's 
complaint  that  he  relies  upon  some 
provision  of  the  constitution,  laws,  or 
treaties  of  the  United  States,  it  does 
decide  that  he  must  so  far  rely,  or 
that  his  claim  must  so  far  be  predi- 
cated, upon  V  some  provision  of  the 
constitution,  law,  or  treaty  of  the 
United  States,  as  would  authorize 
him  to  bring  an  original  action  in 
the  circuit  court."  State  v.  Atchison, 
etc.  R'y,  77  Fed.  Rep.  389,  341,  343 
(1896). 


1  Andrews  Bros.  Co.  v.  Youngs- 
town  Coke  Co.,  80  Fed.  Rep.  58o  (1898). 

2  Provident,  etc.  Soc.  v.  Ford,  114 
U.  S.  035  (1885);  Friezen  v.  Allemania 
F.  Ins.  Co.,  30  Fed.  Rep.  349  (1886), 
holding  that  a  general  appearance 
waives  the  objection  to  jurisdiction. 
See  also  Brooks  v.  New  York,  etc.  R. 
R.,  30  Hun,  47  (1883),  holding  that  a 
general  answer  has  the  same  effect ; 
also  Cook  V.  Champlain  Transp.  Co., 
1  Denio,  91  (1845);  North  Missouri  R. 
R  V.  Akers,  4  Kan.  453  (1808),  holding 
that  after  entering  appearance  it  can- 
not question  the  jurisdiction  of  the 
court  in  an  action  upon  contract. 
See  also  §  752,  sxipra;  McCormick  v. 
Pennsylvania  Cent.  R  R,  49  N.  Y. 
303  (1872);  Lung  Chung  v.  Northern 
Pac.  R'y,  19  Fed.  Rep.  254  (1884);  Moch 
V.  Virginia  F.  &  M.  Ins.  Co.,  10  Fed. 
Rep.  096  (1882).  Where  a  foreign  cor- 
poration, seiwed  in  the  state  where  it 
is  incoi-porated,  answers  by  pleas  to 
the  jvu-isdiction  and  also  files  pleas 
to  the  merits,  reserving  its  rights 
Txnder  the  former  pleas,  it  waives 
any  objection  to  the  jurisdictioru 
St.  Louis,  etc.  R'y  v.  Whitley,  77  Tex. 
126  (1890).    See  also  note  3,  p.  1037. 


1662 


PART  T. 

BONDS,  MORTGAGES,  FORECLOSURES,  RECEIVERS,  AND 
REORGANIZATIONS. 


CHAPTER  XLYL 

BONDS,  NOTES,  ETC.,  OF  A  CORPORATION  —  GUARANTIES  AND 
ACCOMMODATION  PAPER. 


§  760.  A  corporation  may  borrow 
money  —  Loans  in  excess  of 
the  charter  or  contract 
limit  —  Overissues  of  bonds. 

761.  Bills,  notes,  and  acceptances 

may  be  made  and  issued  by 
corporations. 

762.  Bonds  may  be  issued  by  corpo- 

rations—Bonds may  be  valid 
although  tlie  mortgage  se- 
eming them  is  invalid  — 
Bonds  to  preferred  credit- 
ors —  Re-issues. 

763.  Pledge  of  bonds  by  a  corpora- 

tion  and  enforcement 
thereof. 
764  Forged  bonds  —  Priorities 
among  bonds  —  Incomplete 
bonds  —  References  to  the 
mortgage  —  Purposes  of  the 
issua 

765.  Attachments  levied  on 

bonds  —  Form  of  bonds  — 
Gold  clause  —  Seal  —  Can- 
cellation  and   subrogation. 

766.  Bonds   issued  below  par  for 

cash,  property,  or  construc- 
tion work  —  Dividend  of 
bonds  —  Bonds,  notes,  or 
mortgages  given  without 
consideration  —  Statutory 
and  constitutional  prohibi- 
tions relative  to  issues  of 
bonds  —  Fraudulent  issues 
of  bonds  — -Bojia  fide  pur- 
chasers of  bonds  issued  at 
less  than  their  par  value  are 
protected  —  Fraudulent  is- 
sues of  bonds  to  the  direct- 
ors, or  through  directors 
who  are  "dummies,"  or  to 

1GG3 


construction  companies  in 
which  the  directors  are  in- 
terested —  Who  may  com- 
f)lain  of  an  issue  of  bonds  at 
ess  than  par  —  Stockhold- 
ei-s  — The  state  —  The  corpo- 
ration itself  —  Bondliold- 
ers  —  Corporate  creditors  — 
Usury  as  affecting  bonds  is- 
sued at  less  than  par  —  Dis- 
tribution of  bonds  on  sale 
of  corporate  assets  —  Bonds 
and  stock  to  be  issued  to  a 
contractor  who  fails  to  per- 
fomi. 
§  767.  Negotiable  character  of  bonds 
and  coupons  of  a  corpora- 
tion payable  to  order,  bearer, 
or  holder  —  Lost  bonds. 

768.  The  negotiability  of  the  bonds 
extends  also  to  the  mort- 
gage. 

769.  Miscellaneous  features  of 
bonds  —  Issue  in  payment 
of  the  property  of  another 
coi-poration  —  Consolida- 
tions — Bondholders'  suits  — 
Bonds  exchangeable  into 
stock. 

770.  Suits  at  law  on  bonds  — De- 
•     mand  of  payment  —  Form 

of  action  —  Statute  of  limit- 
ations. 

771.  Coupons  and  interest 
bonds  —  Negotiability 
coupons  —  Participation 
foreclosure  —  Interest 
overdue  bonds  and  cou- 
pons—  Purchase  of  coupons 
when  presented  for  pay- 
ment. 


on 
of 
in 
on 


§  760.] 


BONDS    AND    COUPONS. 


[cn. 


XLVI. 


§  772.  Suit  to  collect  coupons  — Exe- 
cution cannot  be  levied  upon 
the  mortgaged  property  — 
Demand  of  payment  —  Stat- 
ute of  limitations. 

773.  Income  bonds. 

774.  Accommodation  paper  by  a 

corporation  —  Bona  fide 
holders. 

775.  Guaranty  by  one  corporation 

of  the  bonds  or  dividends  of 
another  corporation — Guar- 
anty by  an  individual 

§  Y60.  A  corjwration  may  Iwrroiv  money  —  Loans  in  excess 
of  the  charter  or  contract  limit — Occr  issues  of  ho  nils. —  The 
power  of  a  corporation  to  borro^y  money  is  implied,  and  exists 
without  being  expressly  granted  by  charter  or  statute.'  A  bank 


77G.  Debentures. 

777.  Debenture  stock  secured  by 

an  American  mortgage. 

778.  Mode  of  drafting,  signing,  seal- 

ing, and  acknowledging  cor- 
porate obligations  to  pay 
money — Lialnlity  of  tlie  cor- 
poration and  the  corporate 
ollicers  on  irregularly  exe- 
cuted instruments  —  Char- 
ter j)rovisions  as  to  author- 
izing the  instruments. 


'  Memphis,  etc.  R.  R  n  Dow,  19 
Fed.  Rep.  388  (1884);  Philadelphia, 
etc.  R.  R.  V.  Stichter,  21  Am.  L.  Reg. 
713  (Pa.,  1882);  Barry  v.  Merchants' 
Exchange  Co.,  1  Sandf.  Ch.  280  (1844); 
Beers  v.  Phoenix  Glass  Co.,  14  Barb. 
3.j8  (1852);  Mead  v.  Keeler,  24  Barb. 
20  (1857);  Partridge  v.  Badger,  25 
Barb.  146  (1857);  Clark  v.  Titcomb, 
42  Barb.  122  (1864);  Curtis  v.  Leavitt, 
15  N.  Y.  9  (1857);  Barnes  v.  Ontario 
Bank,  19  N.  Y.  152  (1859);  Smith  v. 
Law,  21  N.  Y.  296  (18G0);  Nelson  v. 
Eaton,  26  N.  Y.  410  (1863);  Kent 
V.  Quicksilver  Min.  Co.,  78  N.  Y.  159, 
177  (1879);  Coats  v.  Donnell,  94  N.  Y. 
168  (1883);  Oxford  Iron  Co.  v.  Sprad- 
ley,  46  Ala.  98  (1871);  Alabama,  etc. 
Ins.  Co.  V.  Central,  etc.  Assoc,  54  Ala. 
73  (1875);  Taylor  v.  Agricultural,  etc. 
Assoc,  68  Ala.  229  (1880);  Hays  v. 
Gallon  Gas,  etc  Co.,  29  Ohio  St.  330, 
840  (1876);  Hope  Ins.  Co.  v.  Perkins, 
88  N.  Y.  404  (1868).  A  coi-poration 
may  borrow  money  and  give  notes 
therefor.  Grommes  v.  Sullivan,  81 
Fed.  Rep.  45  (1897);  Magee  v.  Moke- 
lumne  Hill,  etc  Co.,  5  Cal.  258  (1855), 
where  a  statute  prohibiting  corpo- 
rations from  issuing  bills,  notes,  etc., 
"upon  loans  or  for  circulation  as 
money,"  was  held  to  be  intended  to 
prevent  their  loaning  their  credit, 
and  not  to  restrict  their  right  to 


borrow  for  business  purposes;  fol- 
lowed in  Smith  v.  Eureka  Flour 
Mills  Co.,  6  Cal.  1  (1856);  Santa  Cruz 
R  R,  17.  Spreckles,  65  CaL  193  (1884), 
holding  that  the  loan  may  be  ob- 
tained fr;pra  a  dii-ector;  Union,  etc. 
Co.  V.  Rocky  Mountain  Nat.  Bank,  2 
Colo.  248  (1873);  Commercial  Bank, 
etc.  V.  Newport  Mfg.  Co.,  1  B.  Mon.  13 
(1840);  Lucas  v.  Pitney,  27  N.  J.  L. 
221  (1858);  Hackettstown  v.  Swack- 
hamer,  37  N.  J.  L.  191  (1874);  Tliomp- 
son  u  Lambert,  44  Iowa,  239  (1876); 
Larwell  v.  Hanover  Sav.  Fund  Soc, 
40  Ohio  St.  274  (1883);  Bradley  v. 
Ballard,  55  IlL  413  (1870);  Fay  v. 
Noble,  66  Mass.  1  (1853);  Craven 
County  Com'rs  v.  Atlantic,  etc.  R.  R., 
77  N.  C.  289  (1877);  Ridgway  v. 
Farmers'  Bank,  12  Serg.  &  R.  (Pa.) 
256  (1825);  Moss  v.  Harpath  Academy, 
7  Heisk.  (Tenn.)  283  (1872);  Union 
Bank  v.  Jacobs,  6  Humph.  (Tenn.)  515 
(1845);  Rockwell  v.  Elkhom  Bank,  13 
Wis.  653  (1861);  Fvirniss  v.  Gilchrist, 
1  Sandf.  53  (1847);  Holbrook  v.  Basset, 
5  Bosw.  147  (1859);  Life  &  F.  Ins.  Co. 
V.  Mechanics'  F.  Ins.  Co.,  7  Wend.  31 
(1831);  Donnell  v.  Lewis  County  Sav. 
Bank,  80  Mo,  165  (1883),  holding  that, 
if  a  bank  bon'ows  money,  the  fact 
that  its  officers  misappropriate  the 
money  cannot  defeat  the  right  to  re- 
cover it  from  the  bank;  Australian, 


1664 


CH.  XLVI.] 


BONDS  AND  COUPONS. 


[§  T60. 


may  borrow  money,  but  it  is  so  unusual  that  the  loaner  must 
inquire  into  the  authority  of  the  officer  or  agent  ac  mg  for  the 
bank  which  borrows  the  money.  Special  authority  or  ratifi- 
cation by  the  board  of  directors  must  be  shown.^  However, 
although  the  officers  of  a  bank  have  no  power  to  borrow  money 
for  the  bank  without  special  authority  from  the  board  of  direct- 
ors  yet  if  for  a  long  time  they  have  been  accustomed  to  do  so 
this  is  the  same  as  though  express  authority  had  been  given 

Even  if  the  corporation  has  no  impUed  power  to  borrow,  it 
will  be  compelled  to  repay  the  money  actually  received  by  it. 
It  is  le-al  for  the  company  to  borrow  money  of  its  directors. 
The  fiduciary  relation  of  the  directors  towards  the  stockholders 
does  not  prevent  such  a  loan.*  A  street  railroad  company  may 
borrow  money  and  give  a  promissory  note  for  the  same,  and 
a  lonafde  holder  is  protected  even  though  it  was  given  to  a 
director  in  payment  for  services  in  procuring  the  franchise. 


etc.  Co.  V.  Mounsey,  4  K.  &  J.  733 
(1858);  Re  National,  etc.  Co..  1  Dr.  Sc 
Sm.  55  (18601;    Ulster  R'y  v.  Ban- 
bridge,  etc.  R'y.  Ir.  Rep.  2  Eq.  190 
(1868) ;  Bank  of  Australasia  v.  Breillat, 
6  Moore,  P.  C.  152  (1847);  Laing  v. 
Reed,  L.  R.  5  Ch.  4  (1869);  Re  Cork, 
etc.  R'y,  L.  R.  4  Cla.  748  (1869);  Maclae 
V.  Sutherland,  3  EL  &  BL  1,  39  (1854); 
Gibbs's  Case,  L.  R  10  Eq.  312  (1870)  — 
an    insurance    company.     See    also 
Hawtayne  v.  Bourne,  7  M.  &  W.  595 
(1841);  Lowndes  v.  Gamett,  etc.  Co., 
33  L.  J.  (Ch.)  418  (1864) ;  Ex  parte  Pit- 
man, L.  R.  12  Ch.  D.  707  (1879);  HiU's 
Case.  L.  R.  9  Eq.  605,  618  (1870);  Bur- 
mester  v.  Norris,  6  Ex.   796  (1851), 
holding  that  a  mining  company  can- 
not borrow.  Under  a  power  to  borrow 
on  bonds  or  debentures,  the  company 
may  borrow  without  issuing  bonds 
or  debentures.    Commercial  Bank  v. 
Great  Western  R'y,  3  Moore's  P.  C. 
Rep.  (N.  S.)  295  ( 1865).    A  canoe  club 
may  borrow  money  to  erect  a  build- 
ing.  Bradbury  v.  Boston  Canoe  Club, 
153  Mass.  77  (1891).    A  building  asso- 
ciation has  power  to  borrow  money 
and  give  security  for  it.    North,  etc. 
Assoc.  V.  First  Nat.  Bank,  79  Wis.  31 

(1891).  ^„. 

105  166 


1  Western  Nat  Bank  u  Armstrong, 
152  U.  S.  346  (1893). 

2  Armstrong  v.  Chemical  Nat  Bank, 
83  Fed.  Rep.  556  (1897). 

sManville  v.  Belden  Min.  Ca,  17 
Fed.  Rep.  425  (1883);  Memphis,  etc 
R  R  u  Dow,  19  Fed.  Rep.  388  (1884); 
Union,  etc  Co.  u  Rocky  Mountain 
Nat  Bank,  2  Colo.  248  (1873);  Hum- 
phrey V.  Patrons'  IMercantile  Assoc, 
50  Iowa,  607  (1879);  Larwell  v.  Han- 
over, etc  Soc,  40  Ohio  St  274  (1883); 
jReMagdalena  Steam  Nav.  Co.,  Johns. 
(Eng.  Ch.)  690  (1860);  Bradley  v.  Bal- 
lard, 55  111.  413,  417  (1870);  Darst  v. 
Gale,  83  III  136, 141  (1876);  Hays  v. 
Gallon  Gas,  etc  Co.,  29  Ohio  St.  330, 
340  (1876);  Hoare's  Case,  30  Beav.  225 
(1861);    Troup's  Case,  29  Beav.  353 
(1860).    Compare  White  v.  Carmar- 
then, etc  R'y,  1  Hem.  &  M.  786  (1863). 
Contra,  Burraester  v.  Norris,  6  Exch. 
796(1851).   A  person  who  loans  money 
to  a  corporation  cannot  petition  to 
have  it  woimd  up  tmder  the  English 
act    Ex  parte  Williamson,  L.  R  5 
Ch.  309  (1869). 
<  See  §  692,  supra. 
5  Kneeland  v.  Bramtree  Street  R'y, 
167  Mass.  161  (1896). 


§  760.] 


BONDS   AITD   COUPONS. 


[cn.  XLVi. 


WTiere  a  corporation  has  power  to  borrow  money,  neither  it 
nor  its  stockholders  can  evade  payment  of  a  loan  by  the  de- 
fense that  the  money  was  used  for  an  unauthorized  business,  and 
that  the  party  loaning  the  money  knew  that  fact.* 

The  common  law  places  no  limit  upon  the  amount  which  the 
corporation  may  borrow.  The  amount  borrowed  may  be  greater 
than  the  capital  stock.^ 

Although  a  statute  forbids  a  corporation  from  borrowing 
more  than  a  specified  amount,  yet  if  the  corporation  actually 
does  borrow  in  excess  of  that  amount  it  cannot  escape  payment 
to  the  lender.'    Thus,  a  national  bank  is  liable  on  a  debt  con- 


1  Bradley  v.  Ballard,  55  111.  413 
(1870).  A  preference  for  money  bor- 
rowed to  purchase  stock  ultra  vires 
is  illegal,  the  lender  knowing  that 
the  money  was  to  be  so  used.  Adams, 
etc.  Co.  V.  Deyette,  5  S.  D.  418  (1894). 
Even  though  a  person  loaning  money 
on  the  bonds  and  mortgage  of  a  cor- 
poration knows  that  the  money  is  to 
be  used  for  an  ultra  vires  purpose, 
yet  he  may  enforce  the  sama  Wright 
V.  Hughes,  119  Ind.  3S4  (1889)l  But 
see  §  7G1,  infra. 

2  Barry  u  Merchants'  Exchange  Co., 
1  Sandf.  Ch-  280  (1844). 

» Ossipee,  eta  Mfg.  Co.  v.  Canney, 
64  N.  a  295  (1874);  De  Camp  v.  Dob- 
bins, 29  N.  J.  Eq.  36  (1878) ;  Humphrey 
V.  Patrons'  Mercantile  Assoc,  50  Iowa, 
607  (1879);  Garrett  v.  Burlington 
Plow  Co.,  70  Iowa,  697  (1886);  Auer- 
bach  V.  Le  Sueur  MiU  Co.,  28  Minn. 
291  (1881).  A  mortgage  securing  a 
debt  in  excess  of  the  amount  allowed 
by  statute  is  nevertheless  binding  on 
the  corporation  and  its  subsequent 
creditors.  Sioux  City,  etc.  Ware- 
house Co.  V.  Trust  Co.,  83  Fed.  Rep. 
124  (1897).  In  England  the  rule  is 
contra.  Fountains  v.  Carmarthen 
R'y,  L.  R  5  Eq.  316  (1808),  where  de- 
bentures issued  in  excess  of  author- 
ity were  held  void;  Wen  lock  u  River 
Dee  Co.,  L.  R  10  App.  Cas.  354  (1885); 
Re  Pooley  Hall  Colliery  Co.,  21  L.  T. 
<N.  S.)  690  (1869),  where  similar  de- 


bentures were  said  to  be  "  not  void- 
able, but  absolutely  void."  The  holder 
was  allowed  to  come  in  as  a  general 
creditor.  And  see  two  cases  turning 
upon  the  construction  of  "  rules  "  or 
by-laws.  Davis's  Case,  L.  R  12  Eq. 
516  (1871),  and  Wilson's  Case,  L.  R  13 
Eq.  521  (1871).  But  see  Gordon  v.  Sea, 
etc  Ins.  Ca,  1  H.  &  N.  599  (1857). 
Municipal  bonds  issued  in  excess  of 
a  limit  fixed  by  constitutional  provis- 
ion are  void.  Bona  fide  holders  are 
not  protected.  Millerstown  v.  Fred- 
erick, 114  Pa.  St.  435  (1886).  The  de- 
fense of  debt  in  excess  of  the  amount 
allowed  must  be  pleaded.  German 
Sav.  Inst.  v.  Jacoby,  97  Mo.  617  (1889). 
Where  the  charter  prescribes  that 
the  debts  shall  not  exceed  one-half 
of  the  capital  stock,  capital  stock 
means  the  paid-in  capital  stock  and 
not  the  capital  stock  as  stated  in  the 
charter.  Lehigh,  etc  R'y  Co.'s  Ap- 
peal, 129  Pa.  St.  405  (1889).  Although 
the  power  of  a  railroad  to  borrow  be 
limited,  yet  preferred  stock  may  be 
issued,  secured  by  a  mortgage,  where 
the  power  to  mortgage  has  been 
given,  and  such  preferred  stock  may 
be  deprived  of  the  power  to  vote. 
Miller  v.  Ratterman,  47  Ohio  St.  141 
(1890).  Where  by  statute  corporate 
debts  must  not  exceed  two-thirds  of 
the  capital  stock  unless  secured  by 
"  real-estate  securities,"  a  mortgage 
on  real  estate  is  such  "  real-estate  se- 


1666 


OH.  XLVI.] 


BONDS  AND  COUPONS. 


[§  T60. 


tracted  by  it,  even  though  its  entire  indebtedness  exceeds  the 
amount  allowed  by  act  of  congress.^  Although  a  gas  company 
has  no  power  to  issue  bonds  in  excess  of  its  capital  stock,  yet 
this  does  not  restrict  its  right  to  issue  notes.  A  lonafide  pur- 
chaser is  protected,  even  though  there  was  an  excess  of  power.' 
The  attorney-general  may  enjoin  a  corporation  from  incurring 
debts  in  excess  of  a  limit  fixed  by  the  charter.'  A  by-law  lim- 
iting the  debts  of  the  company  is  waived  where  such  excess  of 
debt  is  reported  to  the  stockholders  and  acquiesced  in  by  them. 
The  by-law  does  not  bind  strangers  who  do  not  know  of  it.* 
Bonds  secured  by  mortgage  and  issued  by  a  corporation  are 
valid  and  enforceable  although  they  exceed  in  amount  the 
limit  prescribed  by  charter  or  statute.'    Where  one  street  rail- 


curities."    First  Nat.  Bank  v.  Sioux 
City,  etc.  Warehouse    Co.,  69  Fed. 
Rep.  441  (1895).    A  note  for  a  loan  in 
excess  of  a  statutory  limit  is  valid 
to  at  least  the  extent  of  the  limit. 
Moon,  etc.  Co.  v.  Waxahachie,  etc 
Co.,  35  S.  W.  Rep.  337  (Tex.,  1896).  A 
bank  cannot  collect  from  a  corpora^ 
tion  money  loaned  in  excess  of  the 
amount  limited  by  the  articles  of 
such  corporation.    First  Nat.  Bank 
V.  Kiefer  Milling  Co.,  95  Ky.  97  (1893). 
Where  the  charter  prohibits  the  di- 
rectors making  a  contract  for  over 
$250  unless  a  stockholders'  meeting 
authorizes  the  same,  a  contract  for 
$2,000  without  such  authorization  is 
void.     Georgetown,  etc.  Co.  v.  Central, 
etc.  Co.,  34  S.  W.  Rep.  435  (Ky.,  1896). 
Where  the  charter  limits  the  indebt- 
edness to  $1,000,  a  person  loanmg  it 
$1,500  can  recover  only  $1,000.  Krani- 
ger  V.  People's  Bldg.  Soc,  60  Minn.  94 
(1895).    A  defense  that  the  debts  ex- 
ceed the  charter  limit  is  not  good  as 
against  claims  existing  before  the 
charter  limit  was  reached,  and  is  not 
good  except  as  to  the  excess  over  the 
charter  limit.    Oswald  v.  Minneapo- 
lis Times  Co.,  65  Minn.  249  (1896).    A 
by-law  prohibiting    directors    from 
contracting  debts  beyond  a  certain 
amount  does  not  invalidate  a  loan  by 
the  directors  to  a  corporation  in  ex- 


cess of  that  amount,  where  the  stock- 
holders knew  of  the  loan  and  did 
not  object  thereto,  and  allowed  the 
money  to  be  used  on  the  plant  of  the 
company.  The  corporation  being  a 
private  one  no  one  else  is  interested. 
The  corporation  cannot  repudiate 
the  debt.  Bensiek  v.  Thomas,  66  Fed. 
Rep.  104  (1895).   See  87  Fed.  Rep.  815. 

1  Weber  v.  Spokane  Nat.  Bank,  64 
Fed.  Rep.  208  (1894),  rev'g  50  Fed.  Rep. 
735. 

2  Merchants'  Nat.  Bank  v.  Citizens* 
Gas  Light  Co.,  159  Mass.  505  (1893). 

3  Lehigh,  etc.  R'y  Co.'s  Appeal,  129 
Pa.  St.  405  (1889).  Concerning  tlie 
constitutional  and  statutory  provis- 
ion limiting  corporate  debts  in  Penn- 
sylvania, see  Manhattan  Hardware 
Co.  u  Phalen,  128  Pa.  St.  110  (1889). 

*  Underbill  v.  Santa  Barbara,  etc. 
Co.,  93  CaL  300  (1892). 

5  Bonds  are  valid  although  the 
amount  exceeds  twice  the  capital 
stock  of  the  company,  the  limit 
fixeS  by  statute.  Fidelity,  etc.  Co. 
V.  West  Pennsylvania,  etc.  R.  R.,  138 
Pa.  St.  494  (1891).  C/.  Pittsburg, 
etc.  R.  Pu's  Appeal,  4  AtL  Rep.  385 
(Pa.,  1880).  A  mortgage  is  enforce- 
able although  it  is  given  to  secure  a 
debt  contracted  in  excess  of  the 
amount  limited  by  the  charter  of  the 
corporation.    Allis  u  Jones,  45  Fed. 


1607 


§  T60.] 


BONDS   AND   COUrONS. 


[oh.  xlvi. 


road  buys  out  another  and  assumes  the  bonds  of  the  latter,  it 
cannot  question  such  bonds  on  the  ground  that  they  exceed 
the  capital  stock,  in  violation  of  the  statute.*  It  is  no  defense 
to  a  mortgage  that  a  consolidation  was  irregular,  or  that  the 
debt  exceeded  the  capital  stock,  contrary  to  statute,  or  that  an 

Rep.  148  (1891),  holding  also  that  a 
subsequent  creditor  whose  claim  also 
is  open  to  this  objection  cannot  have 
the  mortgage  set  aside.    Bonds  in 
excess  of  the  charter  limit  may  be 
vahd.    Des  Moines  Gas  Co.  v.  West, 
50  Iowa,  16  (1878);  Warfield  v.  Mar- 
shall, etc.  Co.,  73  Iowa,  GG6  (1887).    A 
corporate  mortgage  is  valid  though 
it  secui'es  a  sum  in  excess  of  the 
amount  allowed  by  statuta  Warfield 
V.  Marshall,  etc.   Co.,  72  Iowa,  CGG 
(1887).  Although  the  statutes  autlior- 
ize  a  mortgage  for  an  amount  not  ex- 
ceeding two-thirds  of  the  capital  paid 
in,  yet  if  a  mortgage  is  given  for  an 
amount  in  excess  of  the  limit,  but 
not  in  excess  of  two-thirds  of  the  au- 
thorized capital,  honafide  holders  of 
the  bonds  may  enforce   the  mort- 
gage.   Hackensack  Water  Co,  v.  De 
Kay,  36  N.  J.  Eq.  548  (1883).    A  con- 
tractor who  takes  part  in  the  issue 
of  bonds   in  excess  of  the  capital 
Btock,  an  act  prohibited  by  statute,  is 
estopped  from  questioning  the  va- 
lidity of  the  mortgage  securing  the 
bonds.   Reed's  Appeal,  122  Pa.  St.  565 
(1888).   Although  bonds  issued  by  the 
company  to  raise  money  are  unau- 
thorized and  illegal  by  statute,  yet 
the    holders  may  collect  from  the 
company  the  amount  received  by  the 
company  on  the  bonds.  Re  Cork,  etc. 
R'y,  L.  R.  4  Ch.  748  (1869).    But  see 
Davis's  Case,  L.  R.  12  Eq.  516  (1871). 
A  mortgage  is  not  void  although  the 
bonds  are  in  excess  of  the  statutory 
limit.     New  Britain  Nat.  Bank  v.  A. 
B.  Cleveland  Co.,  91  Hun,  447  (1895). 
A  mortgage  under  the  New  York  act 
cannot  exceed  the  capital  stock  or 
two-thirds  of  the  value  of  the  prop- 
erty at  the  time  of  the  execution  of 


the  mortgage,  even  though  a  part  of 
the  bonds  are  not  to  be  issued  until 
subsequently.     Flynn  v.  Coney,  etc. 
R.  R.,  26  N.  Y.  App.  Div.  416  (1898). 
Bonds  in  excess  of  the  charter  limit 
of  two  of  the  three  states  in  which 
the    company    is    incorporated    are 
nevertheless  valid  in  the  third.     At- 
wood  V.  Shenandoah,  etc.  R.  R,  85 
Va.  966  (1889).    In  Commonwealth  v. 
Smith,  93  Mass.  448  (1^65),  it  is  held 
that  mortgage  bonds  issued  in  excess 
of  the  charter  limit  are  void.    When 
the  constitution  of  a  state  forbids 
"  county,  political,  or  other  municipal 
corporations"  within  the   state    to 
"become  indebted  in  any  manner" 
beyond  a  named  percentage  "  on  the 
value  of  the  taxable  property  within 
such  county  or  corporation,"  nego- 
tiable bonds  issued  by  such  corpo- 
rations in  excess  of  such  limit  are 
invalid  without  regard  to  any  recitals 
which  they  contain.    Nesbit  v.  River- 
side Independent  District,  144  U.  S. 
610  (1892).    Where  the  power  to  mort- 
gage does  not  exist,  except  it  be  ex- 
pressly given  by  statute,  as  in  the 
case  of  railroads,  a  mortgage  in  ex- 
cess of  the  statutory  authorization  is 
void.    Commonwealth  v.  Smith,  93 
Mass.  448  (1865).    An  .agreement  of  a 
corporation  to  issue  a  certain  amount 
of  bonds  does  not  limit  the  bonded 
debt  to  that  amoimt    If  the  bonds 
are  not  issued,  but  the  land  in  pay- 
ment therefor  is  deeded  to  the  com- 
pany, the  party  has  a  lien  on  the 
land,  but  must  demand  the  bonds  be- 
fore suing.   Cordova  Coal  Co.  v.  Long, 
91  Ala.  538  (1891). 

1  Such  bonds  are  not  void.  Smith 
V.  Ferries,  etc.  R'y,  51  Pac.  Rep.  710 
(Cal.,  1897). 


1663 


€H.  XLVI.] 


BONDS  AND  COUPONS. 


[§  T60. 


increase  of  stock  was  irregular,  or  that  there  had  been  an  over- 
issue of  bonds,  all  parties  ha\ing  concurred  therein  and  inter- 
est having  been  paid  for  three  years.^ 

Where  there  is  an  overissue  of  bonds  by  reason  of  the  issue 
of  a  greater  amount  of  bonds  than  the  mortgage  recites  and 
secures,  great  diiTiculty  is  found  in  determining  whether  all  of 
the  bonds  participate  in  the  benefit  of  the  mortgage  security. 
The  rule  is  that  all  lonafide  holders  participate  in  the  security, 
oven  though  this  includes  some  or  all  of  the  overissue.' 

In  England  it  has  been  held  that  where  a  company  had 
power  to  borrow,  but  the  power  had  been  already  exhausted, 
and  the  directors  nevertheless  raised  more  money,  they  were 
personally  liable  to  repay  it.' 


1  Farmers'  L.  &  T.  Co.  v.  Toledo,  A. 
A.  etc.  R'y,  G7  Fed-  Rep.  49  (1895). 
Bonds  issued  in  excess  of  the  charter 
limit  are  valid  to  the  extent  of  the 
consideration  received  for  them. 
Peatman  v.  Centerville,  etc  Co.,  69 
N.  W.  Rep.  541  (Iowa,  1896). 

2  Where  there  are  two  sets  of  num- 
bers for  two  sets  of  bonds,  all  secured 
by  the  same  mortgage,  a  purchaser 
is  not  bound  to  know  of  an  overissue 
where  the  method  of  numbering  is 
not  explained.  Stephens  v.  Benton, 
1  Duv.  (Ky.)  112  (18G3).  Where  by 
error  $420,000  of  bonds  are  issued, 
while  the  mortgage  secures  but 
$400,000,  the  extra  $20,000  are  secured 
also  by  the  mortgage  as  against  the 
company,  and  also  as  against  income 
bondholders  not  secvired  by  mort- 
gage; but  as  against  a  subsequent  re- 
corded second  mortgage,  the  $20,000 
of  bonds  are  unsecured,  and  the  in- 
come bondholders  take  the  rights  of 
the  second  mortgage  bondliolders  to 
come  in  ahead  of  tliis  $20,000.  Ste- 
phens V.  Benton,  1  Duv.  (Ky.)  112 
(1863).  Where  a  mortgage  is  given  to 
secure  bonds  to  the  amount  of  $16,000 
per  mile  of  road  thereafter  built,  to  be 
determined  on  certain  certificates  to 
be  given  by  the  chief  engineer  and 
others,  and  more  than  $10,000  of  bonds 
per  mile  are  issued,  all  of  the  bonds 


share  equally  in  the  foreclosure  as- 
sets, since  it  is  impossible  to  tell  which 
are  overissued  bonds  except  by  the 
numbers,  whicn  are  not  sufficient 
proof  of  the  date  of  issue.  Stanton 
V.  Alabama,  etc.  R  R.,  2  Woods,  523 
(1875);  S.  C,  22  Fed.  Cas.  1070.  See 
also  State  v.  Cobb,  64  Ala.  127  (1879), 
sustaining  the  validity  of  the  same 
bonds  and  enforcing  the  state's  guar- 
anty of  them-  But  neither  the  court 
nor  the  trustees  have  power  to  make 
an  overissue  of  bonds  in  order  to  ful- 
fill a  corporate  contract.  Vose  v. 
Bronson,  6  Waa  452  (1867). 

3  Weeks  v.  Propert,  L.  R.  8  C.  P.  427 
(1873);  Chapleo  r. '  Brunswick,  etc. 
Building  Soc,  L.  R.  6  Q.  B.  D.  696 
(1881);  Richardson  v.  Williamson,  L. 
R.  6  Q.  B.  276  (1871),  explained  by 
Mellish,  L.  J.,  in  Beattie  v.  Ebury,  L. 
R  7  Ch.  801  (1872).  Wher6  a  person  ad- 
vanced money  to  a  company  on  tho 
security  of  an  invalid  Lloyd's  bond 
of  tiie  company,  the  directors  who 
issued  it  were  held  not  to  be  person- 
ally liable  to  repay  the  money  ad- 
vanced. Rashdall  v.  i'ord,  Li.  "E.  2 
Eq.  750  (1866).  See  on  this  case,  West 
London  Com.  Bank  v.  Kitson,  L,  R. 
13  Q.  B.  D.  363  (1884).  W^here  the 
directors  of  a  benefit  building  society 
had  power  to  borrow  if  a  rule  en- 
abling them  to  do  so  had  been  passed. 


1GS9 


§  760.] 


BONDS   AND   COUPONS. 


[on.  XLVI. 


Sometimes  the  statutes  make  tlie  directors  personally  liable 
for  debts  of  the  company  contracted  in  excess  of  a  certain 
amount.' 

The  defense  of  usury  on  the  part  of  a  corporation  is  con- 
as  is  also  the  subject  of  the  power  of  a  cor- 


sidered  elsewhere ;  ^ 


and  they  borrowed  money  for  the 
society  in  the  absence  of  any  rule 
enabling  them  so  to  do,  it  was  held 
that  they  were  personally  liable  to 
repay  it.    Eichardson  v.  Williamson, 
L.  R.  6  Q.  B.  276  (1871),  explained  by 
Mellish,  jL.  J.,  in  Beattie  v.  Ebury,  L. 
R  7  Ch.  801  (1872).    See  also  West 
London  Commercial  Bank  v.  Kitson, 
L,  R  12  Q.  B.  D.  157  (1883),  and  L.  R 
13  Q.  B.  D.  360  (1884).    Where  a  com- 
pany had  power  to  issue  debenture 
Btock  to  a  limited  extent,  and  the 
directors,  after  the  power  was  ex- 
hausted, issued  more  debentui-e  stock, 
they  were  held  personally  liable  to 
the  holders  of  the  unauthorized  stock. 
The  damages  were  held  to  be  the 
Talue  which  the  stock  would  have 
had  if  it  had  been  authorized.    Fir- 
bank  V.  Humphreys,  L.  R  18  Q.  B.  D. 
64  (1886).    Although  the  statute  re- 
quires the  articles  to  state  the  amount 
of  indebtedness  which  may  be  in- 
curred,   the   articles    may    fix    the 
amount,  with  the  right  to  the  stock- 
holders to  increase  it  up  to  the  stat- 
utory limit.    Thornton  v.  Balcom,  85 
Iowa,  198  (1892).    Although  the  di- 
rectors have  agreed  to  pay  for  goods 
in  debentures,  and  although  the  com- 
pany is  unable  to  fulfill  by  reason  of 
all  its  authorized  debentures  having 
already  been  issued,  nevertheless  the 
directors  are  not  personally  liable  to 
the  vendor  to  make  good  the  failure 
to  deliver  the  debentures.   Elkington 
V.  Hiirter,  [1892]  2  Ch.  452.    Where  a 
person  bought  new  preference  stock 
of  a  railway  company  which  both  he 
and  the  directors  bona  fide  believed 
they  had  power  to  issue,  but  which  in 
truth  they  nad  not,  it  was  held  that 
ne  had  no  remedy  against  them,  for 

16^ 


there  was  nothing  more  than  a  com- 
mon mistake  of  law.  Eaglesfield 
V.  Londonderry,  L.  R  4  Ch.  D.  093 
(1876). 

1  Where  the  statutes  provide  that 
directors  are  liable  for  an  excess  of 
indebtedness,  tliis  liability  has  been 
held  to  be  a  general  one,  enuring  to 
the  benefit  of  all  creditors  upon  bill 
filed  and  not  for  the  benefit  of  in- 
dividual creditors.     Ilornor  v.  Hen- 
ning,  93  U.S. 228  (1876).    C/.Rossiterv. 
Rossiter,  8  Wend.  494  (1832);  Palmer 
V.  Stephens,  1  Denio,  471  (1845).    See 
also  ch.  XII,  supra,  and  §  082.  supra. 
The  provision  making  the  directors 
liable  for  corporate  debts  in  excess 
of  the  capital  stock  does'  not  relieve 
the    corporation    from  liability  for 
such  excess  nor  invalidate  the  debt. 
Underbill  v.  Santa  Barbara,  etc.  Co., 
93  CaL  300  (1892).    Under  the  Illinois 
statute  rendering  directors  liable  for 
debts  in  excess  of  the  capital  stock, 
if  they  assent  thereto,  directors  wha 
do  not  know  of  such  excess  until 
after  it  has  been  contracted  are  not 
liable,  even  though  they  allowed  one 
director  to  transact  all  the  business. 
Lewis  V.  Montgomery,    145    III   30 
(1893).  Where  the  statute  renders  the 
directors  liable  for  money  received  in 
excess  of  a  certain  limit,  they  are 
liable,  even  though  by  reason  of  the 
fraud  of  the  secretary  they  did  not 
know  that  the  excessive  borrowing 
was  being  done.  Cross  u  Fisher,  L.  R 
[1892J  1  Q.  B.  467.    If  directors  give 
their   personal  notes  for  corporate 
debts  contracted  in  excess  of  the 
charter  limit,  they  cannot  sue  the 
stockholders  for  contribution.  Heald 
V.  Owen,  79  Iowa,  23  (1890). 

2  See  §  766,  infra. 
0 


CH. 


XLVI.] 


BONDS  AND  COUPONS. 


[§  761. 


poration  to  loan  money,  discount  notes,  and  take  a  mortgage ;  * 
and  tlie  subject  of  issuing  bonds  to  become  due  after  the  charter 
of  the  corporation  expires.^ 

§  761.  Bills,  notes,  and  acceiJtances  may  le  made  and  issued  T)t/ 
corporations. —  A  private  corporation  may  make  and  issue  a 
promissory  note.' 

A  note  given  under  the  seal  of  the  corporation  is  not  neces- 
sarily a  sealed  instrument,  inasmuch  as  the  seal  is  the  old  mode 
of  signature  to  an  instrument  by  a  corporation.  Such  a  note  is 
not  a  sealed  instrument  in  its  effect  on  the  negotiability  of  the 
instrument,  nor  on  the  remedy  to  enforce  it,  nor  on  the  statute 
of  limitations.*    There  are  cases,  however,  to  the  contrary.* 


1  See  §  690,  supra, 

-  See  ^  041,  supra. 

8  Moss  V.  Averell,  10  N.  Y.  4i9,  457, 
(1853);  Barry  V.  IMerchants' Exchange 
Co.,  1  Sandf.  Ch.  380  (1844);  Clark  v. 
Farmers',  etc.  Mfg.  Co.,  15  Wend.  256 
(183G);  Mead  v.  Keeler,  24  Barb.  20 
(1857) ;  Kent  v.  Quicksilver  Min.  Co., 
78  N.  Y.  159, 177  (1879);  Mottu  Hicks, 
1  Cow.  513  (1833);  Attorney-General 
V.  Life,  etc.  Ins.  Co.,  9  Paige,  470  (1842); 
Moss  V.  Oakley,  2  Hill,  265  (1843); 
Smith  V.  Law,  21  N.  Y.  296  (1860); 
Lucas  u  Pitney,  27  N.  J.  L.  321  (1858); 
Eichmond,  etc.  R  R.  v.  Snead,  19 
Gratt.  (Va.)  854  (1869),  a  due-bill; 
Rockwell  V.  Elkhorn  Bank,  13  Wis. 
653  (1861);  Union  Bank  v.  Jacobs,  6 
Humph,  (Tenn.)  515  (1845);  Straus  v. 
Eagle  Ina.  Co.,  5  Oliio  St.  59  (1855); 
Curtis  V.  Leavitt,  15  N.  Y.  9  (1857-); 
Oxford  Iron  Co.  v.  Spradley,  46  Ala. 
98  (1871);  Smith  r.  Eureka  Flour  Mills 
Co.,  6  CaL  1  (1856);  Ex  parte  Esta- 
brork,  2  Low.  547  (1877);  S.  C,  8  Fed. 
Cas.  ''94;  Barnes  v.  Ontario  Bank,  19 
N.  Y.  153  (1859);  Mumford  v.  Ameri- 
can, eta  Co.,  4  N.  Y.  463  (1851);  Mo- 


Masters  V.  Reed,  1  Grant  Cas.  (Pa.)  3ff 
(1854),  holding  that  they  may  also 
issue  bonds;  Pitman  v.  Kintner,  5 
Blackf.  (Ind.)  250  (1839);  Commercial 
Bank  v.  Newport  Mfg.  Co.,  1  B.  ]\fon. 
(Ky.)  18  (1840);  Leavitt  v.  Blatchford, 
17  N.  Y.  521  (1858);  Magee  v.  Moke- 
lumne  Hill,  etc.  Co.,  5  CaL  258  (1855); 
Hamilton  v.  Newcastle,  etc.  R  R.,  9 
Ind.  359  (1857) ;  Randolph,  Com.  Paper, 
§§  327-335;  Millard  v.  St  Francis,  etc. 
Academy,  8  Bradw.  (IlL)  341  (1880), 
where  an  educational  institution  bor- 
rowed money  and  gave  a  note  there- 
for. A  corporation  may  make  a 
promissory  note.  Barker  v.  Mechan- 
ics', etc.  Ins.  Co.,  3  Wend.  94  (1829). 
Corporations  may  issue  notes  and  bills 
of  exchange  "  where  the  nature  and 
character  of  their  business  warrants 
it."  Re  General  Estates  Co.,  L.  R  3 
Ch.  758  (1868).  The  indorsers  of  a 
corporate  note  cannot  question  the 
power  of  the  corporation  to  malce  the 
note.  Glidden  v.  Chamberlin,  46  N. 
E.  Rep.  103  (Mass.,  1897). 

♦  The  note  of  a  corporation  is  nego- 
tiable, even  though  the  corporate  seal 


5  Clark  V.  Farmers',  etc  Ca,  15 
Wend.  256  (1836),  holding  that  such  a 
note  is  not  negotiable  so  as  to  author- 
ize a  suit  by  an  indorsee  in  his  own 
name.  The  note  may  be  sued  upon 
as  a  sealed  instrument.  St.  James's 
Parish  v.  Newbuiyport.  etc.  R  R.,  141 


Mass.  500  (1886).  An  instrument  in 
form  a  note,  but  signed  by  the  corpo- 
rate seal,  must  be  sued  on  as  a  sealed 
instrument.  Benoist  v.  Carondelet, 
8  Mo.  250  (1843).  See  also,  concern- 
ing  this  subject,  §§  767,  770,  infra. 


1671 


§  761.] 


BONDS  AND  COUPONS. 


[CH.  XLVr. 


A  corporation  may  draw  or  accept  a  bill  of  exchange  for  the 
purposes  of  its  business.^  But  a  note  or  bill  of  exchange  issued 
or  accepted  by  a  corporation  for  purposes  which  the  corpora- 
tion is  not  authorized  to  engage  in  cannot  be  enforced  by  the 


is  attached  thereto.  Chase  Nat.  Bank 
V.  Faurot,  149  N.  Y.  533  (189G).  An 
instrument  in  the  form  of  a  promis- 
sory note  does  not  become  an  instru- 
ment under  seal  by  having  the  corpo- 
rate seal  affixed.  The  corporate  seal 
is  the  corporate  mode  of  signing.  Re 
General  Estates  Co.,  L.  R  3  Ch.  758 
(1868).  The  seal  of  a  corporation 
stamped  on  its  promissory  note  does 
not  destroy  the  negotiability  of  the 
note.  The  seal  is  the  proper  signa- 
ture of  the  corporation.  Re  General 
Estates  Co.,  L.  R.  3  Ch.  758  (1SG8).  It 
is  not  necessary  that  the  corporate 
seal  be  attached.  Mott  v.  Hicks,  1 
Cow.  513  (1823);  Hamilton  v.  New- 
castle, etc.  R  R,  9  Ind-  359  (1857). 
See  also  Buckley  v.  Briggs,  30  Mo. 
452  (1860);  also  §  731,  supra.  The 
promissory  note  of  a  corporation, 
signed  by  its  president  and  treasurer 
as  such,  is  negotiable,  even  though 
the  seal  of  the  corporation  is  at- 
tached, there  being  no  evidence  that 
it  was  the  intention  that  the  instru- 
ment should  be  under  seal,  and  no 
words  in  the  note  stating  that  it  was 
to  be  under  seal,  and  no  evidence 
that  the  seal  was  the  seal  of  the  cor- 
poration, or  that  it  was  affixed  by 
authority.  Weeks  v.  Esler,  68  Hun, 
518  (1893).  In  this  case  on  appeal, 
143  N.  Y.  374  (1894),  the  court  doubted 
whether  a  corporate  seal  upon  a 
promissory  note  could  affect  its  nego- 
tiability, and  held  that,  where  there 
was  no  evidence  that  the  seal  was 
affixed  by  authority,  the  negotiabil- 
ity was  certainly  not  affected.  The 
note  of  a  corporation  is  a  note  and 
not  a  bond,  although  the  corporate 
seal  is  affixed  thereto.  Landauer  v. 
Sioux,  etc.  Co.,  72  N.  W.  Rep.  467 
(S.  D.,  1897). 


*  For  instances  of  making  bills,  see 
Olcott  V.  Tioga  R  R,  40  Barb.  179 
(1862);  S.  C,  aff'd,  27  N.  Y.  546  a863); 
Safford  v.  Wyckoff,  4  Hill,  442  (1842), 
holding  that  a  negotiable  bill  irregu- 
larly issued  will  bind  the  corporation 
in  favor  of  a  bona  fide  indorsee.  For 
instances  of  accepting  bills,  see  Munn 
V.  Commission  Co.,  15  Johns.  44  (1818); 
Partridge  v.  Badger,  25  Barb.  146 
(1857);  Prairie  Lodge  v.  Smith,  58 
Miss.  301  (1880),  where  the  corpora- 
tion accepted  an  order  drawn  by  its 
contractor;  City  Bank  of  Colmubus 
V.  Beach,  1  Blatchf.  425  (1819);  S.  C, 
5  Fed.  Cas.  739.  In  England  it  is  held 
that  a  bill  of  exchange  cannot  be  ac- 
cepted by  a  mining  company  unless 
proof  is  given  that  it  is  necessary. 
Dickinson  v.  Valpy,  10  B.  &  C.  128 
(1839).  Nor  by  a  railroad.  Bateman 
V.  Mid-Wales  R'y,  L.  R  1  C.  P.  499 
(1866).  Nor  a  salt  company.  Bult 
V.  Morrell,  13  Ad.  &  E.  745  (1840); 
Broughton  v.  Manchester,  etc.  Works, 
3  B.  &  Aid.  1  (1819).  Nor  a  salvage 
company.  Thompson  v.  Universal, 
etc.  Co.,  1  Exch.  694  (1848),  (a  promis- 
sory note  case).  Nor  a  cemetery. 
Steele  v.  Harmer,  14  M.  &  W.  831 
(1845).  But  the  right  may  exist  if 
specified  in  the  articles  of  incorpora- 
tion. Re  Peruvian  R'ys,  L.  R  2  Ch. 
617  (1867).  Directors  who  had  ac- 
cepted bills  on  behalf  of  a  company, 
which  had  no  power  under  its  pri- 
vate acts  of  parliament  to  accept 
bills,  were  held  liable  to  the  holders, 
who  had  no  notice  in  fact  that  the 
company  was  not  empowered  to  ac- 
cept bills.  West  London  Com.  Bank 
V.  Kitson,  L.  R  12  Q.  B.  D.  157  (1883), 
and  L.  R  13  Q.  B.  D.  360  (1884). 


1673 


CH.  XLVI.] 


BONDS  AKD  COUPONS. 


[§  'Gl. 


payee  or  by  an  indorsee  taking  the  same  with  notice.^  A  cor- 
poration, however,  cannot  set  up  the  defense  of  ultra  vires  to  a 
note  where  it  has  received  the  property  for  which  the  note  was 
given.2  The  indorsers  of  a  corporate  note  cannot  question  the 
power  of  the  corporation  to  make  the  note.' 

A  lonafide  purchaser  of  a  corporate  note  is  protected  as  he 
would  be  if  the  maker  were  an  individual.* 


1  Bacon  v.  Mississippi  Ins.  Co.,  31 
Miss.  116  (1856);  Stark  Bank  v.  U.  S. 
Pottery  Co.,  34  Vt  144  (1861);  Pearce 
V.  Madison,  etc  R  R.,  21  How.  441 
(1858),  where  a  note  given  by  a  rail- 
road company  for  the  purchase  of  a 
steamboat  was  held  void:  Ehrgott 
V.  Bridge  Manufactory,  16  Kan.  486 
(1876),  where  the  payee  took  the  note 
in  payment  of  a  third  person's  debt. 
Parties  taking  a  corporate  bill  of  ex- 
change in  payment  of  business  which 
they  knew  the  corporation  was  not 
authorized  to  carry  on  cannot  enforce 
it.  Balfour  v.  Ernest,  5  C.  R  (N.  S.) 
601  (1859).    But  see  §  760,  supra. 

2  Dewey  v.  Toledo,  etc  R'y,  91  Mich. 
351  (1893). 

» GUdden  v.  Chamberlin,  46  N.  K 
Rep.  103  (Mass.,  1897). 

*  Bissell  V.  Michigan,  etc.  R.  R  Cos., 
22  N.  Y.  258,  289  (1860);  Daniel,  Neg. 
Inst,  g§  1503-1504;  Stoney  v.  Amer- 
ican, etc  Ins.  Co.,  11  Paige,  635  (1845). 
See  Attorney-General  v.  Life,  etc. 
Ins.  Cc,  9  Paige,  470  (1842),  holding 
that  the  burden  of  proof  is  on  the 
holder;  Genesee  Sav.  Bank  v.  Mich- 
igan Barge  Co.,  52  Mich.  438  (1884). 
Although  an  agent  duly  authorized 
by  the  corporation  to  make  notes  for 
it  issues  its  notes  for  accommodation, 
yet  a  bona  fide  holder  cannot  hold 
the  agent  liable  in  tort.  He  should 
sue  the  corporation  on  the  notes. 
Bird  t".  Daggett,  97  Masa  494  (1867). 
See  also  Monument  Nat.  Bank  v. 
Globe  Works,  101  Mass.  57  (1869); 
Lafayette  Sav.  Bank  v.  St.  Louis 
Stoneware  Co.,  2  Mo.  App.  299  (1876). 
In  these  cases  the  agent  indorsed 


paper  for  the  accommodation  of  third 
parties.  Madison,  etc.  R.  R  u  Nor- 
wich Sav.  Soc,  24  Ind.  457  (1865), 
where  an  agent  represented  a  rail- 
road company  as  being  the  owner  of 
certain  bonds,  when  in  fact  it  was  an 
accommodation  gviaranfor.  It  was 
held  liable  upon  the  guaranty. 

In  Merchants'  Bank  v.  State  Bank, 
10  Wall  604,  644  (1870),  Mr.  Justice 
Swayne  said:  "Where  a  party  deals 
with  a  corporation  in  good  faith  — 
the  transaction  is  not  ultra  vires  — 
and  he  is  unaware  of  any  defect  of 
authority  or  other  irregularity  on  the 
part  of  those  acting  for  the  corpora- 
tion, and  there  is  nothing  to  excite 
suspicion  of  such  defect  or  irregular- 
ity, the  corporation  is  bound  by  the 
contract,  although  such  defect  or  ir- 
regularity in  fact  exists.  If  the  con- 
tract can  be  valid  under  any  circum- 
stances, an  innocent  party  in  such  a 
case  has  a  right  to  presume  their  ex- 
istence, and  the  corporation  is  es- 
topped to  deny  them."  This  remark 
was  quoted  with  approval  in  Gano 
V.  Chicago,  etc  R'y,  60  Wis.  12  (1884); 
Claflin  V.  Farmers',  etc.  Bank,  25  N.  Y. 
293  (1862),  where,  however,  the  cer- 
tification of  his  personal  check  by 
the  president  of  a  bank  was  consid- 
ered to  constitute  such  a  suspiciovis 
circumstance  as  should  put  a  pur- 
chaser upon  his  guard,  and  render 
the  certification  invalid  even  in  the 
hands  of  a  bona  fide  holder  for  value. 
See  also  §  293,  supra.  Ridg^vay  v. 
Farmers'  Bank,  12  Serg.  &  R  (Pa) 
256  (1825),  where  a  draft  fraudulently 
drawn  by  a  president  was  enforced 


1673 


§  761.] 


BONDS  A^^)  couroNS. 


[en.  xLvi. 


A  corporation  has  no  power  to  become  an  accommodation 
indorser  of  a  note ;  but  where  all  the  stockholders  assent  thereto 
and  creditors  are  not  injured,  the  indorsement  is  sustained.^  A 
corporation  may  of  course  draw  checks  on  its  bank  account.' 

The  authority  of  the  president  or  cashier  or  other  officer  to 
issue  a  note  in  the  name  of  the  corporation  is  discussed  else- 
where.'    Sometimes  the  charter  or  a  statute  forbids  a  corpora- 

against  the  corporation;  Philadel- 
phia, etc,  R.  R  V.  Lewis,  33  Pa.  St.  33 
(1859),  holding  that  bonds  wei'e  not 
void  because  secured  by  a  mortgage 
executed  without  authority;  Piow- 
land  V.  Apothecaries'  Co.,  47  Conn. 
384  (1879),  a  note  of  a  corporation 
given  by  its  treasurer  for  money  for 
his  personal  use  being  held  valid 
against  the  corporation;  Mechanics' 
Banking  Assoc,  v.  New  York,  etc 
Co.,  35  N.  Y.  505  (1866),  accommoda- 
tion indorsement  by  president;  Ex 
parte  Estabrook,  2  Low.  547  (1877); 
S.  C,  8  Fed.  Cas.  794,  a  note  given 
by  a  manager  without  authority; 
Thompson  v.  Lambert,  44  Iowa,  239 
(1876),  misappropriation  by  officers 
of  money  obtained  on  mortgage; 
White  V.  How,  3  McLean,  291  (1843); 
S.  C  29  Fed.  Cas.  1019,  where  the 
corporate  agent  improperly  issued 
notes;  Genesee  Sav.  Bank  v.  Michi- 
gan Barge  Co.,  52  Mich.  438  (1884), 
where  the  treasurer  was  authorized 
to  issue  notes  and  did  so,  but  improp- 
erly, it  was  claimed.  The  rule  was 
stated  to  be  (p.  446)  that  "where  a 
corporation  has,  under  any  circum- 
stances, power  to  issue  negotiable 
paper,  the  bona  fide  holder  has  the 
right  to  presume  that  it  was  issued 
under  ciroumstances  which  gave  the 
requisite  authority;  and  the  nego- 
tiable paper  of  a  corporation  wliich 
appears  on  its  face  to  have  been  duly 
issued  by  such  corporation,  and  in 
conformity  with  the  provisions  of  its 
charter,  is  valid  in  the  hands  of  a 
bona  fide  holder;  "  Western,  etc.  R. 
R.  V.  Franklin  Bank,  60  Md.  36  (1883), 
where  a  clerk  forged  certificates  of 


coupons  surrendered  for  funding. 
Certificates  of  deposit  issued  by  a 
bank  cashier  for  the  purpose  of  rais- 
ing money  for  the  bank's  use,  though 
not  based  on  an  actual  deposit, 
have  been  hold  binding  upon  the 
bank  when  held  by  bona  fide  pur- 
chasers without  notice.  See  oh. 
XLin,  supra.  In  The  Floyd  Accept- 
ances, 7  Wall  666  (1868),  it  was  held 
that  acceptances  of  drafts  due  in  the 
future  for  army  supplies  not  deliv- 
ered were  void  as  not  being  within 
the  authority  of  the  secretary  of  war. 
Barnes  v.  Ontario  Bank,  19  N.  Y.  152 
(1859);  Ellsworth  v.  St.  Louis,  etc. 
R  R.,  33  Hun,  7;  aff'd,  98  N.  Y.  553 
(1885),  where  bonds  were  issued  in 
violation  of  the  charter;  Re  General 
Estates  Co.,  L.  R  3  Ch.  758  (1868). 
See  also  Re  Land  Credit,  etc.  Co.,  L. 
R  4  Ch.  460  (1869);  Beers  v.  Phoenix 
Glass  Co.,  14  Barb.  358  (1852),  secre- 
tary borrowing  money  without  au- 
thority. The  bona  fide  purchaser  of 
a  note  indorsed  by  a  corporation  may 
enforce  it  against  the  company.  Cen- 
tral Bank  v.  Empire,  etc.  Co.,  26 
Barb.  23  (1857);  Bridgeport  City  Bank 
u  Empire,  etc.  Co.,  30  Barb.  421  (1859). 
But  a  purchaser  of  a  bill  of  exchange 
before  it  is  accepted  by  the  company 
is  not  such  a  bona  fide  purchaser. 
Farmers',  etc.  Bank  v.  Empire,  etc. 
Co.,  5  Bosw.  275  (1859).  See  also  §  774, 
infra. 

1  See  §  774,  infra. 

2  Waterlow  v.  Sharp,  L.  R  8  Eq.  501 
(1869);  Re  Cefn  Cilcen  Min.  Ca,  L. 
R  7  Eq.  88  (1868). 

3  See  §§  716,  etc.,  supra. 


1674 


CH.  XLVI.] 


BONDS   AlTD   COUPONS. 


[§  T62. 


tion  from  issuing  a  note.  In  such  a  case  tlie  note  would  be 
void.^  The  holder,  however,  may  collect  from  the  corporation 
the  money  or  value  advanced  for  the  note.*  The  power  of  a 
corporation  to  indorse  notes  in  connection  with  its  own  busi- 
ness is  of  course  undoubted.  It  is  a  part  of  the  every-day  busi- 
ness of  most  corporations.' 

§  762.  Bonds  may  le  issued  hj  corporations  —  Bonds  may  he 
valid  altJioiigh  the  mortgage  securing  them  is  invalid —  Bonds 
to  preferred  creditors  —  Re-issues. —  A  corporation  has  inherent 
power  to  issue  bonds  for  the  payment  of  money,  and  no  ex- 
press power  is  necessary  to  authorize  the  issue.*    A  provision 


1  Leavitt  v.  Palmer,  3  N.  Y.  19  (1849) ; 
Root  V.  Wallace,  4  McLean,  C.  C.  8 
(1845);  S.  C.  20  Fed.  Cas.  11G7;  Davis 
V.  River  Raisin  Bank,  4  McLean,  C.  C. 
387  (1848);  S.  C,  7  Fed.  Cas.  Ill;  At- 
torney-General V.  Life,  etc.  Ins.  Co., 
9  Paige,  470  (1842);  New  York  Fire- 
men Ins.  Co.  V.  Ely,  2  Cow.  678  (1824); 
Weed  V.  Snow,  3  McLean,  265  (1843); 
S.  C,  29  Fed.  Cas.  572;  Root  v.  God- 
ard,  3  McLean,  102  (1842) ;  S.  C,  20  Fed. 
Cas.  1159;  Ilayden  v.  Davis,  3  Mc- 
Lean, 276  (1843);  S.  C,  11  Fed.  Cas. 
898,  where  an  acceptance  and  bond 
given  to  secure  it  were  held  void; 
Broughton  v.  [Manchester,  etc.  Co., 
3  B.  &  Aid.  1  (1819),  where  the  bill  of 
exchange  contravened  the  statute 
giving  the  Bank  of  England  a  mo- 
nopoly; Bank  of  Chillicothe  v.  Dodge, 
8  Barb.  233  (1850),  holding,  however, 
that  a  foreign  corporation  innocently 
holding  a  draft  issued  in  violation  of 
a  statutory  prohibition  stands  in  the 
same  situation  as  if  it  had  paid  money 
under  a  mistake  of  material  facts, 
and  may  recover  the  money  paid  for 
it.  See  also  Smead  v.  Indianapolis, 
etc.  R.  R.,  11  Ind.  104  (1858).  Certifi- 
cates of  deposit  payable  to  bearer 
are  not  within  the  New  York  re- 
straining statutes  prohibiting  the 
issue  of  notes  for  circulation  as 
money.  Muraford  v.  American,  etc. 
Co.,  4  N.  Y.  463  (1851). 

2  Oneida  Bank  v.  Ontario  Bank,  21 

16 


N.  Y.  490  (1860).  Cf.  Attorney-Gen- 
eral V.  Life,  etc.  Ins.  Co.,  9  Paige,  470 
(1842).  See  also  the  English  cases 
supi^a. 

3  Olcott  V.  Tioga,  etc.  R.  R.,  27  N.  Y. 
546  (1863);  Hardy  u  Merriweather,  14 
Ind.  203  (1860);  Frye  v.  Tucker,  24  Ilk 
180  (1860);  Buckley  v.  Briggs,  30  Mo. 
452  (1800);  Smith  v.  Johnson,  3  H.  & 
N.  222  (1858),  the  last  case  being  that 
of  a  bill  of  exchange. 

*  Philadelphia,  etc.  R  R.  v.  Lewis, 
33  Pa.  St.  33  (1859);  Commonwealth 
V.  Smith,  92  Mass.  448  (1865).  Also 
many  cases  infra.  They  may  be 
issued  to  carry  out  a  reorganization 
scheme.  Memphis,  etc.  R.  R.  v.  Dow, 
19  Fed-  Rep.  388  (1884),  and  120  U.  S. 
287  (1887).  A  railroad  company  has 
inherent  power  to  issue  bonds.  Cra- 
ven County  Com'rs  v.  Atlantic,  etc 
P..  R.,  77  N.  C.  289  (1877);  MiUer  v. 
New  York,  eta  R,  R,  8  Abb.  Pr.  431 
(1859);  McMasters  v.  Reed,  1  Grant, 
Cas.  (Pa.)  36  (1854).  A  furnace  and 
chemical  company  may  issue  first- 
mortgage  bonds,  and  may  sell  them, 
partial  payments  to  be  made  from 
time  to  time.  These  payments  may 
be  enforced.  Davis  u  Montgomery, 
etc.  Co.,  8  S.  Rep.  496  (Ala.,  1890).  A 
subscription  for  bonds,  the  amount 
being  payable  on  call,  may  be  paid 
at  once  and  the  bonds  demanded. 
Watjen  v.  Green,  48  N.  J.  Eq.  322 
(1891).     A  railroad  corporation  may 


§  T62.] 


BONDS    A2^D    COUPONS. 


[cn.  XLVL 


in  a  charter  that  property  should  not  be  mortgaged  or  pledged 
except  with  the  consent  of  the  stockholders  is  for  their  benefit, 
and  cannot  be  set  up  by  one  creditor  as  against  another  creditor.* 
The  corporation  may  issue  bonds  unsecured  by  mortgage. 
Hence,  where  a  mortgage  is  made  to  secure  the  bonds,  and 
that  mortgage  is  illegal  and  declared  void  by  tlie  courts,  the 
bonds  will  be  valid  as  unsecured  obligations.'    The  validity  of 


issue  bonds  without  express  author- 
ity so  to  do.  Miller  v.  New  York,  etc. 
R  R,  8  Abb.  Pr.  431  (1859).  "There 
seems  to  be  no  reason  why  a  railroad 
corporation  should  not  be  considered 
as  having  power  to  make  a  bond  for 
any  purpose  for  which  it  may  law- 
fully contract  a  debt,  without  any 
special  authority  to  that  eflfect,  un- 
less restrained  by  some  restriction, 
express  or  implied,  in  its  charter  or 
in  some  other  legislati  ve  act.  A  bond 
is  merely  an  obligation  under  seak" 
The  court  held,  however,  that  in  Mas- 
sachusetts the  statute  specifying  the 
purposes  for  which  bonds  may  be  is- 
sued and  regulating  their  issue  pre- 
vents a  common-law  issue  of  them. 
Conmionwealth  v.  Smith,  92  Mass. 
448  (1865).  In  McLanahan  v.  Mott  Co., 
73  Him,  131  (1893),  the  court  declared 
illegal  a  proposed  issue  of  §100,000,000 
of  bonds  payable  in  the  year  4343, 
and  to  draw  interest  at  six  per  cent 
annually,  two  per  cent  to  be  paid 
semi-annually,  and  the  remaining 
two  per  cent  at  the  maturity  of  the 
bonds,  two  thousand  four  him.dred 
and  fifty  years  hence.  A  sinking 
fund  was  to  be  established  for  grad- 
ual redemption.  This  was  to  be  made 
up  of  $500,000  deposited  with  the 
trustee  of  the  mortgage  before  each 
interest  day,  and  also  a  sum  equal  to 
the  semi-annual  interest,  two  per 
cent,  on  aU  bonds  previously  re- 
deemed. The  bonds  to  be  redeemed 
were  to  be  designated  by  the  trust- 
ees by  lot  one  month  before  the  bonds 
were  redeemed  They  were  to  be  re- 
deemed "at  their  maturity  value;" 
and  this  language  was  construed  by 

16^ 


the  directors  to  mean  tliat  each  bond 
was  to  be  redeemed  by  tlie  payment 
of  $5,000,  such  amount  being  arrived 
at  by  taking  the  principal  of  the 
bond,  $100,  and  adding  to  it  items  of 
the  annual  interest  at  two  per  cent 
for  two  thousand  four  hundred  and 
fifty  ye^rs.  For  another  lottery 
scheme  in  the  issue  of  bonds,  see  the 
indictment  in  MacDonald  v.  U.  S.,  63 
Fed.  Rep.  426  (1894).  Power  to  mort- 
gage property  gives  power  to  borrow 
money  and  issue  bonds.  Gloninger 
V.  Pittsburgh,  etc  R  R,  139  Pa.  St. 
13  (1891).  Where  a  corporation  has 
power  under  the  statute  to  execute 
bonds  and  mortgages,  neither  a  pre- 
ferred nor  common  stockholder  can 
prevent  it  on  the  theory  that  the  di- 
rectors may  possibly  vise  the  bonds 
for  other  purposes  than  those  speci- 
fied in  the  statute  and  mortgage. 
Thompson  v.  Erie  R'y,  43  How.  Pr. 
68  (1871).  Purchase-money  bonds 
given  by  a  cemetery  corporation  in 
New  York  are  legaL  Seymour  v. 
Spring  Forest  Cem.  Assoc,  19  N.  Y. 
Supp.  94(1892).  Where  a  land-improve- 
ment company  causes  a  street  rail- 
way to  be  built,  and  the  two  compa- 
nies, having  substantially  the  same 
stockholders,  join  in  the  execution 
and  issue  of  bonds  seciired  by  a  mort- 
gage on  both  their  properties,  the 
bonds  and  mortgage  are  legal  North- 
side  R'y  V.  Worthington,  88  Tex.  563 
(1894). 

1  Alabama,  etc.  Co.  v.  McKeever,  20 
S.  Rep.  84  (Ala.,  1896).  See  also  §  808, 
infra. 

2  The  bond  may  be  valid  although 
the  mortgage  is  mvalid  for  want  of 
6 


CH.  XLVI.] 


BONDS  AND  COUPONS. 


[§  '^62. 


mortgage  bonds  given  to  certain  creditors  by  way  of  prefer- 
ence is  considered  elsewhere.^  A  bond  dividend  is  sometimes 
made.     When  made  under  proper  circumstances  it  is  legal.* 

It  is  legal  for  a  corporation  to  sell  its  bonds  to  its  directors, 
provided  the  sale  is  a  fair  one.  Directors  hold  a  fiduciary  re- 
lation towards  the  stockholders,  and  sales  of  corporate  property 
to  the  directors  are  voidable  at  the  instance  of  a  stockholder.' 
But,  unless  a  stockholder  objects,  the  sale  is  valid.  These  prin- 
ciples apply  to  a  director's  purchase  of  bonds.*  Although  the 
amount  of  bonds  that  may  be  issued  is  limited  by  the  charter 
or  by  statute,  yet  bonds  in  excess  of  that  amount  may  be  en- 
forced against  the  corporation.'  An  agreement  of  a  corporation 
to  issue  a  certain  amount  of  bonds  does  not  limit  the  bonded 
debt  to  that  amount.''    The  company  may  re-issue  such  of  its 


power  to  make  it.    Illinois  T.  &  S. 
Bank  r.  Pacific  R'y,  49  Pac  Rep.  197 
(Cal.,  1S97);  Union  Tnist  Co.  v.  New 
York,  etc.  R.  R.,  1  RV  &  Corp.  L.  J. 
50  (Ohio  Com.  PL,  18S7).    "Where  a 
stockholder  of  a  vendor  corporation 
sets  aside  the  sale  of  a  railroad  as 
ultra  vires,    a  mortgage    given  by 
the  vendee  corporation  is  void.    The 
bondholders   are,  however,  entitled 
to  enforce  payment  from  any  other 
property  owned  by  the  vendee.  Knox- 
ville  V.  Knoxville,  etc.  R  R,  23  Fed. 
Rep.  758  (18S4).    Bonds  may  be  issued 
which  are  not  a  lien  upon  any  prop- 
erty and  are  not  secured  by  any  mort- 
gage or  deed  of  trust.    It  is  immate- 
rial that  they  are  called  "  equipment 
bonds."    They  may,  however,  by  con- 
tract constitute   an  equitable  lien. 
Tysen  v.  Wabash  R'y»  15  Fed.  Rep. 
763  (1883).    Where  one  road  has  been 
leased  to  another,  the  two  roads  may 
subsequently  be    consolidated   and 
consolidated  mortgage  bonds  issued, 
of  which  a  part  shall  go  to  the  for- 
mer lessor  company  in  extinguish- 
ment of  its  claim  to  rent  under  the 
old  lease.    If  the  transaction  is  a  fair 
one  towards  the  stockholders  of  the 
lessor,  the  court  will  not  disturb  it. 
Hazard  v.  Vermont,  etc.  R  R,  17  Fed. 


Rep.  753  (1883).  The  bonds  of  a  rail- 
road company  are  not  rendered  void 
in  consequence  of  being  secured  by 
a  mortgage  which  is  void  because 
the  company  had  no  authority  to 
execute  it  Philadelphia,  eta  R  R 
V.  Lewis,  33  Pa.  St.  33  (1859).  Equip- 
ment bonds  unsecured  by  moii;- 
gage  are  subject  to  future  mortgages 
made  by  a  consolidated  company 
into  which  the  company  issuing  the 
bonds  has  been  consolidated.  Though 
the  holders  might  have  exchanged 
their  bonds  for  consolidated  mort- 
gage bonds,  a  failure  to  exorcise  the 
right  is  fatal  AVabash,  etc.  R'y  v. 
Ham,  114  U.  S.  587  (1885).  Cf.  Comp- 
ton  r.  Jesup,  167  U.  S.  1  (1897).  Bonds 
issued  under  an  amendment  to  a 
charter  with  the  consent  of  all  the 
stockholders  will  be  enforced,  even 
though  the  amendment  was  invalid. 
Johnson  r.  IMercantile  Trust,  etc  Co., 
94  Ga.,324  (1894). 

1  See  §  691,  mpra, 

2See  §  766,  n?/ra. 

»  See  §  653,  supra. 

*See  %  Q92,  supra. 

5See§760,  supra, 

6  Cordova  Coal  Co.  v.  Long,  91  Ala. 
538  (1891).  holding  also  that  if  the 
bonds  are  not  issued,  but  the  land  in 


1677 


§  763.] 


BONDS   AXD    COUPONS. 


[CH.  XLVI. 


own  bonds  as  it  has  purchased.*  A  corporation  cannot  have 
specific  performance  of  an  agreement  of  a  person  to  purchase 
its  debentures.  The  remedy  is  an  action  for  damages.'^  For 
breach  of  an  agreement  to  subscribe  to  bonds  of  a  corporation 
the  damage  is  the  loss  actually  sustained,  the  contract  really 
being  a  contract  to  loan  money.'  An  executory  contract  of  a 
corporation  to  issue  debentures  is  enforceable,  even  though  the 
corporation  has  become  insolvent.* 

§  763.  Pledge  of  londs  hy  a  corporation  and  enforcement 
thereof —  A  corporation  has  power  to  pledge  its  bonds  as  secu- 
rity for  a  corporate  debt.' 

The  statutes  of  the  state  may,  however,  limit  this  right,  as 


payment  therefor  is  deeded  to  the 
company,  the  party  has  a  lien  on  the 
land,  but  must  demand  the  bonds  be- 
fore suing. 

1  Claflin  V.  South  Carolina  R.  R.,  8 
Fed.  Rep.  118  (1880);  Ee  Mortgage 
Bonds,  15  S.  C.  304  (1880);  Ex  parte 
Williams,  18  S.  C.  299  (1881).  Al- 
though a  mortgage  is  given  to  bo- 
cure  bonds  in  order  to  retire  pre- 
vious bonds,  yet  if,  after  retiring 
such  bonds,  some  of  the  new  issue 
stiU  remain,  the  company  may  issue 
them.  Claflin  v.  South  Carolina  R.  R, 
8  Fed.  Rep.  118  (1880).  Such  part  of 
the  first-mortgage  bonds  as  are  re- 
issued may  be  issued  and  deposited 
as  additional  security  for  second- 
mortgage  bonds.  Atwood  v.  Shenan- 
doah, etc.  R.  R,  85  Va.  966  (1889). 
Outstanding  bonds  which  are  pur- 
chased by  a  corporation  may  be  re- 
issued. Pruyne  v.  Adams  Furniture, 
etc.  Co.,  93  Hun,  214  (1895).  Bonds 
which  have  been  purchased  by  the 
corporation  and  not  re-issued  can- 
not participate  in  the  proceeds  of  a 
foreclosm-e  sale.  An  assignment  by 
the  company  of  past-due  coupons 
which  it  has  piirchased  is  not  a  re- 
issue of  them  where  they  are  not  act- 
ually delivered.  New  York  Security, 
etc.  Co.  V.  Equitable  Mortgage  Co.,  77 
Fed.  Rep.  64  (1896). 

2  South,  etc.  Co.  V.  Wallmgton,  78 
Ju  T.  Rep.  426  (1898). 


1678 


s  South  African  Territories,  Ltd.,  v. 
Wallington,  76  L.  T.  Rep.  520  (1897). 

*  Pegge  V.  Neath,  etc  Co.,  77  L.  T. 
Rep.  550  (1897). 

8  Peck  V.  New  Jersey,  etc.  R  R,  22 
Hun,  129  (1880);  Duncomb  v.  New 
York,  etc.  R  R,  84  N.  Y.  190  (1881); 
Peck  V.  New  York,  etc.  R'y,  85  N.  Y. 
246  (1881).  Bonds  made  to  retire  and 
pay  other  bonds  and  debts  may  be 
issued  as  collateral  security  for  such 
other  debta  Claflin  v.  South  Caro- 
lina R  R,  8  Fed.  Rep.  118  (1880); 
County  Court  v.  Baltimore,  etc.  R.  R, 
35  Fed.  Rep.  161  (1888).  Where  bonds 
are  authorized  for  extension  pur- 
poses, and  the  mortgage  and  bonds  so 
provide,  they  cannot,  after  the  com- 
pany becomes  insolvent,  be  used  as 
a  pledge  for  old  debts  where  the 
pledgees  are  really  the  directors. 
Farmers'  L.  &  T.  Co.  v.  San  Diego, 
etc.  R'y,  45  Fed.  Rep.  518  (1891).  Bonds 
may  be  pledged  by  the  company  for 
past  or  new  debts.  Lehman  v.  Tal- 
lassee,  etc.  Co.,  64  Ala.  567  (1879); 
Grand  Rapids,  etc.  R.  R  v.  Sanders, 
54  How.  Pr.  214  (1877);  Re  Regent's, 
etc.  Co.,  24  W.  R  687  (1876).  A  cor- 
poration may  deposit  its  bonds  as 
collateral  security  for  notes  made  for 
its  beneflt  by  its  stockholders  imder 
a  verbal  agreement  that  the  bonds 
shall  be  held  for  the  protection  and 
security  of  the  makers  against  liabil- 
ity on  the  note,  their  respective  in- 


CH.  XLVI.] 


BONDS  AND  COUPONS. 


[§  T63. 


in  Wisconsin,  where  bonds  can  be  issued  at  not  less  than  seventy- 
five  cents  on  the  dollar.^  A  constitutional  provision  against 
the  issue  of  bonds  except  for  money,  labor,  or  property  does 


terests  in  the  bonds  being  proportion- 
ate with  their  agreed  liability  on  the 
note  as  between  themselves.    Reid  u 
Bank  of  Mobile,  70  Ala.  199  (1881); 
Rice's  Appeal,  79  Pa.  St.  168  (1875), 
holding  tliat  the  accommodation  in- 
dorser  for  the  company  may  enforce 
the  bonds  to  the  extent  of  his  liabil- 
ity.   The  company  may  pledge  its 
unissued  bonds  to  secure  its  debts. 
Union,  etc.  Co.  v.  Southern,  etc.  Co., 
51  Fed.  Rep.  840  (1892).    A  bona  fide 
pledgee  of  bonds  from  the  company 
is  protected  in  his  pledg&    Allen  v. 
Dallas,  etc.  R.  R.,  3  Woods,  316  (1878); 
S.  C,  1  Fed.  Cas.  465.    But  not  if  the 
pledge  was  in  bad  faith  in  order  to 
buy  the  property  in  cheaply.    See 
g  766,  infra.    The  issue  of  bonds  as  a 
pledge  and  security  for  an  anteced- 
ent indebtedness  of  the  company  has 
been  held  to  be  contrary  to  the  pro- 
visions of  the  constitution  of  Cali- 
fornia relative  to   fictitious  bonds. 
Farmers'  L.  &  T.  Co.  v.  San  Diego,  etc. 
R'y,  45  Fed.  Rep.  518  (1891).    Where 
a  subscriber  to  bonds  fails  to  pay,  and 
the  corporation  then  pledges  them, 
it  can  hold  him  liable  only  for  the 
value  of  the  bonds  at  the  time  of  the 
pledge,  and  not  the  value  at  a  later 
date.    Cleveland  Iron  Co.  v.  Ennor, 
14  N.  R  Rep.  673  (IlL,  1888).    Pledgees 
from  the  company  itself  may  be  bona 
fide  holders  and  will  then  be  pro- 
tected as  such.    Allen  v.  Dallas,  etc. 
R  R,  3  Woods,  316  (1878);  S.  C,  1 
Fed.  Cas.  465.    It  is  legal  for  a  rail- 
road company  to  pledge  its  bonds. 
Power  to  sell  gives  power  to  pledge. 
Farmers'  L.  &  T.  Co.  v.  Toledo,  etc. 
Co.,  54  Fed.  Rep.  759  (1893).    Where 
the  pledgor  is  tlie  corporation  itself, 
and  by  agreement  the  pledgee  is  au- 
thorized to  purchase  the  bonds  at  a 
pledgee's  sale  upon  defavilt,  and  does 
80,  and  the  mortgage  is  foreclosed, 

16 


an  outside  creditor  cannot  question 
the  full  title  of  the  pledgee  to  the 
bonds,  the  company  itself  not  object- 
ing. Farmers',  etc.  Co.  u  Toledo,  etc. 
Co.,  54  Fed.  Rep.  759  (1893).  A  cor- 
poration may  pledge  its  unissued 
bonds.  Nelson  v.  Hubbard,  96  Ala. 
238  (1899).  Bonds  may  be  pledged. 
Hunt  V.  ]\Iemphis  Gaslight  Co.,  95 
Tenn.  136  (1895).  In  Ex  parte  Caro- 
lina Nat  Bank,  18  S.  C.  289  (1882),  the 
receiver  borrowed  money  to  operate 
the  railroad  and  pledged  the  unissued 
bonds  of  the  company.  He  borrowed 
$20,000  and  pledged  $134,000  of  bonds. 
The  pledgee  sold  them  out  for  $13,000, 
and  then  applied  to  have  the  remain- 
ing $7,000  paid  out  of  the  income. 
The  court  so  ordered,  the  bondhold- 
ers having  failed  to  object  for  six 
years.  That  a  corporation  may  pledge 
its  unissued  stock,  see  §  465,  supra. 

1  Where  a  statute  forbids  the  issue 
of  bonds  at  less  than  seventy-five  cents 
on  the  dollar,  and  they  are  pledged  by 
the  company  at  forty  cents  on  the 
dollar,  they  are  void  in  the  hands  of 
the  pledgea  National,  etc.  Works  v. 
Oconto,  etc.  Co.,  52  Fed.  Rep.  29  (1892). 
Bonds  issued  in  Wisconsin  in  pledge 
for  a  debt  of  the  company,  with  a 
stipulation  that  they  should  be  ac- 
counted for  at  least  seventy-five 
cents  on  the  dollar,  are  void  by  stat- 
ute, and  the  pledgees  cannot  main- 
tain a  bill  in  eqviity  to  enforce  their 
lien  by  reason  of  the  bonds.  Pfister 
V.  Milwaukee  Electric  R'y,  83  Wis.  86 
(1892)."  Where  a  person  pledges  his 
stock  as  additional  security  to  a  cor- 
porate creditor  who  has  bonds  of  the 
company  in  pledge  for  the  same  debt, 
such  pledge  of  bonds,  however,  being 
illegal,  the  pledgor  of  the  stock  can- 
not compel  the  creditor  to  resort  to 
the  bonds  first;  nor,  altliough  a  fic- 
titious sale  of  the  stock  is  alleged,  can 
79 


§  T63.] 


BONDS    AND    COUPONS. 


[CU.  XLVI. 


not  prevent  the  corporation  from  pledging  its  bonds.'  A  pledgee 
of  bonds  from  the  corporation  cannot  attack  another  pledge  of 
bonds  to  the  president  to  secure  a  debt  duo  the  president,  espe- 
cially where  the  former  took  the  bonds  in  pledge  with  knowl- 
edge of  the  pledge  to  the  president.^  A  hona  fide  pledgee  of 
bonds  is  protected  to  the  same  extent  that  'bona  fide  purchasers 
are  protected.'  The  power  of  a  corporate  agent  to  sell  bonds 
does  not  give  him  power  to  pledge  them  even  to  secure  corpo- 
rate debts,  and  holders  not  Jjona  fide  are  not  protected.*  A 
pledgee  of  bonds  and  coupons  may  collect  the  same  and  apply 
the  proceeds  on  the  debt.*  A  holder  of  collateral  may  enforce 
his  claim  in  the  ordinary  way  by  judgment  and  execution  against 
the  debtor  without  any  deduction  for  his  collateral.' 

"Where  the  company  pledges  its  own  bonds  they  may  be  sold 
upon  notice  to  pay  the  debt  the  same  as  shares  of  stock,  even 
though  the  bonds  are  promises  to  pay  and  the  sale  has  been 
enjoined  in  another  state.'    Parties  holding  bonds  as  collateral 


he  compel  the  transferee  of  the  stock 
to  return  the  stock  so  that  the 
pledgor  may  vote  it,  unless  the  pledgor 
pays  the  amount  due.  Hickley  v. 
Pfister,  83  Wis.  64  (1892).  Although 
bonds  are  issued  illegally,  being  given 
in  pledge  for  less  than  seventy-five 
cents  on  the  dollar,  yet  neither  the 
company  nor  an  officer,  nor  a  stock- 
holder, can  maintain  an  action  for 
the  surrender  or  cancellation  of  such 
bonds,  unless  they  tender  the  amount 
for  vphich  the  bonds  were  pledged. 
The  company  and  its  officers  are  in 
equal  wrong  with  the  pledgee.  Hick- 
ley  V.  Pfister,  83  Wis.  64  (1892). 

1  Illinois  T.  &  S.  Bank  v.  Pacific 
R'y,  49  Pac.  Rep.  197  (CaL,  1897).  Al- 
though a  corporation  pledges  $150,000 
vmissued  bonds  to  secure  a  corporate 
debt  of  $85,000,  yet  there  is  no  fic- 
titious issue  of  bonds.  Dexter  v. 
McClellan,  22  S.  Rep.  461  (Ala.,  1897). 
See  also  §  766,  infra. 

2  Hook  V.  Ayers,  63  Fed.  Rep.  347 
(1894). 

8  The  following  syllabus  is  a  clear 
statement  of  the  law:  The  pledgee 
of  negotiable  bonds  before  maturity, 


and  without  notice  to  him  of  any 
defect  of  title,  as  collateral  security 
for  the  loan  of  money,  is  entitled  to 
hold  such  paper,  to  the  extent  of  his 
loan,  with  the  same  immunities  as  an 
ordinary  holder  of  commercial  paper 
taken  by  purchase  in  good  faith,  for 
value,  and  before  maturity;  and  it  is 
not  material  whether  the  evidence  of 
the  principal  debt  be  in  negotiable 
form  or  not.  Thomson-Houston  Elec. 
Co.  V.  Capitol  Elec.  Co.,  65  Fed.  Rep. 
341  (1894).  Pledgees  of  bonds  from 
the  corporation  are  not  bona  fide  hold- 
ers where  their  debts  were  past  due 
at  the  time  of  the  pledge.  Moore  v. 
Ensley,  20  S.  Rep.  744  (Ala.,  1896). 
This  decision  is  in  accordance  with 
the  New  York  decisions,  but  is  not 
the  general  law  of  the  land. 

*  Shaw  V.  Saranac  Horse  Nail  Co., 
144  N.  Y.  220  (1894). 

8  Ritchie  v.  McMullen,  79  Fed.  Rep. 
522,  551  (1897). 

*  Chemical  Nat.  Bank  v.  Arm- 
strong, 59  Fed.  Rep.  372  (1893);  Lewis 
V.  United  States,  92  U.  S.  618  (1875). 

''Union  Cattle  Co.  v.  International 
Trust  Co.,  149  Mass.  492  (1889).     A 


1689 


CH. 


XLVI.] 


BONDS    AND    COUPONS. 


[§  'res. 


to  corporate  debts  cannot  be  enjoined  from  selling  tbem  out 
during  a  voluntary  dissolution.^  The  appointment  of  a  receiver 
does  not  affect  the  rights  of  a  pledgee  from  the  corporation 
prior  to  such  appointment.  The  pledgee  may  sell.''  A  cred- 
itor of  a  corporation  who  holds  collateral  security  for  his  debt 
cannot  be  compelled  to  exhaust  such  security  before  resorting 
to  the  general  assets  of  the  corporation  for  payment.'  Where 
a  corporate  creditor  has  collateral  security  he  may  participate 
in  the  corporate  assets  as  though  he  had  no  security,  and  after- 
wards realize  what  he  can  from  the  security,  except  that  any 
surplus  over  and  above  his  claim  must,  of  course,  be  paid  over 
to  the  representative  of  the  insolvent  corporation.* 


sale  by  a  pledgee  after  insolvency 
proceedings  are  commenced  gives 
the  purchaser  none  except  equitable 
rights.  Union  Cattle  Co.  v.  Interna- 
tional Trust  Co.,  149  Mass.  492  (1889). 
Cf.  Jerome  v.  McCarter,  94  U.  S.  734, 
739  (1876). 

^Ee  Binghamton  Gen.  Elec.  Co., 
143  N.  Y.  261  (1894).  The  appoint- 
ment of  a  receiver  does  not  affect 
the  rights  of  a  pledgee  from  the  cor- 
poration prior  to  such  appointment. 
The  pledgee  may  selL  National,  etc. 
Bank  v.  Benbrook,  etc.  Co.,  27  S.  W. 
Rep.  297  (Tex.,  1894).  A  corporate 
creditor  who  takes  negotiable  corpo- 
rate bonds  as  collateral  security,  and 
then  sells  the  bonds  to  himself  for  a 
nominal  consideration,  cannot,  under 
the  Connecticut  statutes,  file  a  claim 
for  the  par  value  of  the  bonds  and 
also  for  his  claim,  less  the  amount 
realized  at  the  sale,  the  bonds  not 
being  secured  by  mortgage.  Re  Wad- 
dell-Entz  Co.,  67  Conn.  324  (1896). 

2  Guaranty  Trust  Co.  v.  Galveston 
City  R.  R.,  87  Fed.  Rep.  813  (1898). 

3  Doe  V.  Northwestern  Coal,  etc.  Co., 
78  Fed.  Rep.  62  (1896). 

*  Tod  V.  Kentucky  Union  Land  Co., 
57  Fed  Rep.  47  (1893).  A  creditor  of 
an  insolvent  national  bank  is  entitled 
to  prove  the  whole  amount  of  the 
claims  against  it  held  by  him,  with- 
out reference  to  the  collateral  held 


to  secure  such  claims.  Merrill  v. 
First  Nat.  Bank,  75  Fed.  Rep.  148 
(1896).  Although  a  creditor  of  a  cor- 
poration holds  collateral  security, 
nevertheless,  upon  the  insolvency  of 
the  corporation,  he  may  participate 
in  the  assets  as  though  he  did  not 
have  the  collateral  security,  and  may 
realize  and  apply  the  collateral  se- 
curity in  addition  to  his  proportion- 
ate part  of  the  assets,  to  the  extent, 
however,  only  of  the  full  amount  of 
his  debt.  Chemical  Nat.  Bank  v. 
Armstrong,  59  Fed.  Rep.  372  (1893). 
A  pledgee  of  bonds  from  the  corpo- 
ration is  entitled  to  full  dividends 
upon  the  foreclosure  of  the  mort- 
gage Tintil  the  amount  due  on  the 
pledge  has  been  fully  paid.  Cochran 
V.  Anglo-American,  etc.  Co.,  69  Hun, 
168  (1893).  The  fact  that  a  credit- 
or's claim  is  secvired  by  mortgage  or 
otherwise  does  not  affect  his  right 
to  prove  for  the  full  amount  of  tlie 
claim,  nor  does  the  fact  that  he  has 
realized  part  thereof  out  of  the  col- 
lateral, since  the  date  of  the  receiv- 
ership; but  in  the  latter  case  he  is 
entitled  to  dividends  only  until  the 
balance  of  his  debt  is  satisfied.  New 
York  Security,  etc.  Co.  v.  Lombard 
Inv.  Co.,  73  Fed.  Rep.  537  (1896). 
Mortgage  bondholdei's  may  file  their 
claims  as  general  creditoi's  in  addi- 
tion to  realizing  what  they  can  f  ron> 


106 


1681 


.§  V63.] 


BONDS   AND   COITPONS. 


[cn.  XLvr. 


■  Where,  however,  the  company  pledges  its  bonds,  the  pledgee 
can  prove  up  against  general  assets  his  debt  only  and  not 
the  par  value  of  the  bonds.'  The  pledgee  of  securities  who 
turns  them  in  to  a  reorganization  and  takes  new  securities, 
without  the  consent  of  the  pledgor,  is  guilty  of  a  conversion, 
but  the  pledgor  can  recover  only  the  actual  value  of  the  secu- 
rities so  turned  in.  The  pledgee  is  not  bound  to  aid  the  pledgor 
in  using  the  pledge  in  a  reorganization,  nor  is  the  pledgee 
bound  to  delay  the  reorganization  on  account  of  any  demand  of 
the  pledgor.^  A  mechanic's  lien  on  the  plant  of  a  gas  company 
may  be  waived  by  taking  bonds  of  the  company  as  collateral  se- 


their  mortgage.  A  pledgee  of  mort- 
gage bonds  from  the  corporation  it- 
self, after  realizing  what  he  can  from 
the  bonds,  may  file  a  claim  as  a  general 
creditor,  not  as  a  bondholder,  but  on 
his  original  claim,  Pattberg  v.  Lewis, 
etc.  Bros.,  38  AtL  Rep.  205  (N.  J.,  1897). 
Where  a  corporation  has  given  bonds 
as  collateral  secm^ity  for  certain 
debts,  the  assets  of  the  corpora- 
tion upon  insolvency  should  be  mar- 
shaled, the  bonds  being  estimated 
at  their  true  value,  and  the  creditor 
allowed  to  pro  rate  with  imsecured 
creditors  upon  at  least  the  balance 
of  his  claim.  Lowry  Banking  Co.  v. 
Empire  Lumber  Co.,  91  Ga,  624  (1893). 
In  Nebraska,  the  court,  after  review- 
ing the  conflicting  rules  in  the  dif- 
ferent states,  held  that,  where  a  cred- 
itor held  collateral,  he  must  deduct 
from  his  claim  all  that  he  realizes 
from  the  collateral  before  he  can  get 
a  dividend,  and  must  also  deliver  up 
his  collateral  to  the  receiver.  State 
V.  Nebraska  Sav.  Bank,  40  Neb.  342 
(1894).  Under  the  Connecticut  stat- 
utes an  insolvent  corporation  is 
placed  in  a  receiver's  hands  for  the 
benefit  of  all  creditors,  and  a  person 
holding  security  must  stand  on  his 
security  or  else  come  in  only  for  the 
excess  of  his  claim  above  the  value 
of  the  security.  Re  Waddell-Entz 
Co.,  67  Conn.  324  (1896).    Under  the 


statutes  of  Connecticut  a  pledgee  is 
limited  to  a  dividend  on  the  unpaid 
portion  of  his  claim  unless  he  waives 
his  security  altogether.  In  re  Gree- 
ley &  Co.,  40  AtL  Rep.  233  (Conn., 
1898). 

1  Re  Blakely,  etc.  Co.,  L.  R,  8  Eq. 
244  (1869);  Newport,  etc.  Co.u  Doug- 
lass, 12  Bush  (Ky.),  673  (1877).  The 
bonds  of  a  corporation  not  secured 
by  mortgage,  when  given  as  collat- 
eral secm-ity  for  the  debt  of  the  com- 
pany, do  not  entitle  the  creditor  to 
any  greater  dividend  in  the  assets  of 
the  company,  upon  its  insolvency  and 
winding  up,  than  he  would  have  if  he 
did  not  hold  such  collateral  secvirity. 
International  Trust  Co.  v.  Union  Cat- 
tle Co.,  3  Wyo.  803  (1892).  Bonds 
issued  as  collateral  security  have  the 
right  to  participate  in  the  benefits 
of  the  foreclosure  to  the  extent  of 
their  par  value.  Duncomb  v.  New 
York,  etc.  R.  R.,  84  N.  Y.  190  (1881); 
Peck  V.  New  York,  etc.  R'y,  85  N.  Y. 
246  (1881);  Re  Regent's,  etc.  Co.,  L.  R. 
3  Ch.  D.  411  (1875);  Jerome  v.  McCar- 
ter,  94  U.  S.  734,  740  (1876);  Third  Nat. 
Bank  v.  Eastern  R.  R.,  122  Mass.  240 
(1877);  Morton  v.  New  Orleans,  etc. 
R'y,  79  Ala.  590  (1885).  See  also  §  476, 
supra. 

2  Griggs  V.  Day,  21  N.  Y.  App.  Div. 
442  (1897).  To  same  effect,  see  136 
N.  Y.  152,  162  (1892). 


1683 


CH.  XLVI.]  BONDS   AlfD    COUPONS.  [§  Y63. 

curity,  where  the  "bonds  recite  that  they  are  a  first  mortgage.* 
The  fact  that  the  bonds  pledged  by  the  corporation  sell  for  very 
little  at  a  pledgee's  sale  does  not  invalidate  the  sale.^  But  any 
fraud  whereby  the  bonds  are  purposely  sacrificed  will  invali- 
date the  sale.'  Purchasers  of  bonds  at  a  pledgor's  sale,  though 
the  pledge  was  by  the  company  itself,  and  the  price  at  such 
sale  very  low,  may  enforce  such  bonds  at  their  par  value.*  In 
foreclosure  the  pledgee  of  bonds  from  the  corporation  is  the 
owner  to  the  extent  of  his  loan.^  Where  bonds  are  issued  by 
a  corporation  to  a  director  or  officer  for  a  certain  purpose,  he 
cannot  retain  them  on  the  ground  that  the  company  owes  him 
money  ;^  and  where  a  corporation  delivers  bonds  to  a  creditor 
to  sell  and  apply  on  his  debt,  the  bonds  are  good  though  he 
fraudulently  disposes  of  them.''  Where  bonds  are  deposited  as 
collateral  security  to  notes,  and  before  the  notes  are  due  the 
bonds  are  stamped  on  their  face  as  subordinate  to  a  junior  lien, 
the  indorsers  of  the  notes  are  released.^  A  pledge  of  bonds 
by  one  person  to  another  is  similar  to  a  pledge  of  stock,  a  sub- 
ject which  is  fully  considered  elsewhere.®  A  sale  of  bonds  as 
collateral  security,  in  violation  of  the  agreement  as  to  the  no- 
tice to  be  given,  does  not  release  a  surety  on  the  note  secured 

1  Bristol,  etc.  Co.  v.  Bristol  Gas,  etc  8  Nassau  Bank  v.  Campbell,  74  Hun, 
Co.,  42  S.  W.  Rep.  19  (Tenn.,  1897).  616  (1893). 

2  Wlieelwriglit  v.  St.  Louis,  etc.  » See  ch.  XXVI,  supra.  Bona  fide 
Transp.  Co.,  56  Fed.  Rep.  164  (1893).  pledgees  have  the  same  rights  as  a 

3  James  v.  Railroad  Co.,  6  Wall  752  bona  fide  purchaser  to  the  extent 
(1867).    See  76  N.  W.  Rep.  195  of  their  pledga    Allen  v.  Dallas,  etc. 

*  Jerome  v.  McCarter,  94  U.S.  734  R,  R,  3  Woods,  316  (1878);  S.  C,  1 
(1876).  The  purchaser  of  bonds  at  a  Fed.  Cas.  465.  Where  a  bank  re- 
pledgee's  sale  may  enforce  such  bonds  ceives  a  pledge  of  bonds  in  good  faith 
for  their  full  par  value.  Wade  v.  its  title  is  good,  although  it  advanced 
Chicago,  etc.  R.  R,  149  U.  S.  327  money  on  the  bonds  by  certifying 
(1893).  Where  the  pledgee  sells  bonds  checks,  contrary  to  the  national  bank- 
held  as  collateral  and  buys  them  in,  ing  act.  Thompson  v.  St.  Nicholas 
he  may  enforce  them  for  their  fuU  Nat  Bank,  146  U.  S.  240  (1892).  Tlie 
par  value  instead  of  to  the  extent  of  indorser  of  a  note  secured  by  bonds 
only  his  claim.  Atlantic  Trust  Co.  is  released  if  the  bonds  are  subse- 
V.  Woodbridge,  etc.  Co.,  86  Fed.  Rep.  quently,  by  the  holder  of  the  note, 
975  (1897).  made  subject  to  liens  which  origi- 

6  Hayden  v.  Lincoln  City  Elect.  R'y,  nally  were  second  to  the  mortgage 

43  Neb.  680  (1895).  securing  the   bonds.    Nassau  Bank 

6  Greenville  Gas  Co.  v.  Reis,  54  Ohio  v.  Campbell,  63  Hun,  229  (1892).    A 

St.  549  (1896).  pledgee  of  bonds  from  an  individual 

■^  Persse   v.   Atlantic,   etc.   Tunnel  pledgor  may  prove  the  entire  amount 

Ca,  5  Colo.  App.  117  (1894>  of  the  collaterals,  but  can  recover  no 

1683 


§  TG4] 


BONDS   AND    COUPONS. 


[Cn.  XLVI. 


by  the  bonds,  but  discliarges  him  only  to  tlie  extent  of  the  act- 
ual value  of  the  bonds.^ 

§  764.  Forged  donds  —  Priorities  among  tonds  —  IncomiHete 
"bonds  —  References  to  the  mortgage  —  Purposes  of  the  issue. — 
If  any  material  part  of  a  bond  is  forged  the  bond  is  void.^  An 
alteration  of  the  number,  however,  is  immaterial  and  docs  not 
affect  the  bond  itself.'  The  bonds  may  be  incomplete,  in  that 
the  payee  or  place  of  pa^^ment  may  be  omitted.  In  such  cases 
the  validity  and  enforceability  of  the  bond  depend  on  the  ex- 
tent of  the  omission  and  the  facts  connected  with  the  case.* 


surplus  over  and  above  the  amount 
of  liis  debt  or  advances  with  proper 
costs  of  suit.  The  pledgor  takes  the 
remainder.  Morton  v.  New  Orleans, 
etc.  Ry,  79  Ala.  590 (1885). 

1  Vose  V.  Florida  R  R.,  50  N.  Y.  369 
(1873). 

2  Bonds  containing  a  forged  seal  of 
the  corporation  and  a  forged  certifi- 
cate by  the  trustee  are  Invalid  and 
void,  and  not  enforceable.  A  con- 
solidated road  is  not  liable  therefor. 
Maas  V.  Missouri,  etc.  R'y,  83  N.  Y. 
223  (1880).  See  also  §§  363-307,  supra. 
But  it  is  no  defense  to  an  action  on 
coupons  that  certain  forged  bonds 
are  out.  Wood  v.  Consolidated,  etc. 
Co.,  36  Fed.  Rep.  538  (1888). 

3  In  State  v.  Cobb,  64  Ala.  127, 158 
(1879),  the  court  said:  "The  change  or 
mutilation  of  the  number  would  be  a 
mere  change  or  mutilation  of  a  mark, 
placed  upon  the  bond,  it  may  be,  by 
the  maker,  or  the  indorser,  or  it  may 
be  by  any  holder,  for  the  convenience 
and  protection  of  the  one  or  the 
other."  The  alteration  of  the  num- 
ber on  a  bond  does  not  destroy  its 
negotiability,  and  a  bona  fide  pur- 
chaser of  it  from  a  thief  is  protected. 
The  number  is  merely  for  conven- 
ience in  identifying  the  bond,  the 
same  as  the  private  mark  of  the  owner 
upon  it  would  be.  Commonwealth 
V.  Emigrant,  etc.  Bank,  98  Mass.  12 
(1867),  citing  Smith  v.  Ill  etc.  R.  K 
(N.  Y.  Super.  Ct.).  To  same  effect, 
Elizabeth  v.  Force,  29  N.  J.  Eq.  587 


1684 


(1878);  Birdsall  v.  Russell,  29  N.  Y. 
220  (1804).  Even  though  the  thief  of 
negotiable  railroad  bonds  changes 
the  numbers  on  the  bonds,  yet  the 
bona  fide  purchaser  is  protected. 
Such  an  alteration  is  an  immaterial 
one.  Wylie  v.  Missouri  Pac  R'y,  41 
Fed.  Rep.  623  (1890). 

■* Railroad  bonds  maybe  negotiable 
though  payable  to  a  blank  person. 
White  V.  Vermont,  etc.  R.  R.,  21  How. 
575  (1858).  Although  the  name  of 
the  payee  is  left  blank  in  a  deben- 
ture, yet  if  there  is  a  corporate  con- 
tract to  deliver  debentures  to  the 
holder  of  them,  they  are  enforceable. 
Ee  Queensland,  etc.  Co.,  [1894]  3  Ch. 
181.  A  bond  incomplete  in  that  tiie 
payee  is  left  blank  may  be  filled  in 
by  any  holder  and  sued  upon  by  him, 
where  the  proceeds  from  the  sale 
thereof  went  to  the  company  and  the 
legislatui'e  has  ratified  the  bond. 
Chapin  v.  Vermont,  etc.  R.  R.,  74  Mass. 
575  (1857) ;  Hubbard  v.  New  York,  etc. 
R.  R,  36  Barb.  286  (1862).  Where  in 
a  railroad  bond  the  place  of  payment 
is  left  blank,  with  power  to  the  pres- 
ident to  fill  it  in,  vmtil  so  filled  in  the 
bond  is  not  negotiable,  and  a  thief 
can  give  no  title  to  a  pui-chaser.  Led- 
wich  V.  McKim,  53  N.  Y.  307  (1873). 
Where  the  place  of  payment  is  left 
blank,  with  authority  to  the  presi- 
dent to  fill  it  in,  but  he  does  not  fill 
it  in,  and  the  bonds  are  stolen  from 
the  company,  they  are  not  negotia- 
ble.   Jackson  v.  Vicksburg,  etc.  R  R, 


<0H.  XLVI.J 


BONDS  AND  COUPONS. 


[§  T64. 


Where  the  bonds  are  stolen  before  the  trustee's  certificate  is 
attached,  such  certificate  being  required  by  the  terms  of  the 
bond,  the  bonds  are  void  absolutely,  and  there  can  be  no  lona 
fide  purchaser  of  them.* 

The  vendor  of  bonds  does  not  impliedly  warrant  that  they 
were  legally  issued,^  nor  does  he  guarantee  payment.'  The  num- 
bers on  the  bonds  do  not  give  one  bond  any  priority  as  against 
other  bonds  having  a  larger  number.*  IS'or  does  the  fact  that 
they  were  issued  at  different  times  give  any  prior  right  to  pay- 
ment of  those  first  issued.^  All  the  bonds  are  conclusively  pre- 
sumed to  have  been  issued  at  their  date."  All  outstanding 
bonds  in  lona  fide  hands  are  conclusively  presumed  to  have 


2  Woods,  141  (187G);  S.  C,  13  Fed.  Cas. 
257.  Where  the  bonds  state  that  the 
president  is  authorized  to  fix  the 
place  of  payment,  and  the  bonds  are 
stolen  from  the  company  before  he 
does  so,  tliey  are  not  negotiable  nor 
collectible.  Parsons  v.  Jackson,  99 
U.  S.  431  (1878).  In  the  case  of  a  note 
by  a  firm  the  date  may  be  filled  in 
by  any  holder.  Michigan  Bank  v.  El- 
dred,  9  Wall.  544  (1869).  Municipal 
bonds  payable  "to ,  his  execu- 
tors, administrators,  and  assigns,"  are 
negotiable  Dutchess  County  Ins.  Co. 
V.  Hachfield,  1  Hun,  675  (1874).  Bonds 
stolen  before  completion  are  void. 
Maas  V.  Missoiui,  etc.  R'y.  H  Hun, 
8  (1877),  where  forgery  completed  the 
bonds. 

1  Maas  V:  Missouri,  etc.  R'y,  83  N.  Y. 
i;33  (1880).  Municipal  bonds  stolen 
and  negotiated  before  they  were  le- 
gally issued  by  the  municipality  are 
void,  and  even  a  hona  fide  purchaser 
cannot  enforce  them.  Germania  Sav- 
ings Bank  v.  Suspension  Bridge,  73 
Hun,  590  (1893). 

2  Otis  V.  CuUum,  93  U.  S.  447  (1875). 

3  Ketchum  v.  Duncan,  96  U.  S.  659 
(1877). 

* "  The  bonds  aU  bear  the  same  date, 
and  fall  due  on  the  same  day.  Bond 
number  one  has  therefore  no  advan- 
tage over  any  other  bond,  and  no 
presumptions  are  to  be  indulged  in 

168 


its  favor."  Stanton  v.  Alabama,  etc. 
R.  R.,  2  Woods,  523  (1875);  S.  C,  22 
Fed.  Cas.  1070.  The  fact  that  bonds 
are  ntmabered  does  not  give  priority 
in  payment  to  one  bondholder  as 
against  another.  Commonwealth  v. 
Susquehanna,  etc.  R.  R.,  122  Pa.  St. 
306,  331  (1888). 

» Reed's  Appeal,  122  Pa.  St.  565 
(1888).  Each  bond  shares  x:)ro  rata 
in  the  distribution.  Hodge's  Appeal, 
84  Pa.  St.  359  (1877).  See  also  §  881, 
infra,  on  the  subject  of  distribution. 

6  The  purchasers  of  bonds  bearing 
the  same  date  as  the  mortgage  may 
rely  on  the  fact  that  they  were  made 
and  issued  simultaneously,  and  that 
there  was  no  intervening  time  for 
the  liens  of  material-men  to  attach. 
Nelson  v.  Iowa,  etc.  R.  R.,  8  Am.  R'y 
Rep.  82  (Iowa,  1875).  In  Reynolds  v. 
Manhattan  T.  Co.,  83  Fed.  Rep.  593 
(1897),  the  court  held  that  where  the 
mortgage  has  been  delivered  to  the 
trustee,  but  no  bonds  have  yet  been 
issued,  a  mechanic's  lien  may  be  ob- 
tained at  any  time  prior  to  the  issue 
of  the  bonds.  Engraved  bonds  issued 
in  lieu  of  temporary  lithographed 
bonds  are  legal  Illinois  T.  &  S.  Bank 
V.  Pacific  R'y,  49  Pac.  Rep.  197  (Cal., 
1897).  Engraved  bonds  substituted 
for  temporary  printed  bonds  are 
good.  McKee  v.  Vernon  Coimty,  3 
Dili  210  (1874);  S.  C,  16  Fed.  Cas.  188. 


§  T64.] 


BONDS   AND   COUrONS. 


[cn,  XLVi. 


been  issued  on  the  date  of  the  recording  of  the  mortgage.* 
The  bond  and  mortgage  may,  however,  provide  for  the  priority 
of  one  part  of  the  bonds  over  another  part.  Such  priorities 
are  matters  of  contract  and  are  legaL' 

First-mortgage  bonds  have  priority  over  second-mortgage 
bonds,  although  issued  after  the  latter.' 

Where  the  bonds  refer  to  a  mortgage  securing  them,  the 
mortgage  becomes  thereby  a  part  of  the  bond  and  is  construed 
with  it.*    And  statements  and  representations  in  the  bonds  are 

1  Pittsburgh,  etc.  R'y  v.  Lynde,  44 
N.  E.  Rep.  596  (Ohio,  1896).  A  mort- 
gage deed  of  trust  is  a  lien  from  the 
date  of  its  record,  even  though  the 
bonds  are  not  issued  until  after  other 
liens  have  attached.  Central  Trust 
Co.  V.  Bartlett,  57  N.  J.  L.  206  (1894). 
A  mortgage  operates  from  the  time 
of  recording,  even  though  the  bonds 
are  issued  thereafter,  and  during 
the  intermediate  time  other  incum- 
brances are  mada  This  applies  to 
chattels  as  well  as  real  estate  cov- 
ered by  the  mortgage.  Camden,  etc. 
Co.  V.  Burlington,  etc.  Co.,  33  AtL 
Rep.  479  (N.  J.,  1895).  "  It  is  the  rule, 
as  between  bondholders  and  persons 
acquiring  liens  on  the  mortgaged 
property  subsequent  to  the  recording 
of  the  mortgage,  that  the  rights  of 
the  bona  fide  holders  of  the  bonds 
are  to  be  determined  as  if  they  had 
been  acquired  at  the  date  of  the  re- 
cording of  the  mortgage  securing 
them."  Belden  v.  Burke,  72  Hun,  51, 
75  (1893). 

2  There  may  be  a  preference  to  cer- 
tain bonds  as  against  others  of  the 
same  issue,  all  secui'ed  by  the  same 
mortgage.  Chicago,  etc.  Land  Co. 
V.  Peck,  112  111.  408  (1885);  McMiirray 
V.  Moran,  134  U.  S.  150  (1890).  Al- 
though part  of  the  bondholders  pur- 
chased by  reason  of  fraudulent  rep- 
resentations of  brokers  to  whom  the 
other  bondholders  had  sold  part  of 
their  holdings,  this  does  not  give  any 
priority  to  the  former  over  the  latter. 
Coe  t?.  East,  etc.  R.  R.,  52  Fed.  Rep. 


531  (1892).  In  Commonwealth  v. 
Chesapeake,  etc.  Canal  Co.,  32  Md. 
501  (1870),  various  complicated  ques- 
tions as  to  the  priority  of  different 
classes  of  bonds  were  passed  upon. 
In  Massacliusetts  a  statutory  provis- 
ion forbids  the  issue  of  bonds  re- 
deemable in  their  numerical  order. 
See  L.  1891,  ch.  382.  A  Cnal  decree 
in  a  foreclosure  suit  not  appealed 
from  may,  so  far  as  it  awards  prior- 
ity to  some  of  the  bonds  as  against 
others,  be  subsequently  modified  to 
conform  to  a  decision  of  the  supreme 
court  of  the  United  States  in  another 
case,  and  holding  differently  as  ta 
such  priority.  The  second  case  was 
for  the  sole  purpose  of  determining 
what  bonds  were  legal.  IMoran  u 
Hagerman,  64  Fed.  Rep.  499  (1894). 
Where  by  the  charter  the  stockhold- 
ers are  liable  for  aU  debts  and  they 
buy  some  of  the  company's  bonds, 
the  remaining  bonds  will  be  paid 
first  out  of  the  proceeds  of  foreclos- 
\rre.  Shaw  v.  Saranac  Horse  Nail  Co., 
78  Hun,  7  (1894). 

3  Claflin  V.  South  Carolina  R.  R,  8 
Fed.  Rep.  118  (1880). 

^Bondholders  are  bound  to  take 
wnotice  of  what  is  indorsed  and  "  of 
what  was  contained  in  their  deed  of 
mortgage,  and  of  the  laws  of  the 
state  referred  to  in  the  deed  of  mort- 
gage." Stanton  v.  Alabama,  etc.  R. 
R.,  2  Woods,  523  (1875);  S.  C,  22  FecL 
Cas.  1070:  Morton  v.  New  Orleans, 
etc.  R  R,  79  Ala.  590  (1885).  A  bond- 
holder need  not  take  notice  of  a  pro- 


1686 


CH.  XLVI.] 


BONDS  AND  COrPONS. 


[§  T64. 


controlled  by  explanations  contained  in  the  mortgage,  but  if 
the  terms  conflict  the  bond  controls.^ 

The  purchasers  of  railroad  bonds  cannot  rescind  on  the  ground 
that  the  railroad  has  used  the  proceeds  for  purposes  other  than 
those  stated  in  its  prospectus.^ 

Although  the  statute  restricts  the  mortgage  to  certain  pur- 
poses, yet  if  the  bonds  are  used  for  other  purposes,  lonafide 
purchasers  are  protected.^    When  part  of  the  bonds  are  issued 


vision  in  the  mortgage  that  he  can- 
not sue  at  law  on  liis  bond  unless 
one-fourth  of  the  bondholders  assent. 
Gtiilford  V.  ^Minneapolis,  etc.  Ry,  48 
Minn.  560  (1891).  Bondholders  are 
bound  by  recitations  in  the  deed  of 
trust  recognizing  tmrecorded  prior 
liens.  Skiddy  v.  Atlantic,  etc.  R.  R., 
3  Hughes,  320,  356  (1879);  S.  C,  22 
Fed.  Cas.  274.  A  statute  referred  to 
in  the  bond  becomes  thereby  a  part 
of  the  bond.  Oilman  v.  New  Orleans, 
etc.  R  R,  72  Ala.  566  (1882);  IMorton 
V.  New  Orleans,  etc.  R'y,  79  Ala.  590 
(1885);  Commonwealths.  Chesapeake, 
etc.  Co.,  32  Md.  501  (1870).  Purchas- 
ers are  boi:nd  to  know  the  contents 
of  the  mortgage  which  secures  the 
bo  nd.  Caylus  v.  New  York,  etc.  R  R, 
10  Hun,  295  (1877);  affirmed,  76  N.  Y. 
609.  The  holders  of  consolidated 
bonds  are,  it  has  been  held,  charge- 
able with  notice  of  the  prior  bonds 
and  mortgages  and  of  the  terms  upon 
which  their  own  bonds  were  issued. 


bonds  are  protected.  Carpenter  v. 
Black  Hawk,  etc.  Co.,  65  N.  Y.  43 
(1875).  After  the  purpose  of  the  issue 
is  fulfilled,  the  remaining  bonds  may 
be  issued  for  other  piirposes.  Claflin 
V.  South  Carolina  R.  R,  8  Fed.  Rep. 
118  (1880).  A  mortgage  reciting  that 
it  is  made  for  the  purpose  of  borrow- 
ing money  to  carry  on  the  operations 
of  the  company  is  valid,  although 
the  bonds  are  issued  in  payment  for 
the  plant.  Davidson  v-  Westchester, 
etc.  Co.,  99  N.  Y.  558  (1885).  Although 
bonds  are  issued  expressly  according 
to  their  terms  to  take  up  outstand- 
ing bonds,  yet  a  hona  fide  purchaser 
is  not  boimd  to  ascertain  whether 
the  bonds  were  used  for  that  pur- 
pose. Galveston  R  R  v.  Cowdrey, 
11  Wall.  459  (1870).  But  where  by 
statute  new  mortgage  bonds  are  is- 
sued to  take  up  old  bonds,  purchas- 
ers of  such  new  bonds  must  see  to  it 
that  the  old  bonds  are  taken  up,  even 
though  the  new  bonds  are  stated  to 


Hence,  they  cannot  impeach  the  va-    be  first-mortgage  bonds.    Spence  v. 


lidity  of  the  bonds  which  were  re- 
tired. Coe  V.  East,  etc.  R  R,  52  Fed. 
Rep.  531  (1892).    See  87  Fed.  Rep.  392. 

1  If  the  wording  of  the  bond  is  dif- 
ferent from  the  wording  of  the  moi-t- 
gage,  the  bond  controls.  Railway 
Co.  V.  Sprague,  103  U.  S.  756  (1880). 

2  Banque  Franco-Egyptienne  v. 
Brown,  34  Fed.  Rep.  162,  196  (1888); 
Van  Weel  v.  Winston,  115  U.  S.  228 
(1885).  Although  bonds  and  a  mort- 
gage are  authorized  to  pay  debts,  but 
are  partially  used  to  carry  on  the 
business,  bona  fide  purchasers  of  the 


Mobile,  etc.  R'y,  79  Ala.  576  (1885). 
The  understanding  of  a  bondholder 
as  to  the  use  of  the  funds  does  not 
bind  the  corporation.  Ives  v.  Smith, 
3  N.  Y.  Supp.  645  (1888).  An  action 
to  rescind  the  purchase  of  stock  lies 
where  the  money  paid  therefor  was 
to  be  applied  to  a  certain  purpose, 
but  was  not  so  applied,  but  the  re- 
ceiver will  not  be  directed  to  give  up 
the  money.  Moore  r.  Robertson,  25 
Abb.  N.  C.  173  (1890).  See  also  Belden 
V.  Burke,  in  §  766,  infra, 

3  Where  bonds  and  a  mortgage  are 


1687 


ro5.] 


BONDS    AJS'D    COUPONS. 


[cu. 


XL  VI. 


the  corporation  may  ao^ree  not  to  issue  the  others  except  on  cer- 
tain conditions.^  Bonds  are  sometimes  issued  convertible  inte 
stock,  and  sometimes  stock  is  issued  convertible  into  bonds.  The 
questions  connected  with  such  issues  are  considered  elsewhere.' 

§  765.  Attacliments  levied  on  honds — Form  ofhonds —  Gold 
clause  —  Seal — Cancellation  and  siihrogation. —  The  unissued 
bonds  of  a  corporation  cannot  be  attached  for  corporate  debts.' 
Bonds  may  be  taxed/  and  an  attachment  may  be  levied  on 
them  at  the  place  where  they  actually  are,  but  not  at  the  place 
where  the  corporation  is  and  they  are  not.'  There  can  be  no 
attachment  of  bonds  which  are  issued  to  a  trustee  to  pay  a  cer- 
tain debt.' 

A  suit  at  law  will  lie  for  the  conversion  of  bonds,'  or  a  suit 


prohibited  except  to  pay  debts,  but 
instead  of  that  are  partially  used  to 
carry  on  the  business,  bona  fide  pur- 
chasers of  the  latter  are  protected. 
Carpenter  v.  Black  Hawk,  etc.  Min. 
Co.,  05  N.  Y.  43  (1875);  Lord  v.  Yon- 
kers,  etc.  Co.,  99  N.  Y.  547  (1885). 
Where  a  company  has  power  to  mort- 
gage, but  not  to  give  bills  of  ex- 
change, a  mortgage  securing  bills  of 
exchange  is  good  as  security  for  the 
money  represented  by  the  bills  of 
exchanga  Scott  v.  Colburn,  2G  Beav. 
276  (1858). 

iln  general,  all  the  bonds  share 
equally  in  the  proceeds  of  a  fore- 
closvire  sale;  but  where  the  corpora- 
tion agreed  with  the  first  purchasers 
to  issue  only  $10,000  per  mile,  al- 
though the  mortgage  provided  for  a 
much  larger  issue,  a  purchaser  of 
bonds  in  excess  of  that  amount,  who 
purchases  with  knowledge  of  the 
above  agreement,  will  share  in  the 
proceeds  only  after  such  first  purchas- 
ers' bonds  have  been  paid.  McMur- 
ray  v.  Moran,  134  U.  S.  150  (1890),— 
the  court  stating  also  that  the  mort- 
gage might  have  provided  for  prior- 
ity among  the  bonds  if  it  had  been 
80  drawn. 

2  See  §  283,  supra. 

'  An  attachment  of  unissued  bonds 


is  not  good.  Richardson  v.  Green,  133 
U.  S.  30,  47  (1890);  Coddington  v.  Gil- 
bert, 17  N.  Y.  489  (1858);  Barnes  v. 
Mobile,  etc.  R.  R.,  12  Hun,  12G  (1877); 
Sickles  V.  Richardson,  23  Hun,  559 
(1881). 

<  See  §  572a,  supra. 

*  Negotiable  bonds  held  outside  of 
the  jurisdiction  of  the  court  cannot 
be  attached  by  serving  the  attach- 
ment on  the  corporation  which  issued 
the  bonds.  Von  Hesse  v.  ^Mackaye, 
55  Hun,  365  (1890);  aflf'd,  121  N.  Y.  094. 
Garnishee  process  does  not  lie  against 
a  non-resident  company  on  bonds, 
since  the  debtor  may  have  sold  them. 
Junction  R.  R.  u  Cleneay,  13  InA  161 
(1859). 

*•  Alabama,  etc.  Co.  v.  Chattanooga, 
etc.  Co.,  37  S.  W.  Rep.  1004  (Tenn., 
1896). 

Tor  the  allegations  in  an  action 
for  the  conversion  of  a  bond,  see 
Saratoga,  etc.  Co.  v.  Hazard,  55  Hun, 
251  (188«) ;  aff 'd,  121  N.  Y.  677.  Where 
bonds  are  loaned  to  use  temporarily 
upon  an  agreement  to  return  them 
when  called  for,  and  the  member  of 
the  firm  to  whom  they  are  delivered 
uses  them  for  his  own  purposes,  he 
converts  them.  Birdsall  v.  Daven- 
port, 43  Hun,  552  (1887). 


1688 


OH.  XLVI.] 


BONDS  AND  COrPONS. 


[§  765. 


in  equity  for  their  value ;  ^  but  an  equitable  suit  does  not  lie  to 
rescind  a  sale  of  worthless  bonds.  A  suit  at  law  for  damages 
is  the  proper  remedy.'^ 

There  is  no  particular  form  in  which  the  bonds  of  a  corpo- 
ration must  be  drawn.  In  order  to  be  negotiable  they  of  course 
must  contain  the  essential  features  of  negotiable  paper.' 

1 A  suit  by  an  equitable  owner  of 
bonds  to  recover  the  bonds,  or  their 
value,  is  properly  brought  in  equity. 
Phelps  V.  Elliott,  29  Fed.  Rep.  53  (1886). 

2U.  S.  Bank  v.  Lyon  County,  46 
Fed.  Rep.  514  (1891).  Concerning 
fraud  inducing  the  purchase  of  bonds, 
see  §f5 140, 157,  supra.  A  bill  in  equity 
is  proper  to  rescind  when  third  par- 
ties with  notice  are  to  be  reached. 
Banque,  etc.  v.  Bro%vTi,  34  Fed.  Rep. 
162  (1888). 

3  See  §  411,  supra,  concerning  these 
requisites;  also,  §  767,  infra,  concern- 
ing the  various  decisions  on  the  ne- 
gotiability of  corporate  bonds. 

The  following  are  forms: 
[Form  of  Coupon  Bond.] 
United  States  of  Amehica, 


No. 


STATE  OF  KEW  YOaK. 


Si.ooo. 


The  Commercial  Cable  Company,  New  York. 
FiasT  Mortgage  Five-Hundred-Year  Four 
Per  Cent  Gold  Bond. 
On  the  first  day  of  January,  A.  D.  2397,  for 
Talue  received,  The  Comrcercial  Cable  Com- 
pany promises  to  pay  the  bearer  the  sum  of 

ONE  THOUSAND  DOLLARS 

In  gold  coin  of  the  United  States  of  America 
of  or  equal  to  the  present  standard  of  weight 
and  fineness,  at  the  office  of  The  Farmers' 
Loan  and  Trust  Company  in  New  York  City, 
and  to  pay  interest  thereon  at  the  rate  of 
four  per  cent  per  annum,  payable  quarterly 
on  the  first  days  of  January,  April,  July,  and 
October,  in  the  gold  coin  aforesaid,  at  the 
said  office  of  the  said  The  Farmers'  Loan  and 
Trust  Company,  upon  the  presentation  and 
surrender  of  the  coupons  annexed  and  to  be 
annexed  hereto,  as  they  severally  become 
due. 

This  bond  is  one  of  an  issue  of  bonds, 
coupon  and  registered,  of  Uke  tenor,  to  an 
amount  not  exceeding  in  the  aggregate 
twenty  million  dollars,  all  of  which  are 
equally  secured  by  a  mortgage  deed  of  trust 
bearing  date  January  1,  1897,  made  by  the 
said  The  Commercial  Cable  Company  to  said 


The  Farmers'  Loan  and  Trust  Company  as 
Trustee,  of  and  upon  the  property  and  fran- 
chises of  The  Commercial  Cable  Company. 

In  case  of  default  for  six  months  after  due 
demand  in  the  payment  of  interest  on  any  of 
said  bonds,  the  principal  of  all  thereof  may 
be  declared  due  in  the  manner  and  with  the 
effect  provided  in  said  mortgage  deed  of 
trust. 

All  payments  upon  this  bond  of  both  prin- 
cipal and  interest  are  to  be  made  without  de- 
duction for  any  tax  or  taxes  which  said  Cable 
Company  may  be  required  to  pay  or  to  retain 
therefrom,  by  any  present  or  future  laws  of 
the  United  States  of  America,  or  any  of  the 
states  thereof,  said  Cable  Company  hereby 
covenanting  and  agreeing  to  pay  any  and  all 
such  tax  or  taxes. 

The  holder  of  this  bond  may  at  any  time 
at  his  option  surrender  the  same,  with  the 
undue  coupons  attached,  to  the  Registrar  of 
said  bonds,  to  be  canceled,  and  receive  in 
lieu  thereof  a  registered  bond  in  the  form 
provided  in  the  mortgage  deed  of  trust. 

This  bond  shall  not  be  valid  or  obligatory 
until  the  certificate  indorsed  hereon  shall  be 
signed  by  the  Trustee  under  said  mortgage 
deed  of  trust. 

In  WITNESS  WHEREOF,  The  Commercial 
Cable  Company  has  on  this  first  day  of  Janu- 
ary, 1897,  caused  its  corporate  seal  to  be  af- 
fixed hereto,  and  this  bond  to  be  signed  by 
its  Vice-President  and  Treasurer,  and  has  also 
caused  a  f  ac-simile  signature  of  its  Treasurer 
to  be  engraved  on  each  of  the  coupons  hereto 
annexed. 

The  Commercial  Cable  Company, 
By 

Vice-Presideni 


Attest: 


Treasurtn . 


Secretary. 


[Form  of  Coupon.] 
$10  J         i'      i  ^j^ 

On  the  first  day  of       1 
.The  Commercial  Cable  Company 
will  pay  the  bearer  at  the  office  of  The  Farm- 
ers' Loan  and  Trust  Company,  Ten  Dollars 
in  gold  coin,  being  three  months'  interest  due 
on  its  first  mortgage  bond  fur  one  thousand 
dollars. 
No. 

Treasurer. 


1689 


§  765.] 


BONDS    AND    COUrONS. 


[CII.  XLVI. 


WTiere  a  bond  provides  that  it  may  be  registered  and  tho 
coupons  surrendered,  and  that  thereafter  the  interest  will  bo 
paid  by  check,  a  bondholder  may,  by  an  action  for  specific  per- 


And  said  bonds  are  to  bear  the  following 
certificate  indorsed  upon  them,  to  be  signed 
by  said  Trustee: 

[Trustee''s  Certificate.'] 
The  Farmers'  Loan  and  Trust  CoMPAirr, 
Trustee,  hereby  certifles  that  this  bond  is  one 
of  the  issue  referred  to  within. 
The  Farmers'  Loan  and  Trust  Company, 
Trustee. 
By 

Vice-President. 

[Form  of  Registered  Bond.] 

(In  denominations  of  $100,  $500,  Sl.OOO,  55,000, 

and  S10,000.) 

United  States  of  America, 

No. 

'I'HK  Commercial  Cable  Company,  New  York. 

First  Mortgage  Four  Per  Cent  Gold  Bond. 

Principal  due  Jan.  1,  A.  D.  SS97. 
interest  payable  quarterly  on  the  first  days 

of  January,  April,  July,  and  October,  at 
the  rate  of  four  per  cent  per  annum. 

For  value  received  The  Commercial  Cable 
Company  promises  to  pay  to  or  assigns 

Dollars  in  gold  coin  of  the  United  States 
of  America  of  or  equal  to  the  present  stand- 
ard of  weight  and  fineness  at  the  office  of 
The  Commercial  Cable  Company,  in  the  City 
of  New  York,  on  the  first  day  of  January, 
A.  D.  two  thousand  three  hundred  and  ninety- 
seven,  and  to  pay  interest  thereon,  in  like 
gold  coin,  at  the  rate  of  four  per  centum  per 
annum,  from  the  first  day  of  18    ,  until 

such  principal  sum  shall  be  paid,  such  inter- 
est being  payable  at  said  office  on  the  first 
days  of  January,  April,  July,  and  October  in 
each  year. 

This  bond  is  one  of  an  issue  of  bonds, 
coupon  and  registered,  of  like  tenor,  to  an 
amount  not  exceeding  in  the  aggregate 
twenty  million  dollars,  all  of  which  are 
equally  secured  by  a  mortgage  deed  of  trust 
bearing  date  January  1,  1897,  made  by  the 
said  The  Commercial  Cable  Company  to  said 
The  Farmers'  Loan  and  Trast  Company,  as 
Trustee,  of  and  upon  the  property  and  fran- 
chises of  The  Commercial  Cable  Company 
(including  the  franchises,  stock,  and  property 
of  the  Postal  Telegraph-Cable  Company, 
heretofore  acquired  by  said  The  Commercial 
Cable  Company). 

In  case  of  default  for  six  months  after  due 
demand  in  the  payment  of  interest  on  any  of 


said  bonds,  the  principal  of  all  thereof  may 
be  declared  due  in  the  manner  and  with  the 
effect  provided  in  said  mortgage  deed  of 
trust. 

All  payments  upon  this  bond  of  both  prin- 
cipal and  interest  are  to  be  made  without 
deduction  for  any  tax  or  taxes  which  said 
Cable  Company  may  be  required  to  pay  or  to 
retain  therefrom,  by  any  present  or  future 
laws  of  the  United  States  of  America,  or  any 
of  the  states  thereof,  said  Cable  Company 
hereby  covenanting  and  agreeing  to  pay  any 
and  all  such  tax  or  taxes. 

This  bond  is  transferable  only  at  the  ofTRce 
of  said  The  Commercial  Cable  Company  on 
the  books  of  said  The  Commercial  Cable 
Company  by  the  registered  owner  in  person 
or  by  attorney  upon  the  surrender  hereof, 
and  may  be  transferred  into  similar  bonds  of 
smaller  denominations  or  be  merged  with 
other  bonds  of  this  issue  into  a  similar  bond 
of  larger  denomination,  except  that  the  only 
denominations  shall  be  $100,  $500,  $1,000, 
$5,000,  and  §10,000. 

Instalments  of  interest  on  this  bond  shall 
be  paid  by  cheques  or  warrants  mailed  to 
proprietors  at  their  addresses  registered  in 
the  books  of  said  Cable  Company,  and  such 
payments  shall  be  in  full  in  the  order  of  their 
maturity  and  in  accordance  with  the  provis- 
ions of  said  mortgage  deed  of  trust. 

This  bond  may  be  exchanged  for  the  De- 
benture Stock  of  said  The  Commercial  Cable 
Company  on  the  terms  set  forth  in  the  mort- 
gage deed  of  trust  securing  this  bond. 

This  bond  shall. not  be  valid  or  obligatory 
untU  the  certificate  indorsed  hereon  shall 
have  been  signed  by  the  Trustee  under  the 
said  mortgage  deed  of  trust. 

In    witness    whereof    The    Commercial 
Cable  Company  has  on  this       day  of 
caused  its  corporate-seal  to  be  affixed  hereto, 
and  this  bond  to  be  signed  by  its  Vice-Presi- 
dent and  Treasurer. 

The  Commercial  Cable  Company, 
By 

yice-President. 

Treasurer. 
Attest: 

Secretary. 

The  above  class  of  bonds  usually 
contain  a  registration  clause  as  fol- 
lows: 

This  bond  shall  pass  by  dehvery,  or  by 
transfer  upon  the  transfer  books  of  the  Com- 
pany in  the  city  of  New  York.    After  regis- 


1690 


CH. 


XLVI.] 


BONDS  AND  COUPONS. 


[§  T65. 


formance,  compel  the  carrying  out  of  this  contract  on  the  part 
of  the  party  issuing  the  bonds.^ 

The  bonds  may  be  payable  to  the  bearer.'^  If  the  payee  of 
the  bond  is  left  blanlv,  the  holder  may  fill  in  his  name ;  ^  but  if 
it  is  payable  only  to  a  specified  person,  a  written  assignment 
is  necessary/  If  payable  to  a  certain  person,  he  may  indorse 
them  in  blank  and  then  they  pass  by  delivery,^  A  bondholder 
is  a  payee  and  not  an  assignee.^  The  bonds  should  not  be  de- 
scribed as  first-mortgage  bonds  if  there  are  underlying  mort- 
gages on  divisions  of  the  property.''  A  purchaser  of  bonds  and 
stock  may  rescind  on  the  ground  that  the  vendor  falsely  repre- 
sented that  there  was  but  one  mortgage  on  the  property.  It  is 
immaterial  that  the  vendor  paid  off  the  other  mortgage  after 
suit  was  brought.^  Where  a  corporation  issues  bonds  having 
the  words  printed  on  their  face  "  first-mortgage  bonds,"  when, 
as  a  matter  of  fact,  there  was  an  underlying  mortgage  which 
the  party  to  whom  the  bonds  were  soid  agreed  to  pay,  but  did 


tration  of  ownership  certified  hereon  by  the 
transfer  agent  of  the  Company,  no  transfer, 
except  on  the  books  of  the  Company,  shall 
be  valid,  unless  the  last  transfer  is  to  bearer, 
which  shall  restore  transferability  by  de- 
Lvery;  and  it  shall  continue  subject  to  suc- 
cessive registrations,  and  transfers  to  bearer 
as  aforesaid,  at  the  option  of  each  holder. 

1  Benwell  u  Mayor,  36  AtL  Rep.  6G8 
(N.  J.,  1897). 

2  Kneeland  v.  Lawrence,  140  U.  S. 
209  (1891);  Mercer  County  v.  Hackett, 
1  Wall  83  (1863);  Savannah,  etc.  R 
R.  V.  Lancaster,  62  Ala.  555  (1878). 
Railway  bonds  may  be  payable  to  the 
trustees  in  tlie  mortgage  or  bearer, 
or  may  be  payable  to  bearer  alone. 
Ide  V.  Passumpsic,  etc.  R  R,  33  Vt. 
297  (1S59).  The  bearer  may  sue  on 
them  in  his  own  nama  Ide  v.  Pas- 
sumpsic, etc.  R  R,  33  Vt.  297  (1859). 
Bonds  are  often  drawn  payable  to 
the  trustee  or  bearer. 

3  See  §  764,  supra. 

*  The  assignee  of  a  bond  payable  to 
a  certain  person  or  assigns  cannot 
sue  thereon  where  the  assignment 
to  him  is  not  in  ^v^iting.  Bunting  v. 
Camden,  eta  R  R,  81  Pa.  St.  254 
(1876> 


5  Brainerd  v.  New  York,  etc.  R  R, 
10  Bosw.  333  (1863). 

6  Rutten  V.  Union  Pac.  R'y,  17  Fed. 
Rep.  480  (1883). 

'  It  is  fraudulent  to  deliver  as  first- 
mortgage  bonds,  bonds  which  are  de- 
nominated "first-mortgage  consoli- 
dated bonds  "  which  are  not  secured 
by  a  first  mortgage,  but  are  second  to 
imderlying  mortgages  on  divisions 
of  the  property.  Williamson  v.  New 
Jersey  Southern  R  R,  29  N.  J.  Eq. 
311, 318  (1878),  affirming  on  this  point 
28  N.  J.  Eq.  277.  Although  the  bonds 
bear  upon  their  face  the  words  "  con- 
solidated ^rs^mortgage  bonds,"  yet, 
if  they  refer  to  a  mortgage,  and  the 
mortgage  shows  that  there  were  un- 
derlying first-mortgage  bonds  whicli 
were  to  be  exchanged  or  taken  up  if 
possible  by  the  consolidated  bonds, 
the  directors  and  the  trustee  are  not 
liable  for  -fraud  in  issuing  the  con- 
solidated bonds,  a  part  of  the  bonds 
having  been  used  for  new  construc- 
tion. Caylus  V.  New  York,  etc.  R  R, 
10  Hun.  295  (1877);  aff'd,  76  N.  Y.  609. 

8  Stevenson  v.  Marble,  84  Fed.  Rep. 
28  (1897). 


1691 


§  7C5.]  BONDS  AND  COUPONS.  [cH.  XLVT. 

not  pay  except  in  part,  the  ofRcers  and  the  directors  who  took 
part  in  the  issue  of  the  bonds  are  liable  to  an  innocent  pur- 
chaser who  relied  on  the  statement  contained  on  the  face  of  the 
bonds.  His  measure  of  damages  is  the  difference  betAvcen  the 
value  of  the  bonds  as  first-mortgage  bonds  and  second-mortgage 
bonds.^  A  person  having  a  prior  lien  may  waive  it  by  taking 
from  the  corporation,  as  security,  bonds  which  purport  to  be 
first-mortgage  bonds.^  The  seal  of  the  corporation  is  attached 
jto  the  bond.^  This  seal  ma}"  be  considered  as  merely  the  sig- 
nature of  the  company,  thereby  rendering  the  "  bond  "  merely 
a  promissory  note  and  subject  to  the  short  statute  of  limita- 
tions,* or  it  may  be  considered  a  seal  the  same  as  an  individuars 
seal,  making  the  instrument  a  scaled  instrument.' 

The  execution  of  the  bonds  should  be  regularly  and  formally 
authorized  by  the  proper  corporate  authorities.^ 

A  mortgage  and  bonds  secured  thereby  may  be  authorized  by 
the  board  of  directors,  afid  no  action  or  authorization  by  the 
stockholders  is  necessary.' 

Bonds  and  mortgages  may  be  executed  outside  of  the  state 
incorporating  the  company.® 

If  no  date  of  payment  of  the  principal  is  specified  it  may  be 
collected  at  any  time.^ 

The  various  questions  arising  concerning  the  interest  on  and 
coupons  of  bonds  are  considered  elsewhere.^" 

A  bond  by  its  terms  may  be  made  payable  in  gold  coin  of 

1  Bank  v,  Byers,  41  S.  W.  Rep.  325  bonds  are  not  good  in  their  hands 
(Mo.,  1897).     Cf.  §  814,  infra,  and  an  execution  sale  of  the  prop- 

2  Bristol,  etc.  Co.  v.  Bristol  Gas,  etc  erty  comes  in  ahead  of  the  mortgage. 
Co.,  42  S.  W.  Rep.  19  (Tenn.,  1897).  IMcKee  v.   Grand  Rapids,   etc.   R'y, 

3  An  official  may,  while  out  of  the  41  Mich.  274  (1879).  See  ?"§  721-725, 
state,  cause  a  new  seal  to  be  made  supra.  As  to  notice  of  a  meeting  to 
and  attach  it  to  the  bonds  of  the  cor-  authorize  bonds,  see  §  599,  supra.  As 
poration  out  of  the  state.  Lynde  v.  to  ratification  of  an  unauthorized 
"Winnebago  County,  16  Wall  6  (1872).  mortgage,  see  §  809,  infra. 

See  also  §  722,  sMj:)ra.  'Hodder  v.  Kentucky,  etc.  R'y,  7 

4  See  g§  770,  772,  infra.  Fed.  Rep.  793  (1881).    See  also  §  808, 

5  See  §g  770.  772,  infra.  infra. 

6  Where  the  stockholders  build  the  8  Hervey  v.  Illinois  Mid.  R'y,  28  Fed. 
road  with  their  own  money  and  take  Rep.  169  (1884). 

the  mortgage  bonds  of  the  company        »  Hopkins  v.  Worcester,  etc.  Canal, 
as  security  without  formal  action  of    L.  R.  6  Eq.  487  (1868). 
the  corporation  authorizing  it,  the       lo  See  §§  771,  772,  infra. 

1692 


OH.  XLVI.] 


BONDS  AXD  COUPONS. 


[§  T65. 


or  equal  to  the  present  standard  of  weight  and  fineness.^  But 
the  court  cannot  change  the  pa^nnents  of  interest  from  cur- 
rency to  gold.2  A  railroad  has  no  right  to  pay  off  bonds  before 
they  are  due,  nor  to  pay  the  money  to  the  trustee  and  have  the 
mortgage  canceled.^ 

Where  the  owner  of  bonds  delivers  them  up  to  the  company 
in  exchange  for  other  bonds  or  securities,  the  courts  are  in- 
clined to  hold  that  he  does  not  thereby  waive  the  security  of 
the  mortgage  that  secured  the  bonds,  but  that  the  new  bonds 
are  subrogated  to  such  security.*    "Where  a  part  of  mortgage 


1  For  various  decisions  on  the  gold 
clause  in  obligations,  see  7  "Wait,  Act. 
&  Def.  p.  586;  2  Dan.  Neg.  Inst.,  4th 
ed.,  §  1247;  Bronson  r.  Rodes,  7  Wall 
229  (18G8).  Where  the  contract  calls 
for  gold  coin,  the  judgment  for  dam- 
ages for  failure  to  pay  should  be  for 
coin  for  the  amount  specified  in  the 
contract.  Butler  v.  Horwitz,  7  WalL 
258  (18G8);  Trebilcock  u  Wilson,  12 
WalL  687  (1871).  An  agreement  to 
pay  in  gold  may  be  impUed,  but 
the  implication  must  be  found  in  the 
language  of  the  contract.  JIaryland 
V.  Railroad  Co.,  22  WalL  105  (1874). 
Coupons  may  by  their  terms  be  made 
payable  in  gold  coin.  Pollard  v. 
Pleasant  Hill,  3  DilL  195;  S.  C,  19 
Fed.  Cas.  944  (1873X  Where  a  statute 
authorizes  the  governor  to  sign  bonds 
bearing  eight  per  cent  interest,  he 
may  sign  bonds  bearing  eight  per 
cent  payable  in  gold.  Young  v.  Mont- 
gomery, etc.  R.  R.,  2  Woods,  606;  S.  C, 
30  Fed.  Cas.  850  (1875).  Where  bonds 
are  payable  in  gold  and  silver  coin 
the  government  has  no  right  to  pay 
them  in  legal-tender  currency.  State 
V.  Hays,  50  Mo.  34  (1872).  As  to  a 
gold  clause,  see  also  Blanck  v.  Sad- 
lier,  153  N.  Y.  551  (1897);  Dennis  v. 
Moses,  52  Pac.  Rep.  333  (Wash.,  1898); 
Carpentier  v.  Atherton,  25  CaL  564 
(1864). 

2  Taylor  v.  Atlantic,  etc.  R'y,  55 
How.  Pr.  275  (1877). 

'  Missouri,  etc.  R'y  v.  Union  Trust 


Co.,  87  Hun,  377  (1895).     See  also 
§  816,  infra. 

<  Although  bonds  are  taken  in  pay- 
ment of  past-due  coupons,  yet  those 
who  take  such  bonds  are  subrogated 
to  and  may  enforce  the  coupons. 
Gibert  v.  Washington,  etc.  R  R.,  33 
Gratt.  (Va.)  586,  596  (1880).  But  in 
Fidelity,  etc.  Co.  v.  Shenandoah,  etc. 
Pu  R.,  86  Va.  1  (1889),  the  same  court 
held  that  where  coupons  are  ex- 
cJaanged  for  income  bonds  at  sixty 
cents  on  the  dollar,  and  the  clear  in- 
tent was  to  satisfy,  discharge,  and 
cancel  the  coupons,  there  is  no  sub- 
rogation. Second-mortgage  bonds 
taken  in  exchange  for  coupons  on 
first-mortgage  bonds  share  in  the 
proceeds  as  though  they  were  such 
coupons.  Farmers'  L.  &  T.  Co.  v. 
G?:een  Bay,  etc.  R  R.,  6  Fed.  Rep.  100 
(1881).  Interest  released  by  first- 
mortgage  security-holders  may  be 
expressly  made  payable  to  holders  of 
otlier  securities,  and  yet  the  latter 
are  not  subrogated  to  the  mortgage 
to  that  extent.  SulHvan  v.  Portland, 
etc.  R  R.,  94  U.  S.  806  (1870).  Bond- 
holders taking  certificates  of  indebt- 
edness do  not  thereby  waive  their 
mortgage  security.  Skiddy  v.  At- 
lantic, etc.  Pu  Pu,  3  Hughes,  320,  357 
(1879);  S.  C,  22  Fed.  Cas.  274  See 
also  Memphis,  etc.  R.  R  v.  Dow,  120 
U.  S.  287  (1887),  where  a  trustee  "for 
the  second-mortgage  bondholders 
bought  for  them  the  property  at  a 


1693 


§  765.]  BONDS    AND    COUrONS.  [en.  ILVI. 

bonds  which  are  in  default  are,  under  a  reorganization  agree- 
ment, returned  to  the  corporation  and  placed  under  a  new 
mortgage,  securing  bonds  which  are  issued  to  the  persons  who 
so  turned  in  the  first-mentioned  bonds,  the  holders  of  the  re- 
mainino:  old  bonds  cannot  claim  that  the  bonds  so  turned  in 
have  been  canceled,  thereby  reducing  the  first  mortgage  issue 
by  that  amount.*  Yet,  where  consolidated  mortgage  bonds  are 
issued  in  exchange  for  bonds  secured  by  prior  lien,  but  all  of 
the  prior  bonds  are  not  so  turned  in,  and  a  foreclosure  takes 
place,  such  of  the  prior  bonds  as  were  not  turned  in  must  be 
paid  in  fulL^  Where  a  holder  of  bonds  exchanges  them  for 
new  bonds,  the  agreement  being  that  the  old  bonds  should  be 
canceled  when  all  of  them  have  been  changed,  such  owner  can- 
not rescind  even  though  all  of  the  bondholders  do  not  come  in 
and  consequently  the  cancellation  docs  not  take  place.'  In  con- 
struing a  provision  in  a  bond  for  a  sinking  fund,  the  prospectus 
is  not  admissible  in  evidence.  The  term  "  sinking  fund  "  does 
not  necessarily  imply  accumulation.*  A  debenture  containing 
an  agreement  that  the  company  will  not  execute  any  mortgage 
prior  in  right  to  such  debentures  does  not  affect  the  rights  of 

foreclosure  sale  under  the  first  moilr  tract  does  not  entitle  the  old  bond- 
gage.  Cf.  Railroad  v.  Soutter,  13  holders  to  be  restored  to  their  posi- 
Wall.  517  (1871),  where  the  sale  was  tion  as  first-mortgage  bondholders, 
fraudulent.  See  also,  in  general,  They  may,  however,  have  their  bonds 
Gibbes  r.  Greenville,  etc.  R  R.,  13  allowed  as  second-mortgage  bonds 
S.  C.  228  (1879);  Newbold  v.  Peoria,  upon  foreclosure.  Fidelity,  etc.  Co. 
etc.  R.  R.,  5  IIL  App.  367  (1879);  Blair  v.  Shenandoah,  etc.  R  R,  33  W.  Va. 
V.  St.  Louis,  etc.  R.  R,  23  Fed.  Rep.  761  (1890). 

524  (1885);  Ames  v.  New  Orleans,  etc.  i  Mo  wry  v.  Farmers'  L.  &  T.  Co.,  76 
R  R,  2  Woods,  206  (1876);  S.  C,  1  Fed.  Rep.  38  (1896). 
Fed.  Cas.  760.     But  a  person  advanc-  2  Bound  v.  South  Carolina  R  R,  78 
ing  interest  is    not   entitled  to  be  Fed.  Rep.  49  (1897).    Where  the  out- 
equitably  subrogated.    Newport,  etc.  standing  bondholders  join  in  a  re- 
Co.  V.  Douglass,  12  Bush  (Ky.),  673  quest  for  a  foreclosure  of  the  mort- 
(1877).    See  also  §  772,  infra;  Sim-  gage  bonds  of  the  reorganized  com- 
mons   V.  Taylor,   38  Fed.   Rep.  683  pany,  they  are  deemed  to  have  waived 
(1889);  Ex  parte  White,  2  S.  C.  469  their  rights  in  the  old  bonds.    First 
(1871).    Where  the  mortgage  bond-  Nat.  Bank  v.  Radford  Trust  Co.,  80 
holders  agree  to  waive  their  lien  and  Fed.  Rep.  569  (1897). 
take    new  second-mortgage    bonds,  3  Central  Trust  Co.  v.  Marietta,  etc. 
and  the  trustee  does  discharge  the  R'y,  73  Fed.  Rep.  589  (1896). 
mortgage,  a  failure  of  the  company  <  Morrison  v.  Chicago,  eta  Co.,  77 
to  issue  the    new  second-mortgage  L.  T.  Rep.  677  (1897). 
bonds  in  accordance  with  the  con- 

1694 


CH.  XLVI.]  BONDS   AND   COUPONS.  [§  766. 

a  hona  fide  mortgagee  without  notice  of  such  debentures  and 
such  contract.^ 

The  question  of  whether  a  provision  that  bonds  may  be  is- 
sued by  vote  of  the  stockholders  only,  and  whether  a  statutory 
notice  may  be  waived,  is  considered  elsewhere.^ 

§  766.  Bonds  issued  heloiv  2)(ii^  for  cash,  2>'*'02)crty,  or  construc- 
tion tvorli  —  Dividend  of 'bonds  —  Bonds,  notes,  or  mortgages 
given  tvithout  consideration  —  Statutory  and  constitutional i)ro- 
Mhitions  relative  to  issues  of  bonds  —  Fraudulent  issues  of 
bonds  —  Bona  fide  imrchasers  of  bonds  issued  at  less  than  their 
par  value  are  protected  —  Fraudulent  issues  of  bonds  to  the  di- 
rectors, or  through  directors  who  are  ^^  dummies,^''  or  to  con- 
struction companies  in  ivhich  the  directors  are  interested  — 
Who  may  co)nplain  of  an  issue  of  bonds  at  less  than  par  — 
Stochholders  —  The  state —  The  corporation  itself — Bondhold- 
ers—  Corporate  creditors —  Usury  as  affecting  bonds  issued  at 
liss  than  par  —  Distribution  of  bonds  on  sale  of  corporate  as- 
sets—  Bonds  and  stocli  to  be  issued  to  a  contractor  who  fails  to 
perform. —  It  is  clear  that  at  common  law  a  corporation  may 
issue  its  bonds  at  less  than  their  par  value.' 

^Re  CasteU,  etc.  Co.,  78  L.  T.  Rep.  burgh,  etc.  R.  R.,  139  Pa.  St.  13  (1891). 

109  (1898).  A  corporation  may  issue  bonds  at 

2  §  725,  supra,  and  §  808,  infra.  eighty  cents  on  the  dollar.   The  Vigi- 

'  Gamble  v.  Queens  Covmty  Water  lancia,  G8  Fed.  Rep.   781   (1895).    A 

Co.,  123  N.  Y.  91  (1890),  where  the  corporate  creditor  cannot  complain 

court,  after  speaking  with  reference  that  a  company  sold  its  bonds  to 

to  the  stock  of  the  company,  pro-  some  of  the  directors  at  a  discount 

ceeded  to  say:    "  A  different  rule,  of   twenty-five  per  cent.     Bank  of 

however,  prevails  in  regard  to  the  Toronto  v.  Cobourg,  etc.  R'y^  10  Ont. 

bonds  of  a  corporation.    An  extended  (Can.)    376  (1885).    Debentures  may 

disciLSsion  of  the  question  is  not  need-  be  issued  at  a  discount,  even  sixty 

f  uL    We  think  a  corporation  has  the  per  cent  discount  being  upheld   in 

power  to  issue  its  bonds  at  less  than  Webb  v.  Shropshire  R'y,  [1893]  3  Ch. 

par.   So  far  as  this  point  is  concerned,  307.    See  also  Handley  v.  Stutz,  139 

it  is  not  restricted  to  an  issue  only  U.  S.  417  (1891) ;  Christensen  v.  Illi- 

upon  payment  to  the  company  of  nois,  etc.  Co.,  52  Hvm,  478  (1889).    But 

the  par  value  of  the  bonds,  either  in  an  agreement  of  a  corporation  to 

money  or  property  for  its  use."    To  issue    bonds    to  a  subscriber   as   a 

same  effect,  Lyceima  v.  Ellis.  57  N.  Y.  "  bonus  "  was  held  to  be  void,  and  the 

Super.  Ct.  533  (1890).    The  holder  of  subscription  was  enforced,  in  Mor- 

a  majority  of  the  stock  of  a  railroad  row  v.  Nashville,  etc.  Co.,  87  Tenru 

company  may  legally  cause  its  bonds  2G2  (1889).    In  Claflin  v.  South  Caro- 

to  be  issued  to  himself  at  ninety  lina  R.   R.,  8  Fed.   Rep.  118  (1880), 

cents  on  a  dollar  in  payment  of  a  bonds  were    issued  at  the  rate  of 

debt  due  him.    Gloninger  v.  Pitts-  eighty  cents  on  the  dollar,  and  no 

1695 


g  'JQQ.'\  BOXDS  AND  COUPONS.  [CH.  XLVI. 

Tlie  person  to  wliom  stock  lias  been  issued  in  payment  for 
property  may  donate  a  part  of  it  as  a  bonus  to  go  with  bonds 
sold  at  par  by  the  corporation  to  the  person  taking  the  bonus.* 
A  person  who  buys  mortgage  bonds  with  stock  as  a  bonus  from 
a  party  to  whom  the  stock  and  bonds  were  originally  i^:sued 
cannot  be  held  liable  on  the  stock  at  the  instance  of  other 
stockholders,  who  did  not  object  at  the  time  of  the  issue,  and 
who  now  come  into  the  foreclosure  suit  and  attempt  to  defeat 
the  bonds  on  the  ground  that  the  amount  due  thereon  is  not 
more  than  the  unpaid  par  value  of  the  stock,  the  bonds  and 
stock  having  originally  been  issued  in  payment  for  property.^ 
The  bonds  of  a  failing  corporation  and  the  mortgage  securing 
them  are  valid  although  when  the  bonds  were  issued  a  large 
amount  of  increased  capital  stock  was  given  by  the  corporation 
as  a  bonus  with  the  bonds.  The  giving  of  the  bonus  is  no  de- 
fense to  a  foreclosure  of  the  mortgage,  it  being  sho^\^l  that  the 
corporation  was  nearly  insolvent  at  the  time  such  increased 
capital  stock  was  issued.'  In  New  York  it  has  been  held  that 
unissued  shares  of  stock  may  be  issued  gratuitously  to  stock- 
holders; also  bonds  of  the  company;  and  they  are  not  liable 
for  the  par  value  or  any  part  thereof  to  the  corporation  or  cor- 
porate creditors,  unless  they  agreed  to  pay  therefor  or  the  stat- 
ute requires  payment.  Even  though  the  stockholder  has  sold 
such  stock  and  bonds,  he  is  not  liable  to  corporate  creditors  for 

question  was  raised  as  to  the  validity  Ala.  576  (1885).    See  also,  on  the  sub- 

of  the  issue.    In  England  debent\ires  ject  of  issuing  stock  and  bonds  at 

may  be  issued  at  a  discount  in  cash,  less  than  their  par  value,  ch.  Ill,  siir 

Campbell's  Case,  L.  R.  4  Ch.  D.  470  pro.    It  is  illegal  to  issue  municipal 

(1876),  where  the  issue  was  to  a  di-  bonds  at  a  discount.    See  g  98,  supra. 

rector;  Re  Regents',  etc.  Co.,  L.  R.  3  In  SherlocJi  v.  Winnetka,  68  III  530 

Ch.  D.  43  (1876),  where  pledgees  of  de-  (1873),  the  court  held  a  sale  of  muuici- 

bentiu'es  shared  equally  with  pur-  pal  bonds  below  par  to  be  tmlawfuL 

chasers,  on  winding  up,  to  the  extent  ^  Davis  v.  Montgomery,  etc.  Co.,  8 

of  the  pledge;  Re  Anglo-Danubian,  S.  Rep.  496  (Ala.,  1890).     See  also  §  42, 

etc.  Co.,  L.  R  20  Eq.  339  (1875);  Re  supra. 

Inns,  etc.  Co.,  L.  R.  6  Eq.  82  (1808).  2  Northern,  etc.  Co.  v.  Columbia, 
Where  railroad  bonds  are  issued  and  etc.  Co.,  75  Fed.  Rep.  936  (1896) ;  Dick- 
paid  for  in  Confederate  currency,  erman  r.  Northern  T.  Co.,  80  Fed.  Rep. 
they  can  be  enforced  only  to  the  ex-  450  (1897). 

tent  of  the  pm-chasing  value  of  the  3  Dummer    v.  Smedley,  68  N.  "W. 

cuiTency  thus  paid,  at  the  time  of  the  Rep.  260  (Mich.,  1896),  the  com-t  rely- 

purchase,  with  interest  upon  that  ing  on  the  authority  of  Handley  v. 

valua    Spence  v.  Mobile,  etc.  R'y,  79  Stutz,  139  U.  S.  417  (1891). 

1696 


en.  xLvi.] 


BONDS    AIS-D    COUPONS. 


[§  "if^Q- 


the  amount  received  from  the  sale.^  Even  though  bonds  are 
issued  as  a  bonus  to  stockholders,  yet  a  lonafde  holder  of  such 
bonds  may  enforce  them.^ 

Generally  a  large  amount  of  stock  is  issued  together  with  a 
quantity  of  bonds  in  payment  for  property  or  construction 
work  Upon  the  insolvency  of  the  company,  the  bonds  having 
passed  into  the  hands  of  bona  fide  holders,  an  attempt  is  made 
to  hold  the  contractors  liable  for  the  par  value  of  the  stock  on 
the  theory  that  it  has  never  been  paid  for.  The  great  weight 
of  authority,  however,  holds  that  the  contractors  are  not  hable 
on  the  stock  whether  they  have  disposed  of  it  or  not.» 


1  Christensen  v.  Eno,  106  N.  Y.  97 
(1887),  the  court  refusing  to  follow 
Skrainka  v.  Allen,  7  Mo.  App.  434 
(1879);  S.  C,  76  Mo.  384  See  also  ch- 
ill, §  42,  supra. 

2  Thomson-Houston  Elec.  Co.  v. 
Capitol  Elec.  Co.,  65  Fed.  Rep.  341 
(1894),  holding  also  that  where  an 
agent  received  the  bonds  with  no- 
tice, but  tried  to  cheat  his  principal, 
the  latter  is  not  chargeable  with  no- 
tice. 

3  Where  all  the  stock  and  a  large 
quantity  of  bonds  are  issued  by  a  rail- 
road corporation  to  its  contractor  in 
payment  for  the  construction  of  the 
road,  the  contractor  is  not  liable  to 
corporate  creditors  on  the  stock,  even 
though  the  bonds  were  a  sufficient 
consideration  for  building  the  road, 
unless  the  corporate  creditors  prove 
that  the  stock  at  the  time  of  its  issue 
had  a  real  or  market  value.  "  If,  when 
disposed  of  by  the  railroad  company, 
it  was  without  value,  no  wrong  was 
done  to  creditors."     Even  the  Mis- 
souri coastitution  and  statutes  do  not 
change  this  rula    Fogg  v.  Blair,  139 
U.  S.  118  (1891);   Van  Cott  v.  Van 
Brunt,  82  N.  Y.  535  (1880).     The  doc- 
trine laid  down  in  Van  Cott  v.  Van 
Bnmt  was  approved  in  Coe  v.  East, 
etc.  R.  R.,  52  Fed.  Rep.  531  (1892).    It 
is  legal  for  a  railroad  company  to  is- 
sue bonds  and  stock  in  payment  for 
the  construction  of  its  road     If  all 


the  parties  assent  no  one  can  com- 
plain.    "  As  the  stock  was  issued  as 
a  part  of  the  consideration  for  con- 
struction, it  cannot  be  said  that  it 
was  taken  without  value  given."  The 
par  value  is  immaterial     "  The  fact 
that  they  were  created  for  an  ex- 
pend itm-e  less  than  the  par  value  of 
the  aggregate  issues  of  capital  stock 
and  bonds  does  not  affect  the  ques- 
tion at  all"    Barr  v.  New  York,  etc. 
R  R.,  125  N.  Y.  263  (1891).     At  com- 
mon law,  even  though  a  railroad  cor- 
poration issues  to  its  president  nearly 
$1,400,000   of  mortgage    bonds   and 
$700,000    of    stock  for  construction 
work  -R^hich  costs  only  about  $700,000, 
nevertheless  the  purchasers  of  such 
stock  and  bonds  cannot  cause  suit  to 
be  brought  by  the  coi-poration,  after 
the  foreclosure  of  its  property,  and 
hold  him  liable.    The  court  held  that 
inasmuch  as  the  stock  had  no  mar- 
ket value  no  harm  was  done.    The 
court  said:  "Nor  is  it  true  that  those 
who  took  the  stock  and  bonds,  and 
paid  money  for  them,  were  cheated 
by  Ka.se,  in  any  real  sense  of  the 
word.    Is  any  man  of  ordinary  judg- 
ment cheated  when  he  pays  seventy- 
five  or  eighty  cents  on  the  dollar  for  a 
seven  or  eight  per  cent  railroad  bond, 
receiving  with  the  bond  a  gift  of  the 
stock  in  many  cases  almost  equaling 
the  face  value  of  the  bond?    Such  a 
purchaser  knew,  just  as  Kase  knew. 


107 


1097 


§  TC6.] 


BONDS    AND    COUPONS. 


[cn.  XLVI. 


The  issue  of  the  bonds  of  a  corporation  in  payment  for  projv 
erty  or  construction  work  is  the  favorite  mode  of  issuing  bonds 
at  less  than  their  par  value.  The  real  value  of  the  property 
or  construction  work  being  uncertain,  it  is  difficult  to  detect 


that  the  value  of  the  paper  was  spec- 
ulative. If  Kase  lived,  if  he  expended 
the  money  in  construction,  if  he  com- 
pleted the  road,  if  the  event  then 
proved  it  to  be  a  meritoriovis  enter- 
prise (that  is,  if  it  received  and  de- 
veloped traffic  sufficient  to  pay  oper- 
ating expenses,  fixed  charges,  and 
reasonable  dividends),  the  specula- 
tive buyer  would  probably  more  than 
double  his  money.  If  any  one  of  the 
contingencies  did  not  happen,  the 
buyer  los.t ;  but  he  was  not  clieated, 
except  in  the  sense  that  all  who  bet 
on  the  happening  of  an  uncertain 
event,  and  lose,  are  cheated."  Dan- 
ville, etc.  R.  R.  V.  Kase,  39  AtL  Rep. 
301  (Pa.,  1898).  In  this  case  stock 
and  bonds  had  been  issued  by  the  cor- 
poi-ation  for  land,  but  the  stock  had 
no  market  value,  and  an  effort  was 
made  to  hold  the  vendor  of  the  land 
liable  for  the  par  value  of  the  stock 
and  the  actual  value  of  the  bonds 
less  the  actual  value  of  the  land. 
The  court  refused,  and  said:  "We do 
not  concur  with  the  master  in  his 
conclusion  that  Kase  should  refund 
to  the  company  a  large  sum  of  money 
in  excess  of  the  profit,  because  of  the 
stock  received  by  him  in  the  trans- 
action. He  finds  as  a  fact  that  the 
stock  was  then,  and  is  now,  worth- 
less. A  court  of  equity  does  not  per- 
form the  duties  of  a  court  of  quarter 
sessions;  does  not  order  restitution 
of  that  which  is  valuable,  and  also 
impose  a  heavy  fine  on  the  gmlty. 
The  company  has  the  land,  Kase  has 
a  profit  of  $111,000  bonds,  and  no 
profit  in  the  worthless  stock.  He 
should  account  for  the  bonds  alone." 
Inasmuch,  however,  as  the  pi-esident 
secretly  owned  land  in  the  name  of 
another  person  and  caused  the  cor- 


poration to  purchase  it  and  issue  stock 
and  bonds  in  payment,  without  dis- 
closing his  interest  in  the  land,  he 
was  held  liable  to  the  corporation  for 
tlie  difference  between  the  actual 
market  value  of  the  stock  and  bonds 
andtheactual  value  of  the  land.  Dan- 
ville, etc.  R.  R.  V.  Kase,  39  Atl.  Rep. 
301  (Pa.,  1898).  Although  $1,500,000 
of  stock,  issued  as  fully  paid,  and 
$1,500,000  in  bonds,  are  issued  for  the 
construction  of  a  work  which  costs 
less  than  $1,500,000,  yet  an  attorney 
who  took  part  in  the  transaction  can- 
not, as  a  creditor  of  the  corporation, 
claim  that  the  stock  was  not  fully 
paid.  Ten  Eyck  v.  Pontiac,  etc.  R.  R., 
72  N.  W.  Rep.  3G3  (:Micli.,  1897).  In 
Northwestern,  etc.  Ins.  Co.  v.  Cotton, 
etc.  Co.,  46  Fed.  Rep.  23  (1891),  how- 
ever,  the  court  lield  that  where  prop- 
erty worth  $157,000  is  turned  in  to  a 
corporation  for  $200,000,  payable  in 
$125,000  of  stock  and  §75,000  of  bonds, 
the  creditors  of  the  company  might 
hold  the  parties  liable  on  the  stock 
as  though  it  were  unpaid  stock,  and 
the  creditor  is  presumed  not  to  have 
known  of  the  transaction  when  he 
contracted  the  debt.  Where  a  rail- 
road worth  §112,000  is  sold  to  a  new 
corporation  for  §1,120.000  of  bonds 
and  all  its  capital  stock,  the  transac- 
tion is  fraudulent.  The  bondholders 
may  obtain  judgment  against  the 
company  on  their  bonds,  and  then 
compel  the  stockholders  to  pay  the 
full  par  value  of  their  stock.  Pres- 
ton V.  Cincinnati,  etc.  R.  R.,  36  Fed. 
Rep.  54(1888).  In  Lloydv.  Preston,  146 
U.  S.  630  (1892),  aff'g  36  Fed.  Rep.  54 
(1888),  where  the  owner  of  a  railroad 
sold  it  to  a  newly-organized  corpora- 
tion for  stock  and  bonds,  the  par 
value  of  which  was  fifty  times  the 


1698 


CH.  XLVI.] 


BONDS    AND    COTJPONS. 


[§  1^^- 


the  real  price  at  whicli  the  bonds  are  issued ;  and  when  it  is  borne 
in  mind  that  bonds  may  be  issued  below  par,  even  when  issued  for 
cash,  the  safety  of  issuing  bonds  at  a  price  greatly  below  par  in 
payment  for  property  or  construction  work  becomes  apparent. 
The  courts  sustain  such  issues  of  bonds,  even  though  the  value 
of  the  property  or  construction  work  is  far  less  than  the  par 
value  of  the  bonds.^    Thus,  a  purchaser  of  bonds,  who  pur- 


real  value  of  the  railroad,  the  bond- 
holders and  other  creditors  who  had 
obtained  judgment  against  the  cor- 
poration, the  execution  being  »Ye- 
turned  unsatisfied,  may  hold  the 
l)arty  receiving  the  stock  liable 
thereon,  on  the  ground  that  the  sub- 
scription price  of  such  stock  has 
never  been  paid.  The  court  said: 
"  The  entire  organization  was  grossly 
fraudulent  from  first  to  last,  without 
a  single  honest  incident  or  redeem- 
ing featura"  The  court  also  said: 
"  It  having  been  found,  on  convinc- 
ing evidence,  that  the  overvaluation 
of  the  property  transferred  to  the 
railway  company  by  Harper,  in  pre- 
tended pa}Tnent  of  the  subscriptions 
to  the  capital  stock,  was  so  gross  and 
obvious  as,  in  connection  with  the 
other  facts  in  the  case,  to  clearly  es- 
tablish a  case  of  fraud,  and  to  entitle 
bona  fide  creditors  to  enforce  actual 
payment  by  the  subscribers,  it  only 
remains  to  consider  the  effect  of  the 
defenses  set  up." 

1  In  ^Vhite  Water,  etc.  Co.  v.  Yal- 
lette,  21  How.  414  (1858),  the  court 
held  that  bonds  issued  in  payment 
for  the  completion  of  a  canal  were 
legal,  although  the  sum  for  which 
they  were  issued  was  largely  greater 
than  the  estimated  cost  of  the  work. 
In  that  case  the  bonds  were  issued 
at  about  fifty  cents  on  the  dollar. 
Railroad  bonds  issued  to  pay  for  the 
construction  of  the  road  are  not  ren- 
dered invalid  by  proof  that  the  road 
could  have  been,  or  was,  constructed 
for  less  than  the  amount  of  such 
bonds,  if  the  contract  for  its  construc- 


tion was  fairly  made  and  carried  out, 
and  called  for  the  amount  of  bonds 
actually  issued,  and  no  fraud  is 
charged  in  the  inception  or  execution 
of  such  contract  Such  a  question, 
however,  may  be  raised  before  the 
master  upon  the  distributioq^of  the 
fund  realized  upon  f oreclosura  Farm- 
ers' L.  &  T.  Co.  V.  Rockaway  Valley  R. 
R,  69  Fed.  Rep.  9  (1895).  Even  though 
a  party  acquires  all  the  stock  of  a 
corporation,  amounting  to  $1,500,000, 
and  then  through  dummy  directors 
issues  $3,500,000  additional  stock  and 
$4,000,000  of  mortgage  bonds  to  him- 
self, and  then  proceeds  to  sell  the 
stock  and  bonds  to  the  public,  yet  a 
person  who  purchases  some  of  the 
stock  cannot  file  a  bill  in  equity 
against  the  corporation  to  set  aside 
the  transaction  and  to  ascertain 
what  part  of  his  stock  is  legal  His 
remedy  is  at  law  for  damages,  or  he 
may  repudiate  and  recover  back  his 
money.  "  It  is  elementary  that  the 
court  is  possessed  of  no  power  to 
make  a  new  contract  between  par- 
ties entirely  distinct  and  different 
from  the  contract  that  they  have 
entered  into."  Chui-ch  v.  Citizens' 
Street  R'y,  78  Fed.  Rep.  526  (1897). 
A  delivery  of  bonds  as  payment  in 
advance  for  services  to  be  rendered 
in  selling  other  bonds  cannot  be  re- 
scinded, where  by  subsequent  agree- 
ment a  loan  with  the  bonds  as  col- 
lateral was  negotiated,  the  bonds  to 
be  subsequently  sold.  American  L. 
&  T.  Co.  V.  Toledo,  etc.  R'y,  47  Fed. 
Rep.  343  (1890);  aff'd,  Burke  v.  Ameri- 
can  L.  &  T.  Co.,  155  U.  S.  534  (1895> 


1699 


§  "^QQ-] 


BONDS    AXD    COUPONS. 


[cn.  XLVL 


chases  with  notice  that  an  alleged  covenant  in  the  mortgage 
securino-  the  bonds,  to  devote  the  proceeds  of  the  bonds  to  the 
improvement  of  the  property,  has  been  broken,  cannot  complain 
of  such  breach  of  covenant,  even  though  the  entire  proceeds 


The  plan  of  issuing  large  quantities 
of  stock  and  bonds  of  a  railroad  com- 
pany to  a  contractor,  the  bonds  being 
all  "water,"  is  declared  illegal  in 
Central  Trust  Co.  v.  New  York,  etc. 
R.  R,  18  Abb.  N.  Cas.  381,  395  (1887), 
holding  also  that  the  full  amount  of 
the  bonds  can  be  claimed  only  by 
bona  fide  holders  without  notice,  and 
that  the  other  bonds  will  be  paid  only 
in  proportion  to  the  actual  value  of 
the  property  given  to  the  company 
for  them.  The  celebrated  case  of  Co- 
lumbus, etc.  R'y  V.  Burke  is  in  point 
here.  It  appeax-s  that  in  July,  1881, 
Burke  purchased  tlie  entire  capital 
stock  (except  seven  shares  which 
seem  to  have  been  lost)  of  three  coal- 
carrying  railroad  companies  in  Ohio 
and  consolidated  them.  He  owned 
aLso  the  stock  of  another  coal  and 
railroad  company.  Accordingly  he 
caused  the  consolidated  company  to 
issue  §8,000,000  of  its  mortgage  bonds 
in  purchase  of  and  payment  for  the 
stock  of  the  coal  and  railroad  com- 
pany, which  was  worth  less  than 
$1,500,000.  He  then  sold  the  bonds 
and  kept  the  proceeds.  The  bonds 
recited  on  their  face  that  they  were 
for  double  tracking,  equipment,  and 
improvement  purposes.  No  default 
was  ever  made  on  the  bonds.  They 
passed  into  bona  fide  hands.  The 
consolidated  company  also  passed 
into  other  hands.  In  1887,  or  there- 
abouts, the  company  commenced  suit 
against  Burke  and  others  to  compel 
an  accounting  and  to  reach  the  stock 
of  the  company  which  Burke  had 
paid  for  out  of  the  proceeds  of  the 
§8,000,000  of  bonds.  A  preliminaiy 
injunction  against  his  transferring 
the  stock  was  obtained,  and  his  mo- 

1' 


tion  to  dissolve  this  injunction  was 
denied.  Columbus,  etc.  R'y  v.  Burke, 
19  Week.  L.  Bulk  27  (Ohio,  1887). 
Subsequently  the  case  was  with- 
drawn from  the  courts  and  submit^ 
ted  to  three  arbitrators.  These  ar- 
bitrators decided  in  1888  that  the 
company  had  no  remedy.  Colum- 
bus, etc.  R'y  V.  Burke,  20  "Week.  L. 
Bull.  287.  Then  a  bona  fide  holder 
of  some  of  the  bonds  brought  a  suit 
in  equity  in  the  New  York  courts  to 
compel  Burke  to  account  to  the  cor- 
poration for  the  value  of  the  bonds 
so  taken  by  him.  A  demurrer  to  the 
bill  was  overruled.  Belden  v.  Burke, 
N.  Y.  L.  J.,  Nov.  3,  1890.  Upon  the 
trial  of  this  case,  however,  the  suit 
was  dismissed,  chiefly  on  the  ground 
that  the  plaintiff  bondholder  was  es- 
topped by  the  fact  that  the  chain  of 
title  of  his  bonds  ran  through  the 
guilty  parties  themselves.  Belden  v. 
Burke,  20  N.  Y.  Supp.  320  (1892).  This 
decision  was  reversed  by  the  General 
Term,  72  Hun,  51  (1893).  The  case 
then  went  to  the  New  Yofk  coiirt  of 
appeals.  (See  next  note.)  In  a  suit 
at  law  by  the  company  to  compel 
the  associates  of  Burke  —  the  parties 
to  whom  he  sold  the  bonds  —  to  pay 
over  the  proceeds  of  the  bonds,  the 
court  directed  a  verdict  for  the  de- 
fendants chiefly  on  the  ground  that 
all  the  stockholders  had  assented  to 
the  transaction.  Columbus,  etc.  R'y 
V.  Lanier,  N.  Y.  L.  J.,  Feb.  4,  1893. 
Where  a  corporation  agrees  to  pay 
for  a  railway  by  bonds  upon  the  same, 
and  does  not  fulfill,  the  vendor  may 
hold  it  liable  for  the  full  par  value  of 
the  bonds,  although  they  are  worth 
less  than  par.  Texas,  etc  R'y  v. 
Gentry,  69  Tex.  625  (1888). 
'00 


CH.  XLVI.] 


BONDS    AND    COUPONS. 


[§  T66. 


of  the  bonds  were,  througli  the  medium  of  sales  of  property, 
diverted  to  the  personal  benefit  of  stockholders.^ 

Parties  owning  real  estate  may  convey  it  to  a  corporation 
formed  for  that  purpose  and  take  bonds  in  payment.  The  New 
York  court  of  appeals  says :  "  No  just  criticism  is  possible  either 
upon  the  legality  or  morality  of  the  transaction.  Evidence 
was  given  to  show  that  the  land  conveyed  was  not  worth  the 
sum  secured,  but  that  is  a  totally  immaterial  fact.  Whatever 
the  price,  it  wronged  no  one,  and  could  wrong  no  one."  ^ 

"Where  a  corporation  has  used  its  surplus  earnings  to  im- 
prove its  property,  it  may  issue  bonds  to  its  stockholders  as  a 
dividend  in  lieu  of  a  cash  dividend,  and  sometimes  may  do  so 
even  where  there  are  no  earnings.' 


iBelden  v.  Burke,  147  N.  Y.  543 
(1885).  The  court  said  (p.  551),  as  to 
the  action  of  the  stockholders:  "TJiey 
had  raised  a  vast  sum  of  money  by 
placing  a  mortgage  upon  their  own 
property,  and  had  expended  and  dis- 
bursed the  money  as  they  thought 
would  best  promote  their  own  inter- 
ests. There  is  no  one  who,  in  this 
action,  has  any  right  to  complain  of 
this,  imless  the  bondholders,  from 
whom  they  borrowed  the  money, 
were  intentionally  deceived  to  their 
loss  or  injury,  for  which  they  have 
no  adequate  redress  at  law."  The 
court  also  said  that  neither  on  the 


preferred  stockholders.  S.  C,  47  Hun, 
550;  State  v.  Baltimore,  etc.  Co.,  6 
Gill  fMd.),  363  (1847);  Frank  v.  Edi- 
son, etc.  Co.,  N.  Y.  L.  J.,  Jan.  12,  and 
Jan.  16,  1893.  In  ^lerz  v.  Interior 
Conduit,  etc.  Co.,  87  Hun,  430  (1895), 
the  issue  of  bonds  to  pay  scrip  which 
had  been  issued  as  a  dividend  was 
enjoined.  The  dissenting  opinion  in 
this  case  seems  the  better  view.  See 
S.  C,  46  N.  Y.  Supp.  243  (1897).  Where 
scrip  dividends  convertible  into  bonds 
rvm  to  the  holder,  the  holder  may 
sue  upon  them  in  his  own  name. 
Chaffee  v.  Rutland  R.  R,  55  Vt.  110, 
139  (1882).    A  railroad    corporation 


ground  of  a  breach  of  covenant —  ,may  issue  certificates  of  indebted- 
the  covenant  being  a  covenant  of  the 
corporation  only —  nor  on  the  ground 
of  fraud  could  the  action  be  main- 
tained. The  court  referred  to  the 
fact  that  the  plaintiff  had  not  paid 
more  for  hLs  bonds  than  they  actu- 
ally were  worth,  the  interest  having 
been  promptly  paid,  and  the  bonds 
having  appreciated  in  market  value. 

2  Seymour  v.  Spring  Forest  Cem- 
Assoc,  144  N.  Y.  333  (1895). 

sin  Wood  V.  Lary,  124  N.  Y.  83 
(1891),  the  court  sustained  the  court 
below  in  refusing  to  cancel  a  moi-t- 
gage  and  bonds,  the  bonds  having 
been  issued  as  a  bond  dividend  to 


ness,  which  the  company  agrees  to  re- 
deem in  money  or  bonds.  Where  the 
president  causes  the  board  to  order 
a  gratuitous  distribution  of  bonds 
among  the  stockholders,  though  they 
hold  five-sixths  of  the  stock,  there 
being  dissenting  stockholders,  the 
company  may  enjoin  foreclosure. 
Virginia,  etc.  Co.  v.  ^Mercantile  Trust 
Co.,  12  N.  Y.  Supp.  529  (1890).  Where 
three  persons  own  all  the  stock  of  a 
company,  two  of  them  may  buy  the 
stock  of  the  third  and  give  the  com- 
pany's notes  in  partial  payment  for 
the  same.  The  transaction  is  legal, 
inasmuch  as  no  one  is  injured  and 


1701 


§  766.-] 


BONDS    AND    COUrONS. 


[cn,  XLVI. 


Even  thongli  a  person  loaning  money  on  the  bonds  and  mort- 
gage of  a  corporation  knows  that  the  money  is  to  be  used  for 


all  consent.  Neither  subsequent  pur- 
chasers of  the  stock,  nor  those  who 
become  stockholders  after  tlie  notes 
are  paid,  nor  stockholders  who  con- 
sent to  the  arrangement,  can  com- 
plain of  it.  Schilling,  etc.  Co.  v. 
Schneider,  110  Mo.  83  (1892).  See 
also  Boston,  etc.  Co.  v.  Bankers',  etc. 
Co.,  36  Fed.  Kep.  288  (1888);  aflE'd 
sub  notn.  United  Lines  Tel.  Co.  v. 
Boston,  etc.  Co.,  147  U.  S.  431  (1893). 
If  on  demand  the  company  does  not 
deliver  the  bonds,  the  holder  may 
sue  for  the  money.  Pusey  v.  New 
Jersey  R.  R..  14  Abb.  Pr.  (N.  S.)  434 
(1873).  A  corporation  cannot  have  its 
mortgage  and  bonds  declared  void 
on  the  ground  that  they  were  issued 
to  its  stockholders,  and  were  mostly 
"water,"  in  violation  of  a  constitu- 
tional provision.  Memphis,  etc.  R. 
R.  V.  Dow,  120  U.  S.  287  (1887);  S.  C, 
to  same  effect,  19  Fed.  Rep.  388.  As 
to  stock  dividends,  see  §§  535,  530, 
supra. 

The  law  goes  still  farther  and  holds 
that  where  all  the  stockholders  as- 
sent, and  corporate  creditors  existing 
at  the  time  of  the  transaction  are 
protected,  a  corporation  may  legally 
issue  its  bonds,  notes,  or  mortgage 
for  the  personal  benefit  of  an  indi- 
vidual stockholder.  The  case  of  Swift 
V.  Smith,  65  Md.  428  (1888),  is  in  point. 
In  that  case  a  person  had  purchased 
all  the  stock  of  a  corporation  and  paid 
for  it  by  notes  secured  by  a  mortgage 
of  the  corporation  on  all  of  its  prop- 
erty. The  corporation  became  in- 
solvent. A  general  creditor  of  the 
corporation  attacked  the  mortgage, 
but  the  court  held  that  it  was  legal 
and  could  be  enforced  by  the  person 
to  whom  the  notes  were  given.  The 
court  saia:  "  A  man  can  certainly  do 
what  he  pleases  with  his  own  prop- 
erty, if  he  does  not  thereby  prejudice 
any  of  the  rights  of  subsisting  cred- 


itors. It  does  not  appear  that  any 
existing  creditors  were  injuriously 
affected  thereby."  The  fact  that  a 
corporation  by  unanimous  consent 
pays  the  premium  on  life  insurance 
of  one  of  its  directors  does  not  enable 
subsequent  corporate  creditors  to 
claim  the  insurance.  Little  v.  Gara- 
brant,  90  Hun,  404  (1895);  aff'd,  153 
N.  Y.  661.  An  improvement  corpo- 
ration may  legally  give  a  mortgage 
to  secure  the  personal  debt  of  its 
president,  if  none  of  the  stockholders 
or  their  existing  creditors  object. 
Osborn  v.  Montelac  Park,  89  Hun, 
167  (1895).  Even  though  an  officer 
pledges  corporate  bonds  for  his  own 
debt,  yet  if  he  owns  the  whole  capi- 
tal stock  of  the  corporation,  the  com- 
pany cannot  for  that  reason  defeat 
the  mortgage  given  to  secure  the 
bonds.  Buffalo  Loan,  etc.  Co.  v.  Me- 
dina Gas,  etc.  Co.,  13  N.  Y.  App.  Div. 
199  (189G).  Wliere  the  solo  owner  of 
the  stock  of  a  corporation  executes 
the  note  of  the  corporation  for  his  in- 
dividual indebtedness,  no  one  but  the 
creditors  of  the  corporation  can  com- 
plain. Millsaps  V.  Merchants',  etc. 
Bank,  71  Miss.  361  (1893).  Where  all 
the  stockholders  and  all  the  directors 
cause  the  corporation  to  sign  a  note 
which  is  given  to  one  of  the  stock- 
holders in  consideration  of  the  sale 
of  his  stock  to  another  stockholder, 
the  corporation  is  bound-  Solomon 
Co.  V.  Barber,  49  Pac.  Rep.  524  (Kan., 
1897).  A  hona  fide  purchaser  of  ne- 
gotiable railroad  bonds  may  enforce 
them,  even  though  the  president  is- 
sued them  for  his  own  use.  Long 
Island  L.  &  T.  Co.  v.  Columbus,  eta 
R'y,  65  Fed.  Rep.  455  (1895).  In  Farm- 
ers' L,  &  T.  Co.  V.  Forest  Park,  etc. 
R.  R.,  65  Fed.  Rep.  882  (1895),  a  mort- 
gagee who  had  not  been  made  a 
party  defendant  in  the  foreclosure  of 
mechanics'  liens  attempted  to  fore- 


1702 


CH.  XLVI.] 


BONDS  AND  COUPONS. 


[§  T66. 


an  ultra  vires  purpose,  yet  he  may  enforce  the  same.^  A  bond- 
holder cannot  cause  to  be  canceled  bonds  Issued  to  stockholders 
on  the  ground  of  no  consideration,  where  the  bonds  are  not  yet 
due,  and  there  has  been  no  default,  and  the  plaintiff  has  no  con- 
trol over  the  management  or  the  earnings  or  money  of  the  cor- 
poration.2  Tj^e  issue  of  bonds  for  cash  at  less  than  their  par 
value  is  sometimes  allowed  by  statute  or  by  the  charter.' 


close  its  mortgage  and  claim  that 
the  mechanics'  lien  foreclosure  sale 
was  subject  to  the  mortgage.    The 
mortgage  was   illegal  when  issued 
because  it  exceeded  the  amount  of 
the  capital  stock,  in  violation  of  the 
statute.    Eesolutions  to  increase  the 
capital  stock  had  been  passed,  but 
the  papers  had  not  been  filed,  nor  the 
statutory  fees  to  the  state  paid,  until 
after  the  foreclosure  of  the  mechan- 
ics' liens.    The  company  had  received 
nothing  from  the  bonds.     The  pur- 
chasers at  the  first  foreclosure  sale 
had  expended  large  sums  of  money. 
Speculators    who    long    afterwards 
bought  the  bonds  with  knowledge  of 
the  facts  bought  the  bonds  for  a 
small  sum  in  order  to  bring  this  suit. 
The  suit  failed.    In  Germania,  etc. 
Co.  V.  Boynton,  71  Fed.  Rep.  797  (1896), 
it  was  held  that  even  though  every 
stockholder  and  director  acquiesces 
in  corporate  bonds  being  issued  to 
secure  the  private  debt  of  an  ofiicer, 
yet  that  a  party  receiving  such  bonds 
with  notice  could  not  enforce  them. 
Where  the  treasurer  uses  the  fimds 
of  the  corporation  to  pay  for  stock  in 
the  corporation  itself  which  he  and 
other  stockholders  had  purchased,  he 
may  be  compelled,  upon  corporate  in- 
solvency, to  refund  the  money,  even 
though  he  took  the  funds  from  the 
treasury  with  the  consent  of  all  the 
stockholders.   Re  Brockway  Mfg.  Co., 
89  Me.  121  (1896).    A  mortgage  given 
by  a  corporation  to  secure  a  debt  due 
to  a  third  person  by  one  of  its  stock- 
holders is  illegal  as  against  corporate 
creditors.     Washington  Mill  Co.  v. 


Sprague  Lumber  Co.,  52  Pac.  Rep. 
1067  (Wash.,  1898).    See  §  774,  infra. 

1  Wright  V.  Hughes,  119  Ind.  324 
(1889).  It  is  no  defense  to  foreclosure 
that  the  mortgagor  misapplied  the 
proceeds  from  the  bonds.  Farmers' 
L.  &  T.  Co.  V.  New  York,  etc.  R.  R., 
78  Hun,  213  (1894). 

2  Bibb  V.  ]\Iontgomery  Iron  Works, 
101  Ala.  301  (1893).  See  also  §  735, 
sux)ra. 

3  See  §  47,  supra.    Under  a  charter 
power  to  sell  bonds  at  such  a  rate  as 
the  directors  think  best,  the  bonds 
may  be  issued  below  par  and  may  be 
issued  to  pay  for  iron  at  less  than  par 
value.    Coe  v.  Columbus,  etc.  R.  R., 
10  Ohio  St.  372  (1859).     Where  the 
charter  allows  the  directors  to  borrow 
money  on  such  terms  as  they  deem 
best,  they  may  issue  and  sell  mortr 
gage  bonds   at   sixty-six   and  two- 
thirds  cents  on  tlie  dollar.    Traders' 
Nat.  Bank  v.  Lawrence  Mfg.  Co.,  96 
N.  C.  298  (1887).   In  Jvmction  Railroad 
V.  Bank  of  Ashland,  12  Wall.  226 
(1870),  the  court  held  a  sale  of  bonds 
below  par  to  be  valid  because  the 
statute  expressly  authorized  it.    In 
White  Water,  etc.  Co.  v.  Vallette,  21 
How.  414  (1858).  the  court  held  a  sale 
of  bonds  below  par  to  be  valid  be- 
cause the  legislature  had  expressly 
approved  the  particular  transaction. 
Under  a  power  to  boiTow  at  such  rate 
of  interest  and  upon  such  terms  as 
the  directors  should  think  fit,  the 
directors  may  sell  £250  debentures 
for  £95  each.   Re  Regents',  etc.  Ca,  34 
W.  R.  687  (1876).   The  power  to  make 
the  is.sue  in  this  case  was  given  by 


1703 


§  760.] 


BONDS  AND  COUPONS. 


[CU.  XLVI. 


In  several  of  the  states  there  are  constitutional  and  statutory 
provisions  to  the  effect  that  fictitious  bonds  and  stock  shall  be 
void.  The  purpose  of  these  provisions  was  to  prevent  the  issue 
of  bonds  and  stock  at  a  price  far  below  par.  The  courts,  how- 
ever, have  practically  construed  such  provisions  as  not  invali- 
dating bonds  and  stock  issued  for  property  or  construction 
work.* 


the  "articles  of  association,"  i.  e.,  the 
by-laws. 

1  See  ch.  Ill,  §  47,  supra.  Thtis.  al- 
though the  constitution  of  Arkansas 
prohibits  the  issue  of  stock  and  bonds 
except  for  Talue,  and  declares  void 
all  fictitious  stock  and  bonds,  the  su- 
preme court  of  the  United  States 
held  tliat  although  property  worfh 
only  $1,300,000  was  turned  in  to  a 
corporation  for  $1,300,000  of  stock 
and  $3,600,000  of  bonds,  yet  that  the 
bonds  were  valid.  Memphis,  etc. 
R.  R.  V.  Dow,  120  U.  S.  287  (1887).  The 
court  said:  "Recurring  to  the  lan- 
guage employed  in  tlie  Arkansas 
constitution,  we  are  of  opinion  that 
it  does  not  necessarily  indicate  a  pur- 
pose to  make  the  validity  of  every 
issue  of  stock  or  bonds  by  a  private 
corporation  depend  upon  the  inquiry 
whether  the  money,  property,  or 
labor  actually  received  therefor  was 
of  equal  value  in  the  market  with  the 
stock  or  bonds  so  issued-  It  is  not 
clear,  from  the  words  used,  that  the 
f ramers  of  that  instrument  intended 
to  restrict  private  corporations  —  at 
least  when  acting  with  the  approval 
of  their  stockholders  —  in  the  ex- 
change of  their  stock  or  bonds  for 
money,  property,  or  labor,  upon  such 
terms  as  they  deem  proper;  provided, 
always,  the  transaction  is  a  real  one, 
based  upon  a  present  consideration, 
and  having  reference  to  legitimate 
corporate  piu-poses,  and  is  not  a  mere 
device  to  evade  the  law  and  accom- 
plish that  which  is  forbidden.  "We 
cannot  suppose  that  the  scheme 
■whereby  the  appellant  acquired  the 


property,  rights,  and  privileges  in 
question,  for  a  given  amount  of  its 
stock  and  bonds,  falls  within  the  pro- 
hibition of  the  state  constitution. 
The  beneficial  owners  of  such  inter- 
ests had  the  right  to  fix  the  terms 
upon  which  they  would  surrender 
those  interests  to  the  corporation  of 
which  they  were  to  be  the  sole  stock- 
holders." See  also  the  important 
case  of  Peoria,  etc.  R.  R.  u  Tliomp- 
son,  103  IlL  187  (1882),  where  a  very 
large  amoimt  of  bonds  and  cash  was 
given  to  a  contractor  for  construc- 
tion work,  and  the  bonds  were  up- 
held by  the  court,  although  pro- 
hibited by  a  constitutional  provision, 
similar  to  that  in  Arkansas,  passed 
upon  in  the  case  cited  supra.  In  re- 
gard to  the  constitutional  provision 
against  the  issue  of  fictitious  bonds 
and  stock,  the  supreme  court  of  Ala- 
bama has  said:  " The  constitutional 
provision,  standing  by  itself,  does  not 
require  that  the  amount  of  money, 
or  the  value  of  the  labor  or  property, 
for  which  stock  or  bonds  are  issued, 
shall  correspond  with  the  face  value 
of  the  stock  or  bonds  for  which  it  is 
issued."  Hence  the  court  held  that 
bonds  might  be  issued  at  less  than 
their  par  value,  provided  that  some 
substantial  value  was  paid  for  them, 
such  value  to  be  fair  and  reasonable, 
and  "  not  a  mere  trick  or  device  to 
evade  the  law."  Nelson  v.  Hubbard, 
96  Ala.  238  (1892).  Bonds  may  be 
issued  at  sixty-five  cents  on  the  dol- 
lar even  though  the  constitution  and 
statutes  of  the  state  forbid  the  issue 
of  fictitious  bonds.    Subsequent  con- 


1704 


CH.  XLVI.] 


BONDS  AND   COUPONS. 


[§  7G6, 


The  supreme  courts  of  Alabama  and  Missouri  have  zealously 
sought  to  enforce  these  constitutional  provisions  in  those  states, 


solidated  bondholders  cannot  com- 
plain. Coe  V.  East,  etc.  R.  R,  52  Fed. 
Rep.  531  (1892).  It  is  legal  for  a  com- 
pany to  issue  $67,000  of  bonds  and 
$67,000  of  full-paid  stock,  even  to  one 
of  its  directors,  for  $67,000  in  cash,  if 
this  was  all  that  the  whole  $134,000 
of  securities  were  worth,  and  if  all 
the  directors  and  stockholders  knew 
of  it  and  agreed  to  it.  Union,  eta 
Co.  V.  Southern,  etc.  Co.,  51  Fed.  Rep. 
840  (1892).  The  Illinois  constitutional 
provision  does  not  render  invalid  tlie 
issue  of  $9,000,000  of  bonds  and 
$18,000,000  of  stock  for  property 
purchased  at  foreclosure  sale  for 
$1,500,000,  there  having  been  added 
to  the  property  $6,000,000  worth  of 
improvements.  The  court  pointed 
out  that  the  issue  of  the  stock  did 
not  interfere  with  creditors  collect- 
ing their  claims,  inasmuch  as  their 
claims  were  ahead  of  the  stock,  and 
the  bonds  by  themselves  were  not  in 
excess  of  the  value  of  the  property  it- 
self. Continental  T.  Co.  v.  Toledo,  etc 
R  R,  82  Fed.  Rep.  642  (1897);  also  86 
Fed.  Rep.  929.  Although  $50,000  of 
stock,  issued  as  full-paid,  and  $25,000 
of  mortgage  bonds  are  issued  for 
$2,500  worth  of  property,  yet  the  par- 
ties receiving  the  same  are  not  liable 
to  corporate  creditors  for  the  value 
of  the  bonds,  the  bonds  still  being  in 
the  possession  of  the  parties  receiv- 
ing the  same.  The  parties  receiving 
the  stock,  however,  are  liable  to  cor- 
porate creditors  on  the  stock  as  being 
unpaid.  Roman  v.  Dimmick,  22  S. 
Rep.  109  (Ala.,  1897).  See  n.  1,  p.  1680. 
In  Coe  V.  East,  etc.  R  R,  52  Fed. 
Rep.  531  (1892),  the  court  held  that 
the  provision  in  Alabama  against 
watered  stock  and  bonds  did  not  in- 
validate bonds,  although  $10,000  of 
lx)nds  and  $10,000  of  stock  were  is- 
sued for  every  mile  of  road  con- 
structed, even  though  it  cost  much 

1' 


less  than  $20,000  cash  per  mUe. 
Where  $100,000  of  bonds  and  $125,000 
of  stock  are  issued  in  payment  of 
construction  w^ork  of  the  value  of 
$121,000,  the  bonds  are  valid  and  may 
be  enforced  by  bona  fide  purchasers. 
"Wood  V.  Corry,  etc.  Co.,  44  Fed.  Rep. 
146  (1890).  This  last  case  held,  also, 
that  only  the  state  could  object  to  an 
issue  of  "  watered  "  stock  and  bonds 
as  being  in  violation  of  this  constitu- 
tional provision.  In  Brown  v.  Duluth, 
etc.  R"y,  53  Fed.  Rep.  889  (1893),  the 
court  refused  to  enjoin  an  issue  of 
stock,  and  refused  to  cancel  stock 
already  issued,  although  $900,000  of 
bonds  and  $945,000  of  stock  were 
issued  for  construction  work  which 
cost  $580,000.  The  court  so  held,  al- 
though the  statute  required  the  stock 
to  be  fully  paid,  and  prohibited  is- 
sues except  for  property  actually  re- 
ceived. The  plaintiff,  however,  was 
a  holder  who  purchased  with  full 
knowledge  of  the  facts.  The  court 
said :  "  This  statute  was  not  intended 
to  prevent  or  interfere  with  the  usual 
method  of  raising  money  to  build 
railroads,  or  for  any  legitimate  cor- 
porate purpose.  It  is  not  to  be  con- 
strued as  obstructive  to  the  extent 
of  restricting  and  hampering  corpora- 
tions in  their  internal  management, 
and  embarrass  them  in  procuring 
means  to  carry  out  the  legitimate 
purposes  of  the  corporation;  and  un- 
less it  appears  that,  under  the  guise 
of  building  its  road,  bonds  and  stock 
of  the  defendant  company  are  to 
be  issued  and  put  upon  the  market 
fraudulently,  that  do  not  and  are 
not  intended  to  represent  money  and 
property,  this  corporation  is  not  pro- 
hibited from  entering  into  a'  real 
transaction,  based  upon  a  present 
consideration,  and  having  reference 
to  legitimate  corporate  purposes." 
The  court  also  said  that  "  such  a  pro 
'05 


^QQ.] 


BONDS   AND    COUPONS. 


[cn.  XLVL 


but  in  doing  so  they  have  been  obliged  to  depart  from  the 
strono-  current  of  authority  to  the  contrary.^    In  Ohio  the  issue 


vision  does  not  necessarily  indicate 
a  purpose  to  make  the  validity  of 
every  issue  of  stock  or  bonds  by  a 
corporation  depend  upon  the  inquiry 
whether  the  money,  property,  or 
labor  actually  received  therefor  was 
of  equal  value  in  the  market  with 
the  stock  or  bonds  so  issued."  A  con- 
tractor who  receives  bonds  in  pay- 
ment for  construction  work,  and  sells 
them,  cannot  claim  that  they  are 
void  as  contrary  to  the  statute  pro- 
hibiting "watered"  bonds.  Reed's 
Appeal,  123  Pa.  St.  565  (1888).  Wliere 
a  consolidated  company  of  New  York 
and  Pennsylvania  issues  bonds  in 
New  York,  fictitiously,  such  bonds 
cannot  be  enforced  in  Pennsylvania, 
since  they  are  void  by  its  constitu- 
tion. A  foreclosure  in  New  York 
of  the  mortgage  securing  the  bonds 
may  be  set  aside  and  the  bonds  de- 
clared void  so  far  as  the  Pennsyl- 
vania part  of  the  property  was  con- 
cerned. Pittsburgh,  etc.  R  R  u 
Rothschild,  4  Cent.  Rep.  107,  decided 
by  the  supreme  court  of  Pennsylvania 
in  1886.  A  purchaser  of  stock  that 
has  voted  for  an  issue  of  *•  watered  " 
bonds  and  stock  is  estopped  from 
complaining,  even  though  the  issue 
was  prohibited  by  the  constitution  of 
the  state  —  Pennsylvania.  Wood  v. 
Corry,  etc.  Co.,  44  Fed.  Rep.  146  (1890). 
See  also,  to  same  effect,  note  3,  p.  1715. 
Although  watered  stock  and  bonds 
are  issued  hi  Pennsylvania,  yet  a 
bona  fide  purchaser  of  the  bonds 
may  foreclose  the  mortgage  securing 
them  in  order  to  obtain  payment. 
Woodbury  v.  Allegheny,  etc.  R  R., 
73  Fed.  Rep.  371  (1895).  The  provis- 
ion in  the  California  constitution 
relative  to  fictitious  stock  and  bonds 
does  not  invalidate  them.  Union, 
etc.  Co.  V.  Southern,  etc.  Co.,  51  Fed. 
Rep.  840  (1893).  The  California  con- 
stitutional  prohibition   against  the 


issue  of  fictitious  bonds  or  stock  does 
not  prevent  the  company  pledging 
its  bonds  for  a  debt  less  than  the  par 
value  of  such  bonds.  Atlantic  Trust 
Co.  V.  AVoodbridge  Canal,  etc.  Co.,  79 
Fed.  Rep.  843  (1897).  A  sale  of  bonds 
at  ninety-five  is  legal,  even  imdertho 
Texas  constitution.  Northside  R'y 
V.  Worthington,  88  Tex.  563  (1895). 
Where  railroad  constructors  pay 
themselves  in  stock  and  tlien  issue 
bonds  without  any  consideration 
whatsoever,  and  pledge  them  to  a 
bank,  which  knows  all  the  facts,  the 
bank  is  not  protected.  Farmers',  etc. 
Bank  v.  Waco,  etc.  R'y,  36  S.  W.  Rep. 
131  (Tex.,  1896).  In  I\ranhattan  Trust 
Co.  V.  Seattle  Coal,  etc.  Co.,  16  Wash. 
499  (1897),  a  person  bought  coal  mines 
for  $70,000,  and  then  organized  a  cor- 
poration and  sold  them  to  the  corpo- 
ration for  $5,000,000  full-paid  stock 
and  $330,000  mortgage  bonds.  The 
company  did  not  pay  the  interest  on 
the  bonds  and  incurred  a  floating 
debt  of  $135,000.  The  bonds  were  still 
held  by  the  original  i)arties,  and  the 
trustee  of  the  mortgage  took  posses- 
sion under  the  mortgage  and  filed  a 
bill  in  equity  to  protect  the  posses- 
sion and  to  obtain  a  receiver.  The 
court  held  that  the  transaction  was 
fraudulent,  and  that  under  the  stat- 
utes of  Washington  the  capital  stock 
must  be  subscribed  for  before  business 
is  commenced,  and  hence  that  the 
claims  of  the  general  creditors  should 
be  allowed  priority.  But  see  S.  C,  g  47, 
supra.  A  provision  in  a  charter  of 
an  Illinois  and  Indiana  railroad  com- 
pany that  its  bonds  shall  not  be  sold 
at  less  than  par  does  not  invalidate 
the  bonds  of  the  company  issued  and 
sold  in  New  York  at  ninety  cents  on 
the  dollar.  Ellsworth  v.  St.  Louis,  etc. 
RR..33Hun,7  (1884);  aff'd,98N.Y.  553. 
1  See  §  47,  supra,  for  a  discvission  of 
this  subject. 


1706 


CH. 


XLVI.] 


BONDS    AND    COUPONS. 


[§  "^Qf^- 


of  bonds  at  less  than  par  to  a  director  is  made  illegal.^  The 
statutes  of  Ohio  reguLating  the  price  at  which  bonds  may  be 
issued  do  not  affect  bonds  issued  to  a  contractor  for  construc- 
tion work,  unless  it  is  shown  that  the  price  was  palpably  in 
violation  of  the  statute  and  that  the  parties  knew  it  so  to  be.^ 
In  Wisconsin  bonds  issued  by  a  corporation  as  collateral  for 
a  debt  will  not  be  ordered  to  be  canceled  because  issued  in  vio- 
lation of  a  state  statute  requiring  payment  in  money  or  prop- 

1  Section  3313  of  the  Revised  Stat- 
utes of  Ohio  sets  forth  that  "  all  capi- 
tal stocks,  bonds,  notes,  or  other  se- 
curities of  a  company  purchased  of 
a  company  by  a  director  thereof, 
either  directly  or  indirectly,  for  less 
than  the  par  value  thereof,  shall  be 
null  and  void."  In  Zabriskie  v.  Cleve- 
land, etc.  R.  R.,  23  How.  381  (1859), 
this  provision  was  held  not  to  affect 
the  liability  of  a  guarantor  of  such 
bonds.  But  in  Union  Trust  Co.  v. 
New  York,  etc.  R.  R.,  1  R'y  &  Corp. 
L.  J.  50  (Ohio  Com.  PI.,  1887),  the  court 
applied  the  statute  and  held  that 
where  $50,000,000  of  paid-up  stock  and 
$15,000,000  of  bonds  were  issued  to  a 
syndicate,  of  which  a  director  was  a 
member,  for  $18,000,000,  the  stocks, 

bonds,  and  mortgage  were  void.    The 

bondholders  became  unsecured  cred- 
itors, the  bona  fide  holders  being  unse- 
cured creditors  to  the  amount  of  the 

par  value  of  their  bonds  and  interest, 

and  the  other  holders  being  unsecured 

creditors  to  the  amount  actually  in- 
vested   by   them.    The    statute    of 

Ohio  rendering  void  bonds  which  are 

issued  to  a  director  at  less  than  par 

affects  only  the  bonds  issued  to  hinx 

Continental  T.  Co.  v.  Toledo,  etc.  R  R.. 

82  Fed.  Rep.  642  (1897).    The  Ohio 

statute  against  a  director  purchasing 

bonds  at  less  than  par  does  not  apply 

to  bonds  purchased  by  the  directors 

from  bona  fide  holders.     Continental 

T.  Co.  V.  Toledo,  etc.  R  R,  86  Fed. 

Rep.  929  (1898).    Where  the  president 

by  secret  agreement  is  to  jjarticipate 

in  a  construction  contract,  he  cannot 


enforce  such  contract;  and  hence 
bonds  issued  to  the  contractor  are  not 
affected  by  the  Ohio  statute  prohibit- 
ing the  sale,  directly  or  indirectly,  of 
bonds  to  an  officer  at  less  than  par. 
Continental  T.  Co.  v.  Toledo,  etc.  R  R, 
86  Fed.  Rep.  929  (1898). 

2  Continental  T.  Co.  v.  Toledo,  etc. 
R  R,  82  Fed.  Rep.  642  (1897).     In  this 
case  the  court  held  that  the  Oliio  stat- 
ute against  the  issue  of  bonds  at  less 
than  seventy-five  cents  on  the  dollar 
is  not  necessarily  violated  by  the  is- 
sue of  $0,090,000  of  bonds  and  about 
$12,000,000  of  stock  for  work  which  . 
will  cost  less  than  $10,000,000.    Tlie 
Ohio  statute  prohibiting  the  issue  of 
bonds  at  less  than  seventy-five  cents 
on  the  dollar  does  not  render  invalid 
$9,000,000  of  bonds  issued  to  a  con- 
tractor,  even   though    he   received 
also    $12,250,000    of    stock,    all    for 
construction  and  work  which  cost 
him,  including  ten  per  cent  profit, 
$10,300,000,  the  proof  showing,  how- 
ever, that  the  $12,250,000  of  stock  was 
worth  not  more  than  $3,400,000.    Con- 
tinental T.  Co.  V.  Toledo,  etc.  R  R.,  86 
Fed.  Rep.  929  (1898).    It  is  no  defense 
to  a  mortgage  that  a  consolidation 
was  irregular,  or  that  the  debt  ex- 
ceeded the  capital  stock,  contrary  to 
statute,  or  that  an  increase  of  stock 
was  irregular,  or  that  there  liad  been 
an  overissue  of  bonds,  all  parties  hav- 
ing concurred  therein  and  interest 
having  been  paid  for  three  years. 
Farmers'  L.  &  T.  Co.  v.  Toledo,  etc 
R'y,  67  Fed.  Rep.  49  (1895). 


1707 


§  TOG.] 


BONDS    AND    COUPONS. 


[CII.  XLVr. 


erty  of  a  certain  per  cent  of  their  face  value,  unless  the  money 
received  by  the  company  upon  the  pledge  of  the  bonds  has 
been  repaid  or  otherwise  secured.' 

Under  the  New  Jersey  statutes  it  is  particularly  dangerous 
to  issue  bonds  and  stock  for  property  and  construction  work 
at  a  large  overvaluation,  inasmuch  as  the  courts  of  that  state 
hold  that  the  bonds  are  illegal,  and  that  the  stocklioldors  are 
liable  on  the  stock.^  In  Indiana,  also,  tlicre  is  a  statute  on  this 
subject.* 

The  invalidity  of  some  of  the  bonds  does  not  render  invalid 


*  Andrews  v.  National,  etc.  "Works, 
76  Fed.  Rep.  IGO  (1896).  The  Wiscon- 
sin statute  that  bonds  sliould  not  be 
issued  for  less  than  seventy-five  per 
cent  of  their  par  value  does  not 
apply  to  a  transaction  where  old 
bonds  are  placed  under  a  new  mort- 
gage, and  the  holders  of  the  old  bonds 
receive  new  bonds  in  lieu  thereof. 
Mowry  v.  Farmers'  L.  &  T.  Co.,  76 
Fed.  Rep.  38  (1896).  Where  a  statute 
forbids  the  issue  of  bonds  at  less  than 
'  seventy-five  cents  on  the  dollar,  and 
they  are  pledged  by  the  company  at 
forty  cents  on  the  dollar,  they  are 
void  in  the  hands  of  the  pledgee.  Na- 
tional, etc.  Works  v.  Oconto  Water 
Co.,  53  Fed.  Rep.  29  (1892).  See  also, 
as  to  pledges,  g  763,  supra. 

^  Bonds  issued  by  a  street  railway 
before  the  capital  stock  is  paid  in  are 
illegal  under  the  New  Jersey  statute, 
except  those  which  are  in  bona  fide 
hands,  and  these  latter  are  entitled  to 
the  amoimt  actually  received  there- 
for by  the  corporation.  Vanderveer 
V.  Asbury  Park,  etc.  R'y,  82  Fed.  Rep. 
355  (1897).  A  railroad  mortgage  in 
New  Jersey  is  not  valid  if  it  exceeds 

3  Where  a  water-works  company 
issues  $197,000  of  stock  as  full  paid 
and  $150,000  of  mortgage  bonds  to 
a  contractor  for  construction  work, 
the  work  actually  costing  less  than 
§150,000,  and  the  contractor  pays  to 
one  of  the  directors  $8,000  in  cash, 
and  gives  to  the  two  others  $20,000 

1708 


the  amount  of  cash  paid  in  on  its 
capital  stock.  The  mortgage,  how- 
ever, may  be  made  in  advance  of  con- 
structioit  Where  $900,000  of  bonds 
and  $900,000  of  stock  are  issued  to 
a  contractor  for  work  costing  only 
§900,000.  the  bonds  are  invalid,  except 
in  bona  fide  hands.  On  a  bill  filed  by 
the  receiver  to  cancel  the  mortgage, 
the  court  so  decreed,  upon  condition, 
however,  tliat  bona  fide  holders  were 
first  paid  the  amounts  they  paid  for 
their  bonds.  Various  parties'  rights 
were  passed  on  by  the  court  Direct- 
ors and  other  participating  parties 
holding  bonds  are  allowed  nothing. 
Baker  v.  Guarantee,  etc.  Co.,  31  AtL 
Rep.  174  (N.  J..  1895).  On  appeal  the 
court  held  that  where  the  statutes 
prohibit  debts  in  excess  of  the  capital 
stock  actually  paid  in,  the  excessive 
bonds  in  the  hands  of  a  director  can- 
not be  enforced.  Steelman  v.  Baker, 
53  N.  J.  Eq.  672  (1896).  But  where 
one  issue  of  bonds  was  legal  and  a 
second  issue  was  illegal,  a  director 
holding  bonds  of  the  first -dssue  may 
enforce  them.  Physick  v.  Baker,  53 
N.  J.  Eq.  673  (1896).    A  bill  in  equity 

each  of  the  stock,  such  directors  are 
liable  to  corporate  creditors  for  the 
debts  due  to  the  latter,  under  the  In- 
diana statute  rendering  the  directors 
liable  where  the  provisions  of  the 
statute  have  been  violated.  Clow  v. 
Brown,  48  N.  E.  Rep.  1034  (Ind.,  1898). 


CH.  XLVI.] 


BONDS    A^^)    COUPONS. 


[§  TOG. 


the  mortgage^securing  the  bonds.*  On  the  contrary,  although 
bonds  secured  by  a  mortgage  are  issued  illegally  or  fraudulently, 
yet  the  mortgage  is  good  to  the  extent  of  protecting  honajide 
holders  in  full,  and  also  protecting  other  holders  to  the  extent 
of  their  actual  investment.^ 

In  other  words,  where  bonds  have  been  illegally  or  fraudu- 
lently issued,  the  court  will  allow  those  which  are  in  the  hands 
of  the  guilty  parties,  or  persons  taldng  with  notice,  to  be  col- 
lected only  for  such  amounts  as  were  actually  received  there- 
from by  the  corporation.^  Bona  jide  holders  may  collect  the 
par  value.* 


is  not  multifarious  when  filed  by  a 
receiver  of  an  insolvent  corporation 
against  the  stockholders  and  bond- 
holders, alleging  that  some  of  them 
as  owners  of  a  large  number  of  paper 
mills,  and  others  as  promoters  of  the 
same,  caused  them  to  be  conveyed  to 
the  corporation  for  bonds  and  pre- 
ferred stock,  and  common  stock,  the 
par  value  of  all  of  wliich  was  much 
greater  than  the  actual  value  of  the 
property  so  conveyed,  even  though 
such  bill  asks  that  the  claims  of 
the  bondholders  be  reduced  to  the 
amount  actually  paid  for  the  bonds, 
and  that  the  stockholders  be  held 
liable  for  such  part  of  the  par  value 
as  was  not  fairly  paid  for  by  the 
property,  and  even  though  such  bill 
asks  tliat  the  promoters  be  held  lia- 
ble on  loss  due  to  stock  and  bonds 
which  passed  into  hona  fide  hands. 
See  V.  Heppenheimer,  36  AtL  Rep.  9C6 
(N.  J.,  1897).  Where  a  corporation 
which  has  no  profits  on  hand  issues 
its  bonds  in  payment  for  its  stock, 
the  party  so  receiving  tlie  bonds  can- 
not enforce  them,  but  on  the  con- 
trary remains  liable  for  the  unpaid 
subscription  price  of  the  stock,  it  not 
liaving  been  properly  issued  as  paid- 
up  stock,  and  he  not  being  a  hona 
Jide  holder.  Hebberd  v.  Southwest- 
em,  etc.  Co.,  36  AtL  Rep.  122  (N.  J., 
1896).  In  this  case  it  was  held  that 
bona  fide  holders  of  bonds  illegally 

17 


issued  could  enforce  them  only  for 
the  amount  paid  therefor  by  such 
bo7ia  fide  holders;  and,  where  bonds 
with  a  bonus  of  stock  had  been  is- 
sued, that,  as  against  the  parties  re- 
ceiving the  bonds,  the  liability  on  the 
stock  could  be  offset  against  the 
amount  due  on  the  bonds,  the  com- 
pany having  become  insolvent. 

1  Graham  v.  Boston,  etc.,  R.  R.  118 
U.  S.  161  (1886). 

■■^TJiomas  v.  Brownville,  etc.  R.  R, 
109  U.  S.  522  (1883);  Central  Trust  Co. 
V.  New  York,  etc.  R.  R,  18  Abb.  N. 
Cas.  381,  403  (1886).  See  also  g  770, 
infra,  and  §  762,  supra. 

3  Thomas  v.  Brownville,  etc.  R.  R., 
109  U.  S.  522  (1883).  See  Union  Trust 
Co.  V.  New  York,  etc.  R  R,  1  Ry  & 
Corp.  L,  J.  50  (Oliio  Com  PL,  1887). 
The  courts  will  require  substantial 
equity  to  be  done  to  the  persons  re- 
ceiving '-watered"  bonds  before  re- 
quiring them  to  account  for  the  bonds. 
Thus,  although  bonds  are  irregularly 
issued  to  a  contractor,  yet  his  con- 
tract is  not  held  invalid  unless  he  is 
repaid  tlie  sums  actually  expended  in 
good  faith  by  him  under  the  contract. 
Porter  v.  Pittsburg,  etc.  Co.,  120  U.  S. 
649,  672  (1887).  See  also  §  744,  and  ch. 
XXXIX,  siipra;  Kappner  v.  St.  Louis, 
etc.  Vs.  R,  3  DilL  228  (1875);  S.  C,  14 
Fed.  Cas.  132.     Cf  note  2,  p.  1708. 

*  Graham  v.  Boston,  etc.  R  R,  118 
U.  S.  161  (1886). 
03 


§  766.] 


BONDS    AKD    COUPONS. 


[cn.  XLVI. 


The  courts  go  very  far  in  protecting  honafide  holders  of  cor- 
poration bonds,  and  will  uphold  and  enforce  such  bonds  under 
nearly  all  circumstances.  The  defense  that  the  bond  was  issued 
below  par  does  not  avail  as  against  a  hona  fide  holder.^     The 


1  Coupon  bonds  of  a  railroad  com- 
pany "payable  to  bearer  pass  by  de- 
livery; and  a  hona  fide  purchaser  of 
them  before  maturity  takes  them 
freed  from  any  equities  that  might 
have  been  set  up  against  the  original 
holders  of  them.  The  burden  of  proof 
is  on  him  who  assails  the  hona  fides 
of  such  purchase."  Kneeland  v.  Law- 
rence, 140  U.  S.  209  (1891);  Ellsworth 
V.  St.  Louis,  etc.  R.  R,  33  Hun,  7; 
aff'd,  98  N.  Y.  553  (1885),  where  the 
issue  below  par  was  even  prohibited 
by  statute.  Though  the  directors 
fraudulently  issue  bonds  to  another 
railroad  to  build  the  latter,  and  the 
latter  uses  the  proceeds  to  purchase 
control  of  the  former,  tlie  hona  fide 
holders  of  the  bonds  are  protected. 
State  V.  Bro%vn,  64  Md.  199  (1885). 
Bonds  issued  below  par  or  without 
consideration  are  nevertheless  valid 
in  hona  fide  hands.  Ex  parte  Chor- 
ley,  L.  R  11  Eq.  157  (1870);  Philadel- 
phia, etc.  R  R  u  Lewis,  33  Pa.  St.  33 
(1859)  —  two  cases  in  which  the  cor- 
poration received  nothing  for  the 
bonds;  Woods  v.  Lawrence  County, 

1  Black,  386  (1861);  Mercer  County  v. 
Hacket,  1  Wall  83  (1863);  "Whitney 
V.  Peay,  24  Ark.  22  (1863),  a  case  of 
pledge  of  bonds.  A  bond  like  a  note 
purchased  by  a  hona  fide  party  may 
be  enforced  at  its  par  value  although 
purchased  at  less  than  the  par  value. 
Cromwell  v.  Sac  County,  96  U.  S.  51 
(1877) ;  Bronson  v.  La  Crosse,  etc.  R  R, 

2  Walk  283(1863);  Alexander  v.  At- 
lantic, etc.  R  R,  67  N.  C.  198  (1872); 
Railway  Co.  v.  Sprague,  103  U.  S.  756 
(1880),  where  nothing  was  received 
by  the  corporation  for  the  bonds; 
Grand  Rapids,  etc.  R  R  v.  Sanders, 
17  Hun,  552  (1879).  Bona  fide  pur- 
chasers of  bonds  from  a  contractor 


are  not  affected  by  the  fact  that  he 
did  not  complete  the  work  accord- 
ing to  contract,  for  which  he  received 
the  bonds  in  payment.  McElrath  v. 
Pittsburg,  etc.  R  R,  55  Pa.  St.  189 
(1867).  The  fact  that  the  proceeds 
received  from  the  sale  of  the  bonds 
are  misappropriated  by  the  stock- 
holders does  not  affect  the  validity 
of  the  bonds  in  hona  fide  liands. 
Western,  etc.  R  R  v.  Drew,  3  Woods, 
692  (1879);  S.  C,  29  Fed.  Cas.  747. 
The  hona  fide  purchaser  is  not  af- 
fected by  the  fact  that  the  president 
sold  the  bonds  and  used  all  the  pro- 
ceeds for  his  individual  purposes. 
Philadelphia,  etc.  R  R  u  Lewis,  33 
Pa.  St.  33  (1859).  Where  bonds  have 
been  illegally  or  fraudulently  issued 
the  court  will  allow  those  which  are 
in  the  hands  of  the  guilty  parties  or 
persons  taking  with  notice  only  for 
such  amounts  as  were  actually  re- 
ceived therefor  by  the  corporation. 
Bona  fide  holders  may  have  greater 
rights.  Thomas  v.  Brownville,  etc 
R  R,  109  U.  S.  522  (1883).  See  Unioa 
Trust  Co.  V.  New  York,  etc.  R  R, 
1  R'y  &  Corp.  L.  J.  50;  also  note  4, 
p.  1719.  Where  the  holder  is  not  a 
hona  fide  purchaser  he  stands  in  the 
shoes  of  his  vendor,  and  where  the 
officers  use  the  corporate  bonds  to 
pay  the  debts  of  other  corporations 
illegally,  the  court  will  order  the 
bonds  and  mortgage  canceled,  there 
being  no  hona  fide  holders  of  the 
bonds.  Chicago  v.  Cameron,  120  111. 
447  (1887).  The  hona  fide  purchaser 
of  municipal  bonds  may  enforce 
them,  although  the  railroad  to  which 
they  were  issued  sold  them  at  a  dis- 
count of  twenty-five  per  cent,  con- 
trary to  the  charter.  Woods  v.  Law- 
rence County,  1  Black,  386  (1861). 


1710 


CH.  XLVI.] 


BOKDS   AKD   COUPONS. 


[§  V66. 


question  of  what  constitutes  hona  fide  holdership  is  largely  a 
question  of  fact  in  cases  where  bonds  have  been  fraudulently 
issued,  and  each  case  is  determined  on  its  own  peculiar  circum- 
stances.^ Moreover,  the  hona  fide  holdership  may  be  destroyed 
by  the  fact  that  the  bond  itself  may  not  be  drawn  in  negotiable 
form.' 

If  the  holder  of  the  bonds  purchased  them  from  an  officer  of 
the  corporation,  and  such  officer  made  the  sale,  not  for  the  cor- 
poration, but  as  the  holder  and  owner  of  the  bonds  himself, 
this  in  itself  may  destroy  the  hona  fides  of  the  purchaser,  if  it 
turn  out  that  the  officer  was  committing  a  breach  of  trust.' 

The  danger  incident  to  an  issue  of  mortgage  bonds  at  less 


1  After  many  years'  delay  in  fore- 
closing the  mortgage,  the  court  will 
scrutinize  closely  the  validity  of  the 
bonds.  A  purchaser  of  the  bonds  at 
from  three  to  twenty  cents  on  the 
dollar,  after  an  ineffectual  foreclos- 
vire,  and  after  the  unpaid  accrued 
interest  nearly  equals  the  principal, 
is  not  a  bona  fide  purchaser,  and  if 
the  original  issue  was  for  no  consid- 
eration he  cannot  enforce  them. 
But  a  hona  fide  purchaser  from  him, 
and  any  subsequent  purchaser  from 
such  hona  fide  purchaser,  may  enforce 
the  bonds.  Bona  fides  must  be 
proved  in  such  a  case.  Simmons  v. 
Taylor,  38  Fed.  Rep.  682  (1889);  rev'd 
on  other  points,  suh  nom.  Simmons 
V.  Burlington,  etc.  R'y,  159  U.  S.  278 
(1895).  A  purchaser  may  be  bona 
fide  although  he  took  the  bonds  in 
exchange  for  other  bonds  worth  only 
ten  cents  on  the  dollar.  Morton  v. 
New  Orleans,  etc.  R'y.  79  Ala.  590 
(1885).  Bona  fides  is  not  presumed 
where  the  fraudulent  issue  has  been 
proved.  Oilman  v.  New  Orleans,  etc. 
R.  R.,  72  Ala.  566  (1882).  Where  over- 
due railroad  mortgage  bonds,  which 
belong  to  the  railroad  company,  are 
bought  at  forty  cents  on  the  dollar 
from  the  vice-president  of  the  com- 
pany after  suit  to  foreclose  has  been 
begun,  and  a  receiver  has  taken  pos- 
session of  the  mortgaged  property. 


the  purchasers  of  such  bonds  are  not 
bona  fide  holders  where  inquiry  on 
their  part  would  have  shown  that 
the  vice-president  had  no  authority 
to  sell  the  bonds.  American,  etc.  Co. 
V.  St.  Louis,  etc.  Co.,  42  Fed.  Rep.  819 
(1890).  A  person  who  purcl;ases  four 
bonds  of  $1,000  each  for  $150  is  bound 
to  inquire  into  the  legality  of  the 
issue.  Riggs  v.  Pennsylvania,  etc. 
R  R.,  16  Fed.  Rep.  804  (1883).  Where 
a  purchaser  of  bonds  knows  that  he 
is  purchasing  from  an  agent  of  the 
corporation,  and  that  the  agent  in- 
tends to  use  the  proceeds  for  his  pri- 
vate purposes,  he  is  not  a  bona  fide 
purchaser.  Chew  v.  Henrietta,  etc. 
Co.,  2  Fed.  Rep.  5  (1880).  A  partner 
of  one  of  the  contractors  who  is  a 
party  to  a  fraudulent  issue  of  bonds 
was  held  not  to  be  a  bona  fide  pur- 
chaser under  the  facts  in  the  case. 
Smith  V.  Florida,  etc.  R.  R.,  43  Fed. 
Rep.  731  (1890),  a  case  involving  the 
bonds  which  were  passed  upon  in  Rail- 
road Cos.r.Schutte,  103  U.  S.  118  (1880), 
and  Trask  v.  Jacksonville,  etc.  R.  R., 
124  U.  S.  515  (1888).     See  84  N.  Y.  190. 

2  See  §  767,  infra, 

3  See-  §§  293,  727,  mpra.  A  plir- 
chaser  of  a  note  of  a  corporation  pay- 
able to  an  officer  of  the  corporation 
is  not  a  hona  fide  purchaser.  Stough 
V.  Ponca  ]\Iill  Co.,  74  N.  W.  Rep.  868 
(Neb.,  1898). 


1711 


§  IGQ.] 


BONDS   AND    COUrONS. 


[cn.  XLvi. 


than  tlieir  par  value  is  generally  added  to  by  the  fact  that  the 
directors  of  the  corporation  are  usually  personally  interested  in 
the  issue.  It  is  an  old  and  well-established  principle  of  law 
that  a  director  is  disqualified  from  contracting  with  his  corpo- 
ration. He  is  acting-  as  a  trustee,  and  as  trustee  cannot  con- 
tract with  himself  as  an  individual.^  It  is  undoubtedly  true 
that  a  director  may  buy  bonds  at  less  than  par  if  the  transac- 
tion is  fair,  and  if  no  stockholder  objects.-  But  any  stockholder 
may  object  to  bonds  issued  for  construction  work  in  which 
the  directors  were  interested.  Upon  such  objection,  the  mort- 
firaire  securino;  the  bonds  being  under  foreclosure,  the  court  will 
allow  the  bondholders  taking  with  notice  to  prove  only  such 
part  of  the  bonds  as  represent  actual  cash  invested,  while  ho7ia 
fide  holders  may  enforce  their  bonds  for  their  investment.' 
If,  however,  all  the  stockholders  assent,  and  the  general  cred- 
itors of  the  corporation  are  not  injured,  the  issue  is  legal.*    In 

1  See  §§  649,  653,  662,  m'prcu 

2  A  purchaser  at  ninety  cents  on 


the  dollar  of  bonds  issued  to  a  di- 
rector at  seventy  cents  is  protected, 
even  though  he  was  informed  of  the 
facts.  Union,  etc  Co.  v.  Southern, 
etc.  Co.,  51  Fed.  Rep.  840  (1802);  i?e 
Cpmpagnie  Bellegarde,  L.  R.  4  Ch.  D. 
470  (1876). 

3  Thomas  v.  Brown ville,  etc.  R  R, 
109  U.  S.  533  (1883).  As  to  bona  fide 
holders,  see  notes,  p.  1709.  See  also 
Warden  v.  Union,  etc.  R  R,  103  U.  S. 
651  (1880);  S.  C,  4  Dill.  330;  S.  C,  29 
Fed.  Cas.  211.  "Where  the  incorpo- 
rating act  requires  all  the  proceeds 
of  sales  of  lots  by  a  cemetery  com- 
pany to  be  used  for  embellishments, 
and  the  directors  proceed  to  buy  land 
for  a  consideration  of  $500,000  in 
bonds,  of  which  bonds  $480,000  are 
turned  back  by  the  vendor  to  the  di- 
rectors, who  divide  them  among 
themselves,  the  bonds  are  void  in  the 
hands  of  directors.  The  directors  in 
this  instance  had  erected  over  the 
entrance  to  the  cemetery  a  statue  of 
Immortality,  and  had  done  so  "  with 
great  pomp  and  solemnity."  Camp- 
bell V.  Cypress,  etc.  Cemetery,  41  N. 

i: 


Y.  34  (18G9).  Bonds  may  be  Issued  by 
a  corporation  to  a  director  as  security 
for  a  debt  from  it  to  him.  A  di- 
rector cannot  buy  bonds  from  the 
corporation  at  less  than  par,  except 
at  the  risk  tliat  the  company  will 
undo  the  transaction.  A  director 
must  give  up  bonds  which  lie  takes 
as  a  bon\is  on  his  subscription-  But 
the  bona  fide  purchasers  may  enforce 
them.  Duncomb  v.  N.  Y.  etc.  R  R, 
84  N.  Y.  190  (1881).  Fraud  in  issuing 
them  to  a  director  does  not  affect  a 
bona  fide  purcliaser.  '  Hulett's  Case, 
2  J.  &  H.  306  (18G3).  For  a  case  that 
carefully  considers  the  facts  which 
render  certain  bonds  legal  and  others 
fraudulent,  see  Bronson  v.  La  Crosse 
R.  R,  3  Wall  283  (1863).  Seven 
years'  delay  in  complaining  that  the 
directors  issued  bonds  to  themselves 
for  no  consideration,  and  then  fore- 
closed and  bought  the  road  in,  is  fatal 
Burgess  v.  St.  Louis  County  R  R,  99 
Mo.  496  (1890).  On  this  subject  of 
laches  see  also  ch.  XLIV,  supra^ 

*  Bonds  issiied  at  their  full  par  value 
to  the  president  in  payment  for  work 
done  by  him  under  a  contract  between 
himself  and  his  company  are  valid 


CH.  XLYI.] 


BONDS  AND  COUPONS. 


[§  T66. 


Ohio  this  disqualification  of  directors  from  purchasing  from  the 
corporation  its  bonds  at  a  discount  is  embodied  in  the  statutes, 
and  the  bonds  are  declared  not  merely  voidable,  but  absolutely 
void.^  It  is  of  course  legal  for  the  company  to  sell  its  bonds 
to  stockholders.^ 

A  more  difficult  question  arises  when  bonds  are  issued  to  per- 
sons who  control  the  directors  of  the  company,  such  directors 
being  mere  "  dummies  "  of  the  persons  to  whom  the  bonds  are 
issued.  There  have  been  decisions  to  the  effect  that  bonds 
issued  below  par  to  the  persons  who  have  put  in  their  "  dummies  " 
as  directors  of  the  company  are  invalid  and  may  be  attacked 
by  stockholders  or  corporate  creditors,  or  by  the  corporation 
itself.'    If,  however,  these  decisions  are  correct,  it  is  difficult 

were  proven  that  a  board  of  directors 
had  literally  no  wills  of  their  own, 
but  merely  carried  out  the  orders  of 
a  third  party  in  making  a  contract, 
the  corporation  should,  if  it  desired, 
be  relieved  from  the  contract,  with- 
out being  compelled  to  prove  that  it 
was  fraudulent  or  disadvantageovis  to 
the  company.  It  seems  to  be  rather 
a  dangerous  doctrine  to  hold  that,  as 
a  matter  of  law,  a  board  of  directors 
who  are  mere  dimimies  can  irrevo- 
cably bind  a  corporation  by  a  contract 
with  the  person  who  has  placed  them 
in  office  for  the  express  purposes  of 
having  them  make  the  contract."  In 
Cleveland  Rolling  SI  Co.  v.  Crawford, 
9  R'y  &  Corp.  L.  J.  172  (IlL  Cir.  Ct., 
1891),  corporate  creditors  sought  to 
hold  the  defendant  liable  for  corpo- 
rate debts,  by  reason  of  the  fact  that 
bonds  and  stocks,  whose  par  value 
was  four  times  greater  tlian  the  value 
of  construction  work  done  by  defend- 
ant, had  been  issued  to  defendant  for 
construction  work,  and  that  the  cor- 
poration was  controlled  by  defendant 
through  "dummies."  A  demurrer 
was  overruled,  the  court  saying :  "  He 
could  no  more  shield  himself  behind  • 
the  nominal  action  of  the  corporation 
by  its  "  dummy  "  board  of  directors 
tlian  a  guardian  or  executor  de  son 
tort  could  shield  himself  behind  the 

ri3 


and  enforceable,  where  all  the  stock- 
holders assented  to  such  contract. 
Arkansas,  etc.  Co.  v.  Farmers',  etc. 
Co.,  13  Colo.  587  (1889).  See  also  ch. 
XLIV,  supra,  and  §§  649,  730,  supra. 

1  See  note  1,  p.  1707,  supra, 

2  The  holder  of  a  majority  of  the 
stock  of  a  railroad  company  may 
legally  cause  its  bonds  to  be  issued 
to  himself  at  ninety  cents  on  the  dol- 
lar in  payment  of  a  debt  due  him. 
Gloninger  v.  Pittsburgh,  etc.  R.  R., 
139  Pa.  St.  13  (1891).  A  stockholder 
may  of  course  purchase  bonds  upon 
their  original  issue  by  the  corpora- 
tion. Bergen  v.  Porpoise  Fishing  Co., 
42  N.  J.  Eq.  397  (1886). 

3  In  Central  Trust  Co.  v.  New  York, 
etc.  R.  R,  18  Abb.  N.  Cas.  381  (1887), 
the  foreclosure  of  a  railroad  mort- 
gage was  sought.  The  corporation 
defended  against  the  bonds  on  the 
ground  that  they  were  issued  below 
par  to  persons  who  controlled  the 
board  of  directors  by  means  of  "  diun- 
mies."  The  court  sustained  this  con- 
tention and  held  that  the  bonds  still 
in  the  hands  of  the  guilty  parties 
must  be  reduced  in  amount  to  the 
amount  actually  paid  therefor.  Judge 
Andrews  said:  "Upon  principle  it 
wovdd  seem  that  whatever  practical 
difficulties  might  arise  in  ascertain- 
ing the  facts  in  any  given  case,  if  it 

108  1' 


§  7G6.]  BONDS   AND   COUPONS.  [cu.  XLYL 

to  see  how  railroads  are  to  be  built  and  corporate  enterprises 
launcbed.  The  usual  way  to  obtain  the  necessary  funds  is  by 
the  sale  of  stock  and  bonds  at  less  than  par,  and  the  only  mode 
of  profit  to  the  originators,  promoters,  and  builders  is  by  tak- 
ing the  construction  contract  or  by  realizing  a  profit  by  the  sale 
of  the  stock  and  bonds.  Unless  there  is  a  profit  they  will  not 
undergo  the  labor,  time,  and  care.  It  is  easy  to  declare  that 
the  board  of  directors  must  be  independent  of  the  parties  who 
furnish  the  money  or  talent  to  carry  the  enterprise  through  and 
realize  a  profit,  but,  as  a  matter  of  fact,  the  directors  are  always 
friends  of  the  promoters  or  are  "dummies"  of  the  promoters. 
In  eitlier  case  they  readily  vote  as  the  promoters  wish.  Theo- 
retically the  principle  of  law  laid  down  above  may  be  correct, 
but  practically  it  would  overthrow  probably  nine-tenths  of  the 
railroad-construction  contracts.  The  law  should  render  such 
contracts  voidable  onl}^  when  they  are  actually  fraudulent.  TJie 
fraud  should  not  be  Implied. 

It  may  be  illegal  for  the  directors  to  vote  to  issue  a  large 
amount  of  bonds  at  less  than  their  real  value  to  a  construction 
company  in  which  they  have  stock  or  in  which  they  are  di- 
rectors.^ If,  however,  all  the  stockholders  assent,  the  contract 
and  issue  are  legal.'^  It  is  fraudulent  to  issue  bonds  at  less 
than  their  actual  value  in  order  to  defraud  other  creditors  and 
the  stockholders,  and  to  buy  in  the  property  cheaply  at  fore- 
closure sale.' 

accoiints  of  the  legal  guardian  or  comes  a  director,  and  the  other  di- 
executor  procured  to  be  made  in  the  rectors  are  clerks  of  the  second  con- 
name  of  such  legal  guardian  or  exec-  tractor,  and  tlie  construction  contract 
utor."  Where  two  persons  organize  is  made  with  these  two  by  means  of 
a  railroad  corporation  by  means  of  "  dummy  "  intermediaries  at  an  im- 
"  dummy  "  stockholders,  their  clerks  provident  price,  one  of  the  contract- 
and  employees,  and  put  their  clerks,  ors  cannot  compel  the  other  to  divide 
etc.,  in  as  "  dummy "  directors,  and  the  profits.  Jackson  v.  McLean,  36 
these  "  dummies  "  issue  all  the  stock  Fed.  Rep.  213  (1888).  See  also  §§  663, 
and  a  large  mortgage  on  the  corporate  664,  supra. 
property  to  the  two  promoters  for  i  See  §§  649,  662,  663,  supra. 
construction  work,  one  of  the  pro-  ^Coe  v.  East,  etc.  R  R.,  52  Fed. 
meters  cannot  call  the  other  to  an  Rep.  531  (1892),  and  §g  649, 662, 663, 730. 
accoimt.  The  court  will  not  aid  the  3  a  foreclosure  sale  based  on  fraud- 
parties.  Jackson  v.  McLean,  100  Mo.  ulently  issued  bonds  will  be  set  aside 
130  (1890).  And  where  two  contract-  as  against  purchasers  with  notice, 
ors  cause  a  railroad  corporation  to  be  and  such  purchasers  held  liable  for 
formed,  in  which  one  contractor  be-  the  real  value  of  the  road.    Drury  v. 

1714 


CH.  XLYI.] 


BOXDS   Ai5T>    COUPONS. 


[§  "^QQ- 


Even  though  the  validity  of  an  issue  of  bonds  is  questionable, 
yet  it  is  not  every  person  who  can  complain.^  A  stockholder 
may  enjoin  the  issue  or  cause  it  to  be  set  aside  where  it  is  fraud- 
ulent or  beyond  the  powers  of  the  corporation.^  But  all  stock- 
holders who  have  assented  to  the  issue,  and  all  transferees  of 
their  stock,  are  estopped  from  objecting  to  the  bonds.' 


Cross,  7  WalL  299  (1868).  Judgment 
creditors  may  bring  an  action  to  set 
aside  a  mortgage  and  to  restrain  a 
foreclosure,  where  the  bonds  secured 
thereby  were  issued  to  the  stockhold- 
ers for  purposes  foreign  to  the  cor 


law,  and  there  are  many  other  de- 
cisions to  the  same  effect.  In  Re 
Syracuse,  etc.  R.  R,  91  N.  Y.  1  (1883), 
the  court  said  of  the  plaintiff  stock- 
holder who  had  purchased  his  stock 
after  the  transaction:  "He  was  not 


porate  purposes,  in  fraud  of  corpo-    a  stockholder  or  an  elector,  and  if  it 


rate  creditors,  the  object  being  to 
close  out  the  property  and  organize 
a  new  corporation  for  the  pvirpose  of 
going  on  with  the  business.  Phenix 
Nat.  Bank  v.  Cleveland  Co.,  11  N.  Y. 
Supp.  873  (1890).  For  an  issue  of 
bonds  fraudulently  by  issuing  them 
in  pledge  and  then  pm-chasing  the 
bonds  at  a  pledgee's  sale,  see  James 
V.  Railroad  Co.,  6  Wall.  752  (1807). 
» See  g  848,  infra,  and  g  788,  supra. 
2  See  chs.  XXXIX,  XL,  and  §  659, 
supra;  §§  828,  848,  infra.  A  stock- 
holder may  object  to  the  payment  of 
bonds  issued  to  other  stockholders  for 
construction  work  which  was  never 
performed.  But  bona  fide  holders  of 
the  bonds  are  protected.  State  v. 
Brown,  64  Md.  199  (1885).  Where 
bonds  have  been  illegally  or  fraudu- 
lently issued  and  stockholders  may 
object,  the  court  will  allow  those 
bonds  which  are  in  the  hands  «f  the 
guilty  parties  or  persons  taking  with 
notice  to  be  collected  only  for  such 
amounts  as  were  actually  received 
therefrom  by  the  corporation.   Bona 


be  claimed  that  he  represents  those 
from  whom  he  acquired  liis  certifi- 
cate of  stock,  the  answer  is  that  they 
are  the  very  parties  who  committed 
the  vrrong  which  the  court  was  asked 
to  redress."  Where  $59,000  of  stock 
and  $20,000  of  bonds  are  issued  for  a 
gas  plant  worth  $34,000  besides  the 
francliise,  a  judgment  creditor  can- 
not hold  the  stockholders  liable  on 
the  stock  where  he  himself  is  a  stock- 
holder and  no  charge  of  fraud  is 
made.  Woolfolk  v.  January,  131  Mo. 
620  (1895).  A  stockholder  cannot  file 
a  bill  to  enjoin  a  pending  sviit  of 
foreclosure  on  the  ground  that  tlie 
bonds  were  fraudulently  issued.  The 
proper  remedy  is  for  the  corporation 
to  set  up  this  defense,  and,  if  it  de- 
clines to  set  it  up,  then  the  stock- 
holder may  intervene.  Waymire  v. 
San  Francisco,  etc.  R'y,  112  CaL  046 
(1890).  A  person  who  buys  mortgage 
bonds  with  stock  as  a  bonus  from  a 
party  to  whom  the  stock  and  bonds 
were  originally  issued  cannot  be  held 
liable  on  the  stock  at  the  instance  of 


fide  holders 'may  collect  their  invest-    other  stockholders,  who  did  not  ob- 


ment.    Thomas  v.   BrownviUe,  etc 
R  R.,  109  U.  S.  522  (1883). 

sSee  ch.  XLIVand  ^'§  730,  IS^supra. 
A  subsequent  purchaser  of  the  stock 
cannot  complain  where  the  stock 
which  he  holds  has  ratified  the  trans- 
action. Several  of  the  cases  cited 
above  expressly  state  this  to  be  the 


ject  at  the  time  of  the  issue,  and  who 
now«ome  into  the  foreclosure  suit 
and  attempt  to  defeat  the  bonds  on 
the  groimd  that  the  amount  due 
thereon  is  not  more  than  the  unpaid 
par  value  of  the  stock,  the  bonds  and 
stock  having  originally  been  issued 
in  payment  for  property.     Northern 


1715 


§  766.-] 


BONDS   AND   COUPONS. 


[CH.  XLVI. 


Tlie  attorney-general,  in  behalf  of  the  state,  certainly  cannot 
enjoin  the  issue.^  Where  a  railroad  has  been  sold  under  fore- 
closure proceedings,  a  judgment  creditor  of  the  company  who 


Tnist  Co.  V.  Columbia,  etc.  Co.,  75 
Fed.  Rep.  936  (1896).  See  also  cases 
cited  in  §§  40,  733,  supra.  In  Stewart 
V.  St.  Louis,  etc.  R  R.,  41  Fed.  Rep. 
736  (1887),  where  a  railroad  road-bed 
worth  $3,000  was  turned  in  to  a  cor- 
poration for  $200,000  of  its  notes  and 
$3,600,000  of  its  stock,  the  court  held 
that  the  notes  were  good  and  could 
be  collected.  The  court  said:  "It 
does  not  appear  in  this  case  that 
there  was  any  deception  or  fraud 
practiced  by  the  parties.  The  i)rop- 
erty  was  open  to  inspection,  and  the 
approximate  cost  of  constructing  it 
was  easily  obtainable.  Its  value  to 
the  company  for  the  purpose  desired 
was  not  difficult  to  ascertain-  I  find 
no  evidence  of  any  representations 
a,s  to  its  value  or  cost  or  purchase 
price  made  by  the  parties  selling; 
but  there  is  record  evidence  that  the 
board  of  directors,  several  months 
after  the  sale  and  with  full  knowl- 
edge of  the  transaction,  formally  a]> 
proved  and  ratified  it,  and  not  only 
that,  but  subsequently,  at  a  meeting 
of  all  the  stockholders,  the  transac- 
tion was  again  ratified.  Now,  who 
was  defrauded  or  deceived  ?  All  par- 
ties—  directors  and  stockholders  — 
assented  to  it;  and,  surely,  subse- 
quent pm-chasers  of  stock,  or  the 
corporation  itself,  cannot  now  ob- 
ject to  it.  It  is  true  the  vendors  got 
a  very  large  advance  on  the  price 
they  paid,  but  that  is  not  alone  the 
test  by  which  the  bona  fides  of  the 
transaction  is  to  be  tried.  To  them 
as  individuals  the  property  was  of 
little  or  no  value.  To  the  railroad 
company  it  could  be  made  wortli 
the  price  paid  for  it;  and  the  vendors 
bent  every  energy  to  make  the  prop- 
erty useful  to  the  company  and  to 
make  the  enterprise  successful,  for 


1716 


their  chances  of  making  money  or 
any  other  value  for  the  property  de- 
pended very  largely  on  the  result. 
As  before  remarked,  parties  taking 
stock  afterwards  in  the  company 
cannot  complain  of  the  purcliase. 
Tlie  records  of  the  company  showed 
the  transaction.  It  was  not  kept  a 
secret.  There  was  no  law  compelling 
any  person  or  municipality  to  take 
stock  in  the  company  unless  they 
volimtarily  chose  to  do  so;  and  if 
they  were  deceived  by  misrepresenta- 
tions of  the  ofiicers,  their  cause  of 
action  rests  on  that  deception  and 
not  on  an  attack  on  the  original  con- 
tract of  purchase."  A  purchaser  of 
stock  that  has  voted  for  an  issue 
of  "watered"  bonds  and  stock  is 
estopped  from  complaining,  even 
though  the  issue  was  prohibited  by 
the  constitution  of  the  state  —  Penn- 
sylvania. "Wood  V.  Corry,  etc.  Co.,  44 
Fed.  Rep.  146  (1890).  Although  the 
bonds  are  sold  at  sixty-five  to  seventy 
cents  on  the  dollar,  and  the  purchaser 
holds  a  majority  of  the  stock  of  the 
company  and  controls  it,  yet  the 
bonds  cannot  be  attacked  by  a  stock- 
holder who  has  acquiesced  in  their 
issue  for  eleven  years.  Alexander  v. 
Searcy,  81  Ga.  536  (1889).  A  pur- 
chaser of  stock  issued  to  a  contractor 
for  work  cannot  attack  the  issue  on 
the  ground  that  it  was  watered  stock, 
even  though  the  contractors  imme- 
diately sell  a  part  of  the  stock  and 
bonds  at  the  rate  of  ninety  cents  on 
the  dollar  for  the  bonds,  with  nearly 
an  equal  amount  of  stock  thrown  in, 
Drake  v.  New  York,  etc.  Co.,  26  N.  Y. 
App.  Div.  499  (1898).  See  also  Cen- 
tral T.  Co.  V.  Columbus,  etc.  R'y,  87 
Fed.  Rep.  815  (1898),  and  §  735,  supra. 
1  Injunction  is  not  the  proper  rem- 
edy for  the  state  in  objecting  to  ultra 


CH, 


3XVI.] 


BONDS   AND    COUPONS. 


[§  T66. 


seeks  to  set  tlie  sale  aside  on  the  ground  that  the  mortgage 
was  invalid  is  in  the  position  of  one  who  asks  to  be  let  in  to 
redeem  from  a  mortgagee  in  possession  under  an  unforeclosed 
mortgage.  He  cannot  in  the  same  action  ask  that  the  pur- 
chaser at  foreclosure  sale,  who  is  about  to  bond  the  property, 
shall  pay  the  judgment  creditors'  claim  out  of  such  bonds.^  But 
a  judgment  creditor  may  attack  the  legality  of  the  bonds  or  of 
the  foreclosure  where  the  company  has  become  insolvent  and 


vires  acts  of  corporations.  Quo  war- 
ranto is  its  remedy.  See  §  635,  supra. 
In  State  v.  Janesville  Water  Co.,  92 
Wis.  496  (1896),  the  court  refused 
leave  to  the  attorney-general  to  bring 
suit  to  forfeit  the  charter  of  a  water- 
works company,  although  it  was  al- 
leged that  watered  stock  and  bonds 
had  been  issued,  it  being  shown  in 
opposition  that  there  had  been  eight 
years'  delay.  In  the  case  of  Colum- 
bus, etc.  R'y  V.  Burke,  19  Week.  L. 
Bull.  27  (Ohio,  1887) ;  20  Week.  L.  BulL 
287  (1888),  the  arbitrators  said:  "The 
theory  that  a  corporation,  even  when 
exercising  public  franchises,  holds  its 
property  upon  any  trust  in  favor  of 
the  public,  was  met  and  unquali- 
fiedly denied  by  Chancellor  Kent  in 
his  luminous  and  learned  opinion  in 
the  great  case  of  Attorney-General 
V.  Utica  Ins.  Co.,  2  Johns.  Ch.  371 
(1817),  where  it  was  held  that  equity 
had  no  jurisdiction  of  a  bill  filed  by 
the  attorney-general  to  enjoin  the 
defendant  from  carrying  on  the  busi- 
ness of  banking  in  violation  of  the 
statuta  In  adverting  to  the  class  of 
cases  in  which  the  English  court  of 
chancery  liad  exercised  control  over 
corporations  for  breach  of  trust, 
Chancellor  Kent  pointed  out  that  in 
every  instance  the  jurisdiction  had 
been  confined  to  charitable  institu- 
tions. He  cited  with  evident  ap- 
proval the  case  of  Colchester  v.  Lot- 
ten,  1  Ves.  &  B.  226  (1813),  which  was 
a  bill  to  set  aside  a  mortgage  of  cor- 
porate property  as  unduly  made  by 
an  officer  of  the  corporation,  under 

17 


the  corporate  seal,  for  purposes  not 
coi'porate,  in  which  he  said  the  lord 
chancellor  had  held  that  there  was 
no  instance  of  a  trust  attaching  upon 
the  ground  of  misapplication  of  funds 
by  corporations,  except  in  the  case 
of  corporations  holding  to  charitable 
uses.  'The  charge  of  a  breach  of 
trust,'  continued  Chancellor  Kent, 
'  ought  to  come  from,  or  on  behalf 
of,  the  cestuis  que  trustent  or  stock- 
holders of  the  company.  If  they  are 
satisfied,  no  other  person  is  entitled 
to  complain.  If  they  approve  of  the 
act  of  their  trustees  in  instituting 
banking  operations,  there  is  no 
ground  of  any  allegation  of  a  breach 
ofti-ust.'"  See  also  §  37,  SMpm.  The 
state  will  not  be  allowed  to  inter- 
vene in  a  foreclosiire  suit  for  the  pur- 
pose of  preventing  it  on  the  ground 
that  the  bonds  are  illegal  and  void, 
and  that  on  a  reorganization  a 
greater  issue  will  be  made.  State  v. 
Farmers',  etc.  Co.,  81  Tex.  530  (1891). 
Where  $100,000  of  bonds  and  $125,000 
of  stock  are  issued  in  payment  for 
construction  work  of  the  value  of 
$121,000,  the  bonds  are  valid  and 
may  be  enforced  by  bona  fide  pur- 
chasers. Wood  V.  Corry,  etc.  Co.,  44 
Fed.  Rep.  146  (1890).  In  this  case  the 
court  held  also  that  only  the  state 
could  object  to  watered  stock  and 
bonds  issued  upon  the  organization 
of  the  company  in  violation  of  the 
statutes. 

1  Merriman  v.  Chicago,  etc.  R.  R, 
64  Fed.  Rep.  535  (1894). 


17 


§  766.-] 


BONDS   AND    COUI'OXS. 


[CH.  XLVI. 


he  has  exhausted  his  remedy  against  it.^    General  creditors  who 
have  proved  their  claims  may  attack  the  legality  of  an  issue  of 


iDrury  v.  Cross,  7  Wall  299  (1868). 
Judgment  creditors  may  bring  an  ac- 
tion to  set  aside  a  mortgage  and  to  re- 
strain a  foreclosure,  where  the  bonds 
secured  thereby  were  issued  to  the 
stockholders  for  purposes  foreign  to 
the  corporate  purposes,  in  fraud  of 
corporate  creditors,  the  object  being 
to  close  out  the  property  and  organ- 
ize a  new  corporation  for  the  purpose 
of  going  on  with  the  business.  Phenix 
Nat.  Bank  v.  Cleveland  Co.,  11  N.  Y. 
Supp.  873  (1890).  The  deed  of  trust  and 
bonds  may  be  declared  invalid  in  a 
suit  instituted  against  the  trustee  and 
all  known  bondholders.  Other  bond- 
holders cannot  afterwards  follow  the 
property  into  other  hands.  Beals  v. 
Illinois,  etc.  R.  R.,  27  Fed.  Rep.  721 
(1886).  A  judgment  creditor  cannot 
attack  consolidated  bonds  on  the 
ground  that  the  old  bonds  which 
have  been  taken  up  were  informally 
and  illegally  issued.  Coe  v.  East,  etc. 
R  R.,  52  Fed.  Rep.  531  (1892).  Although, 
after  foreclosure  and  purchase  by 
the  trustee  and  reorganization,  the 
foreclosure  is  declared  fraudulent  and 
void  at  the  instance  of  judgment 
creditors,  yet  it  is  valid  except  as  to 
those  judgment  creditors  who  at- 
tacked it,  and  hence  a  new  foreclos- 
ure need  not  be  had.  Milwaukee,  etc. 
R.  R.  V.  Soutter,  13  WalL  517  (1871); 
to  same  effect,  Barnes  v.  Chicago, 
etc.  R.  R.,  8  Biss.  514  (1879);  S.  C,  3 
Fed.  Cas.  862.  In  Drury  v.  Cross,  7 
Wall.  299  (1868),  a  person  who  was  a 
general  creditor  at  the  time  of  the 
foreclosure  sale,  but  became  a  judg- 
ment creditor  after  the  sale,  caused 
the  sale  to  be  set  aside  as  fraudulent 
on  the  ground  that  most  of  the  bonds 
were  issued  without  consideration, 
and  for  the  purpose  of  "  wrecking " 
the  company  for  the  benefit  of  the 
directors,  who  were  indorsers  of  the 
company's  paper.    The  case  of  James 

1718 


V.  RaUroad,  6  Wall  752  (1867),  was  to 
the  same  effect.  The  coiirt,  at  the 
instance  of  judgment  creditors,  set 
aside  the  sale  because,  of  the  $2,000,000 
of  bonds  on  which  the  foreclosure 
was  obtained,  only  $200,000  were  bona 
fide  and  enforceable.  But  a  decteo 
invalidating  the  sale  does  so  only  as  to 
complaining  judgment  creditors,  and 
not  as  to  other  creditors  or  bondhold- 
ers, or  the  company  itself.  Barnes  v. 
Chicago,  etc.  R'y,  122  U.  S.  1  (1887). 
A  foreclosure  and  reorganization,  the 
latter  being  agreed  upon  before  the 
foreclosure,  by  the  terms  of  which 
the  bondholders  and  stockholders  buy 
the  property  at  the  foreclosure  sale, 
and  then  organize  a  new  company  to 
own  it,  is  fraudulent  as  against  the 
unsecured  creditors  of  the  company, 
and  they  may  cause  the  stockhold- 
ers' interest  to  be  applied  to  their 
debts.  Railroad  v.  Howard,  7  Wall, 
392(1868).  See  also  §  886,  i«/ra.  "If 
one  creditor  objects  to  the  claim  of 
another  creditor,  and  succeeds  in 
showing  it  to  be  invalid,  such  claim 
does  not  stand  good  as  against  other 
creditors  who  interpose  no  objection 
to  it.  The  opposition  of  one  enures  to 
the  benefit  of  all."  Duncan  v.  Mobile, 
etc.  R.  R.,  3  Woods,  567  (1877);  S.  C, 
8  Fed.  Cas.  19.  Although  a  mortgage 
and  a  foreclosure  thereof,  and  a  pur- 
chase thereunder  by  the  mortgagee, 
are  declared  void  as  a  fraud  on  credit- 
ors of  the  company,  except  as  to  bona 
fide  holders  of  the  bonds,  yet  it  is 
merely  voidable,  and  a  sale  of  the 
property  to  satisfy  another  debt  bars 
the  right  of  such  mortgagee  to  re- 
cover for  liens  which  it  had  paid. 
Such  payment  was  a  payment  of  liens 
on  its  own  property.  Barnes  v.  Chi- 
cago, etc.  R.  R.,  8  Biss.  514  (1879) ;  S.  C, 
2  Fed.  Cas.  862.  See  also  §§  828,  848, 
infra. 


CH.  XLVI.] 


BONDS  AND  COUPONS. 


[§  "IQQ- 


morto-affe  bonds.^  General  creditors  whose  suit  against  the 
company  has  been  consolidated  with  a  foreclosure  suit  may 
contest  the  validity  of  the  bonds.  An  intervening  creditor 
may  also  attack  them.^  Creditors  who  become  such  after  the 
bonds  were  issued  cannot  attack  the  validity  of  the  bonds  on 
the  ground  that  they  were  issued  for  less  than  their  real  value, 
together  with  a  large  amount  of  stock.^  A  subsequent  mort- 
gagee, however,  cannot  make  such  an  attack  except  as  a  judg- 
ment creditor.*  A  purchaser  of  the  bonds  with  notice  cannot 
complain.^ 


In  England  it  is  held  that  although  none  of  the 


^Vanderveer  V.  Asbury  Park,  etc.  R'y, 
83  Fed.  Rep.  355  (1897).  See  §g  848, 735. 

2  Continental  T.  Co.  v.  Toledo,  etc. 
R  R.,  82  Fed.  Rep.  642  (1897). 

3  Continental  T.  Co.  v.  Toledo,  etc. 
R.  R.,  82  Fed.  Rep.  642  (1897) ;  87  id.  828. 

*  Where  a  third  mortgage  is  made 
expressly  subject  to  a  second  mort- 
gage, the  third  mortgagee  in  his  suit 
to  foreclose  cannot  attack  the  valid- 
ity of  the  second-mortgage  bonds. 
Bronson  v.  La  Crosse,  etc.  R  R.,  2 
Wall  283  (1863).  Where  one  tele- 
graph corporation  holds  the  bonds  of 
another  and  exchanges  the  bonds  for 
the  stock  of  the  latter  corjDoration,  a 
subsequent  mortgagee  of  the  first  cor- 
poration cannot  attack  the  validity 
of  the  bonds  and  mortgage  on  the 
property  of  the  second  corporation. 
Boston,  etc.  Co.  v.  Bankers',  etc.  Co., 
86  Fed,  Rep.  288  (1888);  aff'd  sub  nom. 
United  Lines  TeL  Co.  v.  Boston,  etc. 
Co.,  147  U.  S.  431  (1893).  Although 
certain  persons,  being  directors  and 
owners  and  in  control  of  a  railroad 
company,  cause  it  to  make  a  con- 
struction contract  with  a  company 
which  they  also  control,  yet,  if  all 
stockholders  assent,  subsequent  con- 
solidated bondholders  cannot  object 
that  a  part  of  the  old  issue  of  bonds 
was  issued  below  par  and  was  fraudu- 
lently and  illegally  issued.  Cos  v. 
East,  etc.  R  R,  52  Fed.  Rep.  531 
(1892).  The  statute  of  limitations 
runs  against  an  action  by  taxpayers 


against  the  oflBcers  and  promoters  of 
a  railroad  to  which  municipal  aid 
was  voted,  to  compel  them  to  account 
for  watered  stock  and  bonds,  and  to 
cause  the  stock,  bonds,  and  mortgage 
to  be  canceled.  Allen  v.  Wisconsin, 
etc.  Ry,  90  Iowa,  473  (1894). 

*A  purchaser  of  bonds  who  pur- 
chases with  notice  that  an  alleged 
covenant  in  the  mortgage  securing 
the  bonds,  to  devote  the  proceeds  of 
the  bonds  to  the  improvement  of  the 
property,  has  been  broken,  cannot 
complain  of  such  breach  of  covenant, 
even  though  the  entire  proceeds  of 
the  bonds  were,  through  the  medium 
of  sales  of  property,  diverted  to  the 
person  al  benefit  of  stockholders.  Bel- 
den  V.  Burke,  147  N.  Y.  542  (1885). 
The  court  (p.  551)  said  as  to  the  ac- 
tion of  the  stockholders:  "They  had 
raised  a  vast  stun  of  money  by  plac- 
ing a  mortgage  upon  their  own  prop- 
erty, and  had  expended  and  disbursed 
the  money  as  they  thought  would 
best  promote  their  own  interests. 
There  is  no  one  who,  in  this  action, 
has  any  right  to  complain  of  this,  vm- 
less  the  bondholders,  from  whom  they 
borrowed  the  money,  were  intention- 
ally deceived  to  their  loss  or  injury, 
for  which  they  liave  no  adequate  re- 
dress at  law."  The  court  also  said  that 
neither  on  the  ground  of  a  breach 
of  covenant  —  the  covenant  being  a 
covenant  of  the  corporation  only  — 
nor  on  the  ground  of  fraud  could 


1719 


§  7QQ.] 


BONDS  AND  COUPONS. 


[CH.  XLVr. 


stockholders  and  creditors  of  a  company  which  is  in  difficulties 
object  to  a  new  issue  of  bonds  and  stock  for  contract  work,  a 
part  of  the  bonds  and  stock  being  then  given  to  the  stockhold- 
ers and  bondholders  as  a  bonus,  yet  where  the  intention  is  to 
have  outside  people  invest  in  the  bonds  and  stock  of  the  com- 
pany the  scheme  is  illegal,  and  innocent  purchasers  of  the  stock 
may  hold  the  directors  who  did  the  act  liable  for  the  stock 
and  bonds  thus  given  as  a  bonus.^ "  Such  a  purchaser's  remedy, 
however,  is  not  to  have  the  whole  issue  set  aside  as  illegal.'' 

The  corporation  itself  cannot  complain,  unless  some  of  the 
stockholders  object; '  but  it  is  held  that  a  receiver  may.*  Even 
if  the  bonds,  and  hence  the  mortgage,  are  held  to  be  invalid, 
the  court  may  retain  jurisdiction  of  the  property.* 


the  action  be  maintained.  The  court 
referred  to  the  fact  that  tlie  plaintiff 
had  not  paid  more  for  his  bonds  than 
they  actually  were  worth,  the  inter- 
est having  been  promptly  paid,  and 
the  bonds  having  appreciated  in  raar- 
ket  value.  If  the  bondholder  charges 
fraud  he  cannot  obtain  relief  on  other 
groimds,  the  charge  of  fraud  not  being 
substantiated.  Spies  v.  Chicago,  etc. 
R.  R,  40  Fed.  Rep.  34  (1889).  In  a 
bondholders'  and  stockholders'  bill  to 
set  aside  an  amicable  foreclosure  and 
reorganization,  the  parties  charged 
with  participating  therein  must  be 
made  defendants,  Ribon  v.  Railroad 
Cos.,  16  Wall.  446  (1872).  The  holder 
of  a  part  of  the  mortgage  bonds  may 
attack  the  validity  of  other  bonds  of 
that  issue.  Farmers',  etc.  Bank  v. 
Waco,  etc.  R'y,  36  S.  W.  Rep.  131 
(Tex.,  1896). 

1  London  Trust  Co.  v.  Mackenzie,  68 
L.  T.  Rep.  380  (1893). 

2  Church  V.  Citizens'  Street  R  R, 
78  Fed.  Rep.  526  (1897). 

8  Columbus,  etc.  R  R.  v.  Burke,  19 
Week.  L.  Bull.  27  (Ohio,  1887);  20 
Week.  L.  Bull.  287  (1888).  But  see 
New  Castle  Northern  R'y  v.  Simpson, 
21  Fed.  Rep.  533  (1884).  A  reorgan- 
ized company  may  be  charged  with 
notice  of  the  reorganization  agree- 
ment, and  may  be  estopped  from  com- 

11 


plaining  that  a  part  of  the  securities 
issued  by  the  old  corporation  were 
overissues.  Davidson  v.  Mexican  Nat. 
R  R,  11  N.  Y.  App.  Div.  28  (1896).  In 
a  suit  between  the  corporation  and 
bondholders  to  test  the  validity  of 
the  bonds,  stockholders  are  not 
proper  parties.  Des  Moines  Gas  Co. 
V.  West,  50  Iowa,  16  (1878).  Where 
a  trustee  sells  at  great  sacrifice,  and 
at  the  sale  makes  statements  dis- 
paraging the  title,  and  the  purchaser 
is  a  former  trustee  of  the  mortgage, 
the  court  will  set  the  sale  aside. 
Equitable  Trust  Co.  v.  Fisher,  106  111. 
189  (1883).  The  legislature  has  no 
power  to  validate  a  foreclosure  sale 
which  is  invalid  by  reason  of  fraud. 
White  Mountains  R  R.  v.  White 
Mountains  R  R,  50  N.  H.  50  (1870). 

*A  receiver  may  bring  an  action 
to  determine  the  validity  of  bonds. 
See  V.  Heppenheimer,  36  Atl.  Rep. 
966  (N.  J.,  1897);  Hubbell  v.  Syracuse, 
etc.  Works,  42  Him,  182  (1886).  After 
a  receiver  has  been  appointed  for  a 
corporation  its  creditors  cannot  sue 
to  set  aside  mortgages  by  the  corpo- 
ration. National  State  Bank  v.  Vigo 
County  Nat.  Bank,  141  Ind.  352  (1895). 

*  Although  the  bonds  are  held  to 
be  invalid,  yet  the  foreclosure  suit 
being  started,  and  receiver's  certifi- 
cates being  out,  and  all  the  property 
20 


CH.  XLYI.] 


BONDS  AND  COUPONS. 


[§  "iQQ. 


It  is  to  be  borne  in  mind  that  the  statute  against  usury  may 
invalidate  bonds  issued  below  par.  A  bond  bearing  the  full 
legal  interest  and  yet  issued  below  par  is  practically  an  agree- 
ment to  pay  more  than  the  legal  rate  of  interest.  Consequently 
this  defense  may  in  certain  cases  be  set  up  by  the  corporation.^ 


in  the  receiver's  hands,  the  court  will 
sell  and  administer  the  property,  all 
parties  consenting.  The  phrase  all . 
property  "intended  to  be  used,"  in 
the  mortgage,  covers  material  for 
construction,  such  as  rails,  etc.  If 
the  receiver  has  notes  belonging  to 
the  company  the  court  will  adminis- 
ter them  also.  Farmers'  L.  &  T.  Co. 
V.  San  Diego  St.  Car  Co.,  49  Fed.  Rep. 
188  (1892). 

1  Craven  County  Com'rs  v.  Atlan- 
tic, etc.  R.  R.,  77  N.  C.  289  (1877),  where 
a  stockholder  brought  action  to  have 
declared  void  railroad  bonds  so  is- 
sued. In  Schermerhorn  v.  Talman, 
14  N.  Y.  93  (1856),  the  court  came  to 
the  same  conclusion,  and  said  that 
the  sale  of  the  securities  (certificates 
of  deposit  in  that  case)  is  not  a  sale, 
but  a  loan,  and  "  that  neither  indi- 
viduals nor  corporations  can  sell  their 
mere  promises  to  pay."  That  which 
is  called  a  sale  is  nothing  but  a  loan 
(p.  117).  "  If  it  appears  that,  at  the 
end  of  all  the  payments,  the  lender 
will  have  received  more  than  his  prin- 
cipal, with  lawful  interest,  the  con- 
tract is  usurious  "  (p.  121).  See  also 
Neuse  River  Nav.  Co.  v.  Newbern,  7 
Jones,  L.  (N.  C.)  275  (1859).  In  Sturges 
V.  Stetson,  1  Biss.  246  (1858);  S.  C,  23 
Fed.  Cas.  311,  McLean,  J.,  in  a  railroad 
case,  said :  "  From  the  authority  given 
to  the  directors  to  sell  notes,  bonds, 
scrip,  and  certificates  for  the  payment 
of  money  or  px'operty  which  the  com- 
pany had  previously  received  as  do- 
nations, or  in  payment  of  the  sub- 
scriptions to  the  capital  stock,  above 
or  below  par,  an  argvunent  is  drawn 
that  stock  may  be  disposed  of  to  sub- 
scribers for  less  than  $50  a  sliare.  It 
appears  to  me  the  provision  author- 

17 


izes  an  inference  in  conjaict  with  the 
one  drawn.  If  bonds  or  other  instru- 
ments for  the  payment  of  money  be 
transferred  at  less  than  their  face, 
with  legal  interest  on  the  entire  sum, 
in  payment  for  the  money  loaned,  it 
would  be  usurious,  and  this  was  the 
reason  for  the  above  provision.  "With- 
out it  the  sale  of  the  bonds,  etc.,  would 
have  been  illegal."  A  $1,000  bond 
may  be  sold  for  $850,  and  yet  not  be 
usurious.  McTighe  v.  Macon  Constr. 
Co.,  94  Ga.  306  (1894).  Bonds  may  be 
issued  at  less  than  their  par  value 
where  corporations  are  forbidden  by 
statute  from  setting  up  the  defense 
of  usury.  Stevens  v.  Watson.  4  Abb. 
App.  Dec.  302  (1865).  Where  the  char- 
ter authorizes  the  company  to  boiTOw 
money  "  on  such  terms  as  might  be 
agreed  upon  by  the  parties,"  twelve 
per  cent  interest  may  be  agreed  upon. 
Morrison  v.  Eaton,  etc.  R  R.,  14  Ind. 
110  (1860).  If  the  rate  of  interest  is 
legal  where  the  corporation  exists 
and  the  bonds  are  payable,  there  is 
no  usury,  although  the  rate  is  higher 
than  in  other  states  where  suit  is 
brought.  Butler  v.  Edgerton,  15  Ind. 
15  (1860).  Cf.  Butler  v.  Myer,  17  Ind. 
77  (1861).  Where  the  bonds  of  a  cor- 
poration were  sold  for  cash  by  the 
corporation  for  eighty-seven  and  one- 
half  cents  on  the  dollar,  with  an 
agreement  that,  if  other  bonds  were 
sold  at  a  less  rate  within  a  certain 
time,  any  difference  would  be  paid 
to  the  first  vendee,  and  bonds  were 
sold  later  at  seventy-one  cents  on  the 
dollar,  a  suit  will  not  lie  by  the  first 
vendee  to  recover  the  sixteen  and  one- 
half  cents  on  the  dollar.  The  issue 
below  par  was  held  to  be  usuriotis. 
The  Ohio  statute  relative  to  such  is- 
21 


§  TOG.] 


BONDS    AND    COUrONS. 


[cii. 


XL  VI. 


A  corporation,  like  any  person,  may  at  common  law  set  up 
the  defense  of  usury.  But  the  statutes  of  many  of  the  states 
now  prohibit  this  defense  on  the  part  of  the  corporation,  and 
in  all  the  states  the  courts  go  to  the  extreme  in  defeating  the 
defense  if  possible.' 

If  a  company  sells  all  its  property  it  may  divide  the  proceeds 
among  its  stockholders  after  paying  the  corporate  creditors.^ 


sues  was  held  to  apply  to  domestic 
corporations.  McGregor  v.  Coving- 
ton, etc.  E.  R.,  1  Disney  (Ohio),  509 
(1857). 

1  For  various  statutes  on  this  sub- 
ject, see  Part  VII,  iiifra.  In  North 
Dakota,  by  statute,  a  railroad  com- 
pany cannot  plead  usury  against  the 
holder  of  a  bond  or  other  obliga- 
tion. Rev.  Civ.  Code  (1805),  §  29G2; 
also  in  South  Dakota,  Comp.  L.  of  Dak. 
(1887),  §  2993.  In  Iowa  a  railroad  cor- 
poration may  dispose  of  bonds  for 
construction  and  equipment  at  less 
than  par,  and  cannot  plead  usury 
against  them.  1  Rev.  Code  (1888), 
TI  1283;  so  also  in  Maine,  Rev.  Stat. 
(1883),  ch.  51,  §  56;  Mmnesota,  §  2529 
(1891);  Nebraska,  Comp.  Stat.  (1895), 
IF  1820  (ch.  16,  §  117);  New  Jersey, 
Gen.  Stat.  (1895),  voL  3,  p.  3703,  §  6. 
In  Wisconsin  also  a  corporation  can- 
not plead  usury.  Rev.  Stat.  (1878), 
§  1690.  Many  states  have  no  usury 
laws.  See  Jones,  Mortgage,  §  033.  A 
charter  provision  authorizing  the  cor- 
poration to  issue  securities  at  not  over 
seven  per  cent  interest  does  not  pre- 
vent the  company  boiTowing  money 
at  a  greater  rate  of  interest.  Union 
Nat.  Bank  v.  Wheeler,  60  N.  Y.  612 
(1875).  "  A  foreign  corporation  sued 
in  New  York  state  cannot  avail  itself 
of  the  statute  of  limitations."  Board- 
man  V.  Lake  Shore,  etc.  R.  R.,  84  N.  Y. 
157,  185  (1881);  Rathbun  v.  North- 
ern, etc.  R'y,  50  N.  Y.  656  (1872).  See 
also  Curtis  v.  Leavitt,  15  N.  Y.  9,  66 
(1857);  Central  Gold  Min.  Co.  v.  Piatt, 
3  Daly,  263  (1870);  Graham  v.  Atlan- 
tic, etc.  Co.,  N.  Y.  Daily  Reg.,  Oct.  14, 


1884.  The  issue  of  bonds  in  New  York 
below  par  cannot  be  attacked  on  the 
ground  of  usury,  even  by  a  lien  cred- 
itor of  the  corporation-  Atlantic 
Trust  Co.  V.  The  Vigilancia,  73  Fed. 
Rep.  452  (1896).  The  statutory  pro- 
vision that  a  corporation  sliall  not 
plead  usury  in  defense  does  not  pre- 
vent a  suit  in  equity  being  brought 
so  set  aside  as  inequitable  and  usu- 
rious a  settlement  of  accounts,  in 
which  a  corporation  is  retrospectively 
charged  with  compound  interest, 
since  equity  has  power  to  afford  re- 
lief against  improvident  and  extrav- 
agant bargains,  irrespective  of  the 
statutes  against  usury.  Iliggins  v. 
Lansingh,  154  111.  301  (1895).  The 
courts  are  inclined  to  extend  the  ap- 
plication of  laws  which  forbid  a  cor- 
poration from  setting  up  the  defense 
of  usury.  Junction  R.  R.  v.  Bank  of 
Ashland,  12  Wall  226  (1870);  Crom- 
well V.  Sac  County,  96  U.  S.  51  (1877). 
Coupons  at  an  illegal  rate  do  not  pre- 
vent a  recovery  of  the  sum  actually 
loaned  and  legal  interest.  Philadel- 
phia, etc.  R,  R  V.  Lewis,  33  Pa.  St.  33 
(1859).  But  any  corporation  as  as- 
signee of  a  usiurious  contract  may  set 
it  up.  Merchants',  etc.  Nat.  Bank  v. 
Commercial,  etc.  Co.,  49  N.  Y.  635 
(1872).  As  to  tisviry  set  up  against  a 
corporation,  see  §  690,  supra. 

2  See  §g  548,  671,  supra.  Where  a 
railroad  is  sold,  the  proceeds  cannot 
be  distributed  among  the  stockhold- 
ers without  paying  creditors.  Where 
bonds  are  received  in  payment  and 
distributed  among  the  stockholders 
and  income  bondholders,  the  general 


1723 


CH, 


XLVI.] 


BONDS  AND  COUPONS. 


[§  "K^^- 


Before  leaving  this  subject  of  tlie  issue  of  bonds  at  less  than 
par,  it  is  well  to  refer  to  bonds  issued  to  a  contractor  for  work 
which  the  contractor  does  not  complete.  The  general  rule  is 
that  where  bonds  are  issued  to  a  contractor  in  payment  for 
work  which  he  afterwards  fails  to  complete,  the  bonds  cannot 
be  enforced  at  their  full  par  value  unless  they  have  passed  into 
bona  fide  hands.^ 


creditors  may  reach  such  bonds. 
Chattanooga,  etc.  R.  R.  v.  Evans,  66 
Fed.  Rep.  809  (1895);  Boston,  etc.  Co. 
u  Bankers',  etc.  Tel.  Co.,  36  Fed.  Rep. 
288;  affirmed,  mh  nom.  United  Lines 
Tel.  Co.  V.  Boston,  etc.  Co.,  147  U.  S.  431 
(1893).  Here  the  defendant,  in  order 
to  control  the  American  Rapid  Tele- 
graph Company,  bought  the  stock  of 
the  latter  company  and  paid  for  it  by 
giving  to  the  stockholders  of  the 
vendor  first-mortgage  bonds  on  all 
the  property  of  the  American  Rapid 
Telegraph  Company,  those  bonds 
being  issued  to  the  defendant  under 
the  defendant's  contract  with  the 
Rapid  Company  to  construct  new 
lines,  etc.  When  the  bondholders 
came  to  foreclose,  the  defense  was  set 
up  that  the  transaction  was  fraudu- 
lent, ultra  vires,  illegal,  etc.  But  the 
court  upheld  the  bonds  and  enforced 
the  mortgage.  In  this  case  the  usual 
and  simple  process  of  one  company 
selling  all  its  property  to  the  other 
comj^any  and  taking  purchase-money 
mortgage  bonds  in  payment,  and 
then  distributing  the  bonds  among 
its  stockholders,  was  not  adopted,  but 
the  mortgage  was  given  by  the 
vendor  company.  The  vendee  com- 
pany at  the  same  time  agreed  to  con- 
struct new  lines  and  place  them 
under  the  mortgage.  The  whole 
scheme  was  awkward,  and  was  sus- 
tained by  the  courts  only  after  pro- 
longed litigation.  In  McCaleb  v. 
Goodwin.  21  S.  Rep.  967  (Ala.,  1897), 
one  street  railway  purchased  all  the 
stock  of  another  street  railway  and 
paid  the  stockholders  therefor  by  is- 

17 


string  the  mortgage  bonds  of  the 
latter  street  railway  company.  The 
former  then  placed  the  stock  under 
its  own  mortgage,  and,  this  mortgage 
having  been  foreclosed,  the  purchaser 
attacked  the  validity  of  the  first 
mentioned  mortgage.  The  court  sus- 
tained the  mortgage,  however,  on  tlie 
ground  that  all  the  stock  had  voted 
therefor. 

1  State  V.  Brown,  64  Md.  199  (1885); 
Silliman  v.  Fredericksburg,  etc.  R.  R., 
27  Gratt.  (Va.)  119  (1876);  Chicago, 
etc.  R'y  V.  Loewenthal,  93  111.  433  (1879), 
holding  that  the  mortgage  becomes 
invalid.  Where  a  contractor  who  is 
paid  in  stock  assigns  the  stock  and 
then  fails  to  complete  the  contract, 
the  assignee  who  took  with  full 
knowledge  of  the  contract  is  not  en- 
titled to  the  stock,  the  contract  say- 
ing that  if  it  was  not  performed  it 
should  be  null  and  void.  Sargent 
V.  Kansas  Mid.  R.  R.,  48  Kan.  673 
(1892).  Where,  according  to  contract, 
bonds  are  issued  to  a  contractor  in 
payment  for  work  before  the  work  is 
done,  a  pvirchaser  or  pledgee  of  the 
bonds  from  him  is  protected,  even 
though  he  took  the  bonds  with  full 
knowledge  of  all  the  facts.  Mercan- 
tile Trust  Co.  V.  Zanesville,  etc.  R'y, 
52  Fed.  Rep.  342  (1892).  It  is  no  de- 
fense to  bonds  in  hona  fide  hands 
that  they  were  issued  to  a  contractor 
for  work  which  he  did  not  finish  in 
the  time  agreed  upon.  ]\IcElrath  v. 
Pittsburg,  etc.  R  R,  55  Pa.  St.  189 
(1867).  Where  a  contractor  who  has 
been  paid  in  bonds  in  advance  does 
not  perform,  and  by  compromise  he 
28 


§  IQQ-] 


BONDS    AND    COUPONS. 


[cn.  XLVI. 


A  promise  and  contract  of  promoters  to  subscribers  to  cer- 
tain bonds  may  create  an  equitable  lien  on  the  bonds  enforce- 


gives  up  all  the  bonds  except  a  few 
which  it  is  agreed  he  may  retain, 
such  compromise  cannot  afterwards 
be  repudiated  by  the  company. 
Oregon,  etc.  R.  R.  u  Forrest,  128  N.  Y. 
83  (1891).  The  court  will  not  enjoin 
a  coi-poration  from  selling  its  bonds 
and  stock,  although  a  contractor  is 
entitled  to  receive  them  after  his 
contract  work  is  finished.  The  the- 
ory of  this  case  is  that  the  court 
could  not  compel  the  contractor  to 
perform,  and  hence  will  not  enjoin 
the  other  party.  Peto  v.  Brighton, 
etc.  R'y,  1  H.  &  M.  4G8  (18G3).  When 
one  telegraph  company  agrees  to  ex- 
tend the  lines  of  another  telegraph 
company  and  to  take  pay  there- 
for in  advance  in  bonds  of  the  lat- 
ter company,  and  then  exchanges 
the  bonds  for  the  stock  of  the  latter 
corporation,  a  subsequent  mortgagee 
of  the  first  corporation  cannot  attack 
the  validity  of  the  bonds  and  the 
mortgage  on  the  property  of  the  sec- 
ond corporation.  Boston,  etc.  Co.  v. 
Bankers',  etc.  Co.,  36  Fed.  Rep.  288 
(1888).  This  case  was  affirmed  sub 
nom.  United  Lines  Tel.  Co.  v.  Boston, 
etc.  Co.,  147  U.  S.  431  (1893).  The 
court  said  in  regard  to  the  method 
of  issuing  the  stocks  and  bonds:  "It 
violated  no  principle  of  law  and  no 
rule  of  good  morals."  Bonds  wlaich 
are  to  be  issued  for  building  an  ex- 
tension must  be  delivered  when  the 
extension  is  completed.  San  Anto- 
nio, etc.  R'y  V.  Busch,  21  S.  W.  Rep. 
164  (Tex.,  1893).  Where  a  road  agrees 
to  issue  bonds  and  fails  to  do  so,  the 
measure  of  damages  is  the  highest 
market  price  of  the  bonds  between 
the  time  they  shoiild  have  been  deliv- 
ered and  the  time  of  the  trial,  with 
interest  thereon,  irrespective  of  the 
price  which  was  to  be  paid  for  the 
bonds.  San  Antonio,  etc.  R'y  v.  Busch, 
21  Sw  W.   Rep.  164  (Tex.,  1893).   Al- 


though a  party  to  whom  bonds  and 
stock  have  been  sold  or  issued  to  be 
paid  for  in  instalments  has  paid  in 
part  and  is  unable  to  pay  the  re- 
mainder, the  vendor  cannot  rescind 
and  demand  back  the  secm'ities  un- 
less he  returns  the  money  ah-eady 
j)aid.  American  Water- works  Co.  v. 
Venner,  18  N.  Y.  Supp.  379  (1892). 
Where  a  corporation  deposits  stock 
with  its  treasurer  to  be  delivered  in 
payment  for  property  according  to 
contract,  the  treasurer  is  liable  in  tro- 
ver for  the  value  of  the  stock  if  he  re- 
fuses to  deliver  the  stock  to  the  party 
after  such  party  lias  completed  the 
contract.  McDonald  v.  McKinnon,  92 
Mich.  254  (1892),  As  to  the  form  of 
a  syndicate  contract  to  build  tlie 
Southern  Pennsylvania  Railroad,  and 
action  by  a  member  to  break  it 
up,  and  that  no  injunction  will  be 
granted  pendente  lite,  see  Bagaley  v. 
Vanderbilt,  16  Abb.  N.  Cas.  359  (1885). 
As  to  an  issue  of  bonds  on  certificates 
as  fast  as  a  road  is  completed,  see 
§  816,  infra.  A  vendor  taking  mort- 
gage bonds  in  payment  thereby 
waives  a  condition  in  the  contract  of 
sale  that  title  should  not  pass  until 
the  sale  was  completed.  Hinchman 
V.  Point  Defiance  R'y,  14  Wash.  349 
(1896).  In  U.  S.  Ti-ust  Co,  v.  Western 
Contract  Co.,  81  Fed.  Rep.  454  (1897), 
bonds  and  stock  were  deposited  with 
a  railroad  corporation  to  pay  the 
principal  and  interest  on  certain 
other  bonds  and  floating  debts  of  an- 
other corporation.  After  the  con- 
tract had  been  partially  performed 
the  former  corporation  became  in- 
solvent, and  the  court  passed  upon 
the  various  rights  of  the  parties. 
Where  bonds  are  to  be  issued  pro 
rata  for  each  five  miles  of  completed 
railroad  ready  for  rolling-stock  on 
the  certificate  of  the  chief  engineer, 
but  the  contract  is  to  be  forfeited  if 


1724 


OH.  XLVI.] 


BONDS   Aim   COUPONS. 


[§  "^QQ^ 


able  in  equity,  if  tlie  bonds  have  not  passed  into  lona  fide 
hands.^  Where  a  corporation  has  issued  stock  for  work  to  be 
done,  and  the  work  is  not  done,  the  corporation  may  compel  a 
person  in  whose  hands  the  stock  was  deposited  to  deliver  it 
back  to  the  corporation.  The  person  holding  the  stock  may 
interplead.^  But  where  a  "contractor  who  is  paid  in  stock 
assigns  the  stock  and  then  fails  to  complete  the  contract,  the 
assignee  who  took  with  full  knowledge  of  the  contract  is  not 
entitled  to  the  stock,  the  contract  saying  that  if  it  was  not  per- 
formed it  should  be  null  and  void.^  Yarious  questions  arise 
where  stock  is  to  be  issued  or  has  been  issued  for  contract  work 
and  there  occurs  a  default  on  the  part  of  one  party.  Many 
decisions  are  given  in  the  notes  below  as  to  the  measure  of  dam- 
ages and  the  rights  of  the  parties  in  such  cases.* 


the  road  is  not  completed,  the  con- 
tractor is  entitled  to  his  bonds  for 
completed  sections  on  the  engineer's 
certificate,  even  though  the  road  is 
not  completed.  Perkins  v.  Locke,  S7 
S.  W.  Rep.  783  (Tex.,  1894).  Where 
a  water- works  company  issues  all  its 
stock  and  bonds  to  a  contractor  for 
construction  work  in  advance  of  the 
work,  and  the  contractor  pledges 
them  to  a  banker  for  advances,  the 
other  creditors  of  the  water-works 
company  cannot  claim  an  interest 
in  such  securities,  even  though  the 
banker  had  assumed  the  contractor's 
obligation  to  one  other  creditor.  Mc- 
Neal  Pipe,  etc,  Co.  v.  Bullock,  174 
Pa.  St.  93  (1896). 

1  Badgerow  v.  Manhattan  Trust  Co., 
64  Fed.  Rep.  931  (1894).  An  agreement 
of  a  railroad  company  to  deliver  its 
bonds  in  payment  for  sections  of  its 
road  as  fast  as  such  sections  were 
completed  does  not  give  any  lien 
upon  the  bonds,  and  if  the  railroad 
company  pledges  them  to  others  the 
pledgee  is  protected.  There  is  not  even 
an  equitable  lien  upon  the  bonds. 
Badgerow  v.  Manhattan  Trust  Co., 
74  Fed.  Rep.  925  (1896). 

2  Equity  Gas-Light  Co.  v.  McKeige, 
139  N.  Y.  237  (1893). 


3  Sargent  v.  Kansas  Midland  R.  R., 
48  Kan.  672  (1892).  In  Hampton,  etc. 
R.  R.  u  Bank,  26  S.  E.  Rep.  238  (S.  C, 
1897),  where  a  railroad  had  issued 
stock  and  bonds  to  a  finance  com- 
pany for  money  to  be  paid  in  the  fu- 
ture, and  the  finance  company  had 
not  paid  the  money,  but  on  the  con- 
trary had  pledged  some  of  tlie  stock 
to  a  bank,  the  covirt  held  that  the 
bank  was  bound  to  take  notice  of  a 
provision  in  the  charter  to  the  effect 
that  no  sale  of  stock  should  relieve 
an  original  owner  from  his  obliga- 
tions to  the  company,  and  hence  was 
not  protected  as  pledgee. 

4  A  contractor  cannot  recover  any 
damages  for  the  failure  to  deliver 
stock  if  the  stock  is  worthless  and 
the  company  insolvent.  Central 
Trust  Co.  V.  Condon,  67  Fed.  Rep.  84 
(1895).  Several  persons  defrauded  as 
to  their  contract  whereby  they  were 
to  receive  stock  cannot  sue  jointly. 
Each  must  sue  separately.  Sum- 
merlin  V.  Fronteriza,  etc.  Co.,  41  Fed. 
Rep.  249  (1890).  If  an  employee  is 
by  contract  to  be  paid  in  stock,  and 
payment  is  not  made,  lie  may  obtain 
judgment  for  money  to  an  amount 
equal  to  the  par  value  of  the  stock. 
Delafield  v.  San  Francisco,  etc  R'y, 


1725 


§  767.] 


BONDS    AND    COUPONS. 


[CH. 


XLVI, 


§  767.  Negotiable  cliaracter  ofbonds  and  coiqwns  of  a  corpo- 
ration payable  to  order,  bearer,  or  holder  —  Lost  bonds. —  A 
lonafide  purcliaser  of  the  bonds  of  a  corporation  is  protected 


40  Pac.  Rep.  958  (CaL,  1895).  A  land- 
owner who  agrees  to  take  pay  from 
a  railroad  for  a  right  of  way  in  shares 
of  stock  must  take  the  stock  at  its 
par  value,  and  not  at  its  market  value. 
Hoffman  v.  Bloomsburg,  etc.  R.  R, 
157  Pa.  St.  174  (1893).  Stock  issued 
to  a  contractor  instead  of  money  to 
be  paid  to  him  may  be  voted  by  him, 
at  least  to  the  extent  or  proportion  of 
such  part  of  his  liability  as  he  has 
fulfilled.  Price  v.  Holcomb,  89  Iowa, 
123  (1893);  Pendleton  Mfg.  Co.  v.  Ma- 
hanna,  18  Pac.  Rep.  563  (Oreg.,  1888). 
If  a  corporation  accepts  an  absolute 
order  upon  it  by  the  contractor  to  de- 
liver to  a  third  person  certain  stock, 
it  cannot  afterwards  decline  to  issue 
the  stock  on  the  gromid  that  the  con- 
tractor has  not  performed  his  work. 
Hite  Nat.  Gas  Co.'s  Appeal,  118  Pa. 
St.  436  (1888).  The  courts  of  Massa- 
chusetts will  not,  at  the  suit  of  a  for- 
eign construction  company,  enjoin  a 
foreign  railroad  company  and  a  resi- 
dent from  the  issue  l)y  the  railroad 
company  to  the  resident  of  bonds  and 
stock  which  the  I'ailroad  company 
has  contracted  to  deliver  to  the  con- 
struction company.  The  suit  should 
be  at  the  residence  of  the  railroad 
company.  Kansas,  etc.  Co.  v.  Topeka, 
etc.  R.  R.,  135  Mass.  34  (1883).  Where 
property  is  deeded  to  trustees  to  deed 
to  a  corporation  for  part  of  the  stock, 
the  remaining  stock  to  be  for  work- 
ing capital,  the  cestuis  que  trust  are 
entitled  to  the  stock  before  the  rest  is 
sold.  The  statute  of  limitations  does 
not  rim.  Philes  v.  Hickies,  18  Pac. 
Rep.  595  (Ariz.,  1888).  If  the  corpo- 
ration prevents  the  completion  of  the 
contract,  the  contractor  may  recover 
as  damages  the  value  of  the  work  al- 
ready done,  and  also  the  profits  lost. 
Myers  v.  York,  etc.  R.  R.,  2  Curtis,  28 
(1854);  S.  C,  17  Fed.  Cas.  1122.   If  the 


corporation  refuse  to  issue  the  stock 
according  to  contract,  the  contractor 
may  recover  as  damages  the  market 
value  of  the  stock.  Porter  v.  Buck- 
field  Branch  R.  R.,  32  Me.  539  (1851); 
Barker  v.  Troy,  etc.  R.  R,  27  Vt.  766 
(1855).  If  the  contract  provides  for 
payment  to  the  contractor  in  stock, 
without  stating  that  the  stock  is  to  be 
taken  at  its  par  value,  the  contractor 
may  demand  the  stock  at  its  market 
value;  and  if  it  is  worthless,  he  may 
then  demand  money  in  lieu  thereof. 
Hart  V.  Lauman,  29  Barb.  410  (1859). 
The  contractor  cannot,  however,  com- 
plain because  the  capital  stock  has 
been  increased,  nor  is  a  tender  of  the 
stock  to  him  necessary.  Moore  v. 
Hudson  River  R  R,  12  Barb.  156 
(1851).  If,  in  organizing  and  issuing 
the  stock,  the  amount  to  be  issued 
for  the  property  is  not  what  the  con- 
tract calls  for,  the  vendor  may  com- 
pel a  specific  performance.  Bailey 
V.  Champlain,  etc.  Co.,  77  "Wis.  453 
(1890).  See  also  §§  61,  335,  st(j3ra.  For 
failiu-e  to  deliver  bonds  as  called  for 
by  a  contract,  the  vendee  may  re- 
cover the  highest  market  price  be- 
tween the  date  of  the  breach  of  the 
contract  and  the  date  of  the  trial. 
San  Antonio,  etc.  Ry  v.  Wilson,  4 
Tex.  Civ.  App.  178  (1893).  Where, 
after  a  subscription  for  stock  is  made, 
the  company  contracts  to  issue  all  its 
stock  to  a  contractor  in  payment  for 
work,  and  thereupon  the  subscriber 
gives  up  his  stock  to  the  company 
and  it  is  issued  to  the  contractor,  the 
subscriber  is  not  liable  on  such  stock, 
even  though  the  contractor  does  not 
fulfill,  and  even  though  the  subscriber 
causes  the  contract  with  the  con- 
tractor to  be  made.  Riverton  Water 
Co.  V.  Hummel,  175  Pa.  St.  575  (1896). 
Although  a  contractor  who  is  to  take 
stock  and  bonds  in  payment  assigns 


1736 


CH.  XLYI.] 


BONDS  AND  COUPONS. 


[§  T67. 


not  only  against  defenses  set  up  by  tlie  corporation,^  but  also 
against  the  claims  of  prior  owners  of  the  bonds.  This  class  of 
bonds  are  negotiable  like  promissory  notes,^  and  this  feature 
of  negotiability  is  by  far  the  most  important  feature  of  corpo- 


his  contract  to  a  trustee  and  issues 
debenture  bonds  against  it,  and  also 
assigns  scrip  certificates  of  the  com- 
pany exchangeable  for  mortgage 
bonds  on  completion  of  the  work,  yet 
no  equitable  lien  on  the  property  of 
the  company  is  thereby  created.  Fal- 
mouth, etc.  Bank  v.  Cape,  etc.  Co.,  44 
N.  E.  Rep.  617  (Mass.,  1896).  Where 
the  company  defaults  in  paying  in 
stock  as  agreed,  the  measure  of  dam- 
ages is  the  actual  value  of  the  stock. 
Central  Trust  Co.  v.  Richmond,  etc. 
R.  R.,  68  Fed.  Rep.  90  (1895).  An 
executory  contract  of  a  corporation 
to  issue  debentures  is  enforceable, 
even  though  the  corporation  has  be- 
come insolvent.  Pegge  i*.  Neath,  etc. 
Co.,  77  L.  T.  Rep.  550  (1897).  As  to 
the  usual  railroad  contract  for  con- 
struction work,  see  §  911,  infra. 

1  See  §  766,  also  §  38,  siqjra. 

2  White  V.  Vermont,  etc.  R  R.,  21 
How.  575  (1858) ;  Murray  v.  Lardner, 
2  Wall  110  (1864);  Pittsburgh,  etc. 
R'y  V.  Lynde,  44  N.  E.  Rep.  596  (Ohio, 
1896);  Carr  v.  Le  Fevre,  27  Pa.  St.  413, 
418  (1856);  Bunting  v.  Camden,  etc. 
R  R,  81  Pa.  St.  254  (1876);  Hubbard 
V.  New  York,  etc.  R  R,  36  Barb.  286 
(1862);  New  Albany,  etc.  Co.  v.  Smith, 
23  Ind.  353  (1864);  Junction  R  R  u 
Cleneay,  13  Ind.  161  (1859) ;  American 
File  Co.  V.  Garrett,  110  U.  S.  218  (1884); 
Wickes  V.  Adirondack  Co.,  2  Hun,  112 
(1874);  Galveston  R  R  v.  Cowdrey,  11 
Wall  459  (1870);  Mon-is  Canal,  etc. 
Co.  V.  Lewis,  12  N.  J.  Eq.  323  (1858); 
Chapin  v.  Vermont,  etc.  R  R,  74 
Mass.  575  (1857).    In  this  case  railway 

bonds  payable  "  to "  were  held 

negotiable,  the  legislature  having 
ratified  "  the  proceedings  "  whereby 
the  mortgage  was  executed.  Brain- 
erd  V.  New  York,  etc.  R.  R,  25  N.  Y. 

1'; 


496  (1862);  Hackensack  Water  Co.  v. 
De  Kay,  36  N.  J.  Eq.  548  (1883):  Mor- 
ton V.  New  Orleans,  etc.  R'y,  79  Ala. 
590  (1885);  Grand  Rapids,  etc.  R.  R  v. 
Sanders,  17  Hun,  552  (1879);  Chesa- 
peake, etc.  Co.  V.  Blair,  45  Md.  103 
(1876) ;  Stanton  v.  Alabama,  etc.  R.  R., 
2  Woods,  523  (1875);  S.  C,  22  Fed.  Cas. 
1070;  State  u  Cobb,  64  Ala.  127  (1S79); 
Langston  v.  South  Carolina  R.  R.,  2 
S.  C.  248  (1870).  In  Massachusetts, 
corporation  bonds  under  seal  are  ne- 
gotiable by  statute.  Union  Cattle 
Co.  V.  International  Trust  Co.,  149 
Mass.  492  (1889).  This  statute  de- 
clares negotiable  all  bonds  or  other 
obligations  under  seal  for  the  pay- 
ment of  money  to  bearer,  or  some  per- 
son or  bearer,  or  to  order,  and  issued 
by  a  corporation  or  joint-stock  com 
pany.  Stat.  1852,  ch.  76.  Scrip  calling 
for  a  bond  in  the  future  is  negotiable. 
Goodwin  v.  Robarts,  L.  R.  1  App.  Cas. 
476  (1876);  S.  C,  L.  R  10  Exch.  337 
(1875),  distinguishing  Crouch  v.  Credit 
Foncier,  L.  R  8  Q.  B.  374  (1873).  But 
trust  certificates  are  not  negotiabla 
Railroad  v.  Howard,  7  Wall.  392  (1868). 
Coupon  bonds  payable  to  bearer,  is- 
sued by  a  corporation  under  proper 
authority,  have  all  the  qualities  of 
commercial  paper  and  are  negotia- 
ble instruments.  Virginia  v.  Chesa- 
peake, etc.  Co.,  32  Md.  501  (1870). 
Railroad  bonds  are  negotiable.  So- 
ciety for  Savings  v.  New  London,  29 
Conn.  174  (1860).  The  bonds  of  a 
manufacturing  corporation  are  ne- 
gotiable. Lehman  v.  Tallassee  Mfg. 
Co.,  64- Ala.  567,  593  (1879).  See  also 
many  cases  in  §  766,  supra.  In  Eng- 
land the  negotiability  of  foreign 
bonds  is  recognized.  Gorgier  v.  Mie- 
ville,  3  B.  &  C.  45  (1824).  The  House 
of  Lords,  in  London,  etc.   Bank  v. 


§  T67.] 


BONDS    AND    COUrONS. 


[CH.  XLVI. 


ration  bonds.  Tlie  fact  that  the  parties  to  whom  bonds  are 
issued  are  aware  of  their  invalidity  does  not  affect  the  rights 
of  subsequent  holders  of  the  same  bonds  in  good  faith  and  with- 
out notice.*  The  bond  of  an  individual  is  not  negotiable  like  a 
note.^ 

The  negotiability  of  corporate  "  bonds  "  seems  to  have  arisen 
in  the  following  manner:  The  seal  may  be  looked  upon  in  any 
one  of  three  ways :  (1)  as  merely  the  signature  of  the  corpora- 
tion, thus  making  the  instrument  one  not  under  seal  and  hence 
a  negotiable  note ;  (2)  or  as  corresponding  to  an  individual's 
seal,  making  the  instrument  a  regular  bond ;  or  (3)  as  being 
both  the  sill-nature  and  also  the  seal,  similar  to  an  individual 
seal.  The  first  way  of  considering  the  corporate  seal  probably 
o-ave  rise  to  the  negotiability  of  corporate  "  bonds."  In  mod- 
ern times,  however,  these  instruments  are  called  bonds  and  not 
notes.'  However,  the  law  is  well  settled  that  the  bonds  of  a 
corporation  are  negotiable  although  the  seal  of  the  corporation 
is  attached.  The  negotiability  of  a  bond  is  not  destroyed  by 
the  fact  that  the  corporate  seal  is  attached,^  or  that  the  com- 


Simmons,  [1893]  A.  C.  201,  reversed 
[189 IJ  1  Ch.  270,  and  held  that  bona 
fide  holders  of  negotiable  bonds  of  a 
corporation  were  protected. 

iBelden  v.  Burke,  147  N.  Y.  542 
(1895).  Bonds  negotiated  by  the  presi- 
dent without  authority  are  valid  in 
bona  fide  hands.  Pittsburgh,  etc.  R'y 
V.  Lynde,  44  N.  E.  Rep.  596  (Ohio, 
1896). 

2  Bonds  issued  by  an  individual, 
though  negotiable  in  form,  are  special- 
ties and  are  not  negotiable.  Bockes 
V.  Hathorn,  20  Hun,  503  (1880).  The 
bonds  of  an  individual,  when  once 
paid,  cannot  be  re-issued.  Bockes  v. 
Hathorn,  20  Hun,  503  (1880). 

3  Railway  bonds  "are  called  bonds, 
or  railjvay  bonds,  but  they  are  in  fact, 
both  the  bonds  and  the  coupons,  mere 
bills  or  notes,  and  as  strictly  negotia- 
ble as  bank  bills."  The  court  said 
also  that  they  should  not  be  under 
seal,  but  the  court  would  disregard 
the  seal  anyway.    Ide  v.  Passumpsic, 


etc.  R  R,  32  Vt.  297  (1859).  The  fact 
that  an  obligation  for  money  issued 
by  a  corporation  is  under  seal  does 
not  make  it  a  bond.  "  It  is  under 
seal;  but  so,  in  the  absence  of  special 
powers,  must  every  instrument  be 
which  is  executed  by  a  corporation." 
Re  Imperial,  etc.  Co.,  L.  R.  11  Eq.  478, 
491  (1870).  A  debenture  similar  to  an 
American  bond  is  held  in  England  to 
be  nothing  but  a  promissory  note. 
Re  Imperial,  etc.  Co.,  L.  R.  11  Eq.478 
(1870).  See  also  §  770,  infra,  where 
this  same  question  arises  in  connec- 
tion with  the  statute  of  limitations. 
The  corporate  seal  upon  a  bond  raises 
a  presvunption  of  a  consideration. 
Campbell  v.  Cypress,  etc.  Cemetery, 
41  N.  Y.  84  (1869). 

*  Connecticut,  etc.  Ins.  Co.  v.  Cleve- 
land, etc.  R.  R,  41  Barb.  9  (1863);  Re 
General  Estates  Co.,  L.  R  3  Ch.  758 
(1868).  See  also  cases  in  preceding 
notea 


1728 


<5H.  XLVI.] 


BOXDS   AND    COUrONS. 


[§  767. 


pany  retains  the  right  to  pay  the  bond  before  maturity,^  or 
that  registration  is  provided  for,-  or  that  it  is  convertible  into 
stock,^  or  that  it  is  payable  on  or  before  a  specified  date,*  or 
that  overdue  coupons  are  attached  to  the  bonds,*  or  by  the  fact 
that  the  interest  has  been  due  and  unpaid  for  a  period  sufficient, 
if  the  interest  had  been  demanded,  to  make  the  bonds  due,  no 
demand  having  been  made.®  But  the  negotiability  is  destroyed 
by  the  fact  that  the  bonds  call  for  labor  to  be  done,^  or  that 


^  Union  Cattle  Co.  v.  International 
Trust  Co.,  149  Mass.  492  (18S9). 

2  Savannah,  etc.  R.  R.  v.  Lancaster, 

63  Ala.   555  (1878);  Reid  v.  Bank  of 
Mobile,  70  Ala.  199  (1881). 

3  Welch  V.  Sage.  47  N.  Y.  143  (1872); 
Hotchkiss  V.  National  Bank,  21  WalL 
354  (1874). 

4  Union,  etc.  Co.  v.  Southern,  etc. 
Co.,  51  Fed.  Rep.  840  (1892).  Cor- 
porate bonds  are  negotiable,  even 
though  they  are  payable  in  fifty 
years,  with  the  right  to  pay  in  five 
years.  American  Nat.  Bank  v.  Amer- 
ican, etc.  Co.,  32  AtL  Rep.  305  (EL  L, 
1895), 

5  Long  Island  L.  &  T.  Co.  v.  Colum- 
bus, etc.  R'y,  65  Fed.  Rep.  455  (1895). 
A  purchaser  may  be  bona  fide  al- 
though he  buys  bonds  two  days 
before  maturity  and  there  are  eight 
overdue  semi-annual  coupons  there- 
on. But  he  is  not  a  bona  fide  pur- 
chaser of  such  overdue  coupons. 
Gilbough  V.  Norfolk,  etc.  R  R,,  1 
Hughes,  410  (1877,i;  S.  C,  10  Fed.  Cas. 
354.  Several  past-due  coupons  on  a 
municipal  bond  are  sufficient  to  put 
upon  inqmry  a  purchaser  of  the  bond 
from  a  thief.  First  Nat.  Bank  v. 
Scott  County,  14  Minn,  77  (1869). 
"  The  dishonor  of  the  unpaid  coupons 
for  interest  did  not  infect  with  dis- 
honor the  bond  or  other  coupons,  put- 
ting on  inquiry  those  who,  in  the 
usual  course  of  trade,  in  good  faith, 
and  upon  a  valuable  consideration, 
should  acquire  them."   State  v.  Cobb, 

64  Ala.   127,   158  (1879);    Morton  v. 

109  1729 


New  Orleans,  etc.  R'y,  79  Ala.  590 
(1885).  The  fact  that  an  unpaid  cou- 
pon is  attached  to  a  bond  does  not 
render  the  purchaser  a  non  bona  fide 
purchaser.  Cromwell  v.  Sac  County, 
96  U.  S.  51  (1877);  Railway  Co.  v. 
Sprague,  103  U.  S.  756  (1880).  Unpaid 
coupons  on  bonds  do  "  not  necessa- 
rily constitute  notice  of  any  invalid- 
ity in  the  bonds."  Grand  Rapids, 
etc.  R.  R.  V.  Sanders,  54  How.  Pr.  214 
(1877).  "  It  cannot  be  said  that  the 
holder  of  the  bond,  with  its  unde- 
tached  coupons,  is  put  upon  notice 
of  a  defense  as  to  the  delay  because 
some  of  the  coupons  happened  to  be 
overdue."  McElrath  v.  Pittsburgh, 
etc.  R  R,  55  Pa.  St  189  (1867X  It^s 
legal  for  a  company  to  issue  its  bonds 
with  overdue  coupons  attached-  Mc- 
Elrath V.  Pittsburgh,  etc.  R  R,  55 
Pa.  St.  189  (1867). 

6  Railway  Co.  v.  Sprague,  103  U.  S. 
756  (1880).  See  also  Morgan  v.  United 
States,  113  U.  S.  476  (1885);  North- 
ampton Nat.  Bank  v.  Kidder,  106 
N.  Y.  221  (1887).  Wliere,  after  six 
months'  default,  the  principal  is  to 
become  due  by  the  terms  of  the  bonds, 
it  is  doubtful  whether  at  the  end  of 
the  six  months  the  bonds  become  past 
due  and  non-negotiable,  but  certainly 
not  where  the  defaulted  interest  is 
afterwards  paid  Pittsburgh,  eta 
R'y  V.  Lynde,  44  N.  E.  Rep.  596  (Ohio, 
1896). 

7  Knight  V.  Wilmington,  etc.  R  R, 
1  Jones,  L.  (N.  C.)  357  (1854). 


§  TC7.] 


BONDS    AND    COUrONS. 


[cn. 


XLvr, 


provision  is  made  for  extending  the  time  of  payment/  or  Ly 
the  fact  that  the  bonds  are  overdue,-  or  by  the  place  and  method 
of  payment  being  left  in  blank.^  If  the  purchaser  took  witli 
notice,  and  there  were  no  lonafide  purchasers  in  the  line  of  his 
title,  he  takes  subject  to  the  equities."  Where  a  party  pur- 
chases bonds  from  a  lona  fide  holder,  he  thereby  becomes  a 
lonafide  holder  himself,  even  though  he  had  notice  of  defenses 
to  the  bonds.* 

In  determining  who  is  and  who  is  not  a  'bona  fide  purchaser, 
the  facts  of  each  case  by  itself  must  be  taken  into  considerar 
tion,^  especially  where  the  original  issue  of  the  bonds  was  fraud- 


J  McClelland  v.  Norfolk,  etc.  R  R., 
HON.  Y.  409(1888). 

2Vermilye  v.  Adams,  etc.  CJo.,  21 
Wall  138  (1874). 

SLedwich  v.  McKim,  53  N.  Y.  307 
(1873). 

4  Northampton  Nat.  Bank  v.  Kid- 
der, lOG  N.  Y.  221  (1887);  Hervey  t\ 
Illinois  Mid.  R'y,  28  Fed,  Rep.  169 
(1884). 

5  Grand  Rapids,  etc.  R.  R.  v.  San- 
ders, 54  How.  Pr.  214  (1877);  North- 
ampton Nat.  Bank  v.  Kidder,  lOG  N.  Y. 
221  (1887) ;  Cromwell  u  Sac  County, 
96  U.  S.  51  (1877).  A  holder  of  bonds 
is  a  hona  fide  holder  if  any  prior 
holder  thereof  was  a  bona  fide  holder. 
Union,  etc.  Co.  v.  Southern,  etc.  Co.,  51 
Fed.  Rep.  840  (1892).  A  purchaser  of 
bonds  with  notice  does  not,  by  repur- 
chasing the  bonds  from  a  bona  fide 
party  to  whom  the  former  has  sold 
the  bonds,  become  thei'eby  a  bona  fide 
purchaser  himself.  Elwell  v.  Tatum, 
6  Tex.  Civ.  App.  397  (1893). 

^The  rule  laid  down  in  Welch  v. 
Sage,  47  N  Y.  143  (1872),  is  as  follows: 
"  The  law  may  be  regarded  as  settled 
that  a  purchaser,  for  value  advanced, 
of  negotiable  paper,  including  bonds, 
is  not  bound  to  exercise  such  care 
and  caution  as  waiy,  prudent  men 
would  exercise.  Negligence  will  not 
impair  his  titla  It  is  a  question  sim- 
ply of  good  faith  in  the  purchaser. 
Unless  the  evidence  makes  out  a  case 


upon  which  a  jury  would  be  author- 
ized to  find  fraud  or  bad  faith  in  the 
purchaser,  it  is  the  duty  of  the  court 
to  direct  a  verdict."  A  purchaser  of 
bonds  at  an  auction  sale,  no  interest 
having  been  paid  for  ten  years,  and 
the  purchaser  knowing  that  they  had 
been  the  subject  of  litigation,  is  not 
a  bona  fide  purchaser.  Trask  v.  Jack- 
sonville, etc.  R.  R.,  124  U.  S.  515  (1888). 
The  amount  paid  for  bonds  as  well 
as  the  value  of  the  bonds  themselves 
may  be  taken  into  consideration  in 
determining  whether  the  holder  is  a 
bona  fide  purchaser.  Grand  Rapids, 
etc.  R.  R.  V.  Sanders,  54  How.  Pr.  214 
(1877).  Where  the  trustee  named  in 
the  mortgage  is  himself  the  vendor 
of  the  bonds,  and  he  sells  $4,000  of 
bonds  for  $150.  the  purchaser  is  not  a 
bona  fide  purchaser.  Riggs  v.  Penn- 
sylvania, etc.  R.  R.,  16  Fed.  Rep.  804 
(1883).  Where  a  party  contracts  to 
deliver  notes  for  stock,  and  before 
the  delivery  of  the  notes  the  stock  is 
sent  to  the  corporation  for  transfer, 
and  the  corporation  refuses  to  trans- 
fer the  same  on  the  gi-ound  that  it 
was  overissued  stock,  the  vendee  has 
no  recourse  against  the  corporation 
if  he  delivers  the  notes  to  the  vendor 
after  receiving  such  information 
from  the  corporation.  In  this  case 
the  vendor  was  president  of  the  cor- 
poration. Hayden  v.  Charter,  etc 
Park,  27  AtL  Rep.  232  (Conn.,  1893). 


1730 


OH.  XLVI.] 


BONDS    AJSTD    COUPONS. 


[§  TC7. 


nlent  or  without  consideration.^  A  person  taking  bonds  from 
a  corporation  to  secure  a  private  debt  is  bound  to  ascertain 
the  rio-ht  of  the  officer  to  so  issue  the  bonds.^     A  Una  fide 


The  fact  that  one  certificate  of  stock 
gives  notice  of  irregularity  does  not 
convey  notice  to  the  holder  thereof 
as  regards  another  certificate  of  stock 
held  by  him.  Knox  v.  Eden  Musee, 
etc.  Co.,  74  Hun,  483  (1893).  Rev'd  on 
another  point  in  148  N.  Y.  441.  A  pur- 
chaser of  negotiable  bonds  or  other 
commercial  paper,  in  good  faith,  for 
valuable  consideration,  and  before 
maturity,  is  entitled  to  protection, 
although  he  may  have  had  suspicion 
of  a  defect  of  title  or  knowledge  of 
circumstances  sufficient  to  excite 
such  suspicion  in  the  mind  of  a  pru- 
dent man,  and  even  although  he  may 
have  been  guilty  of  gross  negligence; 
and  this  protection  equally  extends 
to  a  mortgage  or  other  security  given 
for  such  commercial  paper  or  bond. 
Spence  v.  Mobile,  etc.  R'y,  79  Ala.  576, 
587  (1885).  Mere  suspicion  on  the 
part  of  a  purcliaser  of  negotiable 
paper  of  a  defect  in  the  seller  s  title, 
or  knowledge  of  facts  which  would 
excite  suspicion  in  the  mind  of  a  pru- 
dent man,  is  not  sufficient  to  vitiate 
or  impair  his  title;  there  must  be  bad 
faith  or  something  equivalent  to  it; 
and  while  gross  negligence  is  not  of 
itself  bad  faith,  it  may  be  evidence 
of  it.  The  bonds  in  this  case  refer- 
ring on  their  face  to  the  deed  of  trust 
executed  by  the  railroad  company 
for  their  security,  which  deed  ex- 
pressly provided  that  the  entire  debt, 
principal  and  interest,  should  become 
due  and  payable  within  ninety  days 
after  refusal  to  pay  the  semi-annual 
interest  due  by  the  coupons,  on  de- 
mand made  at  the  agency  of  the  cor- 
poration in  the  city  of  New  York,  a 
purchaser  having  knowledge  of  such 
demand  and  refusal  at  the  time  he 
acquired  the  bonds  cannot  claim  to 
be  an  innocent  pvirchaser  without  no- 

17 


tice;  but  when  he  has  proved  the 
payment  of  value,  the  onus  of  prov- 
ing knowledge  or  notice  of  such  ex- 
trinsic fact  is  on  the  party  who  seeks 
to  impeach  his  title.  Morton  v.  New 
Orleans,  etc.  R'y,  79  Ala.  590  (1885), 
the  above  statement  being  from  the 
syllabus.  Concerning  the  subject  of 
what  constitutes  a  hona  fide  pur- 
chaser, see  also  §  771,  infra,  and  §  298, 
sux)ra. 

1  See  §  766,  supra. 

2  Germania,  etc.  Co.  v.  Boynton,  71 
Fed.  Rep.  797  (1896).  See  also  §  293, 
supra.  Where  a  corporate  note  is 
issued  to  a  third  person  and  then 
passes  into  the  hands  of  an  officer, 
the  person  taking  it  from  the  officer 
is  not  affected  by  the  rule  that  a  per- 
son taking  corporate  paper  in  its 
original  issue  by  a  corporation  is 
bound  to  ascertain  the  facts  if  the 
officer  is  personally  interested  in  the 
transaction.  Cheever  v.  Pittsburgh, 
etc.  R.  R.,  150  N.  Y.  59  (1896).  In  the 
federal  courts  a  person  taking  from 
the  president  of  a  corporation  a  note 
signed  by  the  coi*poration  and  in- 
dorsed by  him  is  not  bound  to  inquire 
into  the  consideration.  Doe  v.  North- 
western Coal,  etc.  Co.,  78  Fed.  Rep.  63 
(1896).  A  director  cannot  claim  to 
be  a  bona  fide  purchaser  of  bonds 
upon  their  issue  by  the  corporation. 
He  is  bound  to  know  what  transpires 
in  the  meetings  of  the  board  of  di- 
rectors. Greenville  Gas  Co.  v.  Reis, 
54  Ohio  St.  549  (1896).  A  principal 
taking  bonds  as  collateral  security  to 
a  note  sent  to  hina  by  his  agent  is 
not  chargeable  with  notice  of  the 
fact  that  the  agent,  as  the  agent  of 
a  corporation,  has  fraudulently  put 
the  bonds  into  circulation.  Thom- 
son-Houston Elec.  Co.  V.  Capitol  Elea 
Co.,  56  Fed,  Rep.  849  (1893). 

31 


§  767.] 


BONDS    AND    COUrONS. 


[cn.  XLVi, 


purchaser  of  a  bond  wliich  lias  been  stolen  takes  good  title.* 
Where  bonds  have  been  lost  or  destroyed,  a  court  of  equity  will 
direct  the  company  to  issue  new  and  suitable  representatives 
thereof  to  the  owner  upon  full  indemnity  being  given.^ 

Although  there  is  a  suit  pending  to  restrain  a  mortgagor  rail- 
road company  from  negotiating  its  bonds,  yet  where  the  com- 
pany does  negotiate  them,  even  in  violation  of  an  injunction, 


» A  bona  fide  purchaser  of  negotia- 
ble corporation  bonds  is  protected 
even  though  the  bonds  were  stolen 
by  the  vendor.    Dutchess  County  Ins. 
Co.  V.  Hachfield,  73  N.  Y.  226  (1878). 
A  bona  fide  purchaser  of  stolen  rail- 
road bonds  is  protected.    Murray  v. 
Lardner,  2  WalL  110  (1804);  Evertson 
V.  Newport  Nat.  Bank,  GO  N.  Y.  14 
(187G).    The  bona  fide  purchaser  of 
stolen    railroad    bonds    payable    to 
bearer  is  protected.     Carpenter   v. 
Rommel,  5  Phila.  34  (1862).    So,  also, 
as  to  water-works  bonds.     Consoli- 
dated Assoc.  V.  Avegno,  28  La.  Arm. 
553  (1876).    The  bona  fide  purchaser 
of  a  stolen  bond  is  protected.    Gil- 
bough  V.  Norfolk,  etc.  R  R.,  1  Hughes, 
410  (1877);   S.  C,  10  Fed.   Cas.  354. 
Buying  a  security  bona  fide  twelve 
months  after  receiving  notice  that  it 
had  been  stolen  does  not  invalidate 
the  purchaser's  title.  Raphael  v.  Bank 
of  England,  17  C.  B,  161  (1855).    The 
purchase,  by  a  national  bank,  of  gov- 
ernment   bonds    which  have    been 
stolen  may  be  made  in  bona  fide,  al- 
though it  had  not  paid  any  attention 
to  a  notice  sent  to  it  of  the  theft  of 
the  bonds.    Seybell  v.  National  Cur- 
rency Bank,  54  N.  Y.  288  (1873).  AVhere 
the  bonds  are  stolen  before  the  trus- 
tee's certificate  is  attached,  such  cer- 
tificate being  required  by  the  terms 
of  the  bond,  the  bonds  are  void  abso- 
lutely, and  there  can  be  no  bona  fide 
purchaser    of  them.     Maas  v.   Mis- 
souri, etc.  R'y,  83  N.  Y.  223  (1880).    If 
stolen  bonds  are  sold,  the  owner  may 
follow  the  proceeds  of  the  sale  into 
the  hands  of  one  who  takes  with  no- 


tice. Newton  v.  Porter,  69  N.  Y.  133 
(1877).  Where  negotiable  bonds  are 
stolen  from  tlie  owner,  aud  they  pass 
into  bona  fide  liands,  and  then  the 
thief  obtains  them  by  fraud  from 
such  bona  fide  hands  and  returns 
them  to  the  first  owner,  the  latter  is 
entitled  to  keep  them.  London,  etc. 
Co.  V.  London,  etc.  Bank,  61  L.  T. 
Rep.  37  (1889).  See  also  §  771,  notes, 
infra. 

2  Chesapeake,  etc.  Co.  v.  Blair,  45 
Md.  103  (1876).     A  person  losing  ne- 
gotiable bonds  may  compel  the  com- 
pany to  issue  new  ones  to  him  upon 
giving  ample  indemnity,  since  a  bona 
fide  purchaser  of  the  lost  bonds  may 
enforce  them,  and  he  may  be  a  bona 
fide  liolder  although  he  had  suspi- 
cions and  grounds  of  suspicion  as  to 
the  title,  and  was  guilty  of  gross 
negligence  in  not  investigating,  but 
yet  acted  in  good  faitli.  New  Orleans, 
etc.  R.  R.  u  Mississippi  College,  47 
Miss.  560  (1873).    See  also  Lawrence 
V.   Lawrence,  43    N.  H.   109   (1860). 
Equity  will  compel  payment  of  a  lost 
bond  where  full  indemnity  is  given. 
Force  v.  Elizabeth,  27  N.  J.  Eq.  408 
(1876).    So,  also,  of  coupons  where  the 
bonds  and  coupons  were  destroyed 
by  fire  on  a  steamboat.    Rogers  v. 
Chicago,  etc.  R'y,  6  Abb.  N.  Cas.  253 
(1878).     A  lost  bond  will  be  paid  if 
indemnity  is  given.     Miller  v.  Rut- 
land, etc.  R.  R,  40  Vt.  399  (1867).    The 
owner  of  a  lost  coupon  may  recover 
interest  from  the  date  when  he  made 
a  demand  and  tendered  proper  in- 
demnity.   Fitchett  V.  North   Penn- 
sylvania R  R,  5  Phila.  133  (1863). 


1733 


CH.  XLVI.] 


EOXDS   AND    COUPONS. 


[§  T67. 


the  hona  fide  purcliaser  of  the  bonds  is  protected.  The  doctrine 
of  lis  pendens  does  not  apply.^  A  person  selling  bonds  has  no 
purchase-money  lien  on  such  bonds  for  the  price  thereof .^  The 
holder  of  bonds  is  presiuned  to  be  the  lonafide  holder  of  them,' 
but  this  burden  is  easily  shifted.*  The  person  suing  on  bonds 
payable  to  bearer  need  not  show  how  he  came  by  them,^  or  to 
whom  they  were  first  issued.^  Coupons  may  be  detached  from 
the  bond  and  sold  like  promissory  notes.  They  are  negotiable, 
and  a  lona  fide  purchaser  of  them  is  protected.'    The  holder 


1  Farmers',  etc.  Co.  v.  Toledo,  etc. 
R.  R,  54  Fed.  Rep.  759  (1893).  The 
doctrine  of  lis  pendens  does  not  apply- 
to  negotiable  corporate  bonds.  Pitts- 
burgh, etc.  R'y  V.  Lynde,  44  N.  E. 
Rep.  596  (Ohio,  1896). 

2Barstow  v.  Pine  Bluff,  etc.  R'j,  21 
S.  W.  Rep.  652  (Ark.,  1893). 

3  Macon  County  v.  Shores,  97  U.  S. 
272  (1877);  Murray  r.  Lardner,  2  Wall 
110  (1864).  The  holder  of  a  municipal 
bond  is  presumed  to  be  a  bona  fide 
holder.  Kennicott  v.  Wayne  County, 
6Biss.  138  (1874);  S.  C,  14  Fed.  Cas. 
333.  The  possession  of  a  negotiable 
bond  is  prima  facie  evidence  of  title, 
and  ordinarily  is  presvunptive  evi- 
dence that  the  holder  is  bona  fide. 
"Western  N.  C.  R  R.  v.  Drew,  3  Woods, 
691  (1879) ;  S.  C,  29  Fed.  Cas.  747.  The 
burden  of  proof  that  the  plaintiff  is 
not  a  bona  fide  purchaser  of  bonds 
which  he  is  suing  on,  and  which  were 
stolen  and  the  theft  advertised,  is 
upon  the  company  which  is  being 
sued.  Gilbough  v.  Norfolk,  etc.  R.  R, 
1  Hughes,  410  (1877);  S.  C,  10  Fed. 
Cas.  354.  Bona  fide  ownership  is  pre- 
sumed. Lehman  v.  Tallassee,  etc.  Co., 
64  Ala.  567  (1879).  The  holder  of 
bonds  payable  to  "  holder "  is  pre- 
sumed to  be  the  owner  of  them.  Mar- 
tin V.  Somerville,  etc.  Co.,  16  Fed. 
Cas.  903  (1863).  The  holder  of  bonds 
payable  to  bearer  is  presumed  to  be 
the  owner  upon  foreclosvire  proceed- 
ings until  the  contrary  is  shown.  Chi- 
cago, etc.  Land  Co.  v.  Peck,  112  111. 

17 


408  (1885);  Can  v.  Le  Fevre,  27  Pa. 
St.  413  (1856). 

*  Smith  V.  Sac  County,  11  WalL  139 
(1870);  Stewart  v.  Lansing,  104  U.  S. 
505  (1881). 

5  A  holder  of  bonds  payable  to 
bearer  need  not  prove  how  he  came 
by  them.  He  is  presumed  to  be  the 
rightful  owner.  Chicago,  etc.  R  R. 
V.  Peck,  112  111.  408  (1885). 

6  Where  the  bonds  are  payable  to 
bearer,  "  no  rule  of  law  requires  it  to 
be  shown  by  averment  to  whom  such 
bonds,  or  any  of  them,  were  negoti- 
ated in  the  first  instanca"  Savan- 
nah, etc.  R  R  u  Lancaster,  62  Ala. 
555  (1878).  The  bondholder  need  not 
show  how  much  was  paid  for  the 
bonds  or  when  they  were  issued. 
Savannah,  etc.  R  R  u  Lancaster,  63 
Ala.  555  (1878). 

7  Fox  V.  Hartford,  etc.  R  R,  88 
AtL  Rep.  871  (Conn.,  1897);  Common- 
wealth V.  Chesapeake,  etc.  Co.,  32  Md. 
501,  547  (1870);  Spooner  v.  Holmes, 
102  Mass.  503  (1869),  where  the  cou- 
pons had  been  stolen;  Connecticut, 
etc.  Ins.  Co.  v.  Cleveland,  etc.  R.  R, 
41  Barb.  9  (1863),  where  a  guaranty 
of  the  coupon  was  enforced;  Haven 
V.  Grand  Junction,  etc.  Co.,  109  Mass. 
88  (1871),  the  coupons  being  payable 
to  bearer;  Miller  v.  Rutland,  etc.  R 
R,  40  Vt.  399  (1867).  To  same  effect, 
and  holding  that  detached  coupgns 
create  a  distinct  obligation,  National 
Exch.  Bank  v.  Hartford,  etc.  R  R,  8 
R  L  375  (1866).    See  also  Arents  v. 

33 


§  T6Y.] 


BONDS    AND    COUrONS. 


[cn.  XLVL 


need  not  prove  his  title.^  But  if  the  bonds  are  not  negotiable 
the  coupons  are  not,  even  though  the  latter  are  negotiable  in. 
form.''  If  the  coupon  does  not  run  to  any  person  or  order  or 
bearer,  it  is  not  negotiable.'     Coupons  resemble  promissory 


Commonwealth,  18  Gratt.  (Va.)  750 
(1868);  Clark  v.  Iowa  City,  20  Wall 
583  (1874);  Walnut  v.  Wade,  103  U.  S. 
683  (1880) ;  Thompson  v.  Lee  County, 
3  Wall.  327  (1865);  Aurora  City  v. 
West,  7  Wall  82,  105  (1868);  Morris 
Canal,  etc.  Co.  v.  Fisher,  9  N.  J.  Eq. 
699  (1855).  That  coupons  are  nego- 
tiable, see  also  CJiesapcake,  etc.  Canal 
Co.  I'.  Blair,  45  Md.  103  (1876),  where 
bonds  were  lost  and  representatives 
thereof  wei'e  issued  by  the  company 
to  the  owner.  Cicero  v.  Clifford,  53 
Ind.  191  (1870),  a  municipal  bond  cou- 
pon case;  Gilbough  v.  Norfolk,  etc.  R. 
R,  1  Hughes,  410  (1877);  S.  C,  10  Fed. 
Cas.  354,  holding  that  a  bona  fide  pur- 
chaser of  stolen  bonds  might  enforce 
coupons  not  yet  due,  but  not  the 
overdue  coupons.  See  also  Dillon, 
Mun.  Corp.,  for  many  cases  relative 
to  coupons  on  municipal  bonds.  The 
purchaser  from  a  bona  fide  purchaser 
is  protected,  even  though  the  former 
was  not  a  bona  fide  purchaser  him- 
self. Grand  Rapids,  etc.  R.  R.  v. 
Sanders,  54  How.  Pr.  214  (1877);  Mil- 
ler V.  Berlin,  13  Blatchf.  245  (1876); 
S.  C,  17  Fed.  Cas.  306;  Northampton 
Nat.  Bank  v.  Kidder,  106  N.  Y.  221 
(1887).  Coupons  are  negotiable  with- 
out indorsement,  and  title  passes  by 
delivery.  Johnson  v.  Stark  County, 
24  III  75  (1860).  Where  overdue  cou- 
pons from  bonds  stolen  before  matu- 
rity are  sued  for,  the  holder  must 
prove  that  he,  or  a  bona  fide  pur- 
chaser prior  to  him.  purchased  the 
coupons  before  maturity.  Hinckley 
V.  Merchants'  Nat.  Bank,  131  Mass. 
147  (1881).  Payment  of  interest  cou- 
pons on  bonds  cannot  be  refused  on 
the  ground  that  certain  forged  bonds 
are  in  circulation.  Wood  v.  Consoli- 
dated, etc.  Co.,  36  Fed.  Rep.  538  (1888). 


Tlio  numbers  on  coupons  do  not  de- 
stroy their  negotiability.  Evertson 
V.  Newport  Nat.  Bank,  06  N.  Y.  14 
(1876).  "  Coupons,  where  payable  to 
bearer,  are  promissory  notes  nego- 
tiable by  the  law  merchant,  and 
possess  all  the  attributes  of  promis- 
sory notes."  Cooper  v.  Thompson,  13 
Blatchf.  434  (1876;;  S.  C,  6  Fed.  Cas. 
491. 

•The  holder  of  coupons  suing 
thereon  need  not  prove  the  origin  of 
his  title.  He  sues  as  holder  and  not 
as  assignee.  McCoy  v.  Washington 
County,  3  Wall  Jr.  381  (1862).  A  pos- 
session of  uncanceled  coupons,  de- 
tached from  negotiable  bonds,  is 
prima  facie  evidence  of  title  with  all 
the  rights  of  a  purchaser.  Duncan  v. 
Mobile,  etc.  R.  R.,  3  Woods,  567  (1877); 
S.  C,  8  Fed.  Cas.  19. 

2  McClelland  v.  Norfolk,  etc.  R.  R, 
110  N.  Y.  469  (1888),  holding  that 
xmder  a  mortgage  power  the  majority 
of  the  bondholders  might  extend  the 
time  of  payment  of  the  coupons.  But 
see  Manning  v.  Norfolk,  etc.  R  R,  29 
Fed.  Rep.  838  (1887). 

3  In  Myers  v.  York,  etc.  R  R.,  43 
Me.  232  (1857),  and  Jackson  v.  York, 
etc.  R  R,  48  Me.  147  (1858),  the  com-t 
held  that  a  coupon  worded,  the  com- 
pany "  will  pay  thirty  dollars  on  this 
coupon,"  is  not  negotiable,  it  not 
being  to  bearer  or  order,  though 
taken  from  a  negotiable  bond.  But 
a  similar  coupon  attached  to  a  mu- 
nicipal bond  was  held  to  be  negoti- 
able in  Smith  v.  Clark  County,  54  Mo. 
58  (1873),  and  in  McCoy  v.  Washing- 
ton County,  3  Wall  Jr.  381  (1862),  a 
municipal- bond  case,  where  the  court 
said  that  the  coupon  took  its  negoti- 
ability from  the  bond.  In  Wright  v, 
Ohio,  etc.  R  R,  1  Disney  (Ohio),  465 


1734 


CH.  XLVI.] 


BONDS  AND  COUPONS. 


[§  T68. 


notes,  and  a  purchaser  of  the  coupon  after  it  becomes  due 
is  not  a  hona  fide  purchaser.^  A  purchaser  of  overdue  cou- 
pons is  not  bound  bj  a  general  understanding  between  his 
vendor  and  the  company  that  the  coupons  would  not  be  pre- 
sented for  payment  until  it  was  convenient  for  the  company 
to  pay.^ 

§  768.  The  negotiability  oftlie  bonds  extends  also  to  the  mort- 
gage.—  The  bonds  of  a  corporation  are  negotiable,  and  the  cor- 
poration is  unable  to  set  up  many  defenses  against  hona  fide 
holders  which  it  might  have  set  up  against  the  parties  to  whom 
the  bonds  were  originally  issued.  Eut  does  this  protection  and 
negotiability  extend  also  to  the  mortgage  as  well  as  the  bonds? 
Can  the  corporation  defend  against  the  mortgage  on  grounds 
which  it  cannot  set  up  against  bona  fide  holders  of  the  bonds  ? 
In  the  federal  courts  and  in  most  of  the  states  of  the  Union  the 
corporation  cannot.  The  mortgage  follows  and  partakes  of 
the  negotiability  of  the  bonds.' 


(1857),  the  court  held  that  coupons 
worded  as  "  warrants  for  thirty-five 
dollars  .  .  .  payable  in  New  York  on 
the  first  day  of,"  etc.,  were  nob  nego- 
tiable. Coupons  are  not  negotiable 
if  they  are  not  payable  to  bearer  nor 
to  any  one's  order,  Evertson  v.  New- 
port Nat.  Bank,  66  N.  Y.  14  (1876). 
See  also  Clarke  v.  Janesville,  1  Biss. 
98  (1856);  S.  C,  5  Fed.  Cas.  963,  hold- 
ing a  municipal-bond  coupon  not 
negotiable. 

1  Arents  v.  Commonwealth,  18 
Gratt.  (Va.)  750  (1868),  holding  also 
that  a  guaranty  of  the  coupon  passes 
to  any  holder.  Where  railroad-bond 
coupons  are  stolen  and  are  purchased 
after  they  become  due,  the  pxu-chaser 
is  not  protected.  Wylie  v.  Speyer,  62 
How.  Pr.  107  (1881).  A  contract  to 
sell  railroad  bonds  implies  that  the 
unpaid  coupons  are  included,  where 
the  intent  of  the  parties  was  to  prac- 
tically give  title  to  a  railroad  free 
from  all  debts.  Another  purchaser 
of  the  coupons  with  notice  is  not  pro- 
tected. Farmers'  L.  &  T.  Co.  v.  Ore- 
gon, etc.  R.  R.,  58  Fed.  Rep.  639  (1893). 
Where  a  person  sells  coupon  bonds 


on  a  contract,  by  which  he  is  entitled 
to  the  bonds  on  the  payment  of  a 
certain  sum,  the  coupons  which  ac- 
crue in  the  meantime  belong  to  the 
vendee.    Fox  v.  Hartford,  etc.  R  R, 

38  AtL  Rep.  871  (Conn.,  1897). 

2  Fox  V.  Hartford,  etc.  R  R,  38  AtL 
Rep.  871  (Conn.,  1897). 

3  A  negotiable  note  secured  by  a 
mortgage  enables  a  bona  fide  in- 
dorsee thereof  to  enforce  the  mort- 
gage free  from  defenses  that  exist 
against  the  payee.  Carpenter  v. 
Longan,  16  Wall  271  (1872).  See  also 
§  775,  infra.  Such  also  is  the  rule 
where  bonds  are  so  secured  and  have 
passed  into  bona  fide  hands.  Kenicott 
V.  Supervisors,  16  Wall.  452  (1872); 
Chicago  R'y,  etc.  Co.  v.  Merchants' 
Bank,  136  U.  S.  268,  283  (1890);  Swift 
V.  Smith,  102  U.  S.  442,  444  (1880); 
Collins  V.  Bradbury,  64  Me.  37  (1875); 
Towne  v.  Rice,  122  Mass,  67,  73 
(1877);  Heath  v.  Silverthorn,  etc.  Co., 

39  Wis.  146  (1875).  In  Spence  v.  Mo- 
bile, etc.  R'y,  79  Ala.  576,  587  (1885), 
the  court  said:  "Two  states  —  Ohio 
and  Illinois  —  depart  from  the  gen- 
eral ruling  which   extends  the  im- 


1735 


§  7G8.] 


BONDS    AND    COUrONS. 


[cn.  XLvr. 


This  rule  of  law  would  seem  to  be  one  of  the  first  requirements 
of  trade.  The  average  corporate  bond  would  be  a  very  danger- 
ous instrument  if  the  mortgage  were  liable  to  be  swept  away 
by  some  defense  which  the  bond  purchaser  knew  nothing  about. 
It  is  a  wise  rule  of  public  policy  which  causes  the  mortgage  to 
partake  of  the  negotiability  of  the  instrument  which  it  secures. 
!N'evertheless  in  Ohio  and  Illinois  a  contrary  rule   prevails.* 


munity  accorded  to   negotiable  in- 
struments to  the  mortgages  given 
to  secure  their  payment.    Baily  v. 
Smith,  14  Ohio  St.  396  (1803);  Klee- 
man  v.  Frisbie,  63  111.  482  (1872).    And 
in  2  Pom.  Eq.,  §  708,  n.  1,  the  reason- 
ing of  these   cases  is  commended. 
Our  ruling  in  Hawley  v.  Bibb  [09 
Ala.  52]  is  supported  by  the  great 
weight  of  authority."    See  also  Con- 
Terse  V.  Michigan  Dairy  Co.,  45  Fed. 
Rep.  18  (1891);  Swett  v.  Stark,  31  Fed. 
Rep.  858  (1887).     "The  same  immu- 
nity from  defenses  in  the  hands  of 
iona  fide  holders  applies  to  mortr 
gages    securing   such  bonds    as   to 
the  bonds  themselves."    Hackensack 
Water  Co.  v.  De  Kay,  30  N.  J.  Eq. 
548  (1883).    The  general  rule  is  that, 
where  a  negotiable  note  is  secured 
by  a  mortgage,  the  mortgage  may  be 
enforced  by  a  hona  fide  jxirchaser  of 
the  note.     But  in  some  states  the 
negotiability  of  the  note  does  not  ex- 
tend to  the  mortgage.    The  former 
rule  prevails  in  the  federal  courts. 
Myers  v.  Hazzard,  50  Fed.  Rep.  155 
(1881).    See  also  §  764,  supra.    The 
question  of  whether  the  mortgage 
partakes  of  the  negotiability  of  the 
negotiable   paper  which  it  secvires 
has  not  often  arisen,  because  in  most 
of  the  states  the  practice  is  to  give  a 
non-negotiable  bond  instead  of  a  note 
for  the  principal  debt.    The   early 
cases  holding  that  tlie  negotiability 
of  the  note  extends  to  the  mortgage 
are  Reeves  v.  Scully,  Walk.  (Mich.) 
248  (1843);  Dutton  v.  Ives,  5  Mich.  515 
(1858);  Fisher  v.  Otis,  3  Chand.  (Wis.) 
83  (1850);  Croft  v.  Bimster,  9  Wis.  503 


(1859).  The  mortgagee  of  a  corpora- 
tion is  not  chargeable  with  knowl- 
edge of  facts  appearing  on  its  records 
in  regard  to  the  title  to  the  property. 
Blair  v.  St.  Louis,  etc.  R  R.,  25  Fed. 
Rep.  084  (1885).  In  regard  to  th& 
question  whetlier  the  negotiability 
of  a  bond  carries  with  it  the  nego- 
tiability of  the  mortgage,  the  court 
said,  in  Belden  v.  Burke,  72  Hun,  51, 
74,  75:  "It  has  never  been  under- 
stood that  mortgages  of  the  char- 
acter of  the  one  before  xis  are  nego- 
tiable instruments;  nor  Jias  it  ever 
been  the  tlieory  of  the  courts  that  a 
purchaser  of  a  bond  acquires  an  in- 
terest in  the  mortgage  which  ho  can 
assign  when  he  sells  liis  bond,  or 
that  present  holders  of  mortgage 
bonds  are  entitled  to  the  benefit  of 
the  mortgaged  seciirity  because  as- 
signed with  the  secured  debt.  But 
rather  that  a  bondholder's  claim  is 
foimded  on  the  direct  promise  of  the 
railway  company  to  himself,  by  vir- 
tue of  the  trust  instrument  in  which 
he  is  described  as  the  beneficiary. 
Clearly  there  is  no  legal  obstacle  to 
the  making  of  a  contract  in  which 
the  obligations,  with  respect  to  the 
seciirity  for  the  bonds  put  out,  shall 
be  co-extensive  with  the  obligation 
of  the  bonds  themselves  for  the  pur- 
pose of  enhancing  their  public  credit 
and  currency."  Reversed  on  other 
grounds  in  147  N.  Y.  542. 

1  The  supreme  court  of  Ohio,  in  the 
early  case  of  Baily  v.  Smith,  14  Ohio 
St.  396  (1863),  established  the  rule  for 
that  state  that  the  mortgage  did  not 
partake  of  the  negotiability  of  the 


1786 


OH.  XLVI.] 


BOKDS   AND    COUPONS. 


[§  V6&. 


Where  the  bondholders  purchased  their  bonds  with  knowledge 
of  the  fact  that  a  manufacturing  company  has  erected  machinery 
on  the  property  covered  by  the  mortgage,  under  a  contract  by 
which  said  company  reserved  title  in  the  machinery,  and  the 
right  to  take  it  away  in  default  of  payment,  the  lien  of  the 
manufacturing  company  is  prior  in  right  to  that  of  the  bond- 
holders.^ If  negotiable  bonds  are  given  as  collateral  security 
to  a  note  that  is  not  negotiable,  the  bonds  lose  their  negotia- 
bility as  regards  that  note.^ 

§  769.  Miscellaneous  features  ofbomls  —  Issue  in  payment 
of  the  2)roperty  of  another  corporation — Consolidations — Bond- 
holders' suits  —  Bonds  exchangeable  into  stocTc. —  "Where  the 
bonds  are  secured  by  a  mortgage  on  property  which  is  taken 
over  from  an  insolvent  party,  difficult  questions  arise  as  to  the 
rights  of  creditors  of  that  insolvent  party  as  against  the  bond- 
holders and  stockholders.' 

A  railroad  company  is  liable  on  its  bonds  although  by  con- 
solidation with  another  company  all  its  property  has  passed 


note  which  it  secured.  A  bona  fide 
purchaser  of  a  note  who  takes  with 
the  note  an  assignment  of  chattels 
mortgaged  to  secure  the  note  takes 
the  latter  subject  to  the  equities. 
Commercial  Nat.  Bank  v.  Burch,  141 
IlL  519  (1892).  Railroad  bonds  are 
negotiable,  and  the  mortgage  secur- 
ing them  may  be  enforced  in  behalf 
of  bona  fide  purchasers,  even  though 
the  bonds  were  issued  below  par,  in 
violation  of  the  statute.  Peoria,  etc. 
R  R.  u  Thompson,  103  IlL  187  (1882), 
overruling  Chicago,  etc.  R'y  v.  Loew- 
enthal,  93  lU.  433  (1879).  Cf.  Hodson  v. 
Eugene  Glass  Co.,  156  111.  397  (1895). 
If  a  statute  prohibits  the  issue  of 
bonds  below  par,  a  bona  fide  holder 
may  enforce  them,  but  the  mortgage 
is  void  and  he  becomes  an  unsecured 
creditor.  Union  Trust  Co.  v.  New 
York,  etc.  R.  R.,  1  R'y  &  Corp.  L.  J. 
50  (1887,  Cleveland,  Oliio,  Court).  In 
general,  see  also  Kleeman  v.  Frisbie, 
63 IIL  482  (1872).  In  Pomeroy, Eq., §  708, 
note  1,  the  reasoning  of  these  cases  is 


commended.  "Where  by  the  charter 
all  rights  are  to  be  forfeited  unless  the 
road  is  completed  within  a  certain 
time,  and  it  is  not  so  completed,  and 
the  state  forfeits  all  its  rights  and 
turns  them  over  to  another  company, 
a  mortgage  of  the  old  company  falls 
also.  Where  no  part  of  the  money 
from  the  bonds  was  expended  on  tlie 
road,  holders  of  bonds  with  notice  get 
nothing.  Silliman  v.  Fredericksburg, 
etc.  R.  R.,  27  Gratt.  (Va.)  119  (1876). 

1  Central  Trust  Co.  v.  Arctic,  etc 
Mfg.  Co.,  77  Md.  202  (1893). 

2  Thomson-Houston  Elec.  Co.  v. 
Capitol  Elec.  Co.,  56  Fed.  Rep.  849 
(1893). 

'As  to  this,  see  eh.  XL,  supra. 
Bondholders  who  took  with  notice' 
that  the  property  was  received  by  the 
coi'poration  from  another  corporation 
or  firm  in  payment  for  stock,  and  that 
the  latter  coi-poration  or  firm  was  iu 
debt,  cannot  hold  as  against  such 
creditors.  Blair  v.  St.  Louis,  etc.  R'y, 
22  Fed.  Rep.  36  (1884). 


1737 


§  T69.] 


BONDS    AND    COUPONS. 


[cn.  XLVl. 


out  of  its  possession.^  The  consolidated  company  may  be  made 
liable  on  the  bonds.- 

A  judgment  creditor  cannot  attack  consolidated  bonds  on  the 
ground  that  the  old  bonds  which  have  been  taken  up  were  in- 
formally and  illegally  issued.' 

A  contract  to  deliver  the  bonds  of  a  company  is  not  fulfilled 
by  tendering  the  bonds  of  a  company  into  which  the  former 
company  has  been  merged  by  consolidation.* 

Bonds  are  sometimes  by  their  terms  made  convertible  into 
stock.     This  subject  is  considered  elsewhere.* 


lA  bondholder  in  a  corporation 
that  is  afterwards  consolidated  with 
another  cannot  be  compelled  to  look 
to  the  consolidated  company  only. 
Market  Street  R"y  v.  Hellman,  109 
Cal.  571  (189.",) ;  Gale  v.  Troy,  etc.  R.  R., 
51  Hun,  470  (1889). 

2  See  §  897,  infra.    The  holder  of  a 
bond  unsecured  by  mortgage  cannot 
prevent  a  consolidation  where  such 
consolidation    is   authorized  by  an 
existing  statuta    The  consolidated 
company  is  liable  for  the  debts  of 
the  constituent  companies,  including 
this  bonded  debt;  but  one  of  the  con- 
stituent companies  may  place  a  mort- 
gage on  the  property  to  secure  other 
debts  and  still  leave  this  bonded  debt 
unsecured.    Where    a    consolidated 
company  agrees  to  "protect"  unse- 
cured   bonds    of  the    consolidating 
companies,  an  equitable  lien  is  cre- 
ated on  the  consolidated  company 
property.    Tysen  v.  Wabash  R'y,  11 
Biss.  510  (1883);  S.  C,  15  Fed.  Rep. 
763.    As  to  tliis  litigation,  see  Comp- 
ton  V.  Jesup,  107  U.  S.  1  (1897).    Gen- 
eral creditors  of  a  road  that  is  con- 
solidated   with    another    have    no 
equitable  lien  on  the  bonds  issued 
by  the  consolidated  company.    Her- 
vey  V.  Illinois  Mid.  R'y,  28  Fed.  Rep. 
169  (1884).    In  suing  a  foreign  con- 
solidated company  on  bonds  issued 
by  one  of  the  constituent  companies, 
the  statutes  rendering  the  former 
liable  must  be  pleaded.    Rotlischild 


V.  Rio  Grande,  etc.  R'y,  59  Hun,  454 
(1891).    As  to  the  liability  of  the  con- 
solidated company  under  the  New 
York  statute,  see  Janes  v.  Fitchburg 
R'y,  50  Hun,  310  (1888);  PoUiemus  v. 
Fitchburg  R,  R.,  50  Hun,  397  (1888). 
s  Coe  V.  East,  etc.  R.  R,  53  Fed.  Rep. 
531  (1893).    It  is  no  defense  to  a  mort- 
gage that  a  consolidation  was  irregu- 
lar, or  that  the  debt  exceeded  the 
capital  stock,  contrary  to  statute,  or 
tliat  an  increase  of  stock  was  irregu- 
lar, or  that  there  had  been  an  over- 
issue of  bonds,  all  parties  having  con- 
curred therein  and  interest  having 
been  paid  for  three  years.     Farmers' 
L.  &  T.  Co.  V.  Toledo,  etc.  R'y,  67  Fed. 
Rep.  49  (1895).    A  street-railway  com- 
pany and  a  land  company  cannot  le- 
gally join  in  the  execution  and  issue 
of  bonds  and  mortgages  on  the  prop- 
erty of  both,  even  though  the  proceeds 
are  used  to  pay  the  debts  of  the  latter 
and  to  construct  the  railway  of  the  for- 
mer.   But  each  is  liable  on  the  bonds 
to  the  extent  of  the  proportion  of  the 
money  received  by  it.  ISTorthside  R'y 
V.  Worthing-ton,  88  Tex.  5G3  (1895).    A 
general   creditor  of  a  consolidated 
corporation  cannot  attack  the  valid- 
ity of  the  bonds  of  the  corporation  on 
the  ground  that  the  consolidation  was 
not  legal    Louisville  T.  Co.  v.  Louis- 
ville, etc.  R'y,  84  Fed.  Rep.  539  (1898). 

4  New  Jersey,  etc.  R'y  v.  Strait,  35 
N.  J.  L.  833  (1873). 

5  See  §  283,  supra. 


1738 


€H.  XLYI.] 


BONDS  AND  COUPONS. 


[§  170. 


The  riglit  of  bondholders  to  complain  of  ultra  vires  or  fraud- 
ulent acts  of  the  corporation  and  directors,  and  in  general  to 
bring  suits  to  protect  the  corporate  property,  is  considered  else- 
where.^ 

§  YTO.  Suits  at  law  on  londs  —  Demand  ofimyment  —  Form 
of  action  —  Statute  of  limitations. —  A  suit  at  law  may  be 
brought  to  obtain  judgment  on  a  bond  of  ♦a  corporation,  even 
though  the  bond,  with  many  other  bonds,  is  secured  by  a  mort- 
gage.2  ISTevertheless  the  bondholder,  after  obtaining  judgment, 
cannot  levy  execution  on  the  property  covered  by  the  mort- 
gage. The  law  does  not  allow  this  as  against  the  mortgagor, 
nor  as  against  the  other  bondholders.'  No  demand  of  payment 
need  be  made.*  In  New  Jersey,  by  statute,  a  mortgage  bond  or 
coupon  cannot  be  sued  upon  until  after  foreclosure  is  had.* 

The  formalities  connected  with  the  issue  of  bonds  depend 
upon  the  orders  of  the  board  of  directors.® 

The  corporation  cannot  set  up  in  defense  to  its  bonds  that  it 
was  irregularly  incorporated.' 


1  See  §  735,  supra,  and  §  830,  infra. 

2  The  holders  of  bonds  which  are 
due  may  sue  upon  them,  notwith- 
standing they  are  secured  by  a  mort- 
gage. "  The  fact  that  a  mortgage 
had  been  given  as  security  for  the 
debt,  with  trusts  and  covenants, 
which  a  court  of  equity  would  con- 
trol and  enforce  in  a  proper  case,  af- 
forded not  a  shadow  of  defense.  The 
bond  was  the  principal  debt,  the 
mortgage  the  incidental  security. 
Remedies  peculiar  to  each  exist,  both 
in  law  and  equity,  but  they  do  not 
clash  and  destroy  each  other  —  they 
co-exist."  Philadelphia,  etc.  R.  R.  i;. 
Johnson,  54  Pa,  St.  137  (1867). 

3Seeg773,  in/ra. 

*Shaw  V.  Bill,  95  U.  S.  10  (1877), 
where  the  corporation  was  insolvent. 
Demand  of  payment  need  not  be 
made,  alleged,  or  proved  in  an  ac- 
tion on  the  bond,  even  though  the 
bond  is  payable  at  a  certain  place, 
but  the  defendant  may  set  up  that 
the  money  was  there  to  pay  the  bond. 
Langstou  v.  South  Carolina  R.  R.,  3 
S.  C.  248  (1870).  If  the  bonds  are  pay- 

1739 


able  at  the  office  of  the  company  in 
a  particular  place  and  it  has  no  office 
there,  the  demand  may  be  made  else- 
where. Alexander  v.  Atlantic,  etc. 
R.  R.,  67  N.  C.  198  (1872).  See  also 
S  772,  infra,  concerning  demand  of 
payment  of  coupons.  Where  the 
company  has  the  right  to  pay  off  the 
bonds,  it  may  do  so  and  stop  interest 
by  depositing  the  money  at  the  place 
stated  in  the  bond  as  the  place  of 
payment.  But  the  offer  to  pay  mitst 
not  be  conditioned  on  all  the  past- 
due  coupons  being  also  turned  in.  So 
held  in  regard  to  municipal  bonds. 
Bailey  v.  Buchanan  County,  54  N.  Y. 
Super.  Ct  237  (1887). 

8  Holmes  v.  Seashore  Electric  R'y, 
57  N.  J.  L.  16  (1894). 

6  As  to  the  right  of  a  particular 
officer  to  sell  them,  see  Chew  v.  Hen- 
rietta, etc.  Co.,  2  Fed.  Rep.  5  (1880). 
If  valid  on  their  face,  compliance 
with  the  charter  is  presumed.  Nich- 
ols V.  Mase,  94  N.  Y.  160  (1883).  See 
also  ch.  XLIII,  supra. 

7  §  637,  supra. 


K  771.]  BONDS    AND    COUPONS.  [CU.  XLVL 

The  bond  may  be  sued  upon  as  thougb  it  were  a  promissory 
note.^ 

The  statute  of  limitations  begins  to  run  the  same  as  on  other 
ao-reements  to  pay  money,  but  it  is  a  matter  of  doubt  whether 
the  statute  relative  to  sealed  instruments  or  the  statute  appli- 
cable to  promissory  notes  applies  to  the  bonds  of  a  corpora- 
tion.2  AVhere  a  party  sues  to  foreclose  a  mortgage  and  fails 
because  the  mortgage  was  ultra  vires  of  the  corporation,  ho 
cannot  in  that  action  recover  on  the  bonds.' 

§  Y71.  Couimns  and  interest  on  londs  —  NegotiaMlity  of  cou- 
pons —  Participation  in  foreclosure  —  Interest  on  overdue 
londs  and  coupons  —  Purchase  of  coupons  ivlien  presented  for 
payment. —  Nearly  all  bonds  of  corporations  have  attached  to 
them  coupons,  representing  the  semi-annual  or  annual  interest 
on  the  bonds  themselves.  These  coupons  are  usually  in  the 
form  of  promissory  notes  payable  to  the  bearer.  They  are 
generally  signed  by  the  engraved  signature  of  the  treasurer  of 
the  company.*  They  may  be  detached  from  the  bond  and 
sold  like  promissory  notes.  They  are  negotiable,  and  a  bona 
fide  purchaser  of  them  is  protected.* 

The  holder  need  not  prove  his  title.^  But,  if  the  bonds  are 
not  negotiable,  the  coupons  are  not,  even  though  the  latter  are 
negotiable  in  form."'  If  the  coupon  does  not  run  to  any  person 
or  order  or  bearer,  it  is  not  negotiable.'    A  purchaser  of  the 

1 A  corporation  bond  may  be  sued  Fevre,  27  Pa,  St.  413  (185G).    See  also 

and  declared  upon  as  though  it  were  §  761,  supra. 

a  bill  of  exchange  or  promissory  nota  ^See  ^  772,  infra,  as  to  coupons; 

Ide  V.  Passumpsic,  etc,  R.  R,  32  Vt.  and  §  846,  infra. 

297  (1859).    A  railway  bond  payable  3  Dudley  v.  Congregation,  etc.  St 

to  bearer  may  be  sued  upon  in  as-  Frances,  138  N.  Y.  451  (1893). 

sumpsit  and  set  forth  as  a  "bond."  *  A  lithographed  signature  on  the 

It  may  be  joined  with  the  common  coupons  is  good.    McKee  v.  Vernon 

counts  in.  indebitatus  assumpsit.  Ide  County,  3  Dill.  210  (1874);  S.   C,  16 

V.  Passiunpsic,  etc.  R  R.,  32  Vt.  297  Fed.  Cas.  188.  Coupons  of  bonds  may 

(1859).    The  holder  of  bonds  payable  be  signed  by  a  printed  fac-simile  of  a 

to  bearer  is  an  original  payee  and  not  corporate  officer's  autograph  adopted 

an  assignee  merely.   Rutten  v.  Union  by  the  corporation  for  that  purpose, 

Pac.  R'y>  17  Fed.  Rep.  480  (1883 ).    For  though  not  expressly  authorized  by 

the  form  of  complaint  on  a  railroad  statute.   Pennington  v.  Baehr,  48  CaL 

bond,  see  Miller  v.  New  York,  etc.  505  (1874). 

R  R,  8  Abb.  Pr.  431  (1859).     The  5  See  §  767,  ^tpm. 

holder  of  the  bond  may  of  course  sue  ^  gee  §  707,  supra, 

upon  it  in  his  own  nama    Carr  v.  Le  '•  See  §  768,  supra, 

8  See  g  768,  supra. 
1740 


CH.  XLVI.] 


BONDS  AXD  COUPONS. 


[§  m. 


coupon  after  it  becomes  due  is  not  a  lonafide  purchaser.^  Cou- 
pons stand  upon  the  same  footing  as  tlie  bond  in  regard  to  the 
terms  of  the  bond.^  A  provision  in  the  bond  that  it  and  the 
coupons  shall  be  redeemable  within  a  certain  time  follows 
the  coupons,  although  the  latter  are  detached,  the  coupons 
being  still  held  by  the  bondholder.^ 

The  coupon,  although  detached  from  the  bond,  is  secured  by 
the  mortgage.*  The  coupons  participate  ratably  in  any  mort- 
gage which  secures  the  bonds,  but  they  are  not  entitled  to  any 
priority  in  payment  over  the  bonds  when  a  foreclosure  takes 
place  on  all  together.* 


^  See  note  1,  p.  1735. 

2  Guilford  v.  ^Minneapolis,  etc  R'y, 
48  Minn.  560  (1891). 

» And  a  tender  stops  the  interest 
on  the  coupons.  Bailey  v.  Buchanan 
County,  115  N.  Y.  297  (1889).  De- 
tached coupons  in  the  hands  of  the 
holders  of  the  bonds  are  mere  inci- 
dents of  the  latter,  and  may  be  re- 
deemed if  the  bonds  may  ba  Bailey 
V.  Buchanan  County,  115  N.  Y.  297 
(1889). 

*  Miller  v.  Rutland,  etc.  R.  R.,  40 
Vi  399  (1867);  Sewall  v.  Brainerd,  33 
Vt  364  (1865);  Stevens  v.  New  York, 
etc.  R.  R.,  13  Blatchf.  412  (1876);  S.  C, 
23  Fed.  Cas.  22,  giving  a  priority  in 
payment  to  the  coupons.  Although 
the  coupons  are  detached  from  the 
bond,  yet  they  are  protected  by  the 
mortgage  and  secured  by  it.  Union 
Trust  Co.  V.  Monticello,  etc  R.  R,  63 
N.  Y.  311  (1875). 

sjililler  V.  Rutland,  etc  Pu  R,  40 
Vt  399  (1867);  Re  Sewall,  38  Vt.  364 
(1865).  The  coupons  are  not  entitled 
to  any  priority  of  payment  over  the 
bonds  on  a  distribution  of  the  funds 
after  a  foreclosure.  Duncan  v.  Mo- 
bile, etc  R  R,  3  Woods,  567  (1877); 
S.  C,  8  Fed-  Cas  19.  Cf.  Stevens  v. 
New  York,  etc.  R  R,  13  Blatchf.  412 
(1876);  S.  C,  23  Fed.  Cas.  22.  The  ac- 
ceptance of  funded  interest  bonds 
for  overdue  coupons  does  not  waive 
tlie  mortgage  secui-ity.   It  is  a  change 

1' 


and  extension  of  the  debt,  but  not  of 
the  security.  Gibert  v.  Washington, 
etc  R  R,  33  Gratt.  (Va.)  586  (1880). 
See  §  765,  supra.  The  court  may, 
with  the  consent  of  the  interested 
parties,  authorize  the  receiver  to  issue 
certificates  extending  the  unpaid  cou- 
pons without  invalidating  the  lien  of 
the  coupons.  Skiddy  v.  Atlantic,  etc. 
R  R,  3  Hughes,  320,  341  (1879);  S.  C, 
22  Fed.  Cas.  274  No  preference  is 
given  to  the  coupons.  Dunham  v. 
Cincinnati,  etc  R'y,  1  Wall.  254  (1863). 
Asto  distribution,  see  also  §  881,  tnfra. 
Where  a  corporation  issues  debent- 
ures secured  by  a  deposit  of  mort- 
gages with  coupons,  and  the  coupons 
are  to  be  and  are  actually  delivered 
to  the  corporation  as  they  become 
due,  and  the  corporation  fails,  and 
the  depository  forecloses  the  mort- 
gage, not  knowing  that  the  coupons 
on  the  mortgage  had  not  been  paid, 
the  holder  of  such  coupons  cannot 
claim  an  interest  in  the  property 
which  has  been  bought  in  by  the  de- 
pository. State  Finance  Co.  v.  Com- 
monwealth, etc.  Co.,  72  N.  W.  Rep. 
68  (Minn.,  1897).  Where  past-due 
coupons  are,  by  the  terms  of  the 
mortgage,  entitled  to  payment  be- 
fore the  bonds  themselves,  the  hold- 
ers of  such  coupons  may  intervene 
in  the  foreclosure  suit,  and,  if  they 
do  so  in  time,  may  compel  the  pur- 
chaser at  the  sale  to  pay  them  in 
'41 


§  m.-] 


BONDS    AND    COUPONS. 


[cn.  XLVI. 


"When  coupons  are  presented  for  payment  and  are  cashed, 
they  are  held  to  be  canceled  so  far  as  the  bonds  and  other  cou- 
pons are  concerned.^  Even  though  a  third  person  was  buying 
them  instead  of  the  company  paying  them,  the  bondholders 
may  insist  on  their  mortgage  lien  free  from  these  purchased 
coupons,  unless  the  party  presenting  the  coupons  knew  that  he 
was  selling  them.  The  reason  is  that  it  takes  two  parties  to 
make  a  sale,  and  moreover  the  coupon  holders  might  have  pre- 
ferred to  foreclose  rather  than  to  sell.^ 


cash,  where  such  purchaser  made 
payment  in  bonds.  Holland  Trust  Co. 
V.  Thomson-Houston  Elec.  Co.,  9  N.  Y. 
App.  Div.  473  (1896).  See  also  Low 
V.  Blackford,  87  Fed.  Rep.  393  (1898). 

^  United,  etc.  Co,  v.  Farmers'  L.  & 
T.  Co.,  53  Pac.  Rep.  511  (Colo.,  1898). 

2  Quoted  and  approved  in  Farmers' 
L.  &  T.  Co.  V.  Iowa  Water  Co.,  73 
Fed.  Rep.  881  (1897).    In  Cameron  v. 
Tome,  64  Md.  507  (1885),  the  court 
stated  the  law  as  follows:  "That  as 
against  bondholders  who  presented 
their  coupons  for  payment  and  not 
for  sale,  and  who  had  the  right  to 
assume  that  they  were  paid  and  ex- 
tinguished, a  person  who  advances 
the  money  to  take  them  up,  imder  an 
undisclosed  agreement  with  the  com- 
pany that  the  coupons  should  be  de- 
livered to  him  imcanceled  as  security 
for  his  advances,  is  not  entitled  to  an 
equal  priority  in  the  lien,  or  the  pro- 
ceeds of  the  mortgage  by  which  the 
coupons  are  secured."    Although  the 
president  and  manager  of  the  corpo- 
ration claims  that  when  he  paid  cou- 
pons he  did  so  from  his  personal  funds 
and  for  the  purpose  of  holding  the 
coupons  as  unpaid  and  as  a  lien,  yet 
where  the  parties  presenting  the  cou- 
pons supposed  that  they  were  paid, 
and  the  directors  knew  nothing  to 
the  contrary,  the  coupons  cannot  be 
enforced  by  the  president.    Lloyd  v. 
Wagner,  93  Ky.  644  (1893).     In  Com- 
monwealth V.  Chesapeake,  etc.  Co.,  32 
Md.  501  (1870),  the  court  held  that 
persons    "taking  up  and  holding" 


1743 


coupons  as  they  came   due    under 
agreement  with  the  directors,  wliose 
authority  was  only  to  obtain  a  loan 
and  pay  the  coupons,  cannot  claim 
that  the  coupons  are  still  unj^aid.  la 
the  case  of  Duncan  v.  Mobile,  etc.  R.  R, 
3  Woods,  567  (1877);  S.  C,  8  Fed.  Cas. 
19,  the  court  allowed  the  purchaser 
of  coupons  to  participate  in  the  assets, 
although  purchased  when  they  came 
due  and  were  presented  for  payment, 
where  the  owners  presenting  them 
knew  that  they  were  purchased  in- 
stead of  being  paid,  and  did  not  ob- 
ject, the  court  saying  that  the  rule 
was  that  "  there  was  no  purchase  mi- 
less  there  was  an  intent  on  the  part 
of  the  original  holder  to  sell;"  but 
in  this  case  there  was  such  intent. 
Where  coupons  are  presented  at  the 
place  of  payment,  and  money  is  paid 
for  them,  such  coupons  cannot  par- 
ticipate  in   the  security  as  against 
bondholders  who  supposed  the  cou- 
pons were  so  paid  and  canceled.  This 
is  the  rule  even  though,  instead  of 
being  paid,  the  coupons  were  pur- 
chased by  an  outside  party  when  they 
were  received  at  the  place  of  pay- 
ment. Union  Trust  Co.  v.  Slonticello, 
etc.  R'y,63N.  Y.  311  (1875);  Martin 
V.  Citizens'  Trust  Co.,  94  Tenn,  176 
(1894).    Coupons  cashed  by  the  mort- 
gagor are  paid  as  against  the  bond- 
holders, although  actually  purchased 
by  an  outside  party  instead  of  being 
paid.  Bockes  v.  Hathorn,  20  Hun,  503 
(1880).     A  purchase  of  coupons  by  a 
syndicate  is  ngt  payment  and  can- 


OH.  XLVI.] 


BONDS  AND  COUPONS. 


[§  m. 


A  person  who  sells  bonds  with  a  representation  that  past-due 
coupons  have  been  paid  may  be  compelled  to  deliver  up  such 


cellation  of  them  by  the  company. 
Claflin  V.  South  Carolina  R.  R,  8  Fed. 
Rep.  118  (1880).  A  person  who  ad- 
vances money  to  the  corporation  to 
pay  coupons  cannot  claim  that  the 
coupons  are  a  lien  under  the  mort- 
gage unless  the  bondholders  con- 
sented. Fidelity,  etc.  Co.  v.  West 
Pennsylvania  R.  R,  138  Pa,  St.  494 
(1891).  Where  bondholders  are  en- 
titled to  participate  in  a  reorganiza- 
tion on  a  certain  basis,  a  person 
purchasing  coupons  under  an  agree- 
ment with  the  company  when  they 
become  due  may  be  shut  out  of  the 
reorganization.  Child  v.  New  York, 
etc.  R  R,  129  Mass.  170  (1880).  In 
Hand  v.  Savannah,  etc.  R.  R.,  17  S.  C. 
219  (1881),  the  court  held  that  uncan- 
celed coupons  having  been  taken  up' 
by  parties  who  advanced  the  money 
to  an  embarrassed  corporation  for 
that  purpose — although  marked  paid 
in  the  company's  books, —  these  par- 
ties have  an  equity  to  claim  for  their 
coupons  the  benefit  of  the  lien  wliich 
originally  secured  them.  The  court 
also  said  that  the  recognition  of  this 
equity  may  be  required  at  the  hands 
of  persons  seeking  the  equitable 
powers  of  the  court  to  enable  them 
to  contest  the  liability  of  the  com- 
pany to  pay  these  coupons.  When 
the  parties  practically  know  that  the 
company  is  not  paying  out  its  money 
for  the  coupons,  the  sale  is  sustained 
and  the  coupons  are  enforceable. 
Ketcham  v.  Duncan,  96  U.  S.  Go9 
(1877).  But  where  the  parties  pre- 
senting them  know  nothing  about 
this,  they  may  exclude  these  from 
participating  in  the  assets  until  they 
are  first  paid.  South  Covington,  etc. 
R'y  V.  Gest,  34  Fed.  Rep.  628  (1888). 
Railroad  coupons  which  are  paid  and 
so  understood  cannot  afterwards  be 
enforced  as  having  been  merely  as- 


signed. Hollister  u  Stewart,  111  N.  Y. 
644  (1889).  It  is  a  question  of  fact 
whether  a  taking  up  of  overdue  cou- 
pons was  intended  as  a  cancellation 
of  them  or  only  a  transfer  of  interest. 
Wood  V.  Guarantee,  etc.  Co.,  128  U.  S. 
416  (1888).  Where  a  person  pays  cor- 
porate bond  coupons  as  tliey  become 
due,  and  takes  a  note  of  the  corpora- 
tion in  payment,  the  coupons  no 
longer  exist  as  a  corporate  liability. 
The  person  cannot  claim  that  he  is 
secured  by  the  mortgage  which  se- 
cured the  coupons.  South  Covington, 
etc.  R'y  V.  Gest,  34  Fed.  Rep.  628 
(1888).  But  where,  in  order  to  main- 
tain the  credit  of  a  company,  a  di- 
rector, upon  presentation  of  its 
coupons  for  payment,  pays  out  his 
own  money  and  takes  the  coupons,  he 
may  enforce  them,  there  being  suffi- 
cient assets  to  pay  all  other  creditors 
first.  Haven  v.  Grand  Junction,  etc. 
Co.,  109  Mass.  88  (1871).  Where  a  par- 
ent company,  owning  the  stock  of 
branch  companies,  passes  into  a  re- 
ceiver's hands,  coupons  paid  by  the  re- 
ceiver on  bonds  issued  by  the  branch 
road  rank  next  after  the  bonds  and 
other  coupons  are  paid.  Phinizy  v. 
Augusta,  etc.  R.  R.,  62  Fed.  Rep.  771 
(1894).  Where  on  the  sale  of  bonds 
sufficient  is  deducted  from  the  price 
to  pay  the  first  coupons,  and  is  left 
with  the  vendee  for  that  purpose, 
such  coupons  are  considered  paid. 
Farmers'  L.  &  T.  Co.  v.  Oregon,  etc. 
R  R.,  67  Fed.  Rep.  404  (1895).  As  to 
the  purchase  of  coupons,  compare 
Atlantic  Trust  Co.  v.  Kinderhook,  etc. 
R'y,  17  N.  Y.  App.  Div.  212  (1897). 
Where  the  coupons  are  cashed  by  a 
bank  and  punched  as  being  paid,  the 
bank  cannot  afterwards  claim  that 
they  are  still  secured  by  mortgage. 
United  Waterworks  Co.  v.  Farmers' 
L.  &  T.  Co.,  82  Fed.  Rep.  144  (1897). 


1743 


771.] 


BONDS  AND  COUrONS. 


[CH.  XLVI. 


coupons.^  The  pledgee  of  bonds  may  collect  the  coupons 
thereon  as  they  become  due.^  Money  deposited  to  pay  coupons 
cannot  be  attached  as  belonging  to  the  company.' 

It  is  well  settled  that  bonds  bear  interest  after  they  become 
due,  unless  the  corporation  has  the  money  ready  for  payment 
at  the  time  and  place  of  payment  and  continues  to  keep  the 
money  there  for  that  purpose.*   So  also  the  coupons  bear  inter- 


lAnd.  his  wife  may  also  be  com- 
pelled so  to  do.  Chicaj^o,  etc.  R'y  v. 
Turner,  79  Mick  133  (1889). 

-  The  pledgees  of  bonds  liave  a  right 
to  collect  the  coupons,  although  the 
debt  which  is  secured  by  the  bonds 
is  not  yet  due.  Such  a  pledgee  may 
also  start  foreclosure  proceedings  the 
same  as  the  full  owner.  "He  only 
differed  from  an  absolute  owner  in 
this:  that  he  was  bound  to  account 
for  any  surplus  received  from  the 
bonds  and  coupons,  over  and.  above 
what  was  necessary  to  the  payment 
of  his  debt."  Warner  v.  Rising  Fawn 
Iron  Co.,  3  Woods,  514  (1878);  S.  C,  29 
Fed.  Cas.  261. 

3  Rogers  Locomotive,  etc.  Works  v. 
Kelley,  88  N.  Y.  234  (1882),  aff'g  19 
Hun,  399. 

4  Interest  at  the  legal  rate  as  fixed 
by  statute  runs  on  bonds  after  their 
maturity,  and  commences  to  run  on 
bonds  and  coupons  from  the  time 
they  fall  due,  even  though  no  de- 
mand of  payment  is  made;  but  of 
course  the  company  may  show  that 
the  money  was  there  to  pay  with. 
Langston  v.  South  Carolina  R.  R.,  2 
S.  C.  248  (1870).  When  the  principal 
becomes  due  it  continues  to  bear  in- 
terest, unless  the  company  is  ready 
to  pay.  Price  v.  Great  Western,  etc. 
R'y,  4  R'y  &  Can.  Cas.  707  (1847). 
W^here  the  company  does  not  deposit 
the  money  for  the  payment  of  the 
bonds  at  the  time  and  place  of  pay- 
ment, it  is  liable  for  interest  up  to 
the  time  when  payment  is  actually 
made.  Publication  of  a  notice  in  a 
newspaper  is  not  sufficient  to  stop 

17 


interest  imless  the  bondholders  actu- 
ally receive  such  notice.  A  circular 
stating  that  a  higher  rate  of  interest 
will  be  paid  if  the  bonds  are  not  pre- 
sented for  payment  is  binding  on  a 
corporation.  Kelley  v.  Phenix  Nat. 
Bank,  17  N.  Y.  App.  Div.  49G  (1897). 
Simple  interest  at  the  legal  rate  is 
recoverable  on  the  principal  of  the 
bonds  after  they  become  due,  "not 
upon  and  by  virtue  of  the  original 
contract,  but  as  damages  for  the  de- 
tention of  money  due."  Ashuelot 
R.  R.  V.  Elliot,  57  N.  R  397,  437  (1874); 
Langston  v.  South  Carolina  R.  R, 
2  S.  C.  248  (1870);  Commonwealth  v. 
Chesapeake,  etc.  Co.,  32  Md.  501,  551 
(1870).  Interest  is  allowed  on  the 
bonds  after  tliey  are  declared  dua 
Welsh  V.  St.  Paul,  etc.  R.  R.,  25  Minn. 
314  (1878).  If  bonds  are  redeemable 
and  are  called  by  the  company,  which, 
however,  is  unable  to  pay  them,  they 
continue  to  bear  interest.  Gordillo 
V.  Weguelin,  L.  R.  5  Ch.  D.  287  (1877). 
Bonds  do  not  bear  interest  after  they 
become  due,  and  no  demand  is  made, 
where  the  company  proves  that  it 
was  ready,  able,  and  willing  to  pay 
them,  even  though  it  did  not  set  aside 
a  specific  sum  for  that  purpose,  the 
money  being  in  its  general  account. 
Emlen  v.  Lehigh,  etc.  Co.,  47  Pa.  St. 
76  (1864).  Municipal  bonds  after  ma- 
turity bear  interest  at  the  rate  which 
they  bore  before  maturity,  even 
though  it  is  in  excess  of  the  legal 
rate.  Pruyn  v.  ]\Iilwaukee,  18  Wis. 
367  (1864).  The  principal  bears  inter- 
est unless  the  company  is  ready  to  pay 
and  gives  notica  Price  v.  Great  West- 
44 


CU.  XLYI.] 


BONDS   AJSTD    COUPONS. 


[§  ^Tl. 


est  from,  the  time  when  they  become  due,  and  no  presentation 
or  demand  of  payment  is  necessary  to  set  this  interest  running ; 
but  the  company  is  not  obliged  to  pay  interest  on  the  coupons 
if  it  can  show  that  it  was  ready  and  willing  to  pay  the  coupons 
if  they  had  been  presented  for  payment,  and  has  continued  to 
keep  separate,  for  that  purpose,  sufficient  funds.^  There  is 
some  doubt  as  to  whether  coupons  have  three  days  of  grace.^ 


em,  etc.  R'y,  16  J\L  &  W.  244  (1847),  on 
the  ground  that  the  debentures  were 
practically  a  mortgage.  See  also  Ohio 
V.  Frank,  103  U.  S.  697  (1880);  Brews- 
ter V.  Wakefield,  23  How.  118  (1859). 
The  interest  on  the  bonds  after  matu- 
rity is  the  same  as  that  before  ma- 
turity. Beckwith  v.  Hartford,  etc. 
R.  R.,  29  Conn.  268  (18G0);  Cromwell 
V.  Sac  County,  96  U.  S.  51  (1877).  In- 
terest continues  on  the  bonds  from 
the  time  of  foreclosure  at  the  rate 
specified  in  the  bond,  although  dif- 
ferent from  the  statutory  rata  Jack- 
son, etc.  Co.  V.  Burlington,  etc.  R.  R., 
29  Fed.  Rep.  474  (1887).  Interest  is 
allowed  up  to  the  date  of  distribu- 
tion. Re  London,  etc.  Co.,  L.  R.  [1892] 
1  Ch.  639. 

1  Philadelphia,  eta  R.  R.  u  Smith, 
105  Pa.  St.  195  (1884);  North  Penn- 
sylvania, etc.  R.  R.  u  Adams,  54  Pa. 
St.  94  (1867),  holding  also  that  de- 
mand of  payment  at  maturity  is 
excused  if  the  corporation  was  im- 
able  to  pay;  Langston  v.  South  Caro- 
lina R.  R,  2  S.  C.  248  (1870);  Mills 
V.  Jefferson,  20  Wis.  50  (1865);  Arents 
V.  Commonwealth,  18  Gratt.  (Va.)  750 
(1868);  Connecticut,  etc.  Ins.  Co.  v. 
Cleveland,  etc.  R.  R.,  41  Barb.  9  (18G3), 


allowing  same  as  damages  for  delay 
of  payment;  Welsh  v.  St.  Paul,  etc. 
R.  R.,  25  Minn.  314(1878);  Burroughs 
V.  Commissioners,  65  N.  C.  234  (1871); 
Beaver  County  v.  Armstrong,  44  Pa. 
St.  63  (1862) ;  Commonwealth  v.  Ches- 
apeake, etc.  Co.,  32  Md.  501,  547  (1870); 
Gelpcke  v.  Dubuque,  1  Wall.  175 
(1863);  Hollingsworth  v.  Detroit,  3 
McLean,  472  (1844);  S.  C,  12  Fed.  Cas. 
352;  Walnut  v.  Wade,  103  U.  S.  683 
(1880).  In  Alexander  v.  McDowell 
Coimty,  67  N.  C.  330  (1872),  the  court 
said  that  demand  was  necessary  be- 
fore action  on  a  municipal  coupon, 
inasmuch  as  the  changing  officials 
necessitated  such  a  rule,  although  a 
different  rule  prevailed  as  to  individ- 
uals. But  interest  runs  from  the 
time  of  non-payment.  McLendon  v. 
Anson  County,  71  N.  C.  38  (1874).  In- 
terest may  be  recovered  on  overdue 
coupons  from  the  time  of  demand  of 
payment.  Fox  v.  Hartford,  etc.  R.  R., 
38  Atl.  Rep.  871  (Conn.,  1897).  Cou- 
pons bear  interest  after  their  matu- 
rity, Cromwell  v.  Sac  County,  96 
U.  S.  51  (1877);  Aurora  City  v.  West, 
7  Wall  82  (1868)  — mimicipal-bond 
cases.  In  New  York  it  is  held  that 
coupons  which  remain  in  the  hands 


2  Wood  V.  Consolidated,  etc.  Co.,  36 
Fed.  Rep.  538  (1888).  The  coupon  is 
deemed  due  on  the  day  fixed  for  the 
payment  of  interest.  It  is  not  a  bill 
of  exchange,  although  in  the  form  of 
an  order  to  pay  money.  Arents  v. 
Commonwealth,  18  Gratt.  (Va.)  750 
(1868).  In  New  York  they  are  en- 
titled to  days  of  grace.  Evertson  v. 
Newport  Nat.  Bank,  66  N.  Y.  14  (1876). 
110  17 


But  the  common-law  rule  has  now 
been  changed  in  New  York  by  stat- 
ute. L.  1894,  ch.  607.  There  are  na 
days"  of  grace  on  coupons  so  far  as 
concerns  the  provision  that  the  bonds 
shall  become  due  six  months  after 
default  on  matiurity  and  demand  of 
payment.  Alabama,  etc.  Mfg.  Co.  u» 
Robinson,  56  Fed.  Rep.  690  (1893). 


45 


§  772.] 


BONDS    AJ^D    COUrOXS. 


[CH.  XLVI. 


§  7Y2.  Suit  to  collect  couimns  —  Execution  cannot  he  Icned 
upon  the  mortgaged iwoiycrUj  —  Demand  of  lyayment  —  Statute 
of  limitations. —  A  coupon-holder  may  sue  at  law  on  an  overdue 
coupon.^    But  it  is  well-settled  law  that  neither  a  mortgage 


of  the  holder  of  the  bonds,  whether 
attached  or  detached,  do  not  bear 
interest  from  the  maturity  of  such 
coupons.  Williamsburg  Sav.  Bank 
V.  Solon,  136  N.  Y.  465  (1893).  To 
same  effect,  Beattys  v.  Solon,  136 
N.  Y.  662  (1893);  Buffalo  Loan,  etc.  Co. 
V.  Medina  Gas,  etc.  Co.,  12  N.  Y.  App. 
Div.  199  (1896) ;  Jackson  v.  York,  etc. 
R.  R.,  48  Me.  147  (1858);  Crosby  v. 
New  London,  etc.  R.  R.,  26  Conn.  131 
(1857).  Bond  coupons  detached  from 
the  bond  bear  interest  from  matu- 
rity. Philadelphia,  etc.  R.  R.  i\ 
Knight,  124  Pa.  St.  58  (1889);  Internal 
Imp.  Fund  v.  Lewis,  34  Fla.  424  (1894). 
In  Rhode  Island  the  coupons  bear 
interest  from  the  time  of  demand  of 
payment.  Whitaker  v.  Hartford,  etc. 
R.  R.,  8  R  1. 47  (1864);  National  Excli. 
Bank  v.  Hartford,  etc.  R.  R,  8  R.  L 
375  (1866).  Coupons  bear  interest 
from  the  time  that  the  company  is 
in  default  in  paying  them.  Gibert 
V.  Washington,  etc.  R.  R.,  33  Gratt. 
(Va.)  586  (1880).  There  are  many 
municipal  corporation  cases  also  on 
this  subject;  and  to  the  same  effect, 
San  Antonio  v.  Lane,  32  Tex.  405 
(1869);  Genoa  v.  Woodruff,  92  U.  S. 
502  (1875) ;  Jeff ersonville  v.  Patterson, 
26  Ind.  15  (1866);  Davis  v.  Yuba 
County,  75  Cal.  452  (1888),  a  mimici- 
pal-bond  case,  whex*e  the  interest  was 
allowed  from  the  time  when  payment 
was  demanded.  Interest  is  a  crea- 
tion of  contract  and  not  of  the  com- 
mon law.  Pekin  v.  Reynolds,  31  ILL 
529  (1863).  In  Corcoran  v.  Chesa- 
peake, etc.  Co.,  1  Mac  Arthur  (D.  C), 
358  (1874);  aff'd,  94  U.  S.  741,  the 
court  held  that  interest  began  to 
run  on  coupons  only  after  demand 
and  refusal  of  payment,  and  that  a 
waiver  by  the  state  of  its  lien  so  as 


to  make  it  second  to  other  bonds  and 
coupons  is  not  a  waiver  of  interest 
on  those  coupons.  In  Connecticut 
the  coui>on  does  not  bear  interest 
after  maturity.  Rose  v.  Bridgeport, 
17  Conn.  243  (1845).  The  company 
may  decline  to  pay  a  coupon  imless 
it  is  presented  and  delivered  up. 
Warner  v.  Rising  Fawn  Iron  Co.,  3 
Woods,  514  (1878);  S.  C,  29  Fed.  Cas. 
261.  If  the  bonds  are  payable  in  Eng- 
land with  interest  at  five  per  cent, 
the  interest  collectible  after  default 
is  the  legal  rate  in  England,  and  not 
the  legal  rate  in  the  state  wherein 
the  railroad  company  is.  Coghlan  v. 
South  Carolina  R.  R.,  142  U.  S.  101 
(1891).  The  trustee  is  not  the  party 
to  demand  payment  of  the  coupons. 
Taber  v.  Chicago,  etc.  R'y,  15  Ind.  459 
(1860). 

1  Montgomery,  etc.  Soc.  v.  Francis, 
103  Pa.  St.  378  (1883).  In  New  Jer- 
sey a  statute  prevents  such  a  suit. 
Holmes  v.  Seashore  Elec.  R'y,  57  N.  J. 
L.  16  (1894).  A  holder  of  coupons  from 
railroad  bonds  may  sue  on  them,  and 
his  right  to  do  so  is  not  taken  away 
by  the  fact  that  they  are  secured  by 
a  mortgage.  Manning  v.  Norfolk,  etc. 
R.  R.,  29  Fed.  Rep.  838  (1887).  The 
holder  of  a  coupon  may  obtain  judg- 
ment thereon  although  the  mortgage 
provides  that  he  shall  not  levy  exe- 
cution on  the  road.  Widen  er  v.  Rail- 
road, 1  W.  N.  Cas.  472  (Pa.,  1875).  Suit 
on  one  in1;erest  coupon  is  no  bar  to  a 
subsequent  suit  on  another,  thougli 
the  latter  was  due  at  the  time  of 
the  first  suit.  Butterfield  v.  Ontario, 
44  Fed.  Rep.  171  (1890).  The  holder 
of  coupons  may  sue  on  them  even 
though  the  mortgage  is  being  fore- 
closed and  the  principal  sum  men- 
tioned in  the  bonds  has  become  due. 


1746 


OH.  XLVI.] 


BONDS   AJsB   COUPONS. 


[§  772. 


bondholder  nor  the  holder  of  a  coupon  can  levy  an  execution 
upon  the  mortgaged  property  in  order  to  enforce  a  judgment 
obtained  upon  the  bond  or  coupon.  There  are  two  reasons 
for  this  rule :  First,  that  a  mortgagee  at  common  law  cannot 
so  enforce  his  security ;  second,  other  bondholders  and  coupon 
holders  are  entitled  to  participate  equally  in  the  security.^ 
Other  bondholders  may  enjoin  the  execution  or  attachment.^ 


even  though  in  the  trustee's  foreclos- 
ure suit  no  judgment  for  deficiency 
can  be  granted,  the  trustees  not  suing 
on  the  bonds.  Welsh  v.  St.  Paul,  etc. 
R.  R,  25  Minn.  314  (1879). 

^The  bondholders  cannot  recover 
judgment  at  law  and  then  sell  out 
the  mortgaged  premises.  Pugh  v. 
Fairmount,  eta  Co.,  112  U.  S.  238 
(1884).  A  bondholder  who  has  ob- 
tained judgment  on  his  bonds  cannot, 
by  an  execution  levied  on  the  prop- 
erty mortgaged  to  secure  the  bonds, 
obtain  an  advantage  over  other  bond- 
holders. Bowen  v.  Brecon  R'y,  L.  R. 
3  Eq.  541  (1867).  In  West  Branch 
Bank  v.  Chester,  11  Pa.  St.  282  (1849), 
it  seems  that  a  sale  of  the  equity  of 
redemption,  based  on  a  judgment  ob- 
tained by  a  bondholder  for  interest, 
was  upheld.  The  holder  of  coupons 
may  obtain  judgment  and  levy  on 
such  property  as  is  not  covered  by 
the  mortgage  securing  his  coupons. 
Commonwealth  v.  Susquehanna,  etc. 
R  R,  132  Pa.  St.  306  (1888);  Dupont 
V.  Bushong,  1  W.  N.  Cas.  378  (1875); 
Pennock  v.  Coe,  23  How.  117  (1859). 
A  bondholder  cannot  obtain  judg- 
ment at  law  on  unpaid  coupons  or 
the  bond,  and  by  levj'  of  execution 
sell  the  mortgaged  railway  and  fran- 
chises and  buy  it  in  and  turn  it  over 
to  a  reorganized  company  to  operata 
The  state  will  oust  such  a  corpora- 
tion from  possession.  The  only  exe- 
cution which  the  bondholder  can  levy 
in  such  a  case  is  on  property  not 
subject  to  the  mortgage.  The  mort- 
gage securing  that  bond  and  others 
still  exists.    Commonwealth  v.  Sus- 

l' 


quehanna,  etc.  R  R,  132  Pa.  St.  306, 
321  (1888).  Where  bonds  are  secured 
by  a  chattel  mortgage,  one  bond- 
holder cannot  obtain  payment  from 
such  chattels  in  preference  to  other 
bondholders  by  levying  an  execution 
on  them,  even  though  the  chattel 
mortgage  has  not  been  recorded  as  re- 
quired by  the  statutes.  Fish  v.  New 
York,  etc.  Paper  Co.,  29  N.  J.  Eq.  16 
(1878).  One  of  the  parties  secured  by 
a  mortgage  cannot  levy  an  attach- 
ment on  the  mortgaged  property 
"  without  alleging  that  the  residue  of 
the  debts  secured  had  been  paid,  and 
bringing  the  trustees  or  legal  title- 
holders  before  the  court."  Martin  v. 
Mobile,  etc.  R  R,  7  Bush  (Ky.),  116 
(1870).  Where  a  judgment  is  ob- 
tained upon  coupons,  the  judgment 
cannot  be  levied  on  the  income  of 
the  road.  The  mortgagor  company 
and  the  trustee  of  the  mortgage  may 
enjoin  such  collection.  Roberts  v. 
Denver,  etc.  R  R.,  8  Colo.  App.  504 
(1896).  A  holder  of  bonds,  secured  by 
a  tiTist  deed  on  all  the  property  of  a 
corporation,  who  seeks  to  enforce 
payment  by  an  action  at  law,  will  not 
be  permitted  to  enforce  a  lien  by  ex- 
ecution, to  the  embarrassment  of  the 
other  bondholders.  Hackettstown 
Nat.  Bank  v.  Yuengling  Brewing  Co., 
74  Fed.  Rep.  110  (1896). 

2  A  bondholder  may  enjoin  another 
bondholder  from  levying  an  execu- 
tion on  the  property  mortgaged.  They 
are  to  be  treated  as  partners,  and  one 
is  not  allowed  to  obtain  an  advantage 
over  others.  Moreover,  they  have  all 
agreed  that  the  property  shall  be  sold 
■47 


§  772.] 


BONDS  AND  COUPONS. 


[Cn.  XLVI. 


The  holder  of  coupons  need  not  demand  payment  before  com- 
mencing suit  thereon.' 

The  question  whether  a  demand  of  payment  is  necessary  be- 
fore commencing  foreclosure  proceedings  tm'ns  upon  the  pro- 
visions of  the  mortgage.^ 

The  holder  of  coupons,  upon  which  he  is  suing,  need  not  pro- 
duce the  bonds  to  which  they  wore  attached,  nor  need  he  be 
interested  in  them.^    Inasmuch  as  coupons  are  practically  prom- 


as  a  whole.  And  again,  the  reorgan- 
ization provision  in  the  mortgage  is 
a  covenant  that  is  binding.  See  Phila- 
delphia, etc.  R.  R.  V.  Woelpper,  04  Pa. 
St.  366  (1870),  giving  the  decision  of 
the  court  below.  A  bondholder  may 
enjoin  an  execution  sale.  Butler  v. 
Rahm,  46  Md.  541  (1877). 

1  Wahiut  V.  Wade,  103  U.  S.  683 
(1880) ;  Warner  v.  Rising  Fawn  Iron 
Co.,  3  Woods,  514  (1878) ;  S.  C,  29  Fed. 
Cas.  201 ;  Smith  v.  Tallapoosa  County, 
2  Woods,  574  (1874) ;  S.  C,  22  Fed.  Cas. 
682.  Demand  of  payment  need  not 
be  alleged  in  a  suit  on  coupons.  It 
is  a  matter  of  defense  to  the  com- 
pany. Philadelphia,  etc.  R  R.  v.  John- 
son, 54  Pa.  St.  127  (1867).  A  coupon 
is  like  a  note,  and  not  like  a  bilk 
Williamsport  Gas  Co.  v.  Pinkerton, 
95  Pa.  St.  62  (1880).  Coupons  are  like 
other  commercial  paper  in  that,  al- 
though payable  at  a  particular  place, 
suit  may  be  brought  or  foreclosure 
commenced  on  them  without  demand 
of  payment  at  that  place.  So  held 
where  payment  was  to  be  "at  the 
financial  office  of  said  company  in  the 
city  of  New  York."  Warner  v.  Rising 
Fawn  Iron  Co.,  3  Woods,  514  (1878); 
S.  C,  29  Fed.  Cas.  261.  Coupons  need 
not  be  presented  before  suit  if  the 
company  has  resolved  to  default,  and 
has  no  funds  to  pay  with.  In  the 
Buit  the  mortgage  need  not  be  intro- 
duced. Conshohocken  Tube  Co.  v. 
Iron  Car  Eqvup.  Co.,  161  Pa.  St.  391 
(1894). 

2  No  demand  of  payment  of  bonds 
need  be  made  before  foreclosure  pro- 


ceedings if  an  allegation  is  made  that 
the  company  is  insolvent  and  such 
demand  would  have  been  useless. 
Shaw  V.  Bill,  95  U.  S.  10  (1877).  No 
demand  of  payment  of  interest  is 
necessary  before  the  commencement 
of  foreclosure  proceedings.  The  de- 
fendant must  prove  payment  or  readi- 
ness to  pay.  Marlor  v.  Texas,  etc.  R'y, 
21  Fed.  Rep.  383  (1884).  Presentation 
and  demand  of  payment  of  coupons 
need  not  be  shown  in  order  to  prove 
that  the  company  had  failed  for  more 
than  six  months  to  pay  the  interest. 
Savannah,  etc.  R  R.  v.  Lancaster,  62 
Ala.  555,(1878).  A  demand  of  payment 
of  coupons  is  necessary  in  order  to  set 
running  a  provision  of  the  mortgage 
that  the  principal  shall  become  due 
and  a  remedy  become  available  six 
months  after  default.  Potomac  Mfg. 
Co.  V.  Evans,  84  Va.  717  (1888).  See 
also  §  800,  infra.  Non-payment  of 
coupons  is  no  cause  for  foreclosure 
where  no  demand  of  payment  is 
shown.  Davies  v.  New  York  Concert 
Co.,  41  Hun,  492  (1880).  See  also 
Union,  etc.  Ins.  Co.  v.  Union,  etc  Co., 
37  Fed.  Rep.  286  (1889). 

3  Thomson  v.  Lee  County,  3  Walk 
827  (1805).  "  Suits  on  the  coupons  are 
sustained  entirely  independently  of 
the  bonds  to  which  they  were  orig- 
inally annexed.  It  is  therefore  of 
very  little  consequence  whether  they 
are  promissory  notes,  bills,  drafts,  or 
checks,  for  they  have  the  sa.me  quality 
of  negotiability  as  either  of  those  in- 
struments, and  the  holder  sues  upon 
them  and  recovers  in  his  own  nama" 


1748 


CH.  XLVI.] 


BONDS  AND  COUPONS. 


[§  T72. 


issory  notes,  the  form  of  action  on  coupons  is  tlie  same  as  that 
upon  promissory  notes.* 

The  statute  of  limitations  applicable  to  coupons  is  the  same 
as  that  applicable  to  the  bonds.  This  is  generally  tTventy  years.^ 
The  statute  commences  to  run  from  the  time  when  the  coupons 
become  due.^    The  right  of  the  company  to  pay  coupons  in 

Beaver  County  v.  Ai-mstrong,  44  Pa. 
St.  63  (1862).     It  is  not  necessary  to 
produce  the  bond,  and  the  surrender 
and  cancellation  of  the  bond  after 
the  coupon  was  transferred  do  not 
affect  the  coupon.     Miller  v.  Berlin, 
13  Blatchf.  245  (1876;;  S.  C,  17  Fed. 
Cas.  306.    In  suing  on  the  coupons 
the  bonds  to  which  they  were  at- 
tached need  not  be  set  out.    Ring  v. 
Joluison  County,  6  Iowa,  265  (1858j. 
The  holder  of  a  coupon  may  sue  on 
it  although  he  does  not  own  the  bond. 
National  Excli.  Bank  v.  Hartford,  etc. 
R  R,  8  R.  I.  375  (1866);  Knox  County 
V.   Aspinwall,   21    How.   539    (1858); 
Cromwell  n  Sac  County,  94  U.  S.  351, 
362  (1876);  City  u  Lamson,  9  WalL 
477  (1869).    The  holder  of  coupons 
who  sues  thereon  need  not  produce 
or  prove  an  interest  in  the  bond  itself. 
He  should  set  forth  the  number  of 
the  bond,  however,  the  date,  sum,  and 
time  of  payment.    Kennard  v.  Cass 
County,  3  DiU.  147  (1874);   S.  C,  14 
Fed.  Cas.  307;  City  v.  Lamson,  9  WalL 
477  (1869).     Coupons  may  be  sued  on 
without  producing  the  bonds.    Com- 
monwealth V.  Chesapeake,  etc.  Co.,  32 
Md.   501   (1870);    New   London,  etc 
Bank  v.  Ware,  etc.  R  R.,  41  Conn.  542 
(1874).     The  payment  of  a  coupon 
payable  to  bearer  must  be  to  the 
holder  of  it,  and  not  to  the  holder  of 
tke  bond.     Re  Sewall,  38  Vt.  364 
<1865). 

1 A  general  count  in  debt  is  suffi- 
cient to  recover  on  a  coupon.  Na- 
tional Exch.  Bank  v.  Hartford,  etc., 
R  R,  8  R  L  375  (1866).  May  be  proved 
under  the  common  covmts.  Johnson 
V.  Stark  County,  24  1\L  75  (1800).  An 
action  in  tort  for  the  conversion  of 

1 


coupons  lies  against  a  purchaser  of 
the  same  from  a  thief,  but  not  if  such 
purchaser  is  bona  fide.  Spooner  v. 
Holmes,  102  Mass.  503  (1869).  A  single 
coimt  may  include  several  coupons. 
New  London,  etc.  Bank  v.  Ware,  etc. 
Co.,  41  Conn.  542  (1874).  In  suing 
upon  coupons  they  should  be  put  in 
evidence.  De  Graaf  v.  Wyckoff,  13 
Daly,  366  (1885).  For  the  pleading, 
etc.,  on  an  interest  warrant,  see 
Crosby  v.  New  London,  etc.  R  R.,  26 
Conn.  121  (1857). 

2  City  V.  Lamson,  9  WalL  477  (1869). 
"  A  suit  upon  a  coupon  is  not  barred 
by  the  statute  of  limitations  unless 
the  lapse  of  time  is  sufficient  to  bar 
also  a  suit  upon  the  bond."    Lex- 
ington V.  Butler,  14  WalL  282  (1871). 
See  also  Huey  v.  Macon  Coimty,  35 
Fed.  Rep.  481  (1888).    See  ch.  XLIX, 
§  846,  infra.    In  Best  v.  Davis  S.  M. 
Co.,  65  Hun,  72  (1892),  it  was  held 
that  the  six-year  statute  of  limita- 
tions applied  to  corporate  bonds,  the 
court  saying:  '•  The  obligations  being 
promissory    notes    and    not    sealed 
instruments,  the  six-year  statiite  of 
limitations  applies."    Where  the  in- 
strument recites  that  it  is  under  seal 
it  will  be  presumed  to  be  a  sealed  in- 
sti-ument,  especially  where  a  seal  fol- 
lows the  name  of  the  officer  who  signs 
it.    So  held  as  regards  the  statute  of 
limitations.    Rusling  v.  Union  Pipe, 
etc.  Co.,  5  N.  Y.  App.  Div.  448  (1896). 
3  Clark  V.  Iowa  City,  20  WalL  583 
(1874).    So  held  whether  the  coupons 
are  detached  from  the  bonds  or  not. 
Koslikonong  v.  Burton,  104  U.  S.  668 
(1881);  Amy  v.  Dubuque,  98  U.  S.  470 
(1878);  Huey  v.  Macon  County,  35 
Fed.  Rep.  481  (1888).     Contra,  where 
43 


§  T73.] 


BONDS  AND  COUPONS. 


[cn.  XLVI. 


land  scrip  does  not  prevent  the  holders  from  suing  for  money 
if  the  scrip  is  not  issued.^ 

§  773.  Income  londs. —  A  corporation  may  issue  an  "  income 
bond,"  the  interest  on  which  is  not  payable  annually,  but  is  pay- 
able only  in  case  there  is  income  suilicient  to  pay  the  regular 
charges  and  interest  due  from  the  corporation  and  to  leave  a 
surplus  which  is  applicable  to  the  income  bonds.^  An  income 
bond  differs  from  preferred  stock  in  that  it  cannot  vote ;  it  gen- 
erally is  secured  by  mortgage ;  and  its  right  to  interest  is  more 
clear  than  that  of  stock  to  dividends.  The  power  to  issue  irre- 
deemable bonds,  interest  on  which  is  to  be  paid  after  certain 
dividends  have  been  declared  on  the  stock,  is  a  question  still  in 
dispute.' 


the  coupon  is  not  detached.  City  v. 
Lamson,  9  Wall.  477  (18G9);  Lexing- 
ton V.  Butler,  14  Wall.  282  (1871).  The 
statute  of  limitations  on  the  coupons 
of  municipal  bonds  begins  to  run 
from  the  date  when  the  coupons  be- 
came due.  Huey  v.  Macon  County, 
35  Fed.  Rep.  481  (1888).  Tlie  statute 
of  limitations  of  ten  years  applies  to 
detachable  interest  coupons.  Griffin 
V.  Macon  County,  36  Fed.  Rep.  885 
(1888).  As  to  the  effect  of  the  stat- 
ute of  limitations  on  the  interest,  see 
Re  Cornwall  Minerals  R'y,  76  L.  T. 
Rep.  832  (1897). 

1  Marlor  v.  Texas,  etc.  R'y,  19  Fed. 
Rep.  867  (1884);  S.  C,  21  Fed.  Rep.  383 
(1884);  Barry  v.  Missouri,  etc.  R'y,  27 
Fed.  Rep.  1  (1886).  Land  scrip  issued 
in  payment  of  coupons,  the  coupons, 
however,  being  kept  alive  as  collat- 
eral, should  be  retired,  and  the  cou- 
pons paid  in  money,  whenever  the 
finances  of  the  company  fully  war- 
rant it.  Little  Rock,  etc.  R'y  v.  Hunt- 
ington, 120  U.  S.  160  (1887).  The  stat- 
ute of  limitations  does  not  begin  to 
riin  six  months  after  default,  merely 
because  at  that  time  the  bondholders 
have  an  option  to  declare  the  whole 
sum  due.  Nebraska,  etc.  Bank  v. 
Nebraska,  etc.  Co.,  14  Fed.  Rep.  763 
(1883).  Fifteen  years'  delay  in  en- 
forcing a  railroad  mortgage  after  the 

i: 


principal  became  due  is,  in  Vermont,, 
a  bar  to  foreclosure;  but  a  foreclos- 
ure commenced  during  that  time 
preserves  the  security  for  all  bond- 
holders, although  they  are  not  par- 
ties to  the  suit.  Re  Chickering,  56 
Vt.  82  (1883).  Cf.  Simmons  v.  Bur- 
lington, etc.  R'y,  159  U.  S.  278  (1895), 
rev'g  Simmons  v.  Taylor,  38  Fed.  Rep. 
682  (1889). 

2  Garrett  v.  May,  19  Md.  177  (1862), 
upholding  the  giving  of  a  mortgage 
which  took  precedence  over  prior  in- 
come bonds. 

3  The  supreme  court  of  Pennsyl- 
vania, by  a  divided  court,  about  1882, 
held  that  a  railroad  company  with- 
out express  authority  might  issue  ir- 
redeemable interest-bearing  bonds  at 
a  large  discount,  the  interest  to  be 
paid  only  after  a  certain  dividend 
had  been  declared  on  the  common 
stock.  The  bonds  were  called  "de- 
ferred income  bonds."  Philadelphia, 
etc.  R.  R.  V.  Stichter,  21  Am.  L.  Reg. 
(Pa.)  713  (1882);  11  W.  N.  Cas.  325.  A 
contraiy  conclusion  was  reached  in 
Taylor  v.  Philadelphia,  etc.  R.  R.,  7 
Fed.  Rep.  386  (1881).  An  "income 
bond  "  under  the  New  York  statute 
is  secured  by  a  lien  in  regard  to  its 
principal  only.  Its  interest  is  unse- 
cured. The  income  bondholder  can- 
not control  the  discretion  of  the  di- 

■50    , 


CH.  XLVI.] 


BONDS   AND    COUPONS. 


[§  TT3. 


The  rights  of  income  bondholders  are  governed  and  deter- 
mined entirely  by  the  terms  of  the  bonds  themselves  and  the 
mortgage  securing  them,  if  such  a  mortgage  exists.^ 

Frequently  there  is  difficulty  in  determining  whether  any 
"  income  "  actually  exists  which  should  be  applied  to  the  pay- 
ment of  interest  on  income  bonds.     The  same  difficulty  that  is 


rectors  in  paying  such  interest  or 
using  the  funds  for  other  purposes. 
Day  V.  Ogdensburgh,  etc.  R  R.,  107 
N.  Y.  129  (1887). 

1  An  income  mortgage  was  fore- 
closed in  Seibert  v.  Minneapolis,  etc. 
R'y,  58  Minn.  39  (1894),  for  default  in 
applying  net  earnings  to  the  pay- 
ment of  interest  due  on  the  boncb, 
and  also  for  failure  to  repair  and  re- 
place rolling-stock,  the  mortgage  pro- 
viding for  foreclosure  in  such  a  casa 
In  State  v.  Cowen,  83  Md.  549  (1896), 
trustees  representing  income  bond- 
holders were  placed  in  control  of  the 
property  by  the  court  for  four  years. 
The  trustees  expended  $500,000  in 
improvements,  and  thereby  the  busi- 
ness greatly  increased.  The  court 
thereupon  extended  the  time  to  the 
trustees  to  operate  the  canal,  and 
said  that  if  the  income  did  not  pay 
the  operating  expenses  and  produce 
a  net  revenue  the  property  would  be 
sold.  The  court  held  also  that  such 
trustees  might  contract  with  other 
companies  for  the  use  of  the  prop- 
erty. The  case  of  Barry  v.  Missouri, 
etc.  R'y,  27  Fed.  Rep.  1  (18SG),  consid- 
ered the  rights  of  income  bondhold- 
ers under  the  particular  mortgage  in 
that  case.  The  income  bond  pro- 
vided for  the  payment  of  the  inter- 
est, "provided  such  net  or  surplus 
earnings  shall  be  sufficient  therefor." 
The  court  held  that  "tmless  within 
some  one  of  the  six  months'  periods 
between  the  date  and  the  maturity 
of  the  bonds  net  income  is  realized, 
the  company  is  not  in  default,  and  is 
under  no  present  obligation  to  pay 
interest,"  but  nevertheless  the  words 
of  the  bond  may  give  the  holder  the 


right  to  claim  this  interest  at  a  later 
date,  "  whenever  there  is  net  income 
applicable  thereto."  It  must  be  paid 
before  any  dividends  are  declared. 
"According  to  the  scheme  of  the 
mortgage,  as  denoted  by  the  several 
provisions  referred  to,  the  surplus 
earnings  of  each  interest  period  be- 
long to  the  holders  of  coupons  for 
that  period.  If  the  earnings  are  in- 
sufficient to  pay  the  interest  in  full, 
the  holders  are  entitled  to  scrip  cer- 
tificates for  the  residue;  if  the  net 
earnings  more  than  suffice  to  pay  the 
interest  for  the  six  months,  the  sur- 
plus falls  into  a  general  fund  for  the 
payment  of  holders  of  scrip  certifi- 
cates ratably,  if  there  are  no  net 
earnings  imtil  an  exercise  of  the 
power  of  sale  vmder  the  eighth  ar- 
ticle, the  unearned  interest  becomes 
principal,  and  is  to  be  paid  as  princi- 
pal out  of  the  proceeds  of  the  sale. 
The  coupon-holders  have  the  first 
lien  upon  the  surplus  earnings  for 
the  period  represented  by  their  cou- 
pons, but  as  to  earnings  from  any 
other  period  they  have  only  the 
rights  of  certificate-holders;  and 
whether  they  surrender  their  cou- 
pons or  not,  if  the  earnings  are  insuf- 
ficient to  pay  the  interest  in  full 
they  stand  as  certificate-holders  for 
their  interest  unearned."  The  cou- 
pon-holders and  the  certificate-hold- 
ers were  held  to  stand  upon  substan- 
tially the  same  ground.  It  was  the 
duty  of  the  company  to  keep  its  ac- 
counts so  as  to  show  the  net  income 
for  each  six  months.  The  trustee 
was  bound  to  see  that  this  was  dona 
An  accounting  was  ordered. 


1751 


§  T73.] 


BONDS    AND    COUPONS. 


[on.  XLVI. 


experienced  in  ascertaining  whether  there  are  net  profits  for  a 
dividend  is  experienced  in  ascertaining  whether  there  is  a  sur- 
plus properly  applicable  to  income  bonds.  In  general,  the 
courts  decide  each  case  on  the  terms  and  conditions  of  the  in- 
come bonds  themselves.  The  various  rights,  remedies,  and 
incidents  peculiar  to  different  kinds  of  income  bonds  are  set 
forth  in  the  notes  below.* 


1  Passing  upon  the  rights  of  income 
bondliolders  in  a  suit  brought  by 
them  to  have  their  interest  paid,  the 
court  said:  "The  expenses  defrayed 
or  incurred  in  producing  the  earn- 
ings for  a  given  interest  period  are 
the  only  charges  which  can  enter 
into  the  income  account  for  that 
period.  ...  It  is  preposterous  to  as- 
sert that  the  company  could  prop- 
erly charge  against  income  for  any 
period  during  the  life  of  the  mort- 
gage a  payment  or  a  liability  in- 
curred on  account  of  old  indebted- 
ness existing  before  the  mortgage 
was  created,  or  arising  from  a  loss 
incurred  by  the  sale  of  bonds  issued 
to  pay  off  old  indebtedness.  It  might 
with  equal  propriety  seek  to  offset 
its  whole  funded  debt  against  its  in- 
come." Barry  v.  Missouri,  etc.  R'y. 
27  Fed.  Rep.  1,  5  (1886).  An  income 
bondholder  may  obtain  an  accovmt- 
ing  by  the  mortgagor  railroad  in 
order  to  determine  whether  there  is 
any  income  applicable  to  his  bonds. 
Improper  items  of  the  account  will 
be  stricken  out.  But  where  most  of 
the  income  bonds  have  been  turned 
in  for  a  lower  security,  the  complain- 
ant is  entitled  to  an  income  based 
only  on  all  the  income  bonds  as 
originally  issued.  Barry  v.  Missouri, 
etc.  R'y,  84  Fed.  Rep.  829  (1888).  An 
income  bondholder  may  file  a  bill 
for  an  accounting  where  the  funds 
upon  which  he  has  a  lien  have  been 
mingled  with  other  funds  and  no 
separate  accoimt  has  been  kept.  If 
the  directors  have  made  no  determi- 
nation in  the  matter,  it  is  immaterial 

17 


that  the  mortgage  provided  for  a 
final  determination  by  them.  Suit 
lies.  Losses  incurred  by  reason  of 
new  lines,  leased  lines,  etc.,  are  not 
to  be  paid  before  funds  are  set  apart 
to  pay  the  interest  on  income  bonds, 
the  income  mortgage  being  a  lien  on 
the  income  of  the  main  line.  Ordi- 
narily an  income  mortgage  on  pres- 
ent and  future  property  as  a  security 
for  interest  is  "  but  little  more  than 
the  pledge  of  the  good  faith  of  the 
company  in  managing  its  lines." 
The  company  ordinarily  under  such 
a  mortgage  may  improve,  alter,  or 
extend  its  lines  and  may  lease  others 
without  violating  it's  obligation  to 
the  income  bondholders.  If  the  di- 
rectors have  neglected  to  ascertain 
whether  net  income  exists,  the  court 
will  undertake  to  do  so.  Spies  v. 
Chicago,  etc.  R.  R.,  40  Fed.  Rep.  34 
(1889).  Although  an  income  bond- 
holder is  entitled  to  an  accounting 
as  to  the  income  appKcable  to  the 
interest  on  his  bonds,  yet,  if  he 
charges  fraud  against  the  directors, 
he  must  prove  fraud  or  his  bill  will 
be  dismissed,  even  though  fraud  need 
not  have  been  alleged.  Spies  v.  Chi- 
cago, etc.  R.  R.,  40  Fed.  Rep.  34  (1889). 
In  Day  v.  Ogdensbm-gh,  etc.  R.  R., 
107  N.  Y.  129  (1887),  income  bond- 
holders were  held  not  entitled  to  any 
surplus  in  one  year  to  make  up  for  a 
deficiency  in  the  payment  of  interest 
in  a  prior  year.  The  court  held  also 
that  the  company  might  take  a  lease 
of  another  railroad  and  use  its  in- 
come to  pay  the  rental,  and  the  in- 
come bondholders  could  not  object. 


CH.  XLVI.] 


BOXDS    AXD    COUPOXS. 


[§ 


The  ordinary  income  bond  of  a  corporation  does  not  create 
such  a  trust  relationship  between  the  holder  and  the  company 

Where  an  income  boncUiolder  applies 
for  an  injunction  against  a  misappro- 
priation of  the  income  of  the  railroad, 
giving  figures,  the  Injunction  will  be 
granted  though  in  large  part  the  alle- 
gations are  made  on  information  and 
belief,  if  the  defendant  does  not  spe- 
cifically explain  the  figures  and 
merely  denies  the  misapplication. 
Barry  v.  Missouri,  etc.  R'y,  36  Fed. 
Rep.  228  (1888).  An  income  bond- 
holder may  enjoin  an  application  of 
the  company's  funds  to  other  \in- 
usual  corporate  purposes,  thereby  af- 
fecting the  payment  of  interest  due 
to  him.  Barry  v.  ^Missouri,  etc.  R'y, 
36  Fed.  Rep.  228  (1888).  The  holder  of 
coupon  bonds  secured  by  a  mortgage 
on  the  proceeds  from  the  sale  of  cer- 
tain lands  owned  by  a  railroad  may 
by  bill  in  equity  subject  that  income 
to  the  payment  of  the  coupons,  even 
though  the  railroad  has  been  consoli- 
dated with  another  and  the  consoli- 
dated railroad  owns  the  lands.  Rut- 
ten  V.  Union  Pac.  R'y,  17  Fed.  Rep. 
480  (1883).  For  an  instance  of  bonds 
and  a  mortgage  on  the  income  of  the 
property  of  a  canal  company,  see 
Stewart  v.  Chesapeake,  etc.  Canal 
Co.,  5  Fed.  Rep.  149  (1881).  In  this 
case  a  bondholder  asked  to  have  a  re- 
ceiver appointed  for  the  purpose  of 
operating  the  canal  and  applying  the 
profits  to  the  interest  on  the  bonds. 
Mismanagement  was  charged.  The 
court  refused  to  appoint  the  receiver, 
the  proof  not  being  sufficient,  but  re- 
tained the  suit  for  the  purpose  of 
compelling  the  company  to  render 
accounts  from  time  to  time.  The 
court  stated  that  the  only  remedy  of 
the  bondholders  was  a  receiver,  fore- 
closure not  being  possible  of  such  a 
mortgaga  Concerning  the  construc- 
tion of  the  rights  of  an  income  bond- 
holder, see  also  Lehigh,  etc.  Co.  v. 
Central  R.  R.,  34  N.  J.  Eq.  88  (1881). 

1753 


Income  bonds  do  not  necessarily  re- 
strict the  owner  to  payment  in  land 
scrip,  where  the  company  may  so  pay 
interest  thereon,  in  any  year  when 
the  income  is  sufficient.  Unless  the 
company  declares  its  election  to  pay 
in  scrip,  the  owner  may  sue  for  the 
money  as  soon  as  the  income  is  suffi- 
cient. Failure  of  the  bondholder  to 
demand  payment  of  the  interest  is 
no  bar,  he  having  been  notified  that 
the  company  could  not  pay  it.  Texas, 
etc.  R'y  r.  Marlor,  123  U.  S.  687  (1887). 
Where  an  income  bond  has  its  cou- 
pons payable  in  money  or  land  scrip 
at  the  option  of  the  company,  and 
the  company  does  not  exercise  its  op- 
tion when  the  coupons  become  due, 
the  holder  may  insist  on  payment  in 
money  and  sue  therefor.  Marlor  v. 
Texas,  etc.  R'y,  21  Fed.  Rep.  383  (1884). 
It  is  immaterial  that  the  mortgage  is 
a  lien  on  land  only  and  not  on  the 
railroad.  Marlor  v.  Texas,  etc.  R'y,  19 
Fed.  Rep.  867  (1884).  Where  the  in- 
come mortgage  contains  no  provision 
for  the  trustee  taking  possession,  the 
only  remedy  may  be  "  that  no  divi- 
dend can  be  declared  imtU  the  inter- 
est on  it  is  regularly  paid."  Union 
Trust  Co.  V.  Missoiu-i,  etc.  R'y,  26  Fed. 
Rep.  485  (1880).  In  New  York,  by  stat- 
ute, income  bonds  with  voting  privi- 
leges may  be  issued-  Laches  on  the 
part  of  a  dissenting  stockholder  in 
objecting  to  interest-bearing  stock 
will  bar  his  remedy.  Taylor  v.  South, 
etc.  R  R.,  13  Fed.  Rep.  152  (1882).  An 
income  bondholder  bringing  suit  to 
compel  the  coi-poration  to  account 
and  pay  his  interest  coupons  must 
allege  a  request  to  the  trustee  in  the 
deed  of  trust  to  bring  the  suit  and  a 
refusal  by  him.  The  trustee  must 
also  be  joined  as  a  party  defendant. 
Morgan  v.  Kansas,  etc.  R'y,  15  Fed. 
Rep.  55  (1882). 


§  7Y4.]  BONDS  AND  couroNS.  [oh.  xlvi. 

as  authorizes  a  suit  for  an  accounting-.  The  bond  does  not  oper- 
ate as  an  equitable  assignment  of  the  profits,  and  does  not  create 
an  equitable  lien  thereon.  If  the  company  refuses  to  apply  the 
profits  as  called  for  by  the  bond,  it  is  a  breach  of  contract,  the 
remedy  for  which  is  at  law.  If  the  income  bond  gives  discre- 
tion to  the  directors  as  to  payments  for  repairs,  an  error  of 
judgment  on  their  part  cannot  be  reviewed  by  the  court  where 
there  was  room  for  a  difference  of  opinion.^  Income  bomd- 
holders  cannot  prevent  the  consolidation  of  the  company  with 
another  company  under  statutes  existing  at  the  time  when  the 
income  bonds  were  issued.^ 

§  774.  Accommodation  paper  hy  a  corporation  —  Bona  fide 
liolders. —  It  is  a  well-established  rule  that  a  corporation  can- 
not ordinarily  be  bound  by  its  signature  to  or  indorsement  or 
guaranty  of  the  note  or  paper  of  another  person  for  the  accom- 
modation of  the  latter.  The  directors  are  authorized  by  the 
stockholders  to  do  business  for  corporate  purposes,  but  are  not 
authorized  to  use  the  corporation  to  perform  acts  of  friendship 
or  accommodation  to  others.  The  general  rule  is  that  the  ac- 
commodation indorsement,  signature,  or  guaranty  of  the  corpo- 
ration is  illegal  and  cannot  be  enforced.' 

1  Thomas  v.  New  York,  etc.  R'y,  139  Grange,  etc.  Co.,  40  S.  W.  Rep.  328 
N.  Y.  163  (1893),  holding  also  that  a  (Tex,  1897);  Ex  parte  Estabrook,  2 
refusal  of  the  directors  to  certify  Low.  547  (1877);  S.  C,  8  Fed.  Cas.  794; 
that  the  interest  had  been  earned  is  Lafayette  Sav.  Bank  v.  St.  Louis 
sufficient  as  an  allegation  without  Stoneware  Co.,  2  Mo.  App.  299  (1876) ; 
aUeging  a  demand  for  such  certifl-  West  St.  Louis  Sav.  Bank  v.  Shawnee 
cata  As  to  the  pleadings  of  an  in-  Coimty  Bank,  95  U.  S.  557  (1877) 
come  bondholder  in  a  suit  to  compel  holding  that  a  cashier  is  not  pre- 
the  payment  of  interest,  see  Thomas  smned  to  have  power  to  bind  his 
V.  New  York,  etc.  R'y,  19  N.  Y.  Supp.  bank  as  indorser  of  his  personal  note. 
766  (1892).  The  payee  of  such  a  note,  in  order  to 

2  Hart  V.  Ogdensburgh,  etc.  R.  R.,  69    hold  the  bank,  must  prove  that  he 
^Hun,  378  (1893).  had  such  power;  ^tna  Nat.  Bank  v. 

3  Bank  of  Genesee  t).  Patchin  Bank,  Charter  Oak  L.  L  Co.,  50  Conn.  167 
13  N.  Y.  309  (1855);  National  Bank  v.  (1882),  holding  that  a  president  has 
Wells,  79  N.  Y.  498  (1880),  reversing  no  implied  power  to  bind  his  corpo- 
S.  C,  15  Hun,  51;  Central  Bank  v.  ration  as  accommodation  indorser; 
Empire,  etc.  Co.,  26  Barb.  23  (1857);  Culver  v.  Reno  Real  Estate  Co.,  91 
Morford  v.  Farmers'  Bank,  26  Barb.  Pa.  St.  367  (1879);  Beecher  v.  Dacey, 
568  (1857);  Bridgeport  City  Bank  v.  45  Mich.  92  (1881);  Smead  v.  Indian- 
Empire,  etc.  Co.,  30  Barb.  421  (1859);  apolis,  etc.  R.  R.,  11  Ind.  104  (1858). 
Fox  V.  Rural  Home  Co.,  90  Hun,  365  A  general  manager  has  no  power  to 
(1895);  South,  etc.  Nat.  Bank  v.  La  guarantee  in  the  corporate  name  the 

1754 


CH.  XLTI.] 


BONDS  AND  COUPONS. 


^  * 


74. 


The  iiidorseinentj  however,  though  not  enforceable  by  par- 
ties taking  it  with  notice  that  it  was  for  accommodation,  may 
be  enforced  by  honafide  holders.^ 


payment  of  a  third  person's  note. 
Dobson  V.  More,  164  111.  110  (1896). 
The  treasurer  of  a  manufacturing 
corporation  has  no  implied  power  to 
bind  the  corporation  as  an  accommo- 
dation indorser,  and  a  person  taking 
the  note  with  notice  cannot  enforce 
such  indorsement.  Usher  v.  Ray- 
mond Skate  Co.,  163  Mass.  1  (1895). 
A  warehouse  corporation  has  no 
power  to  indorse  paper  as  an  accom- 
modation, even  for  a  consideration 
paid.  A  person  discounting  the  same 
for  tlie  maker  thereby  has  notice  of 
the  illegal  indorsement.  National 
ParkBankt7.German,etc.Co.,116N.Y. 
281  (1889).  A  corporation  organized 
for  freight  transfer  business  is  not 
bound,  and  is  not  liable  on  its  bond 
of  surety  for  the  debt  of  another. 
Even  a  co-surety  cannot  enforce  con- 
tribution. Lucas  V.  White  Line,  etc. 
Co.,  70  Iowa,  541  (1886).  A  corpora- 
tion cannot  be  surety  on  a  note  which 
has  nothing  to  do  with  its  business  — 
pure  accommodation.  The  payee  can- 
not collect.  Hall  v.  Auburn  Turnp. 
Co.,  27  Cal.  255  (1865).  A  national 
bank  cannot  become  an  accommoda- 
tion indorser.  National  Bank  v,  At- 
kinson, 55  Fed.  Rep.  465  (1893) :  Bo  wen 
V.  Needles  Nat.  Bank,  87  Fed.  Rep. 
430  (1898).     Cf.  note  5,  p.  1761. 

1  Bank  of  Genesee  v.  Patchin  Bank, 
19  N.  Y.  312  (1859),  holding  also  that 
a  third  party  is  not  put  upon  his  in- 
quiry if  the  paper  pxu-ports  on  its  face 
to  be  regularly  indorsed  in  the  course 
of  busin  ss;  Ex  parte  Estabrook,  2 
Low.  547  (1877);  S.  C,  8  Fed.  Cas.  794: 
Florence,  etc.  Imp.  Co.  v.  Chase  Nat. 
Bank,  106  Ala.  364(1895);  Re  Jacoby- 
Mickolas  Co.,  70  N.  W.  Rep.  1085 
(Minn.,  1897).  An  innocent  purchaser 
of  paper  indorsed*  for  accommodation 
by  a  trading  corporation  may  enforce 
the  same  against  the  corporation. 
Jacobs    Pharmacy  Co.  v.  Southern 


Bkg.  etc.  Co.,  97  Ga.  573  (1895).  The 
fact  that  the  constitution  of  the  state 
prohibits  fictitious  indebtedness  does 
not  render  void,  as  against  a  honafide 
holder,  an  accommodation  indorse- 
ment by  a  corporation.  Marshall, 
etc.  Bank  v.  O'Neal,  34  S.  W.  Rep.  344 
(Tex.,  1895).  A  honafide  purchaser  of 
a  bill  of  exchange  accepted  for  ac- 
commodation by  a  corporation  may 
enforce  it.  Farmers'  Nat.  Bank  v. 
Suttan,  etc.  Co.,  52  Fed.  Rep.  191 
(1892).  To  same  effect.  Mechanics' 
Banking  Assoc,  v.  New  York,  etc. 
Lead  Co.,  35  N.  Y.  505  (1866),  and  cases 
cited;  Central  Bank  v.  Empire,  etc. 
Co.,  26  Barb.  23  (1857),  holding  that  a 
note  made  by  the  president  and  in- 
dorsed by  the  corporation  is  binding 
upon  the  corporation  in  the  hands 
of  one  who  had  been  induced  by  its 
agent  to  accept  it  as  a  transaction  of 
the  corporation  and  within  the  scope 
of  its  business.  Morford  v.  Farmers' 
Bank,  26  Barb.  568  (1857);  Bridgeport 
City  Bank  v.  Empire,  etc.  Co.,  30 
Barb.  421  (1859) ;  Monument  Nat.  Bank 
V.  Globe  Works,  101  Mass.  57  (1869); 
Lafayette  Sav.  Bank  v.  St.  Louis 
Stoneware  Co.,  2  Mo.  App.  299  (1876), 
holding  also  that  in  a  suit  on  the 
note  the  burden  of  showing  that  it 
was  taken  by  a  third  party  with  no- 
tice of  the  inability  of  the  corporation 
to  indorse  lies  upon  the  defendant. 
A  corporation  cannot  be  an  accom- 
modation indorser.  Yet  a  hona  fide 
holder  of  the  paper  may  hold  the  cor- 
poration liable.  National  Bank  v. 
Young,  41  N.  J.  Eq.  531  (1886);  Credit 
Co.  V.  Howe  Mach.  Co.,  54  Conn.  357 
(1887).  A  manufacturing  corpora- 
tion has  no  right  to  give  accommo- 
dation paper,  but  such  paper  may  be 
enforced  by  a  honafide  holder.  Blake 
V.  Domestic,  etc.  Co.,  38  AtL  Rep.  241 
(N.  J.,  1897). 


1755 


§  775.]  BOXDS    AND    COUPONS.  [CH.  XLVI. 

ISTotwithstancling  the  general  rule  on  this  subject,  there  is 
no  rule  of  public  policy  which  prohibits  an  accommodation 
indorsement  of  commercial  paper  by  a  corporation.  Conse- 
quently, if  such  an  indorsement  is  made  with  the  knowledge 
and  assent  of  all  the  directors  and  stockholders,  and  creditors' 
rights  are  not  affected,  the  indorsement  is  valid  and  enforce- 
able.^ 

Where  the  directors  of  a  business  corporation  accept  paper 
for  accommodation,  they  are  personally  liable  for  payments 
made  or  liabilities  incurred  on  such  paper.^  But  where  an  offi- 
cer causes  a  manufacturing  company  to  indorse  for  accommo- 
dation the  note  of  a  party  all  of  whose  goods  it  purchases,  he 
is  not  personally  liable  to  the  former  company  unless  it  is 
proved  that  the  directors  and  stockholders  were  ignorant 
thereof  and  hence  did  not  acquiesce  therein.'  A  corporation 
engaged  in  selling  manufactured  goods  may  indorse  a  manu- 
facturer's note  to  enable  him  to  furnish  goods.*  "Where  a  trad- 
ing corporation  owns  most  of  the  stock  of  a  manufacturing 
corporation,  and  is  the  agent  of  the  latter  in  making  sales,  and 
furnishes  it  with  money,  and  pays  dividends  to  the  minority 
stockholders  under  an  arrangement  to  that  effect,  the  indorse- 
ments by  the  manufacturing  company  on  the  trading  company's 
paper  are  not  accommodation  indorsements.' 

§  775.  Guaranty  J)y  one  corimration  of  the  honds  or  dividends 
of  another  corjijoration —  Guaranty  hy  an  individual. — One  of 
the  most  important  and  yet  difficult  branches  of  railroad  and 
corporation  law  is  the  question  whether  one  railroad  corpora- 
tion may  guarantee  the  bonds  or  dividends  of  another  railroad 
corporation.     After  a  great  deal  of  litigation  the  rule  has  be- 

1  Martin  v.  Niagara,  etc.  Co.,  122  ^willard  v.  Holmes,  142  N.  Y.  493 
N.  Y.  165  (1890).  Cf.  McClellan  u  De-    (1894). 

troit,  etc.  Works,  56  Midi.  579  (1885).  *  Holmes,  etc.  v.  Willard,  125  N.  Y. 

Where  all  the  stockholtlers  and  all  75  (1890). 

the  directors  cause  the  corporation  to  ^  Blake  v.  Domestic,  etc.  Co.,  38  Atl. 

sign  a  note  which  is  given  to  one  of  Rep.  241  (N.  J.,  1897).    The  accommo- 

the  stockholders  in  consideration  of  dation  indorsement  may  be  valid  if 

the  sale  of  his  stock  to  another  stock-  the  proceeds  of  the  note  are  used  to 

holder,  the    corporation    is    bound,  pay  a  debt  due  to  the  corporation. 

Solomon  Co.  v.  Barber,  49  Pac.  Rep.  Lyon,  P.  &  Co.  v.  First  Nat.  Bank,  85 

524  (Kan.,  1897).    See  also  §  3,  supra.  Fed.  Rep.  120  (1898). 

2  Hutchinson  v.  Sutton  Mfg.  Co.,  57 
Fed,  Rep.  998  (1893). 

1756 


CH.  XLTI.] 


EOXDS  a:s'd  coupons. 


[§  T75. 


come  establislied  tliat  such  a  guaranty  is  valid,  provided  it  is 
based  on  a  valuable  consideration,  and  the  consideration  is  such 
as  the  guarantor  has  power  to  receive  or  invest  in.^ 

Co.  V.  Unwin,  L.  R.  2  Q.  B.  D.  214 

(1877),  where  a  release  by  a  corpora- 
tion of  a  guaranty  of  certain  profits 
made  to  it  by  a  person  who  had  sold 
property  to  it  was  upheld.  However, 
in  Madison,  etc.  Co.  v.  "VVatertown, 
etc.  Co.,  7  Wis.  59  (1858),  where  a 
plank-road  company  guaranteed  and 
paid  the  debts  of  another  plank-road 
company  which  biiilt  and  owned  a 
road  over  that  part  of  the  former "s 
route  which  the  former  had  not  con- 
structed, the  guarantor  was  defeated 
in  a  suit  for  repayment  from  the 
guaranteed  corporation-  In  Simpson 
V.  Denison,  10  Hare,  51  (1852),  the 
stockholder  of  a  railroad  company 
enjoined  the  company  from  guaran- 
teeing a  certain  dividend  on  aU  the 
stock  of  another  railroad  in  consider- 
ation of  the  right  to  carry  on  the 
business  of  the  latter  railroad-  But 
in  De  Groff  v.  American,  etc.  Co.,  21 
N.  Y.  124  (1860),  a  corporation  was 
held  liable  on  its  guaranty  that  the 
patronage  of  the  employees  of  the  cor- 
poration should  continue  to  a  store 
which  tlie  corporation  sold  with  such 
guaranty.  A  railroad  corporation 
may  guarantee  and  sell  the  bonds 
of  another  railroad  company  which 
have  been  given  by  the  latter  to  the 
former  company  in  payment  of  a 
debt.  Rogers,  etc.  Works  v.  Southern 
R  R.,  34  Fed-  Rep.  278  (1888).  Guar- 
antors of  bonds  sold  to  a  corporation 
are  liable,  though  the  corporation 
had  no  power  to  purchase.  State  v. 
Woram,  6  Hill,  33  (1843).  A  corpora- 
tion's guaranty  of  another  corpora- 
tion's bonds  is  an  original  undertak- 
ing, and  may  be  enforced  without 
resorting  to  the  latter  company. 
Philadelphia,  etc.  R.  R  u  Knight,  124 
Pa.  St.  58  (1889).  A  bank  may  guar- 
antee the  interest  on  the  debentm-es 
of  a  company.    Ex  parte  Booker,  L, 


1  Zabriskie  v.  Cleveland,  etc.  R  R, 
23  How.  381  (1859),  where  a  stockhold- 
er's smt  to  enjoin  the  fulfillment  of  a 
guaranty,  which  had  not  been  made 
in  accordance  with  a  statute  author- 
izing it,  failed  because  of  the  laches 
of  the  stockholder;  Harrison  v.  Union 
Pac.  R"y,  13  Fed.  Rep.  522  (1S82;, 
where  the  guarantor  was  a  stock- 
holder in  the  corporation  whose 
bonds  were  guaranteed,  and  the  new 
road,  when  finished,  would  become  a 
feeder  to  the  guarantor.  The  guar- 
anty was  enforced ;  Macon,  etc.  R  R. 
V.  Georgia  R  R,  63  Ga.  103  (1879), 
upholding  a  mortgage  given  by  the 
guaranteed  corporation  to  the  guar- 
antor corporation;  Madison,  etc.  R  R. 
V.  Norwich  Sav.  Assoc,  24  Ind-  457 
(1865),  where  the  guaranty  of  bonds 
in  the  hands  of  a  bona  fide  purchaser 
was  sustained,  the  bonds  having  been 
issued  to  and  in  the  name  of  the 
guarantor,  although  the  latter  acted 
only  for  accommodation;  Connecti- 
cut, eta  Ins.  Co.  v.  Cleveland,  etc.  R 
R,  41  Barb.  9  (1863),  where  an  Ohio 
guaranty  was  uplield,  though  the 
required  assent  of  the  stockholder 
had  not  been  obtained.  Though  the 
bonds  were  void,  the  guaranty  was 
enforced ;  Arnot  v.  Erie  R'y,  67  N.  Y. 
315  (1876),  aff'g  5  Hun,  608,  uphold- 
ing a  guaranty  which  the  defendant 
had  made  on  bonds  sold  by  it;  Rail- 
road Co.  V.  Howard,  7  Walk  392  (1808), 
where  the  guaranty  by  a  railroad  of 
bonds  given  to  it  by  a  city  was  up- 
held; Green  Bay,  etc.  R  R  i;.  Union 
Steamboat  Co.,  107  U.  S.  98  (1882), 
holding  that  iinder  the  charter  a  con- 
tract of  a  railroad  with  a  steamboat 
company  running  in  connection  with 
its  line,  by  which  it  gviaranteed  that 
the  gross  earnings  of  each  of  its  boats 
should  amount  to  a  certain  sum  for 
two  years,  was  valid;  SheflSeld  Nickel 


1757 


§  775.] 


BONDS  AND  COUrONS. 


[CH.  XLVI. 


A  land  and  lumber  compan}^  having  power  to  consolidate 
with  a  railroad  company  may  own  the  stock  and  guarantee  the 


R.  14  Ch.  D.  317  (1880).  A  lessee  rail- 
road, which  on  the  face  of  the  bonds 
of  the  lessor  agrees  to  pay  the  cou- 
pons, cannot,  as  against  bona  fide 
holders,  set  up  that  its  agreement 
was  ultj'a  vires  or  informally  author- 
ized. Singer  v.  St.  Louis,  etc.  R.  R., 
6  Mo.  App.  427  (1879).  Where  the 
complaint  alleges  that  the  defend- 
ant had  authority  to  guarantee  the 
bonds,  the  suit  being  upon  the  guar- 
anty, the  question  of  ultra  vires  can- 
not be  raised  by  a  demurrer.  Bryce 
V.  Louisville,  etc.  R'y,  73  Hun,  233 
(1893).  A  saw-mill  and  lumber  com- 
pany has  implied  power  to  guarantee 
the  interest  of  bonds  of  a  railroad 
constructed  for  the  purpose  of  sup- 
plying the  mill  with  logs,  even  though 
the  railroad  also  serves  the  public. 
All  the  officers  and  stockholders  of 
the  former  company  assented  to  the 
guaranty.  The  aid  in  procuring  logs 
was  sufficient.  Consideration  Mer- 
cantile Trust  Co.  V.  Kiser,  91  Ga.  636 
(1893).  Damages  were  allowed  to  a 
contractor  for  breach  of  contract 
of  a  railroad  company  to  guarantee 
bonds  in  Leroy,  etc.  R.  R.  v.  Sidell,  66 
Fed.  Rep.  27  (1895). 

In  Leavenworth  County  v.  Chi- 
cago, etc.  R.  R.,  25  Fed.  Rep.  219  (1885), 
it  appeared  that  the  Rock  Island  rail- 
road guaranteed  the  interest  on  the 
bonds  of  another  railroad.  Where 
the  guarantor  becomes  insolvent,  the 
maker  of  the  bonds  being  solvent  and 
continuing  to  pay  the  coupons,  the 
distribution  of  the  assets  of  the  guar- 
antor will  not  be  delayed  or  restricted 
by  the  possibility  of  future  liability 
on  the  guaranty.  Gay  Mfg.  Co.  v. 
Gittings,  53  Fed.  Rep.  45  (1892).  A 
construction  company's  contract  to 
pay  certain  interest  on  bonds,  which 
it  received  in  payment  in  advance, 
does  not  obligate  it  to  pay  interest  on 
bonds  received  by  it  in  regular  pay- 


ment. Foster  v.  Mansfield,  etc.  R.  R., 
36  Fed.  Rep.  627  (1888);  aff'd,  146  U. 
S.  88  (1892).  A  guaranty  that  certain 
construction  work  will  be  done  free 
from  any  lieu  ahead  of  a  specified 
mortgage  does  not  render  the  guar- 
antor liable  to  parties  who  have  fur- 
nished materials  to  the  contractor. 
Holly  Mfg.  Co.  V.  New  Chester  Water 
Co.,  48  Fed.  Rep.  879  (1891).  In  March 
V.  Eastern  R.  R.,  43  N.  H.  515  (1862), 
where  one  railroad  leased  its  entire 
property  and  franchises  to  another, 
it  was  held  that,  under  the  provisions 
of  the  lease,  there  was  neither  a 
union  of  interest  and  capital  between 
the  two  roads,  nor  any  warrant  of  an 
equality  of  dividends  between  the 
stockholders  of  the  two  corporations. 
A  brewing  company  has  power  to 
guarantee  a  lease  of  premises  occu- 
pied by  one  of  its  customers,  and  con- 
taining fixtures  mortgaged  to  the 
company.  Fuld  t".  Burr  Brewing  Co., 
18  N.  Y.  Supp.  456  (1892).  A  corpora- 
tion organized  to  deal  in  the  stock  of 
a  stockyard  corporation,  and  hold  per- 
sonal and  real  estate,  may  buy  com- 
peting stockyards;  also  may  buy  the 
stock  of  a  contemplated  competing 
company;  also  buy,  guarantee,  and 
sell  the  bonds  of  such  competing 
company;  also  pay  money  to  settle 
suits  against  the  first-named  stock- 
yard company,  and  to  bind  stockyard 
men  not  to  erect  competing  yards 
for  a  specified  term  of  years  within 
a  certain  territory;  and  may  sell  any 
or  all  of  the  above  property  and  right 
to  the  first-named  company.  Eller- 
man  v.  Chicago  Jvmction,  etc.  Co.,  49 
N.  J.  Eq.  217  (1891).  Where  a  com- 
pany is  in  financial  distress,  and  its 
creditors  agree  to  an  extension  of 
time  provided  the  company  assimaes 
certain  private  debts  of  the  directors, 
the  company  has  power  to  do  so,  but 
bad  faith  may  invalidate  the  trans- 


1758 


CH.  XLYI.] 


BOIsTS    AKD    COTJPOXS. 


rc?  '-^K 


bonds  and  preferred  stock  of  such  railroad  company,  tlie  rail- 
road of  which  is  beneficial  to  the  land  company  in  its  mining, 
manufacturing,  and  lumbering  business.^     If  the  guaranty  is 


action.  Stark  Bank  v.  United  States 
Pottery  Co.,  34  Vt.  144  (1861).  Where 
one  railroad  company  contracts  with 
another  company  to  pay  the  interest 
on  the  bonds  of  the  latter  company, 
and  then  caused  or  consented  to  the 
latter  company's  issuing  bonds  with 
a  statement  in  such  bonds  that  the 
interest  was  guaranteed  by  the  for- 
mer company,  the  former  company 
is  liable  for  such  interest,  even  though 
it  was  not  a  party  to  the  bonds  them- 
selves. Opdyke  v.  Pacific  R.  R.,  3 
DUL  55  (1874);  S.  C,  18  Fed.  Cas.  744 
Coupon-holders  may  assume  that  the 
stockholders  have  authorized  a  guar- 
anty as  required  by  statute.  Con- 
necticut, etc.  Ins.  Co.  v.  Cleveland, 
etc.  R,  R.,  41  Barb.  9  (1863).  Where 
the  guarantor  of  bonds  is  secured  by 
a  mortgage,  the  holder  of  the  bonds 
is  entitled  to  the  benefit  of  the  moi-t- 
gage.  Young  v.  Montgomery,  etc.  R. 
R,  2  Woods,  606  (1875);  S.  C,  30  Fed. 
Cas.  850.  Where,  under  its  power  to 
lease,  a  railroad  buys  all  the  stock  of 
another  railroad,  it  may,  as  a  consid- 
eration for  such  stock,  guarantee  the 
bonds  of  the  lessor  railroad.  Atchi- 
son, etc.  R.  R  V.  Fletcher,  35  Kan,  236 
(1886).  Where  a  lease  of  one  railroad 
to  another  is  valid,  the  consideration 
of  the  lease  may  be  the  guaranty  by 
the  lessee  of  the  bonds  of  the  lessor. 
Low  V.  Central  Pac.  R  R,  52  CaL  53 
(1877).  It  is  sufficient  consideration 
for  a  guaranty  that  the  guarantor  is 
the  lessee  of  the  principal  debtor  and 
the  proceeds  are  to  be  used  in  equip- 
ping the  leased  road.  Codman  v. 
Vermont,  etc.  R  R,  16  Blatchf.  165 
(1879);  S.  C,  5  Fed.  Cas.  1157.  It  is  a 
sufficient  consideration  for  the  guar- 
anty that  it  was  to  enable  a  connect- 
ing line  to  adopt  the  same  gauge  as 
the  guaranteeing  line,  and  thereby 
increase  the  business  of  the  latter. 

i: 


Connecticut,  etc.  Ins.  Co.  v.  Cleve- 
land, etc.  R.  R,  41  Barb.  9  (1863).  A 
railroad  may  guarantee  the  payment 
of  municipal  bonds  which  are  issued 
to  aid  the  railroad.  Railroad  Co.  v. 
Howard,  7  Wall  392  (1868).  An  ad- 
ditional obligation  in  the  bond,  mak- 
ing it  payable  in  gold,  and  added 
after  the  guaranty  was  made,  binds 
the  company,  but  not  the  guarantor. 
WaUace  v.  Loomis,  97  U.  S.  146  (1877). 
The  consideration  of  a  guaranty  may 
be  the  changing  of  the  gauge  of  the 
railway  whose  bonds  are  guaranteed. 
Zabriskie  v.  Cleveland,  etc  R.  R,  23 
How.  381  (1859).  A  stockholder  in  a 
railway  company  cannot  set  aside 
the  company's  indorsement  of  an- 
other company's  bonds  in  considera- 
tion of  certain  contracts  between 
them,  the  indorsing  company  having 
paid  the  interest  for  five  years.  Co- 
zart  V.  Georgia,  etc.  Co.,  54  Ga.  379 
(1875).  Where  the  payment  of  the 
coupon  is  guaranteed,  demand  of  pay- 
ment at  the  place  where  the  coupon 
is  payable  should  be  made  within  a 
i-easonable  time  after  it  becomes  due. 
Arents  v.  Commonwealth,  18  Gratt. 
(Va.)  750  (1868).  The  guarantor  of 
the  prompt  payment  of  the  principal 
and  interest  of  bonds  is  liable  for  in- 
terest on  the  coupons  which  are  not 
paid  when  they  become  due.  Phila- 
delphia, etc.  R  R  u  Knight,  124  Pa. 
St.  58  (1889).  Where  by  the  terms  of 
a  lease  the  net  earnings  are  to  be 
used  to  pay  mortgage  bondholders  of 
the  lessor,  and  the  lessee  afterwards 
passes .  into  a  receiver's  hands,  the 
court  will  enforce  such  agreement. 
Grand  Trunk  R'y  v.  Central  Vt.  R  R., 
78  Fed.  Rep.  690  (1897).  For  a  care- 
ful discussion  of  the  power  of  corpo- 
rations to  execute  guaranties,  see  an 
article  in  31  Am.  L.  Rev.  363. 
1  Marbury  v.  Kentucky  Union  Land 
'59 


§  775.] 


BONDS    AND    COUrONS. 


[cn.  XLVL 


within  the  power  of  the  company,  and  no  stockhohler  objects, 
it  is  not  necessary  to  show  that  it  was  beneficial  to  the  stock- 
hoklers,  nor  to  show  any  special  consideration  other  than  the 
money  paid  for  the  securities  having  the  guaranty.^  Where  a 
land  company  owns  land  and  also  shares  of  stock  in  a  railway 
company,  it  has  power,  upon  selling  such  stock,  to  guarantee 
dividends  thereon.^  Under  a  statute  authorizing  a  guaranty  of 
bonds  of  any  railway  company  within  the  state,  a  railroad  may 
guarantee  the  bonds  of  a  railroad  with  which  it  connects  by 
means  of  a  leased  line,  and  the  consideration  of  the  guaranty 
may  be  the  stock  of  the  company  whose  bonds  are  guaranteed.' 
Hence  a  bill  filed  by  the  guarantor  in  such  a  case  to  cancel  the 
guaranty  will  fail.*  Where  a  bank  buys  wall  paper  at  a  sher- 
iff's sale,  and  organizes  a  corporation  to  sell  the  paper,  all  the 
stock  of  the  corporation  being  ovrned  by  the  bank,  and  the 
bank  guarantees  debts  thereafter  incurred  by  such  corporation, 
the  bank  is  liable  on  such  debts.'  A  guaranty  by  one  railroad 
of  the  liabilities  of  another  railroad,  where  there  is  no  direct 
consideration  therefor,  is  not  enforceable.*    A  company  organ- 


Co.,  62  Fed.  Rep.  335  (1894),  holding 
also  that  it  is  not  necessary  that  an 
actual  consolidation  be  made.  Aff'g 
on  this  point  Tod  v.  Kentucky  Union 
Land  Co.,  57  Fed.  Rep.  47  (1893). 

1  Marbuiy  v.  Kentucky  Union  Land 
Co.,  62  Fed.  Rep.  335  (1894).  See  also 
§  3,  supra.  A  guaranty  by  one  cor- 
poration of  an  obligation  of  another 
corporation  by  reason  of  the  former 
employing  an  expert  of  the  latter  is 
legal  if  all  the  stockholders  of  both 
companies  assent  thereto.  Butter- 
worth,  etc.  V.  KJritzer,  etc,  Co.,  73  N. 
W.  Rep.  990  (Mich.,  1897). 

2Marbury  v.  Kentucky  Union  Land 
Co.,  62  Fed.  Rep.  335  (1894). 

3L6uisville  Trust  Co.  v.  Louisville, 
etc.  R'y,  75  Fed.  Rep.  433  (1896),  holding 
also  that  where  the  road  of  a  consoli- 
dated corporation  runs  into  both  Ken- 
tucky and  Indiana,  and  the  Kentucky 
statutes  authorize  a  guaranty  by  the 
company,  and  the  Indiana  statutes 
authorize  a  guaranty  upon  the  peti- 
tion of  a  majority  in  interest  of  the 

1 


stockholders,  the  guaranty  may  be 
in  accordance  with  the  Kentucky 
statutes.  See  also  87  Fed.  Rep.  sin. 
<  Louisville  Trust  Co.  v.  Louisville, 
etc.  R'y,  75  Fed.  Rep.  433  (1896),  re- 
versing Louisville,  etc.  R'y  v.  Ohio 
Valley,  etc.  Co.,  69  Fed.  Rep.  431  (1894), 
and  practically  reversing  S.  C,  57 
Fed.  Rep.  42  (1893),  where  a  demurrer 
was  involved. 

5  American  Nat.  Bank  v.  National 
Wall-Paper  Co.,  77  Fed.  Rep.  85  (1896). 

6  Pennsylvania  R.  R.  v.  St.  Louis, 
etc.  R.  R.,  118  U.  S.  290  (1886),  where 
a  distant  railroad  guaranteed  to  a 
lessor  railroad  the  rental  to  be  paid 
by  another  railroad.  Coleman  v. 
Eastern  Counties  R'y,  10  Beav.  1 
(1846),  where  a  stockholder  enjoined 
the  railroad  from  establishing  and 
guaranteeing  profits  to  a  packet  line. 
The  payee  of  a  note  given  by  one 
corporation  in  payment  of  a  debt 
due  from  another  corporation,  there 
being  no  connection  or  considera- 
tion between  the  two  corporations, 

•60 


CH. 


XLYI.] 


BONDS    AND    COUPONS. 


[§  '^V5. 


izecl  to  manufacture  ironwork  for  mining  plants  cannot  legally 
guarantee  the  performance  of  a  person's  contract  for  the  erec- 
tion of  a  mining  plant,  even  though  it  thereby  makes  a  sale  of 
iron.  The  company  is  not  liable,  even  though  the  contract  was 
not  performed.^  A  corporation  cannot  give  away  its  funds  or 
guarantee  certain  receipts  to  another  corporation  in  a  different 
business.^ 

A  lumber  company  may  become  surety  on  a  building  con- 
tractor's bond  where  it  is  customary  for  such  companies  so  to 
do  in  order  to  obtain  business.'  A  national  bank  may  agree 
that  a  person  going  security  on  an  attachment  bond  will  be 


cannot  enforce  the  note.  Ehrgott  v, 
Topeka  Bridge  Manufactory,  16  Kan, 
486  (1876);  Rahm  v.  King  Bridge 
Manufactory,  16  Kan.  277  (1876).  A 
transfer  company  cannot  guarantee 
the  credit  of  another  person.  Lucas 
V.  White  Line  Transfer  Co.,  70  Iowa, 
541  (1886).  A  railroad  has  no  power 
to  guarantee  dividends  on  the  stock 
of  an  elevator  company,  even  though 
the  latter  subscribes  for  railroad 
stock.  Memphis,  etc.  Co.  v.  Memphis, 
etc.  R.  R.,  5  S.  W.  Rep.  53  (Tenn., 
1887).  A  contract  between  two  com- 
panies by  which  one  is  to  name  four 
of  the  six  directors  of  the  other  (and 
is  also  to  sell  the  stock  of  the  latter, 
carry  out  its  contracts,  and  pay  divi- 
dends on  its  stock)  is  illegal.  James 
V.  Eve,  L.  R.  6  H.  L.  335  (1873).  The 
amount  of  indebtedness  which  may 
be  incurred  by  a  national  bank  being 
limited  to  the  amount  of  its  capital 
stock,  its  guarantee  of  a  debt,  after 
it  has  already  incurred  liabilities  to 
the  extent  allowed  by  law,  cannot 
be  enforced.  Weber  v.  Spokane  Nat. 
Bank,  50  Fed.  Rep.  735  (1892).  In  a 
suit  to  enforce  a  guaranty  by  one 
company  of  dividends  on  the  stock 
of  another  company,  the  charter  au- 
thority for  such  guaranty  must  be 
set  forth;  and  where  the  suit  is 
against  still  another  corporation  on 
the  ground  that  the  latter  had  as- 
sumed such  guaranty,  the  contract  of 
such  assumption  must  be  set  forth. 


Ordinarily  such  a  guaranty  is  not 
enforceable.  Rhorer  v.  Middlesboro, 
etc.  Co.,  44  S.  W.  Rep.  448  (Ky.,  1898). 

1  Humboldt  Min.  Co.  v.  American 
Mfg.  etc.  Co.,  62  Fed.  Rep.  356  (1894). 

^  Davis  V.  Old  Colony  R.  R.,  181 
Mass.  258  (1881),  where  the  guaranty 
by  a  corporation  of  the  expenses  of  a 
musical  festival  was  held  ultra  vires. 
A  railroad  subscription  to  a  state 
fair  was  enforced  in  State  Board  of 
Agi-iculture  v.  Citizens'  Street  R'y, 
47  Ind.  407  (1874).  Cf.  g§  64,  681, 
supra;  §  909,  infra.  A  stockholder 
may  enjoin  a  railway  from  donat- 
ing its  funds  to  an  exlaibition,  even 
though  it  is  claimed  that  thereby  the 
corporate  receipts  will  be  increased. 
Tomkinson  v.  South  Eastern  R'y. 
L.  R.  35  Ch.  D.  675  (1887).  A  stock- 
holder who  offsets  to  his  statutory 
liability  the  corporate  guaranty  of 
bonds  held  by  him  must  prove  the 
consideration.  Briggs  v.  Cornwell,  9 
Daly,  436  (N.  Y.,  1881).  A  railroad 
cannot  guarantee  the  dividends  of  an 
elevator  corporation  in  consideration 
of  the  latter  company  subscribing 
for  the  stock  of  the  former  company. 
Memphis,  etc  Co.  v.  Memphis,  etc. 
R.  R.,  5  S.  W.  Rep.  52  (Tenn.,  1887). 
A  freight  and  transfer  corporation 
has  no  power  to  guarantee  the  credit 
of  a  third  person.  Lucas  v.  White 
Line  Transfer  Co.,  70  Iowa,  541  (1886). 

3  Wheeler,  etc.  Co.  v.  Everett  Land 
Co.,  14  Wash.  630  (1896). 


Ill 


1761 


>•] 


BOXDS    AND    COUPONS. 


[CH.  XLTI. 


protected  by  the  bank,  although  the  bond  is  not  given  for  the 
benefit  of  the  bank.^  A  receiver,  within  a  reasonable  time 
after  taking  possession,  may  refuse  to  carry  on  a  lease  which 
the  company  had  accepted,  and  may  refuse  to  be  bound  by  a 
guaranty  of  the  bonds  of  the  lessor.^  Where  a  guaranty  au- 
thorized by  statute  is  to  be  by  the  company,  it  may  be  by  the 
directors  without  any  action  of  the  stockholders,'  A  stock- 
holder who  assents  to  a  guaranty  cannot  afterwards  attack  it 
on  the  ground  that  the  corporation  had  no  power  to  enter  into 
it.*  A  statutory  provision  that  a  guaranty  may  be  made  only 
on  the  petition  of  a  majority  in  interest  of  the  stockholders  is 
directory  and  not  mandatory.* 

It  is  a  question  of  considerable  doubt  as  to  whether  the  guar- 
anty on  bonds  is  negotiable,  the  same  as  the  bends  themselves ; 
but  the  better  opmion  is  that  the  negotiability  of  the  instru- 
ment guaranteed  extends  also  to  the  guaranty  itself.^ 


>  Seeber  v.  Commercial  Nat.  Bank, 
77  Fed.  Rep.  957  (1897).  A  bank  is  not 
bound  by  a  guaranty  which  its  cash- 
ier makes  on  a  bond  and  mortgage 
in  which  the  bank  has  no  interest. 
Farmers',  etc.  Nat.  Bank  v.  Smith, 
77  Fed.  Rep.  129  (1896).  A  national 
bank  has  no  power  to  guarantee  the 
payment  of  debts  where  the  bank 
has  no  interest  in  the  matter,  and 
such  a  guaranty  is  not  enforceable. 
Commercial  Nat.  Bank  v.  Pirie,  83 
Fed.  Rep.  799  (1897).   Cf.  note  3,  p.  1754. 

2  Ames  V.  Union  Pac.  R'y,  60  Fed. 
Rep.  966  (1894). 

3  Louisville  Trust  Co.  v.  Louisville, 
etc.  R'y,  75  Fed.  Rep.  433  (1896). 

*  If  all  parties  assent  to  a  guaranty 
by  the  company  of  bonds  and  stock 
in  another  company  owned  by  di- 
rectors of  the  first  company,  such 
guaranty,  being  in  consideration  of 
a  lease,  will  not  be  set  aside.  Barr 
V.  New  York,  etc.  R  R.,  125  N.  Y.  263 
(1891).  Where  an  agricultural  so- 
ciety guarantees  the  bonds  of  a  street 
railway,  a  parti cii^ating  stockholder 
in  such  society  cannot  afterwards 
object.  Thompson  v.  Lambert,  44 
Iowa,  239  (1876).     See  also  Martin 


V.  Niagara,  etc.  Co.,  122  N.  Y.  165 
(1890). 

6  It  is  no  defense  that  the  consent 
of  stockholders,  as  required  by  stat- 
ute, was  not  obtained.  A  party  tak- 
ing with  notice  is  protected  if  such 
party's  pledgor  was  bona  fide  with- 
out notice.  Louisville  Trust  Co.  v.  Lou- 
isville, etc.  R'y,  75  Fed.  Rep.  433  (1896), 
reversing  the  lower  coirrt,  which 
held  that  a  railroad  corporation  has 
no  implied  power  to  guarantee  th© 
bonds  of  another  railroad  corporation, 
and  that  wliere  the  guaranty  is  al- 
lowed by  statute  upon  the  petition 
of  the  holders  of  a  majority  of  th& 
stock,  a  guaranty  without  that  pe- 
tition, there  bemg  no  recitation  that 
the  petition  had  been  made,  is  void, 
and  will  be  canceled  at  the  suit  of  the 
guaranteeing  company,  even  though 
the  guaranty  runs  to  the  holder,  and 
even  though  it  received  stock  as  a 
consideration  and  was  empowered 'to 
acquire  such  stock. 

*•  Louisville  Trust  Co.  v.  Louisville, 
etc.  R'y,  75  Fed.  Rep.  433  (1896);  Top- 
pan  V.  Cleveland,  etc.  R  R.,  1  Flip. 
74  (1862);  S.  C,  24  Fed.  Cas.  56.  See 
also  §  768,  supra.  Not  only  the  bonds^ 


1763 


CH.  XL VI.] 


BONDS    AND    COUPONS. 


[§  775. 


Where  bonds  are  issued  to  a  railroad  company  or  its  assigns, 
and  are  indorsed  by  the  company  and  sold,  the  lonafide  pur- 
chaser may  enforce  the  indorser's  liability.  It  is  the  liability 
of  an  indorser,  and  not  of  a  guarantor.^    A  land  company  own- 


but  the  state's  indorsement  or  guar- 
anty on  them,  are  negotiable,  and  a 
hona  fide  purchaser  of  them  from  a 
contractor  to  whom  they  were  fraud- 
ulently issued  may  enforce  them. 
Oilman  v.  New  Orleans,  etc.  R.  R.,  72 


ridge  v.  Davis,  20  Vt.  499  (1848), 
Davis,  J.,  seems  to  have  thought  such 
a  guaranty  would,  in  effect,  be  ne- 
gotiable ;  while  in  Sandford  v.  Norton, 
14  Vt.  228  (1842),  and  in  Sylvester  v. 
Downer,  20  Vt.  355  (1848),  the  late 


Ala.  566  (1882).     The  state's  indorse-    Chief  Justice  Redfield  was  clearly 

"of  the  opinion   that,  like   ordinary 
simple    contracts,    such    guaranties 
would  not  be  negotiable."    If  a  rail- 
road may  lease  another  road,  it  may 
guarantee    interest    on  the  latter's 
bonds,  such  interest  being  the  rent. 
Though  the  bonds  are  negotiable  the 
guaranty  is  not.     If  bonds  are  issued 
for  construction  work  which  is  not 
done,  a  hona  fide  purchaser  of  the 
bonds  cannot    enforce    a  guaranty 
thereof  by  another  corporation.  East- 
ern, etc.  Bank  v.  St.  Johnsbury,  etc. 
R.  R.,  40  Fed.  Rep.  423  (1889).    As  to 
the  negotiability  of  a  guaranty  of  a 
note  or  bond,  see  also    Brandt  on 
Sm-etyship,  i-§  48, 49;  87  Fed.  Rep.  815. 
1  So  also  where  the  company  buys 
bonds  of  another  company  and  guar- 
antees and  sells  them.     Arnot  v.  Erie 
R'y,  67  N.  Y.  315  (1876).    Where  a 
municipal  bond  is  payable  to  a  rail- 
"road  company  or  its  assigns,  and  the 
company  sells  it  with  the  indorse- 
ment, "  The  New  Orleans,  Jackson,  & 
Great  Northern  Railroad  Company, 
for  value  received,  hereby  transfers 
the  within  bond  to  the  New  Orleans 
Savings  Institution,  or  assigns,"  the 
company  is  liable  as  an  indorser  of 
the  bond  when  it  becomes  due.   Bon- 
ner V.  New  Orleans,  2  Woods,  135 
(1875);  S.  C,  3  Fed.  Cas.  853.    A  rail- 
road  company  may  accept  the  bills 
of  exchange  of  another  railroad  cona- 
pany,  the    consideration  being  the 
altering  the  gauge  of  the  latter  com- 
pany so  as  to  enable  the  cars  of  the 
03 


ment  or  guaranty  of  bonds  is  negoti 
able.  State  v.  Cobb,  64  Ala.  127(1879). 
"  Where  the  statute  confers  express 
authority  upon  the  company  to  guar- 
antee the  bonds  of  another  company, 
a  mere  failure  on  the  part  of  the 
guaranteeing  company  to  pursue  the 
mode  specified  in  the  statute  will 
not  invalidate  such  guaranty  in  the 
hands  of  the  hona  fide  holder,"  Atchi- 
son, etc.  R.  R  V.  Fletcher,  35  Kan. 
236,  248  (1886).    For  a  full  statement 
of  the  law  relative  to  the  negotia- 
bility of  a  guaranty  of  a  note,  see 
Daniels  on  Negotiable  Instruments 
(4th  ed.),  §§  1774-1784.     A  guaranty 
indorsed  on  a  negotiable  note  is  gen- 
erally not  negotiable.    1  Am.  Lead. 
Cas.  (ed.  1871),  410.     Qucere,  whether 
this  is  the  same  as  to  guaranties  of 
railroad  bonds.     Arents  v.  Common- 
wealth, 18  Gratt.  (Va.)  750,  767  (1868). 
In  Codman  v.  Vermont,  etc.  R  R.,  16 
Blatchf.  165  (1879);  S.  C,  5  Fed.  Cas. 
1157,  where  two  companies  joined  in 
making  notes,  and  then  one  of  these 
companies  indorsed    the  same  and 
also  guaranteed  payment,  the  court, 
per  Wheeler,  J.,  said:  "This  guar- 
anty is  not,  in  terms,  negotiable.  By 
it  the  defendant  guarantees  the  pay- 
ment of  the  note,  principal  and  in- 
terest, 'according  to  its  tenor.'    The 
note  being  negotiable,  perhaps  these 
words   draw  that  quality  into  the 
guaranty.     If  they  do,  the  guaranty 
would  seem  to  be  negotiable.     Story, 
Prom.  Notes,  §  484.    If  not,  in  Part- 

1 


§  rr^.:\ 


BONDS    AND    COrrONS. 


[cn.  XL VI. 


ing  tlie  bonds  of  a  railroad  company  may  indorse  or  guaran- 
tee tliem  upon  selling  tliem.^  A  guaranty  of  stock,  Avithout 
specifying  the  length  of  time  for  wliich  tlie  guaranty  is  to 
run,  continues  so  long  as  the  stock  is  outstanding.  In  case  of 
the  insolvency  of  the  guarantor,  the  guaranty  constitutes  a 
claim  against  it,  and  the  amount  of  the  claim  is  measured  by 
the  value  of  the  stock  if  the  guarantor  had  remained  solvent." 
A  guaranty  on  a  bond  is  transferable,  but  at  common  law  a 
suit  to  enforce  it  should  be  brought  in  the  name  of  the  payee 
of  the  bond,  even  though  the  bond  runs  to  a  certain  person  or 
bearer.' 

A  guaranty  of  the  bonds  or  dividends  on  the  stock  of  a  cor- 
poration should  be  written  on  the  bonds  or  certificates  of 
stock  and  signed  by  the  guaranteeing  party.  If  the  guaranty 
rests  merely  on  a  contract  between  the  two  corporations,  it 
may  be  modified  by  the  corporations ;  *  and  it  may  be  beyond 


former  to  run  over  the  tracks.  Smead 
V.  Indianapolis,  etc.  R.  R.,  11  Ind.  104 
(1858).  Where  the  bonds  are  payable 
to  the  order  of  another  railroad  com- 
pany or  its  assigns,  and  are  indorsed 
by  the  latter  and  sold,  the  latter  are 
liable  as  an  indorser  to  a  hona  fide 
holder,  even  though  the  indorsement 
was  ultra  vires.  Madison,  etc.  R.  R. 
V.  Norwich,  etc.  Soc,  24  Ind.  457  (I860;. 
Where  a  land  company  has  power  to 
purchase  the  bonds  of  a  railway  com- 
pany, it  may  guarantee  their  pay- 
ment upon  selling  them.  Tod  v.  Ken- 
tucky Union  Land  Co.,  57  Fed.  Rep. 
47  (1893);  aff'd  on  this  point  in  63  Fed. 
Rep.  335.  A  person  accepting  a  guar- 
anty of  a  railroad,  knowing  that  it 
could  be  given  only  on  the  petition 
of  a  majority  in  interest  of  the  stock- 
holders, and  knowing  that  such  peti- 
tion had  not  been  made,  cannot  en- 
force the  guaranty.  Louisville  Trust 
Co,  V.  Louisville,  etc  R'y,  75  Fed.  Rep. 
483  (1896). 

1  Marbury  v.  Kentucky  Union  Land 
Co.,  62  Fed.  Rep.  335  (1894),  the  court 
Baying:  "  The  power  of  the  land  com- 
pany to  enter  into  such  an  obligation 
for  such  a  purpose  is  completely  es- 


tablished by  the  case  of  Railroad  Co. 
V.  Howard,  7  Wall.  392  (1868).  In 
that  case  it  was  held  that  a  rail- 
road corporation,  with  power  to  issue 
bonds  for  the  construction  of  its  road, 
might  guarantee  the  bonds  of  cities 
and  counties,  which  had  been  law- 
fully issued  for  the  purpose  of  aiding 
the  railroad  in  the  construction."  A 
railroad  that  owns  all  the  stock  of 
another  railroad,  and  builds  the  lat- 
ter, may  take  the  mortgage  bonds  of 
the  latter  in  payment,  and  guarantee 
the  principal  and  interest  of  the 
bonds  and  sell  the  same.  Where  the 
principal  rflay  be  declared  due  on  de- 
fault in  payment  of  interest,  the 
guarantor  is  liable  on  the  principal  so 
declared  due.  Dougan  v.  Evansville, 
etc.  R.  R.,  15  N.  Y.  App.  Div.  483  (1897). 

2  Tod  V.  Kentucky  Union  Land  Co., 
57  Fed.  Rep.  47  (1893).  See  also  Mar- 
bui-y  V.  Kentucky  Union  Land  Co., 
62  Fed.  Rep.  335  (1894). 

3  Owen  V.  Potter,  73  N.  W.  Rep.  977 
(Mich.,  1898). 

4  If  the  guaranty  is  to  the  corpora- 
tion, and  not  to  the  stockholders  sev- 
erally, the  board  of  directors  may 
reduce  the  amount  of  the  guaranty. 


1764 


en.  XLVi.] 


BONDS    AISTD   COUPOXS. 


[§  TT5. 


the  power  of  tlie  bondholder  to  enforce  the  guaranty,'  or  the 
guaranteed  company  may  have  difficulty  in  enforcing  the  con- 
tract.^ The  agreement  of  a  railroad  company  with  another 
company  to  pay  the  interest  on  the  bonds  of  the  latter  cannot 
be  enforced  by  a  contractor  with  the  former,  who  was  to  build 
the  road  for  the  bonds.^  The  holder  of  coupons,  representing 
interest  upon  railroad  bonds,  has  no  right  of  action  on  an  agree- 
ment by  the  lessee  of  the  railroad  to  apply  the  net  earnings  to 
the  payment  of  the  interest  coupons,  and  to  buy  up  the  cou- 
pons if  the  net  earnings  should  not  be  sufficient  to  pay  them, 
such  holder  of  coupons  being  a  stranger  to  the  contract  and 
the  consideration.^  A  guaranty  of  the  principal  and  interest 
of  a  bond  does  not  follow  a  coupon  which  has  been  detached 
from  the  bond.^  A  guaranty  of  coupons  set  forth  in  the  bonds 
themselves  may  be  enforced  by  the  holder,  even  though  the 
trustee  of  the  mortgage  also  has  power  to  enforce  the  guaranty, 
and  even  though  the  mortgage  provides  that  in  case  the  secu- 
rity becomes  insufficient  the  guarantor  shall  pay  certain  of  the 
obligations  until  it  becomes  sufficient.®    Where  the  guaranty 


Beveridge  v.  New  York,  etc.  R  R., 
113  N.  Y.  1  (1889). 

1  The  agreement  of  a  railroad  com- 
pany to  pay  the  bonds  of  another 
railroad  company  is  not  enforceable 
by  the  bondholders.  The  court  said: 
"  A  mere  valid  promise  or  iindertak- 
ing,  taken  by  the  company  to  give  it 
support  financially  by  enabling  it 
to  escape  default  for  the  non-pay- 
ment of  interest,  evidently  is  not  the 
property  which  the  mortgagee  took 
by  force  of  this  indenture,  although 
it  was  obtained  by  the  mortgagor  for 
its  financial  relief  and  support,  and 
its  performance  would  have  had  the 
effect  to  enable  it  to  operate  its  road." 
There  is  no  privity  of  contract  be- 
tween the  contracting  company  and 
the  bondholders  in  such  a  case  as  this. 
The  contract  is  between  the  two  com- 
panies alone.  The  outside  company 
owed  no  debt  and  held  no  fund  in 
trust  for  the  other  company  nor  for 
the  latter's  bondholders.  Metropol- 
itan Trust  Co.  V.  New  York,  etc.  R  R, 

17 


45  Hvm,  84  (1887).  A  different  case 
is  presented  where  the  contract  is 
executed,  as  where  a  lease  has  been 
made.  Metropolitan  Trust  Co.  v.  New 
York,  etc.  R  R,  45  Hun,  84  (1887). 

2  Where  one  railroad,  by  contract 
with  another,  guarantees  the  interest 
on  the  bonds  of  the  latter,  but  fails  to 
fvdfill  its  contract,  the  latter  railroad 
itself  cannot  enforce  the  guaranty. 
The  liability  to  repay  attaches  at  once. 
In  any  case,  the  remedy  is  not  in 
equity.  Bradford,  etc.  E.  E.  v.  New 
York,  etc.  R  R,  123  N.  Y.  316  (1890). 
A  guaranty  by  one  company  of  divi- 
dends on  the  stock  of  another  com- 
pany IS  a  collateral  imdertaking.  Mil- 
ler v.  Eatterman.47  Ohio  St.  141  (1890). 

3Eeynolds  v.  Louisville,  etc.  R'y» 
143  Ind.  579  (1895). 

4  Freeman  v.  Pennsylvania  R  R, 
173  Pa.  St.  274  (1896).  See  g  831  infra. 

8  Clokey  v.  Evansville,  etc.  R  R.,  16 
N.  Y.  App.  Div.  304  (1897). 

^Townsend  v.  Colorado  Fuel,  etc 
Co.,  16  N.  Y.  App.  Div.  314  (1897). 
65 


R  Y75.]  EOXDS    AND   COUPONS.  [CH.  XLVI. 

is  not  for  tlie  yearly  paymont  of  a  sum  equal  to  a  specified  per- 
centage on  the  stock  held  by  the  guaranteed  party  in  the  cor- 
poration, nor  on  the  nominal  amount  of  his  stock,  but  is  that 
the  dividends  of  the  corporation  shall  annually  equal  that  sum, 
the  dissolution  of  the  corporation  puts  an  end  to  the  guarant}^ 
The  dissolution  in  this  case  was  duo  to  acts  of  the  corporation 
for  which  all  parties  were  equally  responsible.^  Where  one 
railroad  leases  another  and  guarantees  dividends  to  the  stock- 
holders of  the  latter,  but  for  several  years  fails  to  meet  the 
guaranty,  a  stocldiolder,  who  in  the  meantime  disposes  of  his 
stock,  but  retains  the  "  dividends  and  profits  "  arising  within 
a  certain  time,  is  entitled  to  the  arrears  of  dividends,  even 
though  the  same  are  paid  after  the  time  specified  in  the  reser- 
vation, and  even  though  by  compromise  they  are  only  paid  in 
part.^  Even  though  the  bondholders  buy  the  property  at  fore- 
closure sale  and  afterwards  sell  it  at  a  profit,  the  guarantor  of 
the  bonds  is  entitled  to  credit  for  only  the  price  realized  at 
the  foreclosure  sale.'  Where  bondholders  of  a  lessor  railroad 
are  entitled  to  the  rent  in  payment  of  their  coupons,  they  may 
enforce  the  obligation.*  Even  though  a  railroad  company  has 
guaranteed  the  bonds  of  another  railroad  company,  and  then 
sells  all  its  property  to  a  third  railroad  company,  yet  the  guar- 
anteed bondholders  cannot  have  a  receiver  appointed  of  the 
price  received  on  such  sale,  nor  can  they  prevent  a  distribution 
of  the  price  among  the  stockholders  of  the  selling  company, 
unless  it  is  shown  that  thereby  the  guarantor  is  made  insolv- 
ent.' Where  a  railroad  company  leases  all  its  property  to  an- 
other company,  and  by  the  terms  of  the  lease  the  lessee  is  to 
pay  dividends  on  the  stock  of  the  lessor  directly  to  the  holders 
thereof,  and  the  lessee  is  also  to  be  allowed  to  place  a  mort- 
gage upon  the  property  of  the  lessor,  the  lessor  corporation, 
which  has  passed  into  the  hands  of  a  receiver  by  reason  of  such 
mortgage,  may  file  a  bill  in  equity  to  compel  the  lessee  to  ao- 

1  Lorillard  v.  Clyde,  142  N.  Y.  456  41 S.  W.  Rep.  1015  (Ky.,  1897).  Where 
(1894),  rev'g  15  N.  Y.  Supp.  809,  and  by  the  terms  of  a  lease  the  rent  is  to 
20  N.  Y.  Supp.  433.  be  used  to  pay  the  interest  on  bonds, 

2  Meldrim  v.  Trustees,  etc.,  28  S.  E.  the  contract  may  be  enforced  by  the 
Rep.  431  (Ga.,  1897).  bondholders.    Welden  Nat.  Bank  v. 

3  Owen  V.  Potter,  73  N.  W.  Rep.  977  Smith,  86  Fed.  Rep.  398  (1898). 
(]\Iicli.,  1898).  5  Guilmai-tin  v.  Middle  G.  &  A.  R'y, 

<  Schmidt  v.  Louisville,  etc.  R.  R.,    29  S.  E.  Rep.  189  (Ga.,  1897). 

1766 


€H.  XLYI.] 


BONDS  AND  COUPONS. 


[§  T75. 


count  for  tlie  funds  realized,  on  the  sale  of  the  mortgage  bonds, 
and  also  to  compel  payment  of  the  guaranteed  dividends.^ 
After  the  filing  of  such  a  bill  a  stockholder  cannot  bring  suit 
to  enforce  the  payment  of  the  guaranteed  dividend  on  his 
stock.2 

A  fcTv  forms  of  guaranties  of  bonds  and  dividends  on  stock 
are  given  in  the  notes  below.' 

If  the  guarantor  takes  up  the  securities  he  may  enforce  their 
payment  as  against  the  company  liable  thereon,  but  his  rights 
are  second  to  those  of  any  of  the  guaranteed  bonds  not  yet 
taken  up.-*    Where  one  company  agrees  on  the  face  of  the 


1  Pacific  R  R  u.  Atlantic  &  R  R  Pu, 
20  Fed.  Eep.  277  (1884). 

2  Reed  v.  Atlantic  &  P.  R  R,  85 
Fed.  Rep.  692  (1884). 

'  Form  of  guaranty  on  West  Shore 
Railroad  bonds: 

Guaranty. 

For  value  received  the  New  York  Central 
and  Hudson  River  Railroad  Company  hereby 
guarantee  the  punctual  payment  of  the  prin- 
■cipal  and  interest  of  the  within  bond  at  the 
time  and  in  the  manner  therein  specified,  and 
covenants,  in  default  of  payment  of  any  part 
thereof  by  the  obligor,  to  pay  the  said  princi- 
pal and  interest  of  the  within  bond  as  the 
same  shall  become  due,  upon  the  demand  of 
the  holder  thereof. 

In  witness  whereof  the  said  company  has 
caused  its  corporate  seal  to  be  hereto  affixed 
and  attested  by  its  secretary,  and  this  instru- 
ment to  be  signed  by  its  president  or  one  of 
its  vice-presidents. 

The  proposed  guaranty  by  the 
United  States  government  of  the 
Nicaragua  Canal  Company  bonds  is 
as  follows: 

The  United  States  of  America  guarantees 
to  the  lawful  holder  of  this  bond  the  pay- 
ment by  the  Maritime  Canal  Company  of 
Nicaragua  of  the  principal  of  said  bonds  and 
the  interest  accruing  thereon,  and  as  it  ac- 
crues. 

Form  of  guaranty  of  dividends  on 
Rome,  Watertown,  etc.,  Railroad 
stock: 

The  New  York  Central  and  Hudson  River 
Railroad  Company  hereby  guarantees  to  the 
holder,  for  the  time  being,  of  this  certificate 
the  payment  of  134  per  cent  on  the  par  value 
of  the  stock  represented  thereby,  on  the  15th 


days  of  May,  August,  November,  and  Febru- 
ary in  each  year,  during  the  continuance  of 
a  certain  lease,  dated  the  14th  day  of  3Iarch, 
1891,  by  the  Rome,  Watertown,  and  Ogdens- 
burg  Railroad  Company  to  the  said  New 
York  Central  and  Hudson  River  Railroad 
Company. 

In  witness  whereof  the  corporate  seal  of 
the  said  New  York  Central  and  Hudson  River 
RaUroad  Company  has  been  hereto  aflixed, 

attested  by  an  ofQcer  thereof,  the day  of 

,  A.  D.  18—. 

New  York  Central  ant)  Hudson*  River 
Railroad  Company, 

By ,  Treasurer. 

Form  of  guaranty  on  bonds  of  New 
York  and  New  England  Railroad 
Company  issued  in  1897: 

For  value  received  the  New  York,  New- 
Haven,  and  Hartford  Railroad  Company  guar- 
antees the  payment  of  the  principal  and  in- 
terest of  this  bond  according  to  the  terms  of 
the  bond  and  coupons  annexed;  but,  if  any 
payment  be  demanded  on  this  guaranty,  this 
bond  shall,  at  the  option  of  said  guarantor, 
or  of  the  then  holder  thereof,  be  exchanged 
for  a  debenture  of  the  guarantor  for  the 
same  amount,  and  at  the  same  rate  of  mter- 
est,  both  payable  in  like  gold  coin,  for  the 
then  unexpired  term  of  this  bond. 

*  Where,  the  bonds  being  in  default, 
the  ti-ustee  foreclosed  by  taking  and 
retaining  possession,  and  conveyed 
the  property  to  a  new  corporation, 
the  bondholders  taking  stock  for 
their  bonds,  a  guarantor  of  the  bonds 
who  paid  some  of  the  old  coupons  as 
they  became  due  gets  nothing,  inas- 
much as  the  whole  property  was  used 
to  pay  the  guaranteed  bonds.  Child 
V.  New  York,  etc.  R  R.,  129  Masa  170 


1767 


775.] 


BONDS    AND    COUPONS. 


[CII.  XLVI. 


Tjonds  of  anotlier  company  to  purchase  the  coupons  and  bonds 
as  they  become  due,  the  former  company  cannot  foreclose  until 
it  has  fully  completed  the  contract  of  purchase.^  A  guarantor 
of  the  interest  on  mortgage  bonds  is  not  a  necessary  party  to 
a  foreclosure  suit,  since  he  is  not  entitled  to  subrogation  until 
the  whole  debt  for  which  he  is  liable  is  paid.  Otherwise  the 
guaranty  would  be  useless.^ 


(1880).     The   guaranty  was   as   fol- 
lows:   "In  consideration  of  the  pro- 
visions of  a  contract  of  even  date 
for  the  use  of  the  Boston,  Hartford 
&  Erie  Railroad  by  the  Erie  Rail- 
way   Company,  the  Erie    Railway 
Company  hereby  agrees    with  the 
holder  of  this  bond  that  the  several 
interest  warrants    hereto   attached 
shall  be  paid  as  they  respectively 
mature.    AVitness  the  seal  of  the  Erie 
Railway  Company  and  the  signature 
of  its  secretary,  at  the  city  of  New 
York,  the  8th  day  of  October,  A.  D. 
1867."    The  contract  by  which  the 
guaranty    was    agreed    upon    con- 
tained the  following  clause:  "  And  it 
is  further  agreed  that  any  interest 
warrants  which  the  said  party  of  the 
second  part  shall  be  obliged  to  take 
up  under  the  provisions  of  this  con- 
tract, or  the  indorsement  which  may 
be  put  on  any  of  said  bonds,  shall  be 
and  remain  a  valid  lien  on  all  the 
franchises  and  property  named  in  or 
secured  by  said  mortgage."    A  guar- 
antor of  bonds  which  have  become 
due  cannot  participate  in  the  assets 
along    with    the    bondholders    on 
coupons  which  have  been  paid  by  the 
guarantor.    The  bondholders  are  to 
be  paid  first,  since  the  guarantor  is 
liable  to  pay  them.    But  where  the 
principal  is  not  due,  the  guarantor's 
coupons  are  to  be  paid  after  other 
outstanding  coupons  are  paid.    Com- 
monwealth V.  Chesapeake,  etc.   Co., 
32  Md.   501,  540  (1870).    Where  the 
guarantor  has  paid  a  part  of  the  se- 
curities which  were  guaranteed,  the 
remaining  part  is  to  be  paid  first,  and 
thus  the  guarantor  is  to  be  repaid 

1768 


and  then  other  creditors  come  in. 
Commonwealth  v,  Chesapeake,  etc. 
Co.,  32  Lid.  501  (1870).  The  lessees 
of  the  guarantor,  having  taken  up 
coupons  which  were  guaranteed,  are 
"  entitled  to  the  same  remedies  for 
the  collection  thereof  to  which  the 
creditors  themselves  would  have 
been  entitled,"  and  may  apply  for  a 
receiver  under  the  New  Jersey  stat- 
ute. Pennsylvania  R  R,  u  Pember- 
ton,  etc.  R.  R.,  28  N.  J.  Eq.  338  (1877). 
As  to  the  guarantor  company's  right 
to  institute  suit  to  protect  its  inter- 
ests, see  also  Florida  v.  Anderson,  91 
U.  S.  667  (1875).  The  guarantor  may 
enforce  a  mortgage  given  to  protect 
it.  lilacon,  etc.  R.  R.  v.  Georgia,  etc. 
R.  R.,  63  Ga.  103  (1879).  Where  rail- 
road bonds  are  secured  by  a  mort- 
gage on  the  railroad,  and  also  a  mort- 
gage on  the  property  of  another 
corporation,  the  latter  may  be  fore- 
closed before  the  former  where  the 
former  would  net  nothing.  Chicago, 
etc.  Land  Co.  v.  Peck,  113  111.  408 
(1885). 

1  Pennsylvania  R,  R  v.  Allegheny, 
etc.  R  R,  48  Fed.  Rep.  139  (1891); 
Pennsylvania  R.  R  v.  Allegheny,  etc. 
R  R,  42  Fed.  Rep.  82  (1890). 

2  Columbia,  etc.  Trust  Co.  v.  Ken- 
tucky Union  R'y,  60  Fed.  Rep.  794 
(1894).  The  guarantor  of  mortgage 
bonds  is  not  a  necessary  party  to  a 
foreclosure  suit.  "  If  the  guarantor 
would  be  subrogated  to  the  rights  of 
the  creditor  or  purchaser,  he  should 
pay  the  debt  or  offer  to  redeem." 
Owen  V.  Potter,  73  N.  W.  Rep.  977 
(Mich.,  1898). 


CH.  XLVI.] 


BOKDS  AXD  COUPONS. 


[§  775. 


Where  a  company  insures  to  an  individual  the  payment  of  a 
debenture  held  by  such  individual  in  case  of  default  on  the  de- 
benture becoming  due,  the  insuring  company  is  liable,  even 
though,  under  a  clause  in  the  debenture,  the  other  debenture- 
holders  postpone  payment.^ 

Where  a  state  guarantees  bonds,  the  guaranty  is  construed  and 
enforced  the  same  as  where  the  guaranty  is  by  a  corporation.- 

A  guaranty  by  one  individual  of  certain  dividends  on  stock 
held  by  another  individual  is  legal  and  enforceable.' 


1  Finlay  v.  Mexican  Inv.  Corp.,  76 
L.  T.  Rep.  257  (1897). 

2  Commonwealth  v.  Chesapeake, 
etc.  Co.,  33  McL  501  (1870);  Morton  v. 
New  Orleans,  etc.  R'y,  79  Ala.  590 
(1885) ;  Oilman  v.  New  Orleans,  etc. 
R  R,  72  Ala.  566  (1882);  State  v.  Cobb, 
64  Ala.  127  (1879);  Florida  v.  Ander- 
son, 91  U.  S.  667  (1875). 

'  See  i^J  334,  note,  supra.  In  a  cele- 
brated litigation  in  New  York  state 
it  was  adjudicated: 

First.  That  such  a  guaranty  is  valid 
and  enforceable.  LoriUard  v.  Clyde, 
86  N.  Y.  384  (1881). 

Second.  That  the  defendants  were 
liable  upon  it,  during  the  time  the 
corporation  subsisted  de  facto,  al- 
though there  existed  cause  for  its 
dissolution.  Lorillard  v.  Clyde,  48 
N.  Y.  Super.  Ct.  409  (1882);  affirmed, 
99  N.  Y.  196. 

Third.  That  separate  actions  may 
be  brought  on  the  contract  as  the  in- 
stalments fall  due,  and  separate  re- 
coveries had  in  each.  Lorillard  v. 
Clyde,  122  N.  Y.  41  (1890). 

Fourtli.  That  the  plaintiff  was  in 
no  legal  sense  a  party  to  an  action  by 
the  people  of  the  state,  and  not  con- 
cluded by  the  findings  therein.  Loril- 
lard V.  Clyde,  48  N.  Y.  Super.  Ct.  409 
(1882);  affirmed,  99  N.  Y.  196. 

Fifth.  That  the  dissolution  of  the 
corporation  put  an  end  to  the  guar- 
anty. Lorillard  v.  Clyde,  142  N.  Y.  456 
(1894),  rev'g  15  N.  Y.  Supp.  809,  and 
20  N.  Y.  Supp.  433,  this  decision  being 


due  to  the  peculiar  wording  of  the 
contract. 

Where  an  insolvent  insurance  com- 
pany buys  out  a  solvent  company, 
and  certain  individuals  guarantee 
that  the  obligations  of  the  latter  com- 
pany will  be  fulfilled,  and  the  latter 
company  is  "wrecked,"  the  guaran- 
tors are  liable.  Mason  v.  Cronk,  125> 
N.  Y.  496  (1891).  Where  one  railroad 
company  agi-ees  to  expend  certain 
money  on  another  railroad,  and  the 
repayment  of  the  money  is  guaran- 
teed by  a  third  person,  such  third  per- 
son cannot  repudiate  the  guaranty, 
after  tlie  money  has  been  expended, 
on  the  ground  that  the  act  was  ultra 
vires.  Alexandria,  etc.  R.  R.  v.  John- 
son, 48  Pac.  Rep.  847  (Kan.,  1897).  In 
U.  S.  Trust  Co.  V.  Western  Contract 
Co.,  81  Fed.  Rep.  454  (1897),  bonds  and 
stock  were  deposited  with  a  raili-oad 
coi-poration  to  pay  the  principal  and 
interest  on  certain  other  bonds  and 
floating  debts  of  another  corporation. 
After  the  contract  had  been  partially 
performed,  the  former  corporation  be- 
came insolvent,  and  the  coiu-t  passed 
upon  the  various  rights  of  the  par- 
ties. Where  certain  stockholders 
agree  with  a  subscriber  for  stock 
that  he.  shall  receive  certain  divi- 
dends and  that  they  will  take  his 
stock  if  he  desires  after  three  years, 
he  has  a  reasonable  time  after  tlie 
three  years  to  exercise  his  right  ta 
sell  to  them.  Rogers  v.  Burr,  97  Ga. 
10  (1895).    An  agreement  of  a  party 


1769 


§  776.] 


BONDS    AJSID   COUPONS. 


[cn.  XLVI. 


§  YY6.  Debentures. —  In  England  the  securities  which  are 
issued  by  corporations  are  generally  called  "debentures."  An 
English  debenture  is  a  term  which  in  its  widest  application  in- 
cludes any  instrument  issued  by  a  corporation  which  creates  a 
debt  or  acknowledges  it.^     But  generally  it  means  a  bond^ 


to  pay  to  a  stockholder  a  sum  of 
money  equal  to  ten  per  cent  on  the 
par  value  of  certain  stock  held  by  the 
latter,  the  stockholder  agreeing  to 
turn  over  to  the  former  all  dividends 
received  on  the  stock  during  the  time 
specified,  is -valid  and  may  be  en- 
forced, although  no  dividends  are  de- 
clared, and  although  no  certificates 
of  stock  are  actually  issued.  Guy  v. 
Craighead,  6  N.  Y.  App.  Div.  463 
(1896).  Where  a  corporation  guaran- 
tees certain  bonds,  and  a  person  hold- 
ing stock  of  the  company  indorses 
on  the  guaranty  that  he  holds  stock 
to  secure  the  performance  of  the 
gviaranty,  he  cannot  afterwards  claim 
that  he  has  a  prior  lien  as  pledgee  of 
the  stock.  Mercantile  Trust  Co.  v. 
Atlantic  Trust  Co.,  86  Hun,  213  (1895). 

1  Levy  V.  Abercorris,  etc.  Co.,  L.  R. 
37  Ch.  D.  260  (1887).  See  also  British, 
etc.  Co.  V.  Inland  Rev.  Comm'rs,  L.  R. 
7  Q.  B.  D.  165  (1881);  Edmonds  v. 
Blaina  Furnaces  Co.,  L.  R.  36  Ch.  D. 
215  (1887).  Cf.  Topham  v.  Greenside, 
•etc.  Co.,  L.  R.  37  Ch.  D.  281  (1887);  2 
R'y  &  Corp.  L.  J.  529. 

-  It  is  applied  to  evidences  of  in- 
debtedness such  as  a  deed  under  seal. 
Ex  parte  Bradshaw,  L.  R.  15  Ch.  D. 
465  (1879),  where  the  form  was  that 
of  a  bond  binding  the  company  "and 
tlieir  successors  and  their  real  and 
personal  estate,"  which  was  held  to 
be  a  charge  upon  the  real  and  per- 
sonal estate  of  the  company  as  it 
existed  at  the  date  of  winding-up 
proceedings,  but  not  including  im- 
paid  capital;  Re  City  Bank,  L.  R.  3 
Ch.  758  (1868),  where,  however,  a  deed 
under  seal,  payable  to  order,  but 
purporting  to  be  a  debenture,  was 

17' 


treated  as  a  mere  promissory  note; 
Ex  parte  Grissell,  L.  R.  3  Ch.  D.  411 
(1875).  Also  to  a  simple  promise  to 
pay,  with  a  clause  subjecting  certain 
property  as  security.  Re  Marine  Man- 
sions Co.,  L.  R.  4  Eq.  601  (1867).  See 
also  note  infra.  A  Lloyd  bond  is  a 
due-bill  or  acknowledgment  of  in- 
debtedness issued  under  seal  by  a 
corporation  to  the  constructors,  sup- 
ply men,  etc.  Rapalje,  Law  Diet. 
And  see  Re  Cork,  etc.  R'y,  L.  R.  4  Ch. 
App.  748  (1869).  Pavanagh,  Money 
Securities  (2d  ed.,  p.  355),  defines  a  de- 
benture as  "an  instrument  in  wTit- 
ing,  generally  under  seal,  creating  a 
definite  charge  on  a  definite  or  in- 
definite fund  or  subject  of  property 
in  favor  of  a  given  person,  or  of  a 
given  person  and  his  order  or  bearer, 
and  constituting  a  member  in  a  series 
of  instruments,  each  entitling  the 
original  holder  thereof  to  similar 
rights.  Hence  a  debenture  is  distin- 
guished (1)  from  a  mortgage,  which 
is  an  actual  transfer  of  property; 
(2)  from  a  bond,  which  does  not  di- 
rectly affect  property;  and  (3)  from 
a  mere  charge  on  property,  which  is 
individualized  and  does  not  form  part 
in  a  series  of  similar  charges.  [Cit- 
ing cases.]  Debentures  may  be  issued 
by  a  single  person,  by  a  partnership, 
or  by  a  corporation."  Debenture 
stock  differs  from  a  pure  debentiire 
in  that  the  title  of  each  original 
holder  appears  in  a  registry  instead  of 
being  represented  by  an  instrument 
complete  in  itself,  and  the  stock  is 
capable  of  being  transferred  in  any 
amounts,  unless  limited  by  corporate 
regulations.  See  Attree  v.  Ha  we,  L.  R. 
9  Ch.  D.  337  (1878). 
70 


CH.  XLYI.] 


BONDS  AXD  COrPOXS. 


[§  T76. 


secured  by  a  mortgage,^  or  by  a  clause  equivalent  to  a  mortgage 
inserted  in  the  bond  itself.-  An  English  debenture,  when  it  is 
a  bond  and  mortgage  combined,  and  covers  land,  is  an  interest 
in  land,  and  hence  a  contract  for  the  sale  of  such  a  debenture 
must  comply  -with  the  statute  of  frauds  applicable  to  a  sale  of 
land.' 

The  power  to  issue  debentures  is  generally  conferred  by  the 
charter.  Where  it  is  not  so  conferred  it  is  implied  from  a  gen- 
eral power  to  borrow  money  and  create  debts.'* 

In  England  statutory  provisions  regulating  the  issue  of  de- 
bentures must  be  carefully  observed.^    Debentures  in  England, 


ijRe  Hamilton's  Windsor  Iron- 
works, L.  R  12  Ch.  D.  707  (1879); 
Wildy  V.  Mid-Hants  R'y,  16  W.  R  409 
(1S68). 

-  Re  Marine  Mansions  Co.,  L.  R  4 
Eq.  601  (18G7);  Re  Panama,  etc.  Co., 
L.  R  5  Ch.  318  (1870);  Re  New  Cly- 
dach,  etc.  Co.,  L.  R  6  Eq.  514  (1868). 
A  debenture  not  making  a  charge 
upon  property  has  been  held  to  be  a 
promissory  nota  Ex  parte  Colborne, 
L.  R.  11  Eq.  478  (1870).  But  security 
upon  property  is  not  a  necessaiy  feat- 
ure. Edmonds  r.Blaina  Furnaces  Co., 
L.  R  36  Ch.  D.  215  (1887),  holding  also 
that  it  is  not  necessary  that  they 
be  issued  and  numbered  seriatim;  a 
single  debenture  may  be  issued  to 
one  man.  "  In  the  ordinary  accepta- 
tion of  the  term  a  debenture  means 
any  document,  binding  on  an  incor- 
porated company,  by  which  it  ac- 
knowledges a  debt  to  be  due  and 
undertakes  to  pay  it."  Romer,  Q.  C, 
in  Edmonds  v.  Blaina  Furnaces  Co., 
L.  R  36  Cli.  D.  215  (1887),  where,  also, 
Chitty,  J.,  said:  "I  find  that  gener- 
ally, if  not  always,  the  instrument 
imports  an  obligation  or  covenant  to 
pay."  The  same  learned  judge,  in 
Levy  V.  Abercorris,  etc.  Co.,  L.  R.  37 
Ch.  D.  260  (1888),  said  that  "  debent- 
ure "  is  not  a  term  of  art,  but  means 
a  document  which  acknowledges  or 
creates  a  debt.  In  the  former  case 
the  instrvunent  was  a  memorandum 

17 


of  agreement  acknowledging  loans 
in  various  amounts  set  opposite  the 
names  of  nine  persons,  covenanting 
with  each  of  them  to  pay  the  same, 
with  interest,  at  a  fixed  date,  and  to 
pay  them  ratably  in  case  the  whole 
was  not  then  paid,  and  pledging  as 
security  the  "  undertaking,  property, 
and  effects  of  every  kind,"  subject  to 
prior  charges,  and  with  liberty  to  the 
company  to  sell  or  pledge  the  things 
manufactured  by  the  company  in  the 
ordinary  course  of  business  until  de- 
fault made. 

3  Driver  v.  Broad,  [1893]  1  Q.  B.  539, 
744  Cf.  Re  Hollon,  69  L.  T.  Rep.  425 
(1893),  as  to  mortmain. 

*  Re  Inns,  etc.  Co.,  L.  R  6  Eq.  82 
(1868);  Bank  of  South  Australia  v. 
Abrahams,  L.  R  6  R  C.  265  (1875), 
holding  that  a  power  to  issue  debent- 
ures after  all  calls  have  been  fully 
paid  does  not  warrant  making  them 
upon  future  calls. 

5  "Where  the  required  assent  of 
stockholders  is  not  obtained,  the  de- 
bentures are  void.  Fountaine  v.  Car- 
marthen R'y,  L.  R.  5  Eq.  316  (18G8). 
Where  the  issue  is  made  before  the 
whole  capital  is  subscribed,  and  the 
statute  forbids  such  issue,  the  debent- 
ure is  void.  Chambers  v.  Manchester, 
etc.  Ry,  5  B.  &  S.  588  (1864).  Wher-e 
the  issue  is  made  when  the  corporate 
debts  are  greater  than  the  statute  al- 
lows, then  the  debentures  are  void, 
71 


§  '^^^■] 


EONDS    AND    COUPONS. 


[cn. 


XLVI, 


coverinfj  all  the  property,  etc.,  of  the  corporation,  are  specific- 
ally excepted  from  the  bill  of  sales  or  chattel  mortgage  act, 
requiring  registration  of  bills  of  sale.^  A  debenture  is  to  be 
construed  according  to  the  language  used  in  it.  There  are  no 
arbitrary  rules  of  construction  peculiar  to  it  alone.^ 


and  the  holders  come  in  as  unsecured 
creditors.  Re  Pooley  Hall,  etc.  Co., 
18  W.  R.  201  (1869). 

iThe  bills  of  sale  act  in  England 
relieves  corporations  from  the  neces- 
sity of  recording  debentures.  Read 
V.  Joannon,  L.  R.  25  Q.  B.  D.  300  (1890). 
Debentures  have  precedence  over  a 
./?.  fa.  Re  Opera,  [1891]  3  Ch.  260. 
The  debentures  of  none  of  the  incor- 
porated companies  in  England  need 
be  recorded  as  a  chattel  mortgage. 
Re  Standard  Mfg.  Co.,  [1891]  1  Cli. 
627;  Edmonds  v.  Blaina  Fvu-naces 
Co.,  L.  R.  36  Ch.  D.  215  (1887).  A  de- 
benture is  a  document  which  creates 
or  acknowledges  a  debt.  It  need  not 
be  recorded  in  the  register's  office 
under  the  bill  of  sales  act.  Levy  v. 
Abercorris,  etc.  Co.,  L.  R.  37  Ch.  D. 
260  (1887).  Cf.  Topham  v.  Greenside, 
etc.  Co.,  L.  R.  37  Ch.  D.  281  (1887). 
For  a  review  of  the  long  litigation  in 
England  whether  a  debenture  had  to 
be  recorded  as  a  bill  of  sale,  i.  e.,  in 
America  as  a  chattel  mortgage,  see 
8  R'y  &  Corp.  L.  J.  222.  This  ques- 
tion was  finally  settled  in  England 
by  act  of  parliament  declaring  that 
debentures  of  corporations  need  not 
be  recorded  under  the  bill  of  sales 
act.  A  debenture  on  the  whole  prop- 
erty, with  a  clause  that  no  prior  mort- 
gage or  charge  should  be  made,  is  not 
good  as  against  an  assignment  by  the 
company  of  money  due  from  an  in- 
surance company,  where  such  as- 
signee gave  notice  to  the  insurance 
company  before  that  company  had 
notice  of  the  debenture.  English, 
etc.  Trust  v.  Brunton,  [1892]  2  Q.  B.  1. 

2  Edmonds  v.  Blaina  Furnaces  Co., 
L.  R.  36  Ch.  D.  215  (1887);  Ex  parte 
Cox,  13  L.  R.  Ir.  174  (1884),  and  Re 

17 


Panama,  etc.  R'y,  L.  R.  5  Ch.  318  (1870), 
holding  that  debentures  secured  by 
the  "  undertaking  and  all  sums  aris- 
ing therefrom  "  are  a  charge  upon  all 
the  property  of  the  corporation,  past 
and  future,  and  are  entitled  fo  be  paid 
before  the  general  creditors.  The 
former  case  gives  the  form  of  the  in- 
denture. Re  Marine  Mansions  Co., 
L.  R,  4  Eq.  601  (1867),  to  same  effect, 
but  not  a  charge  on  the  capital  stock; 
also  Re  Colonial,  etc.  Corp..  L.  R.  15  Cli. 
D.  465  (1879);  Re  New  Clydach,  etc. 
Co.,  L.  R.  6  Eq.  514  (1868),  where  de- 
bentures purporting  to  be  an  assign- 
ment of  the  undertaking,  and  charg- 
ing all  the  real  and  personal  property, 
were  held  valid  upon  all  personal 
property  existing  at  the  date  of  the 
debentures,  but  not  upon  property 
subsequently  acquired.  A  debenture 
on  all  the  property  does  not  necessa- 
rily cover  uncalled  subscriptions.  Re 
Streatham,  etc.  Co.,  75  L.  T.  Rep.  574 
(1896);  Bloomer  v.  Union,  etc.  Co., 
L.  R.  16  Eq.  383  (1873),  holding  that 
book  debts  were  charged;  Ex  parte 
Grissell,  L.  R.  3  Ch.  D.  411  (1875), 
where  a  charge  upon  all  the  funds, 
property,  and  effects  which  the  com- 
pany held  or  possessed,  or  should  hold 
or  be  possessed  of,  was  held  valid; 
Hodsonv.  Tea  Co.,  L.  R.  14  Ch.  D.  859 
(1880),  where  debentures  containing 
an  assignment  of  chattels,  with  a  pro- 
vision that  the  corporation  shall  re- 
tain possession  until  twenty-one  days 
after  default,  were  held  a  lien,  though 
winding-up  proceedings  had  been 
begun  before  they  became  due;  Re 
Heme  Bay  Water-works  Co.,  L.  R. 
10  Ch.  D.  42  (1878),  holding  that  de- 
benture-holders, not  being  in  the  po- 
sition of  ordinary  mortgagees,  may 
(3 


€H.  XLVI.] 


BONDS   AND    COUPONS. 


[§  TT6. 


Many  of  the  rules  of  law  applicable  to  other  evidences  of 
corporate  indebtedness  apply  also  to  this  class  of  obligations.^ 
A  provision  in  an  English,  debenture  that  a  majority  of  the 


have  a  receiver  appointed,  but  can- 
not institute  winding-up  proceedings; 
Wildey  v.  Mid-Hants  R  y,  16  W.  R 
409  (1868),  holding  that  the  holder  of 
a  debenture  secui-ed  by  mortgage  has 
a  title  prior  to  that  of  a  subsequent 
judgment  creditor,  and  may  file  a 
bill  to  protect  his  security,  though 
his  claim  is  not  due;  Ex  parte  Pit- 
man, L.  R  12  Ch.  D.  707  (1879),  hold- 
ing that  the  debenture  does  not 
prevent  the  comjjany  from  selling 
property  and  dealing  with  it  without 
regard  to  the  debenture.  To  same 
effect,  Wheatley  v.  Silkstone,  etc.  Co., 
L.  R  29  Ch.  D.  715  (1885),  where  a 
mortgage  given  subsequent  to  the  in- 
dentures took  precedence  over  them; 
Be  Florence,  etc.  Co.,  L.  R  10  Ch.  D. 
530  (1878) ;  Moor  v.  Anglo-Italian  Bank, 
L.  R  10  Cli.  D.  681  (1879).  But  as 
soon  as  winding-up  proceedings  are 
commenced,  then  the  lien  of  the  de- 
benture-holders attaches,  and  the 
unsecured  holders  are  paid  after  the 
debenture-holders.  lie  Panama,  etc. 
Mail  Co.,  L.  R  5  Ch.  App.  818  (1870). 
To  same  effect.  Re  Home,  L.  R  29  Ch. 
D.  780  (1885);  Hodson  v.  Tea  Co.,  L. 
R  14  Ch.  D.  859  (1880).  A  purchaser 
of  land  from  the  company  may,  be- 
fore taking  title,  require  proof  of  no 
defaviit  as  to  the  debentures.  lie 
Home,  L.  R  29  Ch,  D.  736  (1885).  A 
floating  debentui-e  does  not  prevent 
the  company  from  paying  a  debt  to 
a  director  just  before  a  winding  up 
is  commenced,  Willmott  v.  London 
Celluloid  Co.,  L.  Pu  34  Ch.  D,  147 
(1886).  A  pledge  or  mortgage  of  a 
specific  piece  of  corporate  property 
to  obtain  new  money  takes  prece- 
dence of  a  general  debenture  lien, 
although  the  debenture  was  prior  in 
time.  Ward  v.  Royal  Exchange,  etc, 
Co.,  58  L,  T,  Rep.  174  (1887).  A  de- 
bentui"e  is  not  a  lien  on  the  proceeds 

17 


from  superfluous  land  sold  by  the  com- 
pany. Be  Hiill,  etc.  R'y,  L.  R.  40  Ch, 
D,  119  (1888),  In  England  any  loan 
by  a  corporation  in  excess  of  the 
amount  expressly  authorized  by  its 
charter  is  void,  but  the  company  may 
be  held  liable  for  such  part  of  the 
money  as  they  properly  used  to  pay 
other  debts.  "Wenlock  v.  River  Dee 
Co.,  L.  R  38  Ch.  D.  584  (1888). 

1  "Webb  V.  Heme  Bay  Commission- 
ers, L.  R  5  Q.  B.  642  (1870),  holding 
that  a  defense  of  illegal  issue  cannot 
be  made  by  a  corpoi-ation  against  the 
suit  of  an  innocent  holder  of  assign- 
able debentm-es;  Fountaine  v.  Car- 
marthen R'y,  L.  R  5  Eq.  316  (1868), 
holding  that  when  issued  for  an  in- 
suflicient  consideration  they  are  still 
good  to  the  extent  of  the  value  of  the 
consideration;  Be  Northern  Assam 
Tea  Co.,  L.  R  10  Eq.  458  (1870),  to  the 
effect  that,  when  held  by  a  member 
of  a  corporation  subject  to  a  lien  for 
money  due  to  it,  the  lien  is  released 
by  a  transfer  to  which  the  company 
has  consented;  Agar  v.  Athenaeum 
Life,  etc.  Co.,  3  C.  B.  (N.  S.)  725  (1858), 
holding  that  the  fact  that  due  for- 
mality was  not  observed  in  borrow- 
ing the  money  for  which  debentures 
are  issued  is  no  defense  to  a  suit  upon 
them;  Crouch  v.  Credit  Foncier,  etc., 
L.  R  8  Q.  B.  874  (1873),  holding  that 
debentures  imder  seal,  though  pay- 
able to  bearer,  are  not  negotiable ;  Be 
Brunton's  Claim,  L.  R  19  Eq.  302 
(1874),  holding  that  a  company  can- 
not set  up  equities  against  a  debent- 
ure bond  after  accepting  notice  of 
its  assignment;  Potteries,  etc,  R'y  v. 
Minor,"  L,  R  6  Ch.  621  (1871),  holding 
that  obtaining  judgment  upon  de- 
bentures does  not  change  the  status 
of  the  holder;  he  is  still  bound  by 
the  acts  of  a  majority  of  his  fellow- 
holders  under  the  Railway  Compa- 
73 


§  776.] 


BONDS   AND   COUPONS. 


[cn.  XLVI. 


holders  of  debentures  miglit "  sanction  any  modification  or  com- 
promise of  the  rights  of  the  debenture-hoklers  against  the  com- 
pany or  against  the  property  "  is  valid,  and  such  a  compromise 


nies  Act  of  1867;  Price  r.  Great  West- 
ern R'y,  16  M.  &  W.  244  (1847),  holding 
that  if  the  principal  of  debentui-es 
remains  unpaid  after  maturity  it 
bears  interest  though  all  coupons 
have  been  promptly  paid. 

A  debenture-holder  may  apply  for 
a  receiver  whenever  the  company 
ceases  to  be  a  going  concern.  Hub- 
buck  V.  Helms,  56  L.  T.  Rep.  233 
(1887).  See  Blaker  v.  Herts,  etc.  Co., 
L.  R.  41  Ch.  D.  399  (1889).  A  debent- 
ure-holder cannot  have  a  receiver  of 
all  the  railway  property  appointed 
merely  because  there  is  a  default. 
He  must  first  get  judgment  and  exe- 
cution at  law.  He  differs  from  a 
mortgagee.  Imperial,  etc.  Assoa  v. 
Newry,  etc.  R'y,  2  Ir.  Rep.  Eq.  524 
(1868).  A  debenture  which  in  effect 
is  a  mortgage  on  the  tolls  and  in- 
come of  a  pier  company  cannot  en- 
join a  general  creditor  from  selling 
out  the  land  by  levy  of  execution. 
Perkins  v.  Deptford,  etc.  Co.,  13  Sim. 
277  (1843).  The  court  will  appoint  a 
receiver  at  the  instance  of  debenture- 
holders  if  the  corporation  is  insolv- 
ent, even  though  neither  the  princi- 
pal nor  interest  is  due.  McMahon 
V.  North  Kent  Ironworks,  [1891]  2 
Ch.  148.  Debentures  in  excess  of  the 
amount  authorized  by  statute  are 
void.  Fountaine  v.  Carmarthen  R'y, 
L.  R  5  Eq.  316  (1868).  Where  some 
debentures  have  been  paid,  new  ones 
may  be  issued  to  that  amount  and 
not  be  in  excess  of  the  statutory 
limit.  Fountaine  v.  Carmarthen  R'y, 
L.  R.  5  Eq.  316  (1868).  After  a  re- 
ceiver has  taken  possession,  a  debent- 
ure-holder cannot  obtain  priority 
over  other  holders  by  getting  a  judg- 
ment at  law  and  issuing  execution 
thereonu  Bowen  v.  Brecon  R'y,  L.  R. 
3  Eq.  541  (1867).  Nor  can  a  general 
creditor  interfere  by  execution  on 


property  in  the  receiver's  possession. 
Russell  V.  East  Anglian  R'y,  3  Macn. 
&  G.  104  (1850).  A  debenture  is  more 
of  a  bond  than  a  mortgaga  Subse- 
quent mortgagees  may  obtain  a  pri- 
ority on  lands  in  Italy,  where  the  law 
of  notice  of  prior  liens  does  not  pre- 
vail Norton  v.  Florence,  etc.  Co., 
26  W.  R  123  (1877).  "AU  that  de- 
benture-holders can  claim  is  the  act- 
ual fruit  resulting  from  the  carrying 
on  of  the  business  of  the  company  — 
namely,  the  tolls,  rates,  and  duties 
which  may  be  earned  by  the  company 
through  their  availing  themselves  of 
their  privilege  of  becoming  carriers, 
and  the  rent  which  may  be  paid  by 
other  companies  for  the  use  of  their 
lines."  Norton  v.  Florence,  etc.  Co., 
26  W.  R  123  (1877);  also  Gardner  v. 
London,  etc.  R'y,  L.  R.  2  Ch.  201  (1867). 
A  mortgage  on  the  undertaking  does 
not  cover  the  property  belonging  to 
the  company  as  common  carriers  of 
passengers  or  goods  for  hire,  nor  the 
soil  of  the  railway  itself.  "  The  rail- 
way acts  have  been  prepared  on  the 
model  of  the  canal  acts,  in  which  the 
principal  object  of  the  company  was 
the  proprietorship  of  the  canal,  and 
the  profits  derived  from  the  use  of  it 
by  the  public  in  generah"  Hart  v. 
Eastern,  etc.  R'y,  7  Exck  246  (1852). 
A  debenture  covering  the  xindertak- 
ing  "  is  a  lien  similar  to  an  income 
mortgage."  Gardner  v.  London,  etc. 
R'y,  L.  R  2  Ch.  App.  201  (1867).  In 
Re  Panama,  etc.  Co.,  L.  R  5  Ch.  318 
(1870),  the  com-t  held  that  the  de- 
benture in  that  case  was  a  mortgage 
security  and  came  in  ahead  of  gen- 
eral creditors.  The  word  "under- 
taking "  does  not  cover  and  include 
land  so  as  to  sustain  ejectment.  My- 
att  V.  St.  Helens,  etc.  R'y,  2  Q.  B.  364 
(1841).  Concerning  a  receiver  under 
debentures,  see  Gardner  v.  London, 


1774 


CH.  XLVI.] 


BONDS   AND    COUPONS. 


[§  'TTe. 


is  binding  on  the  minority.^  A  debenture  containing  an  agree- 
ment that  the  company  will  not  execute  any  mortgage  prior 
in  right  to  such  debentures  does  not  affect  the  rights  of  a  lona 
fide  mortgagee  without  notice  of  such  debentures  and  such 
contract.^  Under  some  debentures  the  debenture  does  not  be- 
come a  lien  until  a  receiver  is  applied  for.*  A  mortgage  may 
be  prior  in  right  to  debentures  outstanding  at  the  time  of  the 
morto-ag-e.^  An  English  debenture  attaches  to  the  debts  owing 
to  the  company  at  the  time  of  the  appointment  of  a  receiver.^ 
First  debentures  have  priority  over  second  debentures,  although 
some  of  the  first  are  issued  after  the  second  are  out.®    In  Eng- 


etc.  R'y,  L.  R.  3  Ch.  201  (1867).  De- 
benture-holders may  be  given  power 
to  appoint  a  receiver  to  take  posses- 
sion of  everything  whenever  certain 
things  happen.  Re  Pound,  62  L.  T. 
Rep.  137  (1889).  A  mortgage  on  the 
"  undertaking  "  covers  af ter-acqmred 
personalty.  Re  Panama,  etc.  Co.,  L. 
R.  5  Ch.  818  (1870).  See  also,  in  gen- 
eral, Jones,  Corp.  Bonds,  etc.,  §S  381- 
425.  An  English  mortgage  covers 
only  the  tolls  and  income.  Bowen  v. 
Brecon,  etc.  Ry,  L.  R.  3  £q.  541  (1807). 

1  Sneath  v.  Valley  Gold,  [1893]  1  Ch. 
477. 

2i2e  Castell,  etc.,  Lim.,  78  L.  T.  Rep. 
109  (1898). 

3  Governments,  etc.  Co.  v.  Manila, 
etc.  R'y,  [1895]  3  Ch.  551. 

*  Government,  etc.  Co.  v.  Manila 
R'y,  75  L.  T.  Rep.  553  (1896).  Where 
the  sheriff  levies  on  the  property,  a  de- 
benture-holder may  pay  the  amount 
claimed  by  the  sheriff  in  order  to  dis- 
pose of  the  execution,  and  then  apply 
to  the  court  to  require  the  sheriff  to 
return  the  money,  the  debenture  in 
this  case  being  what  is  called  a  float- 
ing security,  although  the  court  said 
that  there  was  no  clear  definition  of 
such  a  security.  Taunton  v.  Sheriff 
of  Warwicksliire,  [1895]  1  Cli.  734; 
aff'd,  [1895]  2  Ch.  319. 

^Biggerstaff  v.  "Rowatt's  Wlaarf, 
[189()]  2  Ch.  93.  Debentures  whereV)y 
a  cliarge  in  the  nature  of  what  is 

17' 


called  a  floating  security  over  all  a 
company's  property  is  given  to  the 
debenture-holders  allow  the  com* 
pany  to  deal  with  its  assets  in  the 
ordinary  course  of  business  until  the 
company  is  wound  up  or  stops  busi- 
ness, or  a  receiver  is  appointed  at  the 
instance  of  the  debenture-holders; 
or,  in  other  words,  such  debentures 
constitute  a  charge,  but  give  a  license 
to  the  company  to  carry  on  its  busi- 
ness. So  long  as  the  debentm-es  re- 
main a  mere  floating  security,  that 
is  to  say,  so  long  as  the  license  to  the 
company  to  carry  on  its  business  has 
not  been  terminated,  the  property  of 
the  company  may  be  dealt  with  in 
the  ordinary  course  of  business  as 
if  the  debentures  had  not  been  given, 
and  any  such  dealing  with  a  partic- 
ular property  will  be  binding  on  the 
debenture-holders,  provided  that  the 
dealing  be  completed  before  the  de- 
bentures cease  to  be  merely  a  float- 
ing security;  the  court  holding  that, 
so  long  as  the  company  continues  its 
business  and  no  steps  are  taken  to 
wind  it  up  or  to  get  a  receiver  a]> 
pointed,  a  debenture-holder  cannot 
require  a  particular  debtor  to  apply 
his  debt  on  the  debentures,  nor  can 
he  prevent  a  garnishment  from  com- 
ing in  ahead  of  the  debentures.  Rob- 
son  V.  Smith,  [1895]  2  Cii.  118. 

«  Lister  v.  Lister  &  Son,  08  L.  T. 
Rep.  826  (1893). 


§  '?T6.] 


BONDS  AND  COUPONS. 


[CH.  XLVI. 


land  a  receiver  and  manager  will  be  appointed  in  behalf  of 
debenture-holders  when  the  company  is  insolvent  and  execu- 
tions are  about  to  be  levied.^ 

The  power  of  the  corporation  to  pledge  or  mortgage  unissued 
debentures  as  collateral  security  for  money  advanced  has  been 
conceded.2    It  has  been  held  legal  to  issue  them  at  a  discount.' 

The  English  debentures  are  negotiable  or  non-negotiable  ac- 
cording to  the  language  used  in  them.* 

In  the  United  States  the  "  debenture  "  has  no  clearly  defined 
place  among  the  securities  of  corporations.  A  so-called  de- 
benture, however,  is  issued  occasionally,  but  is  not  so  popular 
as  it  was  before  the  business  reverses  of  1893.    Its  character  is 


1  Edwards  v.  Standard,  etc.  Syndi- 
cate, [1893]  1  Ch.  574.  In  England  a 
receiver  may  be  appointed  before 
default  in  the  interest  on  debentures 
where  the  company  is  clearly  insolv- 
ent. Re  Victoria  Steamboats,  75  L. 
T.  Rep.  374  (1896). 

2  Be  Regents'  Canal,  etc.  Co.,  L.  R 
3  Ch.  D.  43  (1876). 

3  See  g  766,  supra;  Campbell's  Case, 
L.  R.  4  Cli.  D.  470  (1876). 

*For  instances  of  negotiable  de- 
bentures, see  Re  Imperial  Land  Co., 
L.  R.  11  Eq.  478  (1870);  Re  Blakely, 
etc.  Co.,  L.  R.  8  Ch.  154  (1867);  Higgs 
V.  Northern,  etc.  Co.,  L.  R.  4  Exch. 
387  (1869);  Re  General  Estates  Co., 
L.  R.  3  Ch.  758  (1868).  For  instances 
of  non-negotiability,  see  Re  Natal,  etc. 
Co.,  L.  R.  3  Ch.  355  (1868);  Athenaeima, 
etc.  Soc.  V.  Pooley,  3  De  G.  &  J.  294 
(1858);  Crouch  t\  Credit  Foncier,  etc., 
L.  R.  8  Q.  B.  374  (1873).  Debentures 
may  be  negotiable  as  to  the  company, 
but  not  as  against  other  debenture- 
holders.  So  held  where  debentures 
were  issued  after  a  winding  up  was 
commenced.  Mowatt  v.  Castle,  etc 
Co.,  L.  R.  34  Ch.  D.  58  (1886),  If  the 
debentures  are  not  negotiable,  the 
company  may  of  coui'se  set  up  de- 
fenses against  any  holder.  Athe- 
naeum, etc.  Soc.  V.  Pooley,  3  De  G.  &  J. 
294  (1858).  Debentures  in  England, 
corresponding  in  form  to  bonds  here. 

17 


are  not  negotiable  instruments. 
Crouch  V.  Credit  Foncier,  etc.,  L.  R. 
8  Q.  B.  374  (1873);  Re  Imperial  Land 
Co.,  L.  R.  11  Eq.  478  (1870);  Re  Natal, 
etc.  Co.,  L.  R.  3  Ch.  355  (1868;;  Re 
Rhos,  etc.  Co.,  17  W  R.  343  (1868). 
"Wliere  debentures  run  to  a  person  or 
his  assigns,  and  he  assigns  them  with 
the  concurrence  of  the  company,  the 
company  cannot  then  set  off  against 
them  a  debt  owed  by  him  to  it. 
Higgs  V.  Northern,  etc.  Tea  Co.,  L.  R. 
4  Exch.  387  (1869).  Debentiores  pay- 
able to  bearer  are  negotiable,  and  in 
the  winding  up  may  be  enforced  by 
the  holders  free  from  equities  be- 
tween the  company  and  the  original 
purchasers.  Purchasers  after  the 
winding  up  commenced,  but  in  ig- 
norance of  it,  are  also  protected.  Re 
Imperial  Land  Co.,  L.  R  11  Eq.  478 
(1870).  But  they  may  be  made  nego- 
tiable by  being  payable  "  to  the  order 
of,"  etc.  Re  General  Estates,  etc.  Co., 
L.  R  3  Ch.  758  (1868).  Although  de- 
benture bonds  payable  to  certain  per- 
sons or  bearer,  or  to  bearer  alone,  are 
not  negotiable  and  cannot  be  sued 
upon  at  law  by  bearer,  yet  he  may 
enforce  them  in  equity  on  the  wind- 
ing up.  Re  Blakely,  etc.  Co.,  L.  R  3 
Ch,  154  (1867).  Debentures  under 
seal  have  been  held  in  England  to  be 
merely  notes.  Re  General  Estates, 
etc.  Co.,  L.  R  3  Ch,  758  (1868). 

re 


CU.  XLYI.] 


BOISTDS   AND    COrPONS. 


[§  T7G: 


usually  as  follows:  Certain  corporate  assets,  generally  railroad 
bonds  or  stock,  or  real-estate  mortgages  or  municipal  bonds, 
or  water-works  bonds,  are  deposited  witli  trustees  to  secure  the 
debenture-holders.  The  debenture  itself  is  a  bond  or  note  of 
the  corporation,  reciting  on  its  face  that  it,  with  other  similar 
debentures,  is  secured  by  the  property  so  deposited  in  the  hands 
of  the  trustees.  Such  a  debenture  as  this  is  practically  a  note 
of  the  corporation  secured  by  the  securities  as  collateral ;  in 
other  words,  it  is  a  note  secured  by  a  pledge  of  securities.  This 
form  of  security  has  been  quite  extensively  issued  by  railroads, 
where  the  parent  company  owns  the  stock  or  bonds  of  many 
branch  or  leased  lines  and  wishes  to  raise  money  on  them  on 
long  time.  Such  debentures  are  legal.  They  are  substantially 
a  borrowing  of  money  and  delivering  of  bonds  or  stock  as  col- 
lateral security.* 


1  See  §  464,  supra,  and  §  852,  infrcu 
The  character  of  such  a  transaction 
is  well  shown  in  the  case  of  Ward  v. 
Johnson,  95  IlL  215  (1880).    Here  a 
bank  in  the  course  of  its  business, 
and  out  of  moneys  received  from  de- 
positors, loaned  large  sums  of  money, 
taking  promissory  notes  from   the 
borrowers  secured  by  first  mortgages 
upon  real  estate  in  Chicago.    In  pur- 
suance of  a  resolution  of  the  board 
of  directors  of  the  bank  creating  an 
'•  investment    department "    of   the 
business,  these  notes  and  collateral 
mortgages    were    assigned    to    one 
Chandler  in  trust  for  the  purpose  of 
conducting  the  business  of  said  "  in- 
vestment department."  Said  tnistee 
was  authorized  to  countersign  and 
issue  certificates  in  sums  of  $100  or 
over  to  all  applicants  applying  there- 
for, but  in  an  amount  not  exceeding 
the  face  value  of  the  notes  held  by 
him  as  trustee.   Said  certificates  bore 
interest  at  the  rate  of  seven  and  three- 
tenths  per  cent,  payable  quarterly, 
and  were  redeemable  by  said  trustee 
upon  the  application  of  the  bearer, 
either  in  not«s  secured  by  mortgage 
of  equal  face  value  with  such  certifi- 
cates, or  in  cash,  at  the  option  of  the 

/7   "' 


trustee.  The  certificates  recited  that 
they  were  secured  by  bond  and  mort- 
gage collaterals  held  in  trust,  secured 
upon  real  estate.  The  money  re- 
ceived by  the  trustee  from  the  sale 
of  the  certificates  was  by  him  turned 
over  to  the  ofiicers  of  the  bank,  and 
by  them  used  to  pay  depositors  and 
for  all  the  other  purposes  for  which 
the  bank  tised  money.  Held,  that  the 
trust  fvmd  in  the  hands  of  the  re- 
ceiver should  be  applied  to  the  pay- 
ment of  the  investment  certificates; 
and  that  the  bank,  after  receiving 
large  siims  of  money  on  the  "  invest- 
ment certificates,"  which  money 
went  into  its  general  business,  and 
after  having  had  the  full  benefit  of 
the  contract  with  the  certificate 
holders,  will  not  be  allowed  to  inter- 
pose the  defense  of  ultra  vires  to  de- 
feat the  execution  of  the  trust.  A 
subscription  for  debenture  bonds  to 
be  paid  for  in  assessments  as  the  com- 
pany might  require  cannot  be  en- 
forced, for  the  benefit  of  corporate 
creditors,  the  bonds  not  having  been 
delivered.  Pettibone  v.  Toledo,  etc. 
R.  R,  148  Mass.  411  (1889).  Bonds 
issued  on  shares  of  stock  were  in- 
volved in  Clarke  v.  Central  R.  E.  etc. 


I  T76.] 


BONDS    AND    COUPONS. 


[cn.  XLvr. 


The  simon-pure  English,  debenture,  however, —  the  debenture 
which  is  in  itself  both  bond  and  mortgage  combined,  without 
any  registry  under  the  mortgage  acts,  and  without  any  delivery 


Co.,  50  Fed.  Rep.  338  (1893).  In  this 
case,  on  the  final  hearing,  the  biU 
was  dismissed.  See  Clarke  v.  Rich- 
mond, etc.  Co.,  63  Fed.  Rep.  338  (1894). 
A  third  mortgage  may  be  secured  by 
such  prior  bonds  as  are  delivered  up 
by  the  parties  in  excliange  for  the 
third-mortgage  bonds,  under  an 
agreement  that  such  pi-ior  bonds  are 
not  to  be  considered  paid.  Poland  v. 
Louisville,  etc.  R.  R.,  52  Vt.  144  (1879). 
For  a  case  involving  the  priority  of 
one  class  of  debentures  as  against 
another,  see  American,  etc.  Co.  v. 
Northwestern,  etc.  Co.,  44  N.  E.  Rep. 
340  (Mass.,  1896 J. 

An  example  of  the  new  form  of 
debentures  secured  by  a  trust  deed 
is  that  of  Chicago  Great  Western  R'y 
Co.  There  the  company  secures  pay- 
ment of  interest  on  the  debenture 
stock,  and  a  fair  accounting  for  the 
preferred,  by  executing  a  deed  of 
trust  to  some  trust  company. 

Anotlier  form  of  debenture  is  what 
is  known  as  a  "collateral  trust  in- 
denture." The  form  adopted  by  the 
Northern  Pacific  R.  R.  Co.  was  briefly 
as  follows: 

This  indenture,  dated  May  1,  1893,  between 
the  Northern  Pacific  Raih-oad  and  the  Farm- 
ers' Loan  and  Trust  Company,  is  to  pay  off  a 
floatmg  debt  of  about  $11,000,000  and  for 
other  requirements;  the  railroad  company 
sells  its  5-year  6  per  cent  gold  notes  to  an 
aggregate  amount  of  ©15,000,000.  The  follow- 
ing collateral  is  deposited  with  the  trust  com- 
pany: 

$10,000,000  par  value  Northern  Pacific  consol. 
5  per  cent  bonds. 

3,000,000  par  value  Chicago  and  Northern 
Pacific  5  per  cent  bonds. 

6,000,000  par  value  Chicago  and  Calumet 
5  per  cent  bonds. 

7,000,000  par  value  St.  Paul  and  Northern 

Pacific  capital  stock. 
15,010,000  par  value  Chicago  and  Northern 
Pacific  stock  beneficial  certificates. 
843,000  par  value  Northern   Pacific   Ex- 
press Company's  stock. 

17 


Article  I.  Notes  shall  be  $1,000  each,  pay- 
able in  gold,  and  may  be  registered. 

Article  II.  The  railroad  company  binds  it- 
self to  make  up  deficiency,  if  any,  after  sale 
of  collateral. 

Article  III.  The  railroad  company  may  de- 
liver the  collateral  from  time  to  time  and  re- 
ceive from  trust  company  a  proportion  of  the 
notes. 

Article  IV.  The  railroad  company  will  not, 
without  first  obtaining  the  consent  of  the 
Committee,  or  until  all  the  notes  are  paid, 
construct  new  lines  or  purchase  or  lease  any, 
or  guarantee  bonds  of  other  companies,  or 
issue  its  own  bonds  against  such. 

Article  V.  A  committee  is  formed  consist- 
ing of  Messrs  R.  G.  Rolston,  John  A.  Stewart, 
James  Stillman,  J.  D.  Probst,  and  F.  T.  Gates. 
Committee  shall  organize  and  appoint  a  sec- 
retary. Members  may  vote  in  person  or  by 
letter  or  telegram,  and  shall  receive  twenty 
dollars  for  attendance  at  each  meeting.  Ma- 
jority shall  bo  a  quorum. 

Article  VI.  Comn]ittee  may  sell  the  bonds 
deposited  as  collateral  from  time  to  time,  but 
without  consent  of  the  railroad  company  can- 
not dispose  of  Northern  Pacific  5s  at  less  than 
90,  or  Chicago  and  Northern  Pacific  5s  at  less 
than  95,  or  Calumet  5s  at  less  than  85.  The 
Committee' has  power  to  sell  all  other  col- 
lateral at  times  and  prices  such  as  the  rail- 
road company  shall  direct  and  the  Committee 
approve.  With  the  money  received  from  such 
sales  the  trust  company  shall  purchase  the 
notes  in  the  open  market.  After  May,  1896, 
the  notes  can  be  called  for  payment  by  lot. 
If  railroad  company  shall  default  in  the  in- 
terest for  ninety  days  the  Committee  shall 
sell  part  of  the  collateral  to  realize  such  in- 
terest, or  at  its  option  shall  have  power  to  de- 
clare the  principal  due,  whereupon  the  trust 
company  shall  dispose  of  underlying  securi- 
ties as  determined  by  the  Committee.  In  such 
case  Committee  may  fix  a  minimum  price. 

Article  VII.  Upon  any  purchase  or  sale  of 
any  coupons  belonging  to  these  notes,  or 
upon  loans  made  after  date  of  maturity  of  said 
coupons,  such  coupons  shall  not  be  within 
this  indenture. 

Article  Vm.  AU  the  notes  may  be  called 
and  paid  by  the  raUroad  company  at  any 
time  after  May  1, 1896,  at  par  and  accrued  in- 
terest. 

Article  IX.  The  Committee  shall  vote  all 
the  stock  among  the  collateral.  Interest  on 
the  bonds  shall  belong  to  the  railroad  com- 
pany. 

rs 


CH.  XLVI.] 


BONDS  AND  COUPONS. 


[§  m. 


of  the  property,— has  not  been  adopted  in  America.  Under 
the  statutes  of  some  of  the  states  ^such  a  mortgage  lien  would 
be  good  against  general  creditors,  even  though  it  was  not  re- 
corded, and  even  though  possession  was  not  taken.^  But  in 
most  states  it  would,  under  the  statutes,  be  held  to  be  illegal 
and  void  as  against  the  rights  of  other  corporate  creditors.^  A 
debenture  which  is  a  mortgage  on  everything,  but  which  ex- 
pressly allows  the  company  to  sell  any  part  until  the  mortgagee 
should  take  possession,  is  void  as  to  other  creditors.' 

§  Til.  Debenture  stock  secured  hij  an  American  mortgage.— 
"  Debenture  stock  "  is  an  English  term.  It  does  not  mean  shares 
of  stock  as  in  America,  but  means  a  debt,  an  absolute  obliga- 
tion to  pay  principal  and  interest  at  fixed  times.  English  de- 
benture stock  is  somewhat  similar  to  a  registered  United  States 
bond.  It  sometimes  is  and  sometimes  is  not  secured  by  a  mort- 
gage.* An  American  mortgage  may  be  so  drawn  as  to  secure 
American  bonds  and  also  English  debenture  stock.  The  Com- 
mercial Cable  Company  mortgage  executed  in  1897  accom- 
plished that  result.'    Moreover,  it  is  possible  to  provide  in  such 


Article  X.  The  Calumet  Terminal  Railway 
Company,  without  consent  of  the  Committee, 
shall  not  issue  any  more  bonds,  but  upon  pay- 
ment to  the  trust  company  of  S-1,500,000  the 
railroad  company  shall  have  the  right  of 
withdrawing  these  Calumet  bonds,  money  to 
,  be  used  to  purchase  notes  in  open  market. 

Article  XI.  Railroad  company  and  trust 
company  shall  have  access  to  papers  and  ac- 
counts of  Committee,  and  Committee  shall 
have  Uke  access  to  books,  papers,  and  ac- 
counts of  railroad  company. 

Article  Xn.  Provides  for  continuance  of  a 
trustee. 

Article  XTTT.  When  notes  are  paid  they 
shall  be  canceled  and  delivered  to  the  rail- 
road company. 

Article  XIV.  The  railroad  company  will  do 
all  necessary  acts  to  carry  the  intent  of  the 
parties  into  effect. 

Article  XV.  Marginal  notes  in  the  indent- 
ure not  to  affect  the  text. 

A  supplementary  agreement  provides  that 
the  railroad  company  shall  not  sell  any  of 
the  Northern  Pacific  5s  which  it  may  have  in 
its  treasury  at  less  than  90,  or  pledge  the 
same  except  under  existing  contracts  with- 
out the  consent  of  the  Committee. 

iSuch  a  security  Avas  enforced 
as  against  the  company  in  White 

17 


Water,  etc.  Co.  v.  Vallette,  21  How. 
414  (1858). 

2  The  danger  and  insufiBciency  of 
the  English  debenture  as  regards  cor- 
porate property  located  in  America 
appears  in  Re  Empire  Min.  Co.,  L.  R. 
44  Ch.  D.  403  (1890),  where  the  prece- 
dence of  attachments  over  the  de- 
bentures was  admitted. 

8  Orman  v.  English,  etc.  Inv.  Trust, 
61  Fed.  Rep.  38  (1894). 

*  See  §  14,  p.  50,  supra,  for  a  defi- 
nition of  debenture  stock. 

6  This  Commercial  Cable  Company 
mortgage  is  on  all  the  company's 
telegraph  and  cable  lines  in  America 
and  Europe,  including  the  telegraph 
lines  of  the  Postal  Telegraph  Com- 
pany. The  mortgage  rvms  for  five 
hundred  years,  thereby  making  it 
practically  a  perpetual  investment, 
as  desired  by  the  English  investor. 
It  secures  $20,000,000  of  bonds  and 
debenture  stock,  all  bearing  the  same 
rate  of  interest,—  four  per  cent.  The 
79 


777.] 


BONDS   AND    COUPONS. 


[CH. 


XLVr. 


a  mortgage  that  the  bonds  and  debenture  stock  shall  be  inter- 
changeable, so  that  the  whole  mass  of  debt  may  flow  from 
the  bonds  into  debenture  stock  or  from  debenture  stock  into 
bonds,  according  as  England  or  America  furnishes  the  best 
market. 


bonds  may  at  any  time  be  returned 
to  the  company  and  debenture  stock 
obtained  in  place  thereof,  at  the  rate 
of  £206  for  every  $1,000  of  bonds.  The 
bonds  are  listed  on  the  New  York 
Stock  Exchange;  the  debenture  stock 
on  the  London  Stock  Exchange.  The 
aggregate  amount  of  bonds  and  de- 
benture stock  combined  is  always 
exactly  $20,000,000.  The  debenture 
stock  is  drawn  in  accordance  with 
English  forms;  is  issued  in  amounts 
of  one  pound  sterling  and  upwards; 
is  intended  solely  for  the  English 
market;  and  contains  the  necessary 
English  features  of  being  practically 
a  perpetual  investment,  issued  in 
small  or  large  denominations  to  suit 
the  investor,  and  having  an  English 
place  of  issue  and  transfer.  This 
$20,000,000  mass  of  debt  has  gradually 
merged  itself  into  the  English  de- 
benture stock,  owing  to  the  fact  that 
a  good  four  per  cent  security  sells 
for  a  higher  price  in  England  than  in 
America.  Inasmuch  as  the  author 
formulated  the  plan  and  drew  the 
mortgage  deed  of  trust,  bonds,  and 
debenture  stock  of  this  combined 
English  and  American  security,  he 
is  able  to  certify  to  the  successful 
working  of  the  plan,  and  is  able  to 
give  a  copy  of  the  certificate  issued 
to  represent  the  debenture  stock,  as 
follows: 

Five  Hundred  Year  Four  Per  Cent  De- 
benture Stock. 

the  commercial  cable  compant. 
No.  £ 

This  is  to  certify  that  is  the  reg- 

istered holder  of  pounds  sterling  of  the 
Debenture  Stock  of  The  Commercial  Cable 
Company  issued  under  the  provisions  of  a 
mortgage  deed  of  trust,  and  bearing  interest 


at  the  rate  of  four  per  centum  per  annum, 
payable  quarterly,  free  of  all  United  States 
taxes,  on  the  first  days  of  January,  April, 
July,  and  October,  in  each  year,  in  London, 
England.  The  payment  of  the  principal  and 
interest  of  this  Debenture  Stock  is  secured  by 
said  mortgage  deed  of  trust,  dated  the  first 
day  of  January,  1897,  and  made  by  the  said 
The  Commercial  Cable  Company  to  Tlie 
Farmers'  Loan  and  Trust  Company  (of  the 
City  of  New  York),  as  Trustee,  by  which 
mortgage  deed  of  trust  all  the  franchises, 
property,  and  assets  of  The  Commercial  Cable 
Company  (including  the  property,  franchises, 
and  assets  of  the  Postal  Telegraph-Cable 
Company  heretofore  acquired  bj^  said  The 
Commercial  Cable  Company)  are  assigned  to 
said  The  Farmers'  Loan  and  Trust  Company 
upon  trusts  for  securing  twenty  miUion  dol- 
lars (S20,000,000)  bonds  or  their  equivalent, 
£4,120,000  sterling  debenture  stock  of  this 
issue. 

Instalments  of  interest  on  this  Debenture 
stock  are  to  be  paid  by  cheques  or  warrants 
mailed  to  proprietors  at  their  addresses  reg- 
istered in  the  books  of  said  Cable  Company. 

The  stock  represented  by  this  certificate  is 
transferable  on  common  transfer  forms,  to 
be  subsequently  registered  on  the  books  of  the 
Company  in  London  or  New  York  or  at  the 
office  of  such  financial  agents  in  London  as 
said  Cable  Company  may  from  time  to  time 
appoint,  and  in  conformity  with  the  provis- 
ions of  the  by-laws  in  that  behalf  upon  the 
surrender  of  this  certificate.  No  transfer  for 
any  sum  less  than  one  poimd  or  for  other 
than  multiples  of  one  pound  will  be  regis- 
tered. 

This  certificate  shall  not  be  valid  unless 
signed  by  such  official  of  said  The  Commer- 
cial Cable  Company  as  the  Board  may  from 
time  to  time  appoint  for  that  purpose,  and 
coimtersigned  by  the  registrar. 

Given  under  the  common  seal  of  the  com- 
pany this       day  of       1 
[L.  S.]    The  Commercial  Cable  Company, 
By . 

Countersigned  in  London  this       day  of 


Registrar. 
No  Transfer  op  any  Portion  op  this  Stock 
WILL  BE  Registered  Without  the  Sur- 
render OF  THIS  Certificate. 


1780 


CH.  XLvi.]  BONDS  AND  couroxs.  [§  778. 

§  778.  Mode  of  drafting^  signing,  sealing,  and  achiowledging 
corporate  ohligations  to  j)ay  money  —  Liability  of  the  corporor 
tion  and  the  corporate  officers  on  irregularly  executed  instru- 
ments—  Charter  provisions  as  to  authorizing  the  instruments. 
These  subjects  are  considered  elsewhere.^ 

1  See  §§  721-725,  supra.     As  to  re-    shall  authorize  the  issue  of  bonds,  see 
quirements   that   the    stockholders    also  §  808,  infra,  and  §  725,  supra. 

1781 


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